Russ Roberts:
Welcome to EconTalk, brought to you by the Library of Economics and Liberty. I'm your host Russ Roberts of George Mason University and Stanford University's Hoover Institution. My guest today is Richard Thaler, the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago's Graduate School of Business. He has made extensive contributions to our understanding of behavior challenging the traditional model of rational choice. He's one of the true pioneers in the area known as behavioral economics. And in 2003, with his colleague Cass Sunstein, he wrote provocative articles for the University of Chicago Law Review and The American Economics Review defending what the authors called libertarian paternalism. And in a recent episode of EconTalk, Edward Glaeser was critical of Thaler and Sunstein's ideas. So I thought we'd give Richard Thaler a chance to defend himself. Richard, welcome to EconTalk.
Richard Thaler:
Thank you. Thanks for having me.
Russ Roberts:
This idea of libertarian paternalism, one of your papers, your title claims it's not an oxymoron. Why don't you tell us what that is? What is libertarian paternalism?
Richard Thaler:
Well, maybe let's begin by defining some terms. So by paternalism, all we mean is attempting to make people better off as judged by themselves. So if I do something for you and my goal is to make you happy by your own lights, then I'm calling that paternalism. Libertarian, I'm sure your listeners are familiar with the term. For this, we just mean a policy that does not restrict anyone's freedom to choose.
Russ Roberts:
Non-coercive.
Richard Thaler:
Non-coercive, correct. And we believe that both terms are particularly unpopular these days. It's hard to find anyone who, outside of an economics department, that's willing to call themselves libertarian, and there is no greater crime than calling yourself a paternalist. But at least using the definitions I've suggested, we think both are attractive and both are possible.
Russ Roberts:
And why would it be justified? Why would it be justified to act in a non-coercive way in someone else's self-interest? What would that mean in practice?
Richard Thaler:
Well, the first and most important point we make is that policymakers be those working for government or in the private sector. Anyone who has to determine rules and operating procedures have to choose something and there's no way around that. So, an example we use to motivate our paper, it's not quite a hypothetical example but let's consider it that, is the example of a cafeteria director. The cafeteria could be anywhere, let's say it's in the school, but it could be in a company. And the cafeteria director discovers that lots of details influence what people eat. Let's say the order of the food, maybe the things that are placed at the beginning or the end are more likely to be selected, or the things at eye level.
Richard Thaler:
Anyway, she learns this fact and then is confronted with a choice, which is how to arrange the food. So she could arrange the food in a way to make people as healthy as possible, or as fat as possible, or she could do it in such a way as to maximize the bribe she gets from suppliers, there's all kinds of alternatives. But the point is that she has to pick some arrangement, and certainly picking the arrangement that's designed to make people better off is as defensible as any and we think it's more defensible than any.
Russ Roberts:
Well, I like that example and I want to encourage our listeners to take a look at some of the original papers that we're talking about here, that we'll put up links to on the EconTalk website. That's a fascinating example and on the surface, it seems rather neutral. Surely the person in charge, the manager, surely she should choose the order or the placement of these items to make the cafeteria customers as happy as possible. That's not quite though, you're asking something stronger than that in the paper, which is…that's easy in a sense, right?
Richard Thaler:
If it's easy, then tell me about it.
Russ Roberts:
Well, I'm going to take the way you the phrase example in the paper. In the paper you say... Actually, let's back up a minute. One of your insights, which I think is one of the things that makes this area so interesting, is that the placement of the articles may matter, right?
Richard Thaler:
Right.
Russ Roberts:
That's an important thing to start with. So the claim is that if you put the ice cream first and then the fruit, people are more likely to take ice cream even though the fruit after going there day after day, they know there's fruit, but there's something so appealing and tempting about the ice cream, they take the ice cream. Whereas if they put the fruit first, if the manager puts the fruit first, people are more likely to take the fruit. Now, those kinds of challenges, it's a big issue in survey design, it's a big issue in choices that you talk about, order matters, how the question's framed, the choices frame matters, the status quo matters, the level that these things are set at might matter. But in the simple case of ice cream and fruit, your claim is that if the ice cream is tempting to people she should put the fruit first.
Richard Thaler:
Well, I'm just saying that she has to put them in some order and that the idea that she can somehow avoid this choice that's an illusion, there has to be some order and there's no neutral placement.
Russ Roberts:
Well, she could move them around.
Richard Thaler:
She could. She could say that.You can make a very principled argument that she should choose an order at random. And I think that's a defensible position, but I think it's an extremist position. And I'm not such an... I think an extremist libertarian might defend that view, though I think they'd be hard pressed to really defend that.
Russ Roberts:
Well, I'll cast myself as an extremist libertarian. I would not defend that view, I think that's the wrong extremist libertarian position. I think the extremist libertarian position would be in a private sector. Let's stick with a company case now not a school case, in a company case, companies set up their cafeterias in a way to attract employees. So they have a natural incentive to array their food choices and everything else in the company, be it benefit plans, work environment, monetary and nonmonetary benefits. They have an incentive to attract employees, and so therefore their incentive is to make employees happy. So why wouldn't that be the default that would emerge from a market solution? And why would you even worry about this idea of paternalism? Why would they be anything different? That is if a manager is corrupt and takes bribes from suppliers, as you mentioned earlier, and puts the food or chooses bad food because she's corrupt, she'll pay a price in the marketplace.
Richard Thaler:
Well, let's move to the topic of saving at least briefly, maybe we will cycle back to that. But we know that for various historical reasons, for defined contribution plans, which haven't been around for all that long, the default option has typically been to not join the plan. So when an employee first becomes eligible for a 401(k) plan, they typically receive some notice in the mail that says you're now eligible for this plan and if you'd like to join, please fill out that form. And virtually all companies ran their pension plans that way. Now, what we've learned is that if you switch the default and make the default so that when people become eligible for the plan, they get a letter that says you're now eligible for the plan and unless you fill out this form, we're going to enroll you.
Richard Thaler:
Now, standard economic analysis of this would say two things. One is that this won't make any difference, these benefits are worth many thousands of dollars, the cost of filling out a form is trivial, so this will have no effect. But secondly, I think the argument you were making a minute ago would be that if one of these is, in fact, better than the other counter to expectations, then companies will certainly have the incentive to adopt then the better one. And what we see is both of those predictions are wrong. So the automatic enrollment has huge effect, sometimes as much as a 40% increase in enrollment. Eventually most people figure out it's a good idea to join, but it happens much faster with automatic enrollment. And essentially until a few years ago, virtually no company did this, what I'm calling the right way. And now gradually they've come around to adopting to do what I think is a better way.
Russ Roberts:
Oh, that's a very nice example. And I, let's take the empirical side is true that requiring people to opt-out rather than having the default be to have to force people to opt-in, encourages people to save more, I think that's very plausible, and I believe that. And I think the standard arguments that economists would give for that difference emerging of procrastination, transactions cost are not very convincing because as you point out, these are very large amounts of money and the transactions costs are relatively small. So let's say that's true. What's the implication of that other than you've uncovered an attractive way for firms to compete in the marketplace and firms that adopt that, the better way, will thrive and the ones that don't will not thrive?
Richard Thaler:
Well, but the argument you were making earlier was that they will have already figured that out. And the point is they haven't.
Russ Roberts:
Well, they have, they just needed your help. There are $20 bills on the sidewalk for a while before somebody figures out how to pick them up. But, but let's say...
Richard Thaler:
But let's go back to the cafeteria. You're suggesting that we needn't worry about a paternalistic way of arranging the food because surely if this cafeteria is in the private sector, they will have already figured that out.
Russ Roberts:
Well, actually I'm making a different point there. I don't think we need to worry about a... I don't think it's paternalistic in the normal sense of the word, I think it's self interest on the part of the company to try to find those things that make their employees happy. The real question is in these situations where it's difficult to define... Let me say it differently. In these situations where people have trouble finding their own self interest, I don't understand why a third party is going to be any better. That's my challenge to this train of thought. I don't understand why for example, if... I don't know why the company manager would not serve ice cream, say. Why that would necessarily be in my self interest if I like ice cream. It's not clear to me what the perfectly benevolent manager would do in that situation. I understand what the manager would do in her own self-interest, she should try to make people come and work at her firm and come to the cafeteria. But if she is truly benevolent, what should she do?
Richard Thaler:
Well, I think that she should... Let's continue on the savings example for a minute and talk about another detail of the 401(k) plan. Something that the companies have been very reluctant to do is to offer their employees advice about how to invest. Now, you'll be happy to hear that the government has something to do with that. In particular, the current Labor Department has been particularly dull with it on this particular front.
Russ Roberts:
Meaning on which side? That they discourage advice?
Richard Thaler:
Well, let me come back to that, so I'll elaborate on that in a minute. But a point that is often missed and the point that I think Ed Glaeser doesn't really appreciate is that there are lots of economies of scale in many situations. So, in a typical company, most of the workers know approximately nothing about investing. Surveys reveal that they think that the company they work for stock is safer than a mutual fund, where I think virtually every economist on earth thinks that investing in your own company is the dumbest thing you can do. And there's a whole host of equivalent things you can point to that people are unsophisticated about investing.
Richard Thaler:
Now, it seems likely that in almost any company there will be someone who is more sophisticated than the median employee, who can offer what will be sensible advice, now, I call that paternalism. And I think a good pension plan will have a default investment fund that is chosen to help the unsophisticated investors. And again, I call that paternalism, you may want to call it self interested, but I think that's just arguing about words. We're both aiming for the same thing, which is to pick a fund that the employees is our best guess as to what they would pick if they went out and got a PhD in finance.
Russ Roberts:
Well, let me disagree with you a little bit there. Again, a very interesting example. You're surely right that many individuals don't have as much knowledge as a PhD in finance and we don't have as much knowledge as a medical doctor or a car mechanic unless we are one of those folks. So what we do in the real world is some of us blunder forward and make stupid mistakes, obviously. Some of us learn from those mistakes, some of us don't but most of us go out and try to find advice from people who we think at least have a chance of having our self interest at heart and those are friends, relatives, so-called unbiased sources.
Richard Thaler:
Where's the evidence that most of us go out and get advice?
Russ Roberts:
Well, I don't know. When I go to a doctor, I don't just look at a random look through the phone book, maybe some people do. When I go get my car repaired, I ask around, I say, who do you use? Did you like him? When we go and choose all kinds of things, we read consumer reports, we ask our friends, we ask our parents, we ask our children. I don't know, we get advice from lots of places.
Richard Thaler:
So this is research by introspection. We've done some somewhat more systematic in this domain. We did one survey of Cornell faculty members asking them how they went about choosing their asset allocation and the extremely generous defined contribution pension plan at Cornell. And we asked them how much time they spent on this, this will be hundreds of thousands of dollars for the typical faculty member. What we found is the typical person spent less than half an hour, the most frequent person they asked advice from turned out to be the clerk who was in charge of receiving the forms that they had to fill out in order to become an employee. So yes, it's true that people have lots of incentives to go seek expert advice but the evidence is they don't.
Russ Roberts:
Well, I guess your presumption about the rationality of Cornell University professors might be different than that of the average listener's presumption. But let's take that example. I don't spend a lot of time on my allocation. I've made a decision a long time ago to invest in index mutual funds, which I think is roughly in line with this mythical PhD in finance advice that we'd get. So the amount of time I spend isn't really the right issue.
Richard Thaler:
Oh, no. It's the amount of time you spent when you first made that decision. And if in half an hour, you decided to put all of your money into a money market because the clerk told you that you're crazy to invest anything in stocks, then since we know that the typical person makes... you're typical in this regard that most people make no changes to their plan, rebalancing is extremely rare. And so the fact that they made not much of a time investment initially can have profound effects, hundreds of thousands of dollars in costs.
Russ Roberts:
No doubt. I do rebalance by the way for what it's worth, but I suppose I'm unusual. I think the real question though is, and on the empirical side I would add the subscriptions to and purchases of money magazine and other consumer reports as I mentioned before, I do think people do turn to advice and I do think they turn to friends. But here's the real question if you're right, which, again, I think there's certainly some evidence that you're right, the question is how big the problem is, that people don't "spend enough time on their financial decisions or their marital decisions or all the other myriad of choices we make in life," who should make the decisions for them? And in life, we choose who we ask for help.
Russ Roberts:
And you're right, some people don't ask for enough help, they marry people who are unfit for them, they choose bad portfolios, they buy cars that are a bad fit for their family size or their demographics or their age or their comfort or their height, people make mistakes all the time. The real question is who should help them? And in the cases we've mentioned so far, which I think we actually pretty much agree on, we've talked about private help, we've talked about for example, an arranged marriage, I think arranged marriages should be legal. Most people don't like them anymore but we understand that there's a certain wisdom to an arranged marriage. They don't do very well in the marketplace but there's a wisdom to it. That's a voluntary choice to get help.
Russ Roberts:
If I work for a company that has lots of paternalistic attributes, discounts for the healthcare club and the fitness club in the company, or a healthy option in the company cafeteria, if I choose to join a company like that because I have self control issues or I think it will help me, I have no problem with that. The problem I have is with the government, which is where I think this really hits the road and you admit as much in your paper, that many libertarians will be okay with this in a private sector setting, it's the government sector. So let's move to the tougher case of government involvement in these decisions, acting in our self interest in a paternalistic way.
Richard Thaler:
Okay. So let's turn to, this will only be a small change, but let's turn to the research I did on the Swedish social security privatization.
Russ Roberts:
Very interesting. Tell us about that program to start with and then what you found. It's a fascinating story.
Richard Thaler:
So, in the year 2000, when President Bush was running for president partly on a campaign of a partial privatization of social security, Sweden was busy adopting something very similar to what Bush was proposing. Namely 2.5% payroll tax that would be directed into a system of individual accounts. And so the design of this system... One of the interesting things about the Bush plan was there were never any details revealed almost right up until the point at which it died, the proposal died, but-
Russ Roberts:
It was a real trial balloon, it never got my air in it. It was a bizarre-
Richard Thaler:
Well, there turned out to be a specific proposal, but I think almost nobody knew what it was. I'll talk about that in a minute. But so in Sweden, they actually launched the thing, so we can see how they did it. And they adopted an approach that I would think you would greatly approve of because it was really a pro-choice, free-market approach. People were allowed to direct their own portfolios, and any fund that met certain fiduciary responsibilities was allowed in, they were allowed to charge whatever they wanted, funds were allowed to advertise. There was the biggest advertising campaign in Swedish history in an attempt to get money into these funds. And now this system got then 456 funds in the plan, that number has now grown to over 600.
Richard Thaler:
Now, there was a default fund that they picked which they more or less had to. That you could have had a system where people were forced to pick on their own, but I think they were worried that some people wouldn't return the form and then what would happen to their contribution. In any case, they picked a default fund and I think most economists would agree that they did a very good job of that. The fund had very low fees, it was well-diversified, the fees in this fund were only 16 basis points, so that's 16% of 1%. And altogether it looked terrific, I personally would have been happy to invest in that fund.
Russ Roberts:
Who managed that fund? Where these 456 all privately managed?
Richard Thaler:
All privately managed. And this was privately managed, but they had competitive bidding to manage the components of it. So presumably some bureaucrat or bureaucrats decided on the asset allocation and then they had competitive bidding.
Russ Roberts:
Very clever.
Richard Thaler:
So the US, I believe all of the investing in the US was done with index funds with even a little hedge fund exposure, a little bit of venture capital exposure, and even with those components, it was only 16 basis points which is surely lower than your or I pay on our retirement investment.
Russ Roberts:
Just to clarify, this Swedish available to Swedish citizens had some investments in the US assets, in hedge funds along with other international assets, Swedish assets, et cetera.
Richard Thaler:
Correct.
Russ Roberts:
And I think it was, was it 82% equity?
Richard Thaler:
Over 90%.
Russ Roberts:
Any default? I think it was something like-
Richard Thaler:
There was over 90% equity. That was pretty much a policy decision that was based on the idea that most of the social security benefits were defined benefit and was like fixed income. And the thought was, this was the part of their portfolio people should have in equities and the rest, which was much bigger, would be like the fixed income. So now we can... They also did something interesting, which is they launched a big advertising campaign, they being the government, launched a big advertising campaign discouraging people from taking the default fund and saying, "It's your Swedish duty to choose for yourself." And they published a book that had all the information one would want about all the funds and encouraged people to choose a portfolio for themselves, they could pick up to four or five funds.
Richard Thaler:
And so I wrote a paper on this with a Swedish graduate student of mine named, Henrik Cronqvist. And what we did is we compared the investments people made on their own to the investment in this default fund. And the investments people made on their own had much higher fees, much more poorly diversified, half of the money they invested was in Swedish stocks, this we call and finance the home bias. People have a tendency to invest in their home country. Sweden has about 1% of world product and 1% of the assets in principle should go into Swedish stocks, but they put half of it into Swedish stocks. And because this was launched in 2000, there was also heavy tech component in what people purchased. Not surprisingly, they purchased funds that had been doing very well in the past. And not surprisingly, those funds did extremely poorly after the thing got launched. The average investor lost 40% of their money in the first three years.
Russ Roberts:
Okay. Keep going.
Richard Thaler:
Well, so what would a libertarian paternalist do with this proposal? My only real complaint is that they discouraged people from electing the default. If they had done everything exactly the same way, but said look, if you're not sure what to do, in Sweden we have access to lots of really good economists, all the ones who want Nobel prizes come and give talks here. So we've designed a pretty good fund and if you have any doubts you might take that one. That would be fine. Now we have a sense of what would have happened under that because we've been monitoring what young workers are doing now as they newly enroll in the system. And over 90% are electing the default fund. Now-
Russ Roberts:
Partly maybe because it's done so well, but partly maybe because of the status quo bias.
Richard Thaler:
That's right or for lots of other reasons. The advertising campaign trying to convince people to choose for themselves has stopped, so for lots of reasons people are doing that. It looks like, my guess is, and we'll never know, but my guess is that if they had launched this without the big advertising campaign, well over 80% of the money would have gone into the default fund. And one can even ask whether it would make any sense to have choices at all in that fund. And the reason why one would ask that is it's quite costly to administer a system with so many choices. And since this is a small portion of everyone's portfolio, there's no reason why people couldn't alter their asset allocations elsewhere. But I'm not pushing that very hard. I will say the following, that the Bush administration seems to have paid some attention to this experience because in 2005, when the privatization plan proposal resurfaced, the number of options was going to be a number like five or six.
Russ Roberts:
Yeah, I remember that.
Richard Thaler:
So, I think the lesson was learned. Now, the lesson was not learned in the prescription drug program. Now, I suspect that you're not a fan of the prescription drug benefit, but let's not argue about that, I'm not either. But we behavioral economists are interested in design features and...
Russ Roberts:
It was a disaster.
Richard Thaler:
It was a disaster, now why?
Russ Roberts:
It's just complicated.
Richard Thaler:
Well, the most important thing they were concerned with is maximizing choice. So there are 40 to 60 options in each state, they differ by state. And now here's something amusing that most people don't know. If you were on Medicaid and there was a prescription drug program there, you were forced to switch to Medicare. If you didn't choose for yourself, they would put you into one. And you know how they did it?
Russ Roberts:
I'm going to guess and say randomly.
Richard Thaler:
Correct.
Russ Roberts:
That's because I don't have as much faith in those government officials benevolence as you do. What you're trying to do-
Richard Thaler:
No, no. They're doing just what you'd want, they're being principled libertarian and not choosing for people.
Russ Roberts:
Perhaps. I think I want to come back to the-
Richard Thaler:
No, let me just respond to that.
Russ Roberts:
Sure.
Richard Thaler:
Which is, it's not possible to have less faith in government officials, particularly the ones we've been dealing with for the last six years than I have. There's absolutely nothing in anything I've written that would suggest that I want governments to do more than they do now, or that I think that they're particularly competent. What would make you think I think that?
Russ Roberts:
Because the whole theme of this paradigm is that government officials often have to choose something. Just let me know if I'm being fair to you. Government officials have to choose something that inevitably will have consequences for how people behave.
Richard Thaler:
Or part of it.
Russ Roberts:
Right, good. So what they should do is choose since they have to affect my incentives and my status quo and my default, they should choose in a way that takes care of my self interest. But since I don't have much faith in their interest in serving my self interest, and I don't have much faith in their knowledge of my self interest, why would I want to push that idea?
Richard Thaler:
Well, what would you charge them with doing?
Russ Roberts:
I'd get them out of the business that they're in.
Richard Thaler:
Well, we can't.
Russ Roberts:
Why not?
Richard Thaler:
Well-
Russ Roberts:
Let's go to the Swedish case, let's take the Swedish case.
Richard Thaler:
Okay.
Russ Roberts:
And I want to come back to that because it's so interesting. You make a very interesting case, they gave a lot of choice, turned out maybe people made some bad choices, I'm sure they did, they foolishly opted away from the default for sometimes because of this advertising campaign or for other reasons or self hubris, and they foolishly chose some plans that were awful. You're recommending there should be one plan.
Richard Thaler:
No.
Russ Roberts:
Sorry, sorry. Careful. You said that wouldn't have been so bad, maybe that's not the best thing, but certainly less choice would have been better. And that the Bush administration's movement towards five or six choices is better than the plethora we're faced with. And I would say two things to that. One, I would ask why is it that our private employers, when giving us choices for our pension plans, give us so many choices if indeed our self-interest is really to be restricted as you suggest? And secondly, wouldn't it be better to get the government out of the pension business and let the private sector and individuals make their own choices? Wouldn't that be better?
Richard Thaler:
Okay. So let's answer those in order. The first is that in the private sector, what we're seeing is retrenchment. So there has been... The number of funds in plans has been growing and plan sponsors and 401(k) administrators have been realizing that the number of options is probably too big. And how do we know that? Well, there's research that the more options there are, the longer it takes for people to get around to signing up because there's some paralysis and the more options there are, the more people that elect to put all their money into a money market account because they're so flustered that they don't know what to do. And what we're going to see, in part because of a provision in the new pension bill that I helped in some ways get through, is that companies will be offering better default options, more advice, and more and more people will elect those. So, much like what I would have liked to see in the Swedish plan, which is offer as many options you want, but have a simple way for the unsophisticated people to elect something good.
Russ Roberts:
I just worry that default plan will be subject to public choice issues of pressure from this group or that.
Richard Thaler:
Well we're talking about private sector so far.
Russ Roberts:
But then why were you talking... I'm sorry, I misunderstood. What bill were you talking about then?
Richard Thaler:
The pension bill has made it easier for companies to offer good default plans by giving safe harbor so that they don't get sued by somebody if they default them into something that goes down.
Russ Roberts:
Oh, that's very interesting. Okay so because people have a tendency to go for the default, these companies were afraid to offer a strong default option because of that worry.
Richard Thaler:
Right.
Russ Roberts:
Oh, that's okay. Okay, that's interesting.
Richard Thaler:
And the problem in the Labor Department that I referred to is that the Labor Department has been unwilling to say anything that has any risk of going down is prudent.
Russ Roberts:
That's because they're risk averse politically, just like the designers of that awful prescription drug benefit. I think they were worried that if they only had a limited number of choices, they'd be accused of being socialists or helping this group or that group. And so they offered this bewildering array and it wasn't very successful.
Richard Thaler:
But it seems to me that your claim that, look, we'll just started to get the government out of this is completely unrealistic. There are some things the government does, we can have them do it well or poorly. And I think we're all interested in improving the services that the government provides in the sectors where they provide it. And remember that half of our term is libertarian and we're not interested in the government making decisions for people. We're interested in having the government help unsophisticated people make better decisions without restricting the freedom of people who are informed or who mistakenly think they're informed to choose for themselves.
Russ Roberts:
I prefer a different approach. Let me try something different, see if this gets closer to a more realistic argument. I'd argue that people are very heterogeneous, a point you recognize in your paper, you worry about this, and I think you're absolutely right. People are heterogeneous. So, the default that's good for one type of person might not be the ideal default for another. People have a lot more information about their own situation than any corporate HR manager or government employee or agency head could have.
Richard Thaler:
That's an empirical question by the way, we'll come back to that.
Russ Roberts:
Agreed. I accept that. I understand and you have some interesting things to say about it. Maybe you'll have a chance to say it in this podcast, it's a little off the track but it's very interesting. So I'm making the claim that individuals have more knowledge of what's in their own self interest than others do. And these default solutions they're one size fits all.
Richard Thaler:
Not necessarily.
Russ Roberts:
Okay, why not.
Richard Thaler:
So for example in the 401(k) world, the most common new defaults are what's called time dated. So there you pick a fund that's based on your age.
Russ Roberts:
Good idea. That's a start.
Richard Thaler:
That's a start.
Russ Roberts:
And that's interesting.
Richard Thaler:
And there are also what they call lifestyle funds that you pick a fund based on your risk preferences. So there are three funds and they're just low, medium, and high risk. That's probably as much insight as 90% of the participants have about their own preferences.
Russ Roberts:
Might be 95. I think we're on the same side here.
Richard Thaler:
So, this is just not a fatal flaw. There's no reason that smart defaults need to worry about that. And that's precisely the problem that the prescription drug program, they didn't offer any help to people in trying to figure out which of these 50 plans would be best for them.
Russ Roberts:
Well, again, I certainly agree with you in the case of private pension plans and the array of choices we're given. We haven't talked about this, but certainly I think it's good that these economies of scale issues you talked about in the case of automobile manufacturers, they always include, most of them not all of them, but almost all of them include a backseat. It's not an option, you got one. That's what most people want, it's cheaper that way, and there are other things that are options, they're add-ons, et cetera. So in the private sector, I have no problem with that, I have no problem with them. The Model T was a very clever idea, it was the default, there weren't any options. These are all recognitions by the marketplace that we often do have trouble making choices that sometimes too much choice is paralyzing or for whatever reason we make the wrong choice.
Russ Roberts:
And so there are market incentives for people to be helped in all kinds of ways. The tougher issue is, where we were stuck on here, which I want to probe, is this issue of government involvement. You said, "Well, it's unrealistic to say the government shouldn't be in the retirement business." It is unrealistic, I agree. I think we've come a long way toward a more private, voluntary retirement world than we were 25, 30 years ago, but we're still not very close to it.
Russ Roberts:
But you as an advocate, you as a social scientist, you as a caring benevolent person, in most settings I assume, why would you want to push for government to have the power to offer that default in that setting? Why wouldn't you push in the other direction to offer more choice, more heterogeneity, and encourage people then to go out and get some help? Why would you want to give the government with all those incentives that they face, which are not yours? I think you're probably a really nice guy. I don't know you very well, but you seem like a nice guy who really would give me good advice about my portfolio, but why would you assume, coming back to this question about the Medicare benefit, why would you want to push the government in that direction, given that they seem to do it rather poorly?
Richard Thaler:
Well, no. What's the alternative? They've launched that plan for better or for worse. That plan wasn't your idea or my idea. What I do is give people advice about how to organize things they're doing. So the government, the Bush administration, decided to have a prescription drug benefit. If they had asked me how to do it, I would have said have fewer choices and have sensible either default or guided choices to help people pick a plan that's best for them, that's all, that's libertarian paternalism.
Russ Roberts:
So maybe we've found an area of agreement here. So we're saying that-
Richard Thaler:
I don't think there's any disagreement. I think that your disagreements are all imaginary because you can't get around the fact that we're not forcing people to do anything.
Russ Roberts:
No, that part's not what bothers me. I can get around that. I think the problem I have, for example, in this case of say that the Medicare plan, is the very notion that somehow in a world of tens of millions of seniors, the idea that the government should choose a default plan that is in the best interest of seniors, that is an illusion.
Richard Thaler:
No, no. But now you're falling into the trap of thinking there's one.
Russ Roberts:
Okay, pick 10, pick 12, pick it by age, pick it by sex.
Richard Thaler:
No. Pick by age... Look, they can have the 50 that they have and then have a simple way of guiding you based on your age and health experience and what drugs you're on. But they just didn't want to go down that path. They set up websites, but they made it very complicated and there's other things that we don't want to get into the details of because the formularies are stochastic, they've made the problem extremely difficult. But the point is that they could have made it in a way that will make it easier for people to make good choices, that's all I'm about, that's it.
Russ Roberts:
Okay. Well, I think we agree that when government is in an area, whether it belongs there or not, it would be nice if they try to make their involvement in our lives as beneficial as possible.
Richard Thaler:
Then you're ready to join the libertarian paternalism party.
Russ Roberts:
I don't know. I sense a little more enthusiasm in your papers, but maybe I'm being-
Richard Thaler:
I don't think. Re-read them, I don't see where you'll find us expressing any enthusiasm.
Russ Roberts:
Okay. I want to turn to one more issue that you brought up in one of these papers we're talking about that I found so interesting and it refers back to another podcast we did with another colleague of yours, Richard Epstein. You talk in one of the papers about the market for organ donations and the opt-in, opt-out differences between the United States and Europe. Could you talk briefly about that?
Richard Thaler:
Well, as you know in the US, to volunteer to allow your organs to be harvested, you have to take some action. Typically, it's to sign the back of your driver's license and get two witnesses to sign it and so forth and so on. I invite people to look at their driver's license and see whether they've signed it. So that's an opt-in system. In many European countries, they have adopted an opt-out system. So sometimes called presumed consent, that you're presumed to have given your consent to have your organs harvested unless you've signed the back of your driver's license or some equivalent. Now, not surprisingly many more people agree to have their organs harvested under an opt-out system than an opt-in system.
Russ Roberts:
It's a dramatic difference. Do you have the numbers handy because those are very interesting.
Richard Thaler:
Well, it's a dramatic difference in willingness at that step. This is not a panacea because in order to harvest the organs, there are a lot of other things you have to do, you have to have infrastructure. But more than 90% of people agree under an opt-out system to allow their organs to be harvested-
Russ Roberts:
In Europe.
Richard Thaler:
...in those countries in Europe. And Spain turns out to be the country that's best at harvesting organs. And this is one of many things they do.
Russ Roberts:
But in the United States, where you have to opt-in and take an action to give away your kidney...
Richard Thaler:
Then we're not getting as many organs as we could.
Russ Roberts:
And not just as many, but the number of people who are at least willing to have them be harvested is dramatically lower. Correct?
Richard Thaler:
Correct.
Russ Roberts:
So I thought that was a very interesting example and I think, as you point out, it's not a cultural difference, it's just the institutional structure, the incentives. Would you advocate a move in the United States toward an opt-out instead of an opt-in?
Richard Thaler:
Yeah. Although I think in this domain, the choice that I would prefer is what we might call required choice. So I think the proposal I would favor is when you get a driver's license, you must check one of those two boxes. And I think the reason for that is just that this is a emotionally charged issue. And I think that system might be politically more acceptable.
Russ Roberts:
Yeah, that's a very... A lot of things come into play there. I think even if the European system did systematically generate more organ donations, a lot of people I think would be uncomfortable with it philosophically just as they are uncomfortable with what I think is the best system, which is a market solution where people can buy and sell organs. People are squeamish about that for emotional and philosophical reasons, even if you could convince them that it'll lead to more kidneys and more lives saved, they still might not favor it. And similarly, I think the idea that the government owns your kidney and unless you claim it back, it would make some people uneasy. And doing it in front of a clerk is a weird thing. As you said, there’s something emotional about it, it's highly charged, it's a very thought provoking policy issue.
Richard Thaler:
So, I think my proposal there would be the required choice. And that seems to protect everyone's rights and I believe it would produce more organs. But again, this is just another example where the government has to choose some rules and we think that they should think systematically about which rules are going to make society better off.
Russ Roberts:
Yeah, but the problem is better off is hard to define. There is no interest of society, we're all different. I think probably that's where we part company in terms of my chances of becoming a libertarian paternalist. When we say things like government should act benevolently or beneficially or in our self-interest, there's no way[SB1] . And so it's often hard to define. I like the idea of multiple defaults, that's a good way to head in the right direction.
Richard Thaler:
No, no. But I'm not letting you off that easy. If governments aren't going to act in what they judge to be the best interest of the citizens-
Russ Roberts:
I don't think they do.
Richard Thaler:
...what should they do?
Russ Roberts:
What they should do and what they actually do are two different things.
Richard Thaler:
No, no. But we're only arguing about what charge to give them. Now, you may say it's difficult or that they are incompetent and I would agree with both of those. But the question is should they pick things at random? Or what we argue at the end of our paper is that we see no alternative to libertarian paternalism unless it's what we call benign,no, what we call inept neglect.
Russ Roberts:
Would be the random or whatever.
Richard Thaler:
Well, so you could try to pick things that will make people worse off.
Russ Roberts:
You're talking about what government should do.
Richard Thaler:
That's it. [crosstalk 00:54:18[SB2] ].
Russ Roberts:
But it isn't what government does. So I think you're talking about proselytizing government to act in a way that would be more in line with what it could be. Then that's an interesting idea. I don't believe in proselytizing government, I think that's a false strategy to think of ask what should government do because that's like asking-
Richard Thaler:
Aren't you proselytizing government to shrink?
Russ Roberts:
No, I'm proselytizing my fellow citizens from time to time in my personal philosophical meanderings. I encourage my friends and family and anyone else who wants to listen that it's good for government to be smaller than it is now. And I hope, perhaps unrealistically, that those preferences will sometimes be translated into political reality. But I wouldn't want to proselytize my friends to encourage government to be kind to us or good to us because that's like encouraging pigs to fly. It's not in their choice set, it's not in their toolkit. You think it is? If you had an hour with President Bush, would you want to encourage him to be a better person? It'd be a waste of time. He is what he is, he faces the constraints he faces.
Richard Thaler:
No,but I think that, look, I think it was easy to influence the Bush administration to make their social security privatization plan better. And that's what we economists always do when we're advising governments the design of policies. And I think that there are lots of ways, just lots of ways of improving the response to Katrina, there's lots of ways of improving the prescription drug program, there's lots of ways of improving everything that the government does. And just to throw up your hands and say they are a bunch of dumb crooks isn't very helpful.
Russ Roberts:
But if you're not careful in your desire to make them more effective, you'll miss out on solutions, where if they would step aside, we'd have a better solution.
Richard Thaler:
Why?
Russ Roberts:
Because I think for example, that in the case of aid to hurricane victims or 9/11 victims, or all kinds of things like that, the political influences on government are not very healthy. Don't work very well and private solutions would be more effective.
Richard Thaler:
Well, then let's encourage those. There's no either or here. And whatever private sector solutions are, they would benefit by the same tools that we're talking about.
Russ Roberts:
I agree with that.
Richard Thaler:
We're equal opportunity here and most of what we're pushing for is aimed at the private sector. But we think the government could use our help as much as anybody.
Russ Roberts:
We're together on the private part, that these insights are very useful. And I think they're useful for listeners to think about their own behavior, where we have faults or things we could improve, it's good to be aware of biases that we have. And your work has been a very enriching aspect of economics and we're on the same side there.
Richard Thaler:
Okay.
Russ Roberts:
My guest today has been Richard Thaler, the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago's Graduate School of Business. Now onto your emails. Pascal Bernard writes from Paris, France. Sir, as many other listeners, I really enjoy your podcast since it's not only interesting and insightful, but not as dry as most economic literature I'm treated to as a student. Unfortunately, I couldn't quite follow the conversation on baseball, the Moneyball Podcast because as a European, this game will forever remain a mystery to me. Nonetheless, I dare to propose two topics which well might relate especially to my European context, but should be of some interest to Americans too. What does economics to say about government's duty, role, futility, et cetera, in trying to prevent or break up monopolies? The case of Microsoft comes to mind. Both the Department of Justice and the European Commission tried to change the firm's behavior in what was allegedly the consumer's interest. Is the remedy worse than market failure in the first place? Maybe you have some new unconventional insights into this problem.
Russ Roberts:
The second topic goes in the same direction. In France, the theme of [foreign language 00:58:46] has become evermore fashionable. But this economic nationalism is, in fact, no stranger to the US, I guess I don't have to remind you of those daunting Chinese trying to buy one of your oil and gas companies or the Arab bid for some of your ports. These cases definitely are not market efficient responses, but is there a link between a nationally owned company, meaning not in foreigner's hands and it's employment policy, growth prospects, for politicians always purport to try to prevent jobs for being outsourced overseas in the wake of a foreign takeover? I'm looking forward to comments on these subjects. Pascal, thanks for your letter. You raised two very interesting areas for discussion. First, the effectiveness of antitrust policy and second, the virtues or lack thereof when governments insist on economic nationalism or as you so gracefully, put it, in what I assume is your native language, [foreign language 00:59:38].
Russ Roberts:
On antitrust, the question is whether the harm outweighs the benefit. A lot of people assume that antitrust is all benefit, they assume that competition's good and that antitrust policy advances competition. The first statement's true, competition is good, but the second statement doesn't necessarily follow. Just because it's called antitrust, doesn't mean it increases competition. It can often be used, and all government power is prone to this, it can often be used by the politically powerful to protect themselves from competition. And I'm afraid I don't have the unconventional insights you're looking for, but I'll try and find someone who does for a future podcast.
Russ Roberts:
On economic nationalism, let me give you one ironic historical example. In the early 1990s, there was a Frontline documentary called Losing the War to Japan. The worry was that Japanese companies were coming into America and giving all the good jobs to their Japanese employees. Americans were stuck answering phones, teaching people how American companies like Nintendo, how their games worked. So in the early 1990s, Americans were worried about getting stuck with call center jobs because of foreign owned companies. And today Americans are worried about losing call center jobs to foreign based companies. So there's always a tendency for the political chaos around us to use these examples of economic nationalism to scare Americans about how a foreign company is going to steal our jobs or if it comes here, it's not going to give the best jobs to Americans, or if a foreign company buys some American asset, they're going to use it in some sinister way.
Russ Roberts:
Now, I assume that foreign companies, whether in the United States or overseas, are trying to do the best they can. Most of them are in a very competitive marketplace and if they don't do the best they can, they're going to go out of business. Now, doing the best you can sometimes means hiring Americans, sometimes it means hiring foreigners, but it's hard to find any evidence that foreigners are buying up American assets or bringing their companies here to America in order to destroy the American economy and that they're sacrificing profits or competitiveness to do so. In general, it's good for assets and people to be employed in their highest valued use. Keeping out foreign companies rarely advances that goal and economic nationalism is usually an excuse for advancing special interest cloaked in the disguise [foreign language 01:02:02] or patriotism as we call it America, in English.
Russ Roberts:
Thanks for your letter, Pascal. Either of the topics you mentioned would make a good podcast in the future. As for baseball, you might try the novel Shoeless Joe by W. P. Kinsella. It captures some of the romance of baseball without getting bogged down in the rules or strategies. I'd like to hear from you. If you have comments you'd like me to read on the air, please email at mail@econtalk.org, mail@econtalk.org. I'm your host, Russ Roberts. Talk to you on Monday.
[SB1]I think he says “we” here not “way” but I can’t be sure.
[SB2]I believe he says here “Full stop”.