A recent news article revealed the federal government's plan to create a "Behavioral Insights Team," which would look for ways to "nudge" people toward supposedly better choices. It kicked off the debate over the potential benefits and pitfalls of nudges.
On the upside, they promise to improve policy effectiveness while allowing consumers greater choice. On the downside, it can be misused for political purposes. If the nudge policy is hijacked by special interests to push a narrow political agenda, it will become yet another tool for the government's intrusion into people's private lives and choices.
Nudges exploit the irrational quirks in human behavior to gently push people to make better decisions. For example, nudges can target our tendency to procrastinate in order to make us save more for retirement. Many people tend to put off retirement saving decisions and save too little as a result. Yet, if companies enroll their employees in a retirement plan by default, most employees stick with that choice. Those who wish to save more or less have the freedom to change the default choice. Ultimately, a simple change in the default option can help people save more for retirement.
While the idea of nudging people to help them make better choices sounds promising, the approach presents several challenges. If individuals making private choices are irrational, so are the policymakers trying to do the nudging. Policymakers tend to overestimate their ability predict policy outcomes, in what is known as hindsight bias. They may also myopically choose expedient policies over those that provide long-term benefits. In addition, individuals choose based on many factors and preferences that are specific to their own circumstances. Since policymakers rarely have detailed personal information at their disposal, it would be difficult for them to improve on individual choices.
As some nudge proponents point out, the problem of poor policymaking is not unique to nudges; it applies to all government policy. However, there is a crucial difference. In a democratic system, we rely on competing political interests to monitor policymakers and to expose the faults and shortcomings of different proposals. By giving the most vocal opponents of a policy a chance to opt-out, nudges reduce the opponents' incentives to track the policy and to express their views. Thus, nudges may face less scrutiny than other policies. However, the simple fact that nudges can be so effective requires that they be subjected to the same level of oversight as other, more restrictive policies.
Finally, nudges can easily turn to shoves. With nudges, policymakers suggest better choices but ultimately leave the decision up to the individuals. Yet, some policymakers do not stop there. They argue that if people are irrational, it is the government's responsibility to constrain individual choices. New York City Mayor Bloomberg's decision to ban large soda drinks, since declared unconstitutional by the state Supreme Court's Appellate Division, is a prime example.
On the federal level, energy efficiency regulations costing billions of dollars are justified by claiming to correct consumers' irrational choices. Regulators claim that given the lifetime energy savings rational, consumers would demand more efficient vehicles and appliances voluntarily. They take the fact that many consumers are willing to forego efficiency in favor of other attributes, such as style, safety or lower upfront costs, as a clear proof that consumers are irrational. Hence, regulators force consumers to save by reducing their choices.
Nudges promise less intrusive and more effective policies. Whether this promise is realized will largely depend on the new nudge unit's mission. If it focuses on improving existing policies by making them less intrusive and granting individuals greater choice, the approach can yield substantial benefits. But without proper oversight and transparency, such a program could spiral out of control.
Sherzod Abdukadirov is a research fellow at the Mercatus Center at George Mason University.