by Peter Orszag and Cass R. Sunstein
Over the past few years, many nations have adopted policies that promise to improve people’s lives while preserving their freedom of choice. These approaches, informed by behavioral economics, are sometimes called nudges.
Nudges include disclosure policies, as in the idea that borrowers should “know before they owe.” They include simplification, as in recent reductions in the paperwork requirements for the Free Application for Federal Student Aid.
Nudges include default rules, which establish what happens if people do nothing at all -- as with automatic enrollment in a savings plan. They also include reminders, such as text messages informing people they are about to go over their monthly allowance of mobile-phone minutes.
When the two of us worked in the Obama administration, we were interested in approaches of this kind, because the evidence suggests they work. For example, the Credit Card Accountability Responsibility and Disclosure Act of 2009 imposes numerous disclosure requirements, which are helping to save consumers more than $20 billion in annual late fees and overuse charges.
In the U.S. and other nations, automatic enrollment has significantly increased participation in savings plans. A recent study found that in Denmark, automatic enrollment has had a larger impact than significant tax incentives in getting people to save. The study found that 99 percent of the retirement contributions made in response to tax incentives would have been saved anyway; by contrast, the bulk of the contributions made by people who were automatically enrolled in a retirement plan represented a net addition to saving.
In an economically challenging time, the nudge approach can deliver major benefits without imposing big costs on the public or private sector. And, like a GPS, nudges still have the virtue of allowing people to go their own way. If informed consumers want to run a risk, they can do that. A nudge isn’t a shove. Yet this approach to government has stirred up objections from both the right and the left.
What makes it legitimate for public officials to nudge people they are supposed to serve? Whenever government acts, isn’t there a risk of error, bias and overreaching?
These are good questions, and some nudges should be avoided. But the whole point of the approach is to preserve freedom of choice, and being nudged is part of the human condition. Both private and public institutions are inevitably engaged in nudging, simply because they design the background against which people make choices, and no choice is ever made without a background.