Book Review: Nudge, by Thaler and Sunstein

Nudge Nudge Wink Wink, Say No More

In Nudge, the behavioral economist Richard Thaler and political scientist Cass Sunstein describe the various ways that people behave irrationally because of the cognitive biases and the seemingly irrelevant contextual cues that influence our choices.  Their solution is what they call “nudging,” or promoting rational choice without limiting one’s choices, through “choice architecture,” the organization and design of choice presentation.  Since human beings’ choices are influenced by seemingly irrelevant environmental circumstances, Thaler and Sunstein see no harm in organizing those environmental circumstances to nudge people to make the best choice, so long as they still have the option of the less good choice.  In discussing Thaler and Sunstein’s book, I’ve divided my comments into three parts: the Good, the Bad, and the Ugly.

The Good: Promoting Rational Choice Through Choice Architecture

Decades of research in psychology, cognitive science, and more recently, in behavioral economics, has resulted in the unfortunate but nevertheless certain conclusion that people have only a limited capacity for rationality.  In contrast to the historical view of people as fundamentally rational but prone to error by external influences, psychologists (such as Daniel Kahneman and Amos Tversky) have modeled the mind as operating on two distinct systems.  The habitual system (which Thaler and Sunstein call the “Automatic System”) is the one that responds on the basis of intuition, practice, and heuristics.  The attentive system (the “Reflective System”) is the one that attempts to exercise rational control.  In situations involving great risk, complexity, or vagueness and uncertainty, people are generally going to rely on the only successful heuristic rules that the habitual-automatic system has ready.  But such heuristics are only sometimes successful – ‘common sense’ doesn’t get things right, a lot.  Hence, we are prone to making irrational decisions.  For example, Thaler and Sunstein note the research in which people pretty much eat whatever’s in front of them, and don’t think a lot about it.

But the habitual-automatic system is also prone to be influenced by irrelevant environmental factors.  In one of Thaler and Sunstein’s example, food placed at eye level is more likely to be picked than otherwise.  In the same vein, in this experiment, researchers discovered that pictures of eyes nearby make people better behaved.  Given this power of the environment to alter our choices, Thaler and Sunstein see little harm in designing environments and organizing choices such that the best choices are privileged over the worse choices.  No one is being forced, in the sense of classical liberalism, to give up any choice.  The better choices are just made more available.  Thaler and Sunstein call this the politics of “libertarian paternalism,” because public and private agencies aren’t forcing anyone to do anything but are helping people to achieve their own best interest.

I see nothing wrong with it either, with one proviso: people have to be doing it to themselves.  People should be their own choice architects, who assent to the privileging of choices as they determine are the best.  Democracy dissolves the problem of paternalism in all its guises, because it’s not paternalism when you do it to yourself.

The Bad: They’re Stupid Goddamned Liberals

Thaler and Sunstein are simply the worst kinds of useless damn liberals.  After a strong start describing fascinating and ingenious nudges, they begin applying the principles of nudging to the worst possible neoliberal, privatizing, anti-democratic projects, such as privatizing Social Security, school “choice”, and defined-contribution pensions.  Such neoliberal ideas haven’t been successful in other countries, not because people have trouble making rational choices but because these things don’t work.  Turning social insurance into private retirement funds in other countries only resulted in the poor being priced out of the market, not because of their irrational choices but because of the increased costs of generating profits, duplicating fund administration, and oligopolistic pricing.  School choice has led to fly-by-night or store-front private schools where public vouchers are collected by hucksters who keep children in unsanitary conditions.  On average, people using defined-contribution pension funds like 401ks make half as much as they could with a defined-benefit plan.

The error such liberal-libertarians make in presuming that people can make free contracts is that the problems that arise from free contract are not the problems of bad choices, but of no choices.  Free contract can only exist between equals of the same bargaining power, and most people lack that when faced with a much larger organization, especially that of the for-profit corporation.

For an example of this upside down “libertarianism”, take their recommendation of lowering medical costs by allowing people to waive their right to a malpractice suit.  If something goes wrong for those who choose this, they have no legal recourse for recovery.  But at least the poor could get the health care that they already deserve but can’t afford!  The neoliberal disease is a cognitive degenerative one.  First a little math, which I hope someone out there will check for me.  Malpractice suits cost between $11 and $29 billion a year, according to Nudge, which does not tell us how that relates to the total.  That’s always a red flag, common when discussing things like the national debt; but those numbers by themselves are meaningless.  Total health care costs (as of 2005) were approaching $2.5 trillion, according to the Congressional Budget Office.  So malpractice suits cost between 0.44% and 1.2% of total health care costs.  So these are the savings that the poor should sell their legal rights for.  But such people, instead of standing on their need and right, should sell away their right to recompense in the case of negligence on the part of the doctor.  How is such a person made free in such a contract?

All of this, I suspect, is part of a strategy on their part to appeal to what they perceive as the dominant political philosophy of the time.  It is typical of the liberal game-book to try to steal the game-book of what they think is the winning team, in this case, the “libertarian” right.  Hence, Clinton can abolish “welfare as we know it,” and Obama can out-torture old George W.  For this reason, the authors choose to identify themselves as “libertarian paternalists”, as if nudging is something to organize your whole political outlook on.  In any case, their choice of identity can serve two functions: first, so they probably think, they get to infiltrate the libertarian right, and second, they just get attention by freaking the squares, like the hippies used to.  Granted this is all speculation, but then it’s hard to believe what comes out of the minds of high academe these days.

The Ugly: Blaming Homeowners for the Economic Crisis

The authors’ whole “libertarian paternalism” shtick depends on adding the word “nudge” to the disaster of neoliberal privatization.  Perhaps that’s why, after the 2007 crash of the world economy, Thaler and Sunstein added an appendix to Nudge that blamed the economic crisis on people refinancing their homes.  After spending an entire book explaining the ways in which human rationality is limited in identifiable and systematic ways, they tell us to “look in the mirror” instead of pointing blame.  The authors claim that the housing bubble is a result of people’s bounded rationality, lack of self-control, and social pressure.  In other words, people are behaving in exactly the ways that their book spent two hundred and some pages telling us they would behave.  Before the crash, people’s poor choices were the fault of institutions failing to provide nudges towards the best option.  After the crash, it’s people who are not measuring up to the system.

It’s never pretty when an ideology smashes into the rocks of reality.

The problem is that a lot of ordinary people actually believe this kind of crap.  The system would work fine if people would only not be people!  Somehow the creditors who made these loans without knowing how the loan would be repaid are blameless.  Now typically, if you take some action with some bad consequences that you could not foresee, you are not held responsible for those bad consequences.  And of course, if you did know that bad consequences were possible, then you would be responsible.  Yet in this case it’s the reverse.  The creditor, who is the economic actor in a position to have more complete knowledge of financial markets, who has the technical resources of vast multinational banks, is blameless for the housing bubble that crashed the world market.  The debtor, who is not even in a position to understand the deliberately difficult contract to which they are a party much less the financial markets, who is surrounded by economic elites telling him Why the Real Estate Boom Will Not Bust (that’s a real book) – they’re to blame, in complete defiance of this basic moral principle.  For some reason, the economists who couldn’t see the stock and housing bubbles are free from blame for the simple inability to do their job, but the ordinary homeowner should have known better.

The greater problem with their position is the belief that everybody has some range of choices, from which they are not choosing rationally.  This is entirely ridiculous.  South Africans, Chileans, and Bolivians aren’t poor and enserfed because they have trouble making the right choices, but because they don’t have choices – that’s what being poor means.  The first people to lose their home were those who borrowed against their homes to pay for medical expenses.  They lacked self-control – they lacked the resources to be in control of their own fate, and had to trade shelter tomorrow for medical necessities today.  But hey, according to Thaler and Sunstein, they could have saved a few cents on their medical costs if they had the option to sell their right to a malpractice suit, or their kidneys.

How much longer do we have to put up with such market idiocy just because some Russians in 1920 thought that central planning was a good idea?  The world is at a precipice where mass democratic action is necessary to save ourselves from planetary disaster, and otherwise intelligent and creative people like Thaler and Sunstein waste their talents and our time propping up a dead and destructive ideology of the twentieth century.

One thought on “Book Review: Nudge, by Thaler and Sunstein

  1. Pingback: “Start Seeing Motorcycle Helmets”: Helmet Laws and Liberty | Democracy in Principle

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