IF YOU'VE STARTED a new job in the past couple of years, your 401(k) plan may be quietly subjecting you to a profound social experiment. Instead of choosing to sign up for the plan, there's a good chance you have been automatically enrolled - so while it used to take a conscious decision to save money for retirement, it now takes a conscious effort not to.
And if you have one of these plans, there is a very good chance that the experiment is working, and you are actually contributing to your 401(k) instead of leaving it on your to-do list.
This might sound like a small administrative change. But what happened is something important: You have been "nudged."
Behind this approach to savings - and a host of other new policy ideas touching on everything from organ donation to weight loss to energy efficiency - is a new answer to a puzzling question: Without using force, how can we get people to choose things that are ultimately good for them?
The problem, as psychologists and economists are increasingly coming to agree, is that, given total freedom of choice, people often fail to make the best decision for themselves. We follow the herd, we stay the course even when it's ruinously costly, we fear losses more than we appreciate gains. And as a result, we make decisions we later come to regret. But social scientists are now starting to explore ways of using those very biases and blinders to get us to make smarter choices in spite of ourselves.
Among the most influential of these new ideas is the "nudge" - a model for how employers, friends, and even the government can structure people's choices to push them in the right direction without restricting their freedom to go their own way. It can take a variety of shapes, from the automatic-enrollment version of the 401(k) to cash payments that encourage recovering drug addicts to stay clean to new kinds of feedback on the power consumption of cars and appliances that will subtly encourage people to save energy.
A form of what psychologically inclined economists call "choice architecture," nudges are the brainchild of the economist Richard Thaler and the legal scholar Cass Sunstein, who have laid out the idea in recent papers and a co-written book called, appropriately, "Nudge: Improving Decisions About Health, Wealth, and Happiness," due out this spring.
Thaler, Sunstein, and other similar-minded thinkers argue that this approach has a panoply of applications: Besides improving people's financial and energy habits, it could restructure health insurance and medical care. In the social realm, some economists are experimenting with contracts to get people to lose weight; in their book, Thaler and Sunstein even suggest changes to the marriage contract.
The ideas are starting to gain traction, both in the private and the public sector. Sunstein, a longtime professor at the University of Chicago, has been hired away by Harvard Law School and next year will launch a new program there dedicated in part to studying these issues. Automatic enrollment is rapidly becoming the norm in 401(k) plans, and Democratic presidential front-runner Barack Obama has worked nudge-like mechanisms into his healthcare, retirement, and higher education proposals.
"I think it's a massively important idea," says Barry Schwartz, a psychology professor at Swarthmore College who looks at economic behavior. "It's hard to imagine a context in which it's not relevant."
Ultimately, Thaler and Sunstein see what they're proposing as a way of breaking through one of the most intractable debates between American liberals and conservatives: whether it's the market or the government that people need more protection from. "Libertarian paternalism," as they call their proposed political movement, addresses both at once: While leaving people in command of their decisions, it eases them toward the alternative most likely to benefit them.
In the realms where it has been recently applied, the successes of nudging have been dramatic. According to a study published last December by researchers at the Vanguard Group, one of the country's leading investment management firms, companies that adopt automatic enrollment in 401(k) plans find that it nearly doubles the number of new hires saving for retirement.
But it's in the public realm that these interventions may have the greatest power to change lives. And it's there, as well, where they generate the most controversy over whether the government should be in the business of nudging at all.
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For generations of economists, the reigning principle of human behavior has been that people are basically rational. The free-market system, and much modern conservative political thought, is rooted in the assumption that individuals themselves are best suited to make decisions about their own interests - and that their collective judgment, embodied in the market, is ultimately sound.
In recent years, however, it has become clear that people can be stubbornly irrational when making real-world decisions about the costs and benefits of what they do. The branch of economics focusing on these issues, "behavioral economics," came into being in the late 1970s, but was long considered a minor and eccentric subfield. In recent years it has become harder to ignore, especially since the 2002 Nobel Prize in economics awarded to Daniel Kahneman, a psychologist who, along with the late Amos Tversky, first identified much of the behavior in question.
The judgment errors behavioral economists have cataloged are the sort of tendencies most of us would recognize from our own daily lives. For one thing, we fear losses much more than we appreciate gains: Experiments have shown that most people won't take a 50/50 bet in which they might lose $100 unless they're offered a chance to win at least $200. In addition, we value immediate gains and costs more highly than those in the future - economists call this "hyperbolic discounting," and it's why we're so bad at saving money, dieting, and quitting smoking. We fall victim to "status quo bias," the tendency to stick with a familiar situation even when it would make more sense to change things. And most of us grossly overestimate our own abilities, whether it's to invest intelligently or avoid divorce.
The trouble, according to Thaler - an economics professor at the University of Chicago often named as the founder of behavioral economics - is that our brains didn't really evolve to calculate the probabilities and make the cold comparisons that economic rationality demands. We've developed cognitive rules of thumb to make sense of them, but those shortcuts don't always work.
"The thinking problems come from the fact that we have a slow, erratic CPU and the fact that we're busy," says Thaler. "So we try to rationally cope with that . . . but we cope in imperfect ways."
Simply giving people more choices, therefore - whether it's among healthcare plans, pension plans, or schools - is no assurance that they'll make the best choice.
So libertarian paternalists like Thaler and Sunstein argue there's a real need for someone to step in and guide us. But they do not hold the traditional liberal belief that a wise government mandate is the best kind of social policy; like laissez-faire conservatives, they see freedom of choice as an inalienable right, and an important check on the power of government. They're loath to give it up, even if it means people will often choose to be stupid.
"Liberals are right that sometimes people's choices are manipulated, or are not going to make their lives go well," says Sunstein, one of the most cited living legal scholars. "But conservatives have also been right, at least those that have insisted that government mandates have been too heavy-handed, too freedom-constricting. That part of Reaganism was correct."
Hence Thaler and Sunstein's faith in choice architecture. Just as a well-designed building or a well-built tool can shape a person's path or actions, a well-designed framework for making decisions, they believe, can lead people to outcomes that will ultimately make them happier. (Another leading behavioral economist, Matthew Rabin, a professor at the University of California, Berkeley, has come up with a similar concept called "asymmetric paternalism," which seeks to provide the most aid to people likely to make poor decisions while imposing the smallest cost on those who know what they're doing.)
Along with automatic enrollment, choice architecture has also produced the successful Save More Tomorrow plan, a workplace savings program in which employees can sign up to tie increases in their savings rate to future pay raises. Designed by Thaler and Shlomo Benartzi, a UCLA economist, the plan takes advantage not only of our natural status quo bias -- it makes increases automatic -- but also of both hyperbolic discounting and loss-aversion: by piggybacking on future raises, the extra money set aside doesn't feel like a loss out of people's paychecks. It is now offered by many large employers, and aspects of it were incorporated into the Pension Protection Act that President Bush signed into law in 2006.
Thaler and Sunstein see a wide range of uses for the nudge beyond retirement savings. Thousands of lives every year, they argue in their book, could be saved if organ donation rules were changed so that people had to opt out of being an organ donor rather than opting in. Charitable giving would increase if there were widespread adoption of a Give More Tomorrow plan similar to Save More Tomorrow. Divorces, they argue, might be less bitter and drawn-out if states promulgated a limited menu of default options that would serve as guidelines, rather than leaving every point wide-open for costly dispute. And healthcare plans like the Medicare prescription drug benefit would be less onerous and wasteful if the government made suggestions to participants about which option best suited their needs, rather than confronting seniors with a huge menu of complex choices.
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For all its success in the realm of savings and investment, as a broader political idea, libertarian paternalism is still viewed with some suspicion by thinkers on either end of the ideological spectrum.
For more liberal political theorists, focusing on individual decisions ignores the bigger threat to people's financial and social well-being: that employers are jettisoning the services they used to provide, and government has stepped away from its role in offering a strong social safety net.
"The background for this discussion is a massive shifting of risk from corporations to employees, as companies shed responsibility for pensions to their employees," argues Michael Sandel, a political philosopher and Harvard government professor. Whether the issue is retirement or healthcare or education (Thaler and Sunstein are, cautiously, in favor of school choice), traditional liberals like Sandel see nudge-type programs as a concession to the conservative idea of privatizing government.
The approach worries traditional libertarians and small-government conservatives, too, since it calls on the government to become a sort of hidden persuader - a role that is troubling in ways that more overt government action is not. Ultimately, as these critics see it, it still amounts to a government bureaucracy pushing an agenda, only a subtle one that would, as a result, be harder to politically confront. And traditional libertarians see no reason why government bureaucrats would be immune from the same crippling economic biases the rest of us suffer.
"I think the track record of governments providing helpful information is pretty awful," says Edward Glaeser, a Harvard economics professor. "We know defaults have power, the question is whether we're better off with a bureaucrat making the decision or an individual."
Nudge enthusiasts respond that the fact that we all are prone to the same cognitive errors doesn't mean we can't design better ways of neutralizing them. "We should talk about the likelihood that a government bureaucrat who's been working on this for a decade is going to make a worse decision than the average citizen who has barely thought about it," says David Laibson, an economist and Harvard colleague of Glaeser's.
And in realms such as retirement savings, healthcare, and organ donation, the government is already setting defaults. It makes sense, say proponents, to set those options intelligently - rather than randomly, as the US government did with millions of enrollees in the Medicare prescription drug benefit.
As George Loewenstein, a leading behavioral economist and a professor at Carnegie Mellon University, points out, choice architecture was a fact of life long before behavioral economists identified it. Part of the role of the government, as he sees it, is to shelter the individual from nudging.
"There are a lot of forces that are subtly arrayed against the individual consumer in the economy right now," he says. "There's the fast food industry that benefits when you eat unhealthy foods, there are banks that benefit when you overdraft, there are credit card companies that benefit when you run a balance, there are healthcare systems that benefit when you get sick, and there are drug companies which benefit when you take expensive drugs off-label when you don't really need them."
In that environment, he suggests, some guidance, and even some nudging back, is an appropriate update of the government's protective role.
"The idea that the government should be the consumer's ally to me doesn't seem like a particularly controversial one," he says.
Drake Bennett is the staff writer for Ideas. E-mail firstname.lastname@example.org.