Making Better Decisions

Executive Summary

There has been significant research on the ability to influence one’s behavior through a series of intricately framed paths during one’s decision-making process. Thaler & Sunstein (2009) have aptly called this process nudging. Through the process of nudging, there has been the rise of the movement called libertarian paternalism, or the attempt to steer one to the most logical decisions to produce the optimal outcome for the individual and for society. The central tenants behind libertarian paternalism is the assumption that individuals do not always make the most logical decisions due to innate behavioral biases and bounded rationality.

This departs from traditional economic theory and the general assumption that the actions of individuals are unfailingly logical and optimal for the individual (homo economicus). It is because of these behavioral biases and bounded rationality that behavioral economists, acting as choice architects, will attempt to sway or nudge the individual down the path that will ultimately produce the optimal outcome for a particular decision. Libertarian paternalism isn’t without it’s unique set of guidelines.

According to Thaler & Sunstein (2009), the use of nudging as a choice architect must not interfere with freewill or the individual’s ability to choose, independent of the nudge. All available options relating to the decision must be presented, free of manipulation or masking. Additionally, the entire process must be reversable, meaning the process can be easily retracted should the actions of the choice architect become sub-optimal.

The theory of libertarian paternalism does not come without its critics. Wielding the power of persuasion and the ability to alter one’s decision making process through nudging has led many in academia to question the morality and ethical implications of the process. Certainly, it is understood that choice architects have an enormous responsibility when implementing nudges and calls into question acts of personal benefit versus total altruism. This essay will discuss the opposing views of libertarian paternalism and provide two examples that may exhibit the potential dangers of putatively misplaced, albeit presumably sincere acts of choice architects.

Postcards from the Concerned

The first example in the analysis discusses the practice of one State, in which the use of gentle reminders of child-support payments coming due using mailed postcards has come under scrutiny. According to advocates of the program, there is a noticeable benefit in the child-support payment collection process. Opponents of the practice state that it violates their privacy by openly and indiscreetly displaying the reality that one is a noncustodial parent, especially in a small-town setting.

The decision to send gentle reminders to noncustodial parents via postcards was clearly an attempt by choice architects to nudge recipients towards making obligatory and on-time payments. The fact that some had taken offense to the process highlights the potential pitfalls of seemingly benign attempts by choice architects to nudge individuals towards optimal decision-making. The question arises about the ethical implications of the process, i.e. invasion of privacy but more importantly, in my opinion, questions if the action falls within the realm of libertarian paternalism as described by its founders. After examining the circumstances of the article, the actions of the choice architects are potentially “out-of-bounds” for it to be truly considered libertarian paternalism.

As discussed, one of the key criteria of libertarian paternalism is the existence of freedom to choose. In the example provided, the article made no mention of the ability to “opt-out” of the reminder program. In the spirit of true libertarian paternalism, a choice should be offered.

If one were to assume that gentle reminders are beneficial, then perhaps some individuals that lead busy lifestyles or are absent-minded bill payers appreciate the reminders to assist them in prioritizing important actions that may be overlooked. This is in addition to the benefits recognized by the State that implemented the program. Understanding my opinion that this example falls outside of the true intentions of libertarian paternalism, Colander & Chong (2010) offer a modification to the traditional theory, called non-paternalistic nudge policy that may be applied in this circumstance. According to the authors, “The goal of non-paternalistic nudge policy is to achieve a better result as seen by the agents being nudged as revealed through their choices of choice architectures.”

If this example were altered slightly, where the default option for individuals responsible for child-support payments were mailed the reminder postcards with the ability to opt-out, then I believe it would fall well within the boundaries of libertarian paternalism. That said, an alternative would be to adopt an approach advocated by Colander & Chong by fully disclosing the benefits of the nudge policy and allowing the participants a choice over choice architecture. On the benefits of non-paternalistic nudge policy they write, “is achieved by making the explicit goal of the nudge policy giving people as much choice over choice architecture as is practically possible, and not as making them more likely to arrive at a particular preference that is determined by some outside group, however well meaning that group may be. (p 4)”

Allowing the recipients of the nudge policy to fully understand the benefits of the choice architecture and then allowing them to opt-out would be a solution to the problem, in my opinion.

Toying with my Emotions – Facebook

In January of 2012, the well-known social media platform known as Facebook conducted an experiment on the impact of users’ responses to positive and negative stimuli (Meyer, 2014). Putting aside the ethical and potentially dangerous repercussions, this attempt to influence behavior has come under intense scrutiny.

While this can be viewed as straying from the true intent of libertarian paternalism, it can conceivably reinforce the views of its’ critics. Rebonato (2013) states, “there lurks behind the surface the assumption that the users of choice architecture will always employ this technique in the best interests of the nudged individuals. (p 5)” While we are unclear from the article the true intensions of the choice architects, one could gather from the information provided that is was in the name of self-interest.

Conclusion

The ability to influence one’s decision through nudging is an acceptable way to overcome an individual’s innate behavioral biases and bounded rationality that may lead to illogical and poor decisions. Through the theory of libertarian paternalism, the choice architect must take responsibility for their actions and adhere to the underlying rules of engagement when nudging. The act should never stymie freedom of choice or freewill. It should be an easily reversable process and should be done in an altruistic manner that benefits the individual and society in general. Deviation from it’s true intentions will give rise to increased criticism and potentially dangerous repercussions for those that are nudged.

Joseph S. Kalinowski, CFA

Colander, D. & Qi Lin Chong, A. (2010). The Choice Architecture of Choice Architecture: Toward a Non-Paternalistic Nudge Policy. Middleburry College of Economics Discussion

Crain, E. (2015). Dad shocked and embarrassed by child support postcard. Yahoo Parenting. Retrieved from: https://www.yahoo.com/news/dad-shocked-and-embarrassed-by-child-support-126696175587.html

Meyer, R. (2014, June 28). Everything we know about Facebook’s Secret Mood Manipulation experiment: It was probably legal. But was it ethical? The Atlantic. Retrieved from https://www.theatlantic.com/technology/archive/2014/06/everything-we-know-about-facebooks-secret-mood-manipulation-experiment/373648/

Rebonato, R. (2013). A Critical Assessment of Libertarian Paternalism. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2346212

Sunstein, C. (2015). The Ethics of Nudging. Yale Journal on Regulation, 32(2), 413-450.

Thaler, R., & Sunstein, C. (2009). Nudge: Improving Decisions about Health, Wealth, and Happiness. New York NY: Penguin Group USA