Saturday, March 1, 2008

Richard Thaler on Libertarian Paternalism

Richard Thaler introduced at UCSD his new book on Libertarian Paternalism. This seems to be a strange title for a Chicago guy (and he gets some heat from his colleagues) and maybe even an oxymoron (which it's not). The talk was, in short, fascinating. The basic idea is that people are not perfectly rational in every single decision they make (which may sound suspicious to economists, but seems trivial for people), and thus they make mistakes. They even make mistakes in a predictable way. They regret these mistakes. The most frequently used example is 401(k) plan: usually, these are opt-in plans - you get in, save money, your employer gives some more money and life is beautiful. Except that people don't opt-in for some reason. Presumably, they face tough choice (easily 80 different hedge funds), they don't have time to thing and decide etc.They end up not only losing possible returns on their own savings, but also employer's contribution. But if they have the opt-out choice, they stay in and save. The designer (government, employer) who has interest of such people in mind might find useful to use opt-out instead of opt-in system. Everybody is free to go (libertarian), if they want to, but if they don't do anything, they are in (paternalism).
The idea of a design of a system that does something for you if you choose not to do anything, but allows you to leave whenever you go will hopefully get more attention in the future. It does not restrict your freedom (costs of saying "no" are negligible), yet it makes the choice for many people easier and they end up satisfied with this decision.
The idea is not limited to 401(k) plans. Among other fascinating examples, I like the one that saves lives and not money. It's the organ donation status. In some countries (Austria, Belgium, Denmark, Finland, France, Italy, Luxemburg, Norway, Singapore, Slovenia, and Spain), everybody is presumed to be willing to donate his/her organs in case of death - opt out is easy. In other countries (USA), one has to opt-in to be considered a donor.So what?

The result is that in “presumed consent” nations over
90 percent of people make their organs available for donation, whereas in the United
States, the corresponding number is below 20 percent.

( (Cass R. Sunstein and Richard H. Thaler)
Simple policy, simple decision and huge impact.

Example like allow me to hope that libertarian paternalism is a future of applied economics. Previously, government simply regulated (enforced, restricted, forbid or taxed) a behavior. We are at the point in which we understand subtler errors of human behavior. And we can use this knowledge to design existing (or even new) regulations better for everybody, especially if some choice about the design needs to be done. The nice libertarian touch is that nobody is forced to do anything, as long as costs of saying "no" are trivial, which they should.

Anyway, if you have an hour to spare, you can listen to Richard Thaler himself at a very similar talk at EconTalk.org

4 comments:

Unknown said...

If presumed consent was implemented in the United States, the supply of organs for transplant operations would increase significantly. According to polls, about 90% of Americans support organ donation but only about 50% have bothered to register. If everybody was automatically registered, few people would bother to un-register.

Presumed consent can only be implemented in the United States through legislative action -- Congress would have to pass a law. The chances of this happening in the foreseeable future are somewhere between very slim and none, because there is wide-spread opposition to the idea of presumed consent.

Fortunately, there is an already-legal way to put a big dent in the organ shortage – allocate donated organs first to people who have agreed to donate their own organs when they die.

Giving organs first to organ donors will convince more people to register as organ donors. It will also make the organ allocation system fairer. People who aren’t willing to share the gift of life should go to the back of the waiting list as long as there is a shortage of organs.

Anyone who wants to donate their organs to others who have agreed to donate theirs can join LifeSharers. LifeSharers is a non-profit network of organ donors who agree to offer their organs first to other organ donors when they die. Membership is free at www.lifesharers.org or by calling 1-888-ORGAN88. There is no age limit, parents can enroll their minor children, and no one is excluded due to any pre-existing medical condition

Myslivec in San Diego said...

Dave,
thanks for your comment and what you are doing at LifeSharers. I tend to be somewhat sceptical about the reach it can have, but it certainly looks like a good idea.
It seems to have significant network effect (works best when most people are in), because it will make more people sign in (non-participant will become less likely to get an organ they need)
On the other hand, I can imagine that only people who are in need of an organ (which is usually long-term need) are most likely to join, not those who might need it in the distant future. Some incentive for long-term membership would be great, to prevent this.

Anonymous said...

Even some guy in Czech Republic ;-) was trying to employ this concept in his pension reform proposal. See http://www.inbes.org/docs/penzijni_reforma.pdf (unfortunately only in Czech).

Anonymous said...

Yeah, right, libertarian paternalism really is a way forward...
And how about banning booze completely for ALL from stores,. If you indeed want to drink, then you have to go and register someplace (for a fee of couple of dollars + spent time - those people processing your application need to be compensated) and get your monthly stock of alcohol from government registered warehouse? Hey, any problems with this> You always can opt-in, cant you?