Tuesday, May 19, 2020

How is behavioral economics relevant to human flourishing?

The practitioners of behavioral economics have tended to direct their research findings mainly at “choice architects”, including paternalistic governments. For example, in their book, Nudge, Richard Thaler and Cass Sunstein adopt the term “libertarian paternalism” to propose:
Choice architects can preserve freedom of choice while also nudging people in directions that will improve their lives”.

An example might help to clarify what a nudge involves. If the government were to invest a certain proportion of your income in a superannuation fund on your behalf this would amount to a nudge, rather than a push or a shove, if you were allowed to withdraw the funds at any time to use as you wished. Because of a tendency for people to avoid choices, or to choose default options, such an arrangement would be likely to result in more investment in superannuation than one that relied solely on tax incentives. It would do this without the interference in personal choice that is involved in compulsory superannuation, such as exists in Australia. (That example is taken from my review of Nudge.)

However, if you view human flourishing as an essentially self-directed activity, as I do, you may be sceptical about claims that such nudging can improve your life. Even if the people doing the nudging have your interests at heart, their perception of what will improve your life will not necessarily accord with your own preferences.

In the example provided above, additional transactions costs may be imposed on the person being nudged. For example, investment in superannuation might not be the best option for a young person wanting to save for a deposit on a house. Over the longer term, the value of an investment in a superannuation fund could be expected to rise to a greater extent than cash in the bank, but short term fluctuations in equity prices make superannuation a less suitable vehicle for shorter term saving. Withdrawing funds for a house deposit could result in capital losses being incurred.

Robert Sugden suggests that “something is clearly wrong if economists think that their response to the discovery of mistakes in individual decision-making must take the form of a recommendation about public policy” (The Community of Advantage, p 44). If you want to help individuals to make better decisions it makes more sense to address the information to those individuals rather than to address it to autocrats.  (I have previously discussed The Community of Advantage here, here and here.)

Sugden makes the point that nudgees (people who are nudged) do not always explain their failure to follow expert advice in terms of self-control problems. For example, an obese person who fails to follow expert advice about choosing fruit rather than cake, could explain his choice in a range of different ways that do not involve a self-control problem. If he sees nothing wrong with his choices, he has no reason to want to be nudged by having the fruit placed in a more prominent position in the cafeteria relative to the cake (p 47).

However, if the obese person acknowledges that he has a self-control problem, research findings about the influence of placement of products on consumer purchases might help him to modify his behaviour. His trusted advisers might be able to suggest how he could nudge himself to make better choices. By coincidence, earlier today, I heard a news item indicating that there is a supermarket chain in Australia that refrains from placing confectionary near checkouts. That information could be relevant to a person with an acknowledged self-control problem, who was wanting to avoid impulse purchases of confectionary.

The fact that supermarkets often place confectionary near checkouts illustrates that choice architects may not always have paternalistic motives. It should not be assumed, however, that their motives are exploitive. Supermarkets want loyal customers, so it is not likely to be in their interests to have shoppers end up feeling that they have been manipulated to make unhealthy choices and/or to spend more money than they wanted to spend. It is possible that the placement of the confectionary helps give most shoppers good feelings about their shopping experience. The nudge that one person views as manipulative may be viewed by others as benign, or even as providing a helpful reminder.

As a rule, it is good to be aware how you are being nudged in the choices you make. It is necessary to be aware that you are being nudged, as the first step in making a conscious choice to accept or reject the suggestion involved. Behavioural economics can make a useful contribution in helping to make us aware of how nudges may affect the choices we make.

Sugden suggests that behavioural economists who discover possible mistakes in individual decision-making are in an analogous situation to epidemiologists who discover an apparent causal relationship between some activity and the prevalence of an illness. The epidemiological findings are made available to the public in various ways and begin to influence behaviour prior to any public policy intervention being contemplated (p 43). 

Similarly, happiness researchers who discover that average life satisfaction of various groups is affected by factors such as leisure, or commute times, are providing information that individuals may wish to consider in the choices they make.  Individuals are likely to be affected differently, but rarely so differently that information about others is irrelevant.

Sugden acknowledges that normative economics has almost always been directed toward public decision-makers rather than private individuals, but suggests that “since economists often characterize their discipline as the science of rational choice one might expect them to recognize the potential value of helping individuals to make better decisions in their private lives” (p 43). He notes that Philip Wicksteed, one of the founders of neoclassical economics, presented economics as a study of the “general laws of the administration of resources” and insisted that these laws apply “from end to end of life”. He gave practical advice on how to avoid common mistakes in decision-making. The passage quoted above reflects the role he saw for economists in helping people to make better choices.

Sugden’s view that there is a role for economists in helping individuals to make better choices seems somewhat at variance with the view of James Buchanan. In his article “What should economists do?”, published in 1964, Buchanan argued that the theory of choice should be removed from “its position of eminence in the economist’s thought processes”. He suggested that economists should concentrate their attention on human behaviour in market relationships and other voluntaristic exchange processes, and upon the various institutional arrangements that can arise as a result of this form of activity.

I maintain the view, as previously expressed, that Buchanan is correct in identifying the heartland of economics to be concerned with voluntaristic exchange processes, but that does not rule out the potential for economists to make useful contributions in helping individuals to make better personal choices. It is in the latter context that behavioural economics is most relevant to human flourishing.

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