Working On …

A post pushing back against the latest (alas U of Chicago, my alm mater) Economics prize which was on “nudges” as policy tools if I gathered the basic notion correctly.

Leave a Reply

Your email address will not be published. Required fields are marked *

One comment

  1. Boonton says:

    Sounds good, some things I think you should consider:

    1. There is no such thing as ‘no nudge’. For example, the famous example was starting new employees with 5% automatically allocated to their 401K’s with an ‘opt out’ that they could then go change versus a default of 0% in their 401K’s requiring the employee to positively assert if they want to change that. The standard default is a nudge towards saving nothing in the 401K, not a ‘neutral’ position.

    2. The previous model to nudges was/is ‘economic man’. A hyperrational calculating agent. For example, in that model the new employee considers how much he enjoys consumption today, how much he expects to enjoy consumption tomorrow, how much he expects to earn as a return inside the 401K versus outside (say by day trading stocks rather than choosing among the 401K funds) and how much benefit he gets from the tax shelter of the 401K versus not using it. That will then result in him choosing the optimal % to put in the 401K. A policy change that makes it changes that calculation (say by adding more funds or more tax advantages) will cause him to then re-evaluate and change. This creates a very testable hypothesis because if nudge is false as a theory, then nudges shouldn’t change the choice. If the company had 40% putting 0% in when the default choice was no contribution but the 0% contributors remain at 0% even after a ‘5% nudge policy’ is implemented, that would be evidence nudge is false as a theory. ‘Economic man’ theory would say the nudge should have little impact.

    3. Probably even more important than the ‘nudge concept’ is the ‘mental accounting’ concept. The airline loses someone’s luggage and gives them a $200 check as compensation. That person goes out to a nice dinner. Without mental accounting buckets, $200 is $200. If you got a small raise that generated $200 more per year, then you should also go out to dinner since the luggage example indicates what you wanted to do was go out to dinner IF you happened to somehow get $200 to spend. Or if you happened to discover your quarterly sewer bill was $50 lower than you thought it would be that too would mean you have $200 extra to spend each year. But that’s not what happens, people treat money differently based on the source it is coming from which in turn means actions that add or subtract money from people’s pockets will have different impacts depending upon the ‘mental accounting bucket’ that those people perceive the money impacting.