Authors pitch solution to ‘bad’ decisions

Do people need help in making certain critical decisions? For example, should your state government restructure its Medicare prescription drug program to steer you toward the drug insurance plan that is best for you?

Your child’s school cafeteria manager could nudge him toward choosing healthful foods by displaying them prominently at eye level. Should she do this? Would you like your employer to nudge you toward saving a larger part of your paycheck?

If you answer “yes” to these questions, you agree with Richard Thaler and Cass Sunstein, two University of Chicago scholars. They are the authors of “Nudge,” a book that advocates nudging people toward making decisions that are “best” for them, in several arenas including personal finance, health, education and the environment.

Thaler and Sunstein claim that people often make “bad” decisions, meaning decisions not in their self-interest, and support this claim with studies by psychologists.

Further, according to the authors, psychologists have explained why we make bad decisions. We tend to follow the herd. We lack self-control, especially when we gain the benefits of a decision right away, but pay the costs in the distant future. We also make bad decisions when it takes a lot of time to study all available options – and often, as you might personally have found, we face many complicated options. Frequently we save time by simply accepting whatever default option is available.

Thaler and Sunstein choose a label – “choice architects” – for those who design the frameworks for other people’s decisions. Choice architects are very powerful people, partly because they designate the default options.

The authors describe their approach as “libertarian paternalism.” Their position is “paternalistic” because good choice architects nudge people toward choices that people, in a calm, reflective mood, would actually want for themselves. Their position is “libertarian” because each person would still choose for himself among a number of options, and no option would be blocked out.

The authors argue that Medicare’s prescription drug program for seniors is an example of poor choice architecture. In 2005, eligible Medicare recipients were asked to choose from a bewildering array of possible drug plans – in most states, more than 65 plans. This led to confusion across the country, with the predictable result that several million Medicare beneficiaries were left without drug coverage.

Seven million people who were eligible under both Medicare and Medicaid made no plan choice at all. The government’s solution to this problem was to assign a specific plan to each of the seven million, and, amazingly, the government selected each person’s plan randomly, without regard to the patient’s specific needs! Because some plans cover only 76 percent of the drugs that these patients typically need, many of our poorest and sickest were left without coverage of needed drugs.

Maine, alone among the 50 states, rejected random assignment and shrewdly chose instead a procedure called “intelligent assignment.” Medicaid beneficiaries who were enrolled in plans covering less than 80 percent of their required drugs were switched automatically to a plan with better coverage. All of these beneficiaries, according to Maine officials, are now in plans covering 90 to 100 percent of their drugs. This, according to “Nudge,” is good choice architecture.

Not surprisingly, some have raised strong objections to the Thaler-Sunstein arguments. Why assume, critics ask, that governments or company managers know more about what is “best” for a person than the person herself? And once we decide to nudge people on a few matters, won’t we eventually find nudging acceptable in many arenas? And surely there are at least a few self-interested or stupid choice architects both in companies and in government.

The Economist magazine offered this cautionary note: “From the point of view of liberty, there is a serious danger of overreach. … And what is to stop lobbyists, axe-grinders and busybodies of all kinds hijacking the whole effort?”

So do you support “libertarian paternalism”? Or do you think it is a terrible idea whose time should never come? You choose.

And if you don’t want to choose, doesn’t this support the “libertarian paternalist” view that people need help in choosing?

Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues. George Will is on vacation until August.