The NZ Initiative's Khyaati Acharya says non-intrusive paternalism, including 'nudging' people in the 'right' direction needs to be treated with extreme caution

The NZ Initiative's Khyaati Acharya says non-intrusive paternalism, including 'nudging' people in the 'right' direction needs to be treated with extreme caution

By Khyaati Acharya*

Humans often make stupid decisions - contrary to what we’d prefer to believe. Most psychologists would argue we’re not actually all that rational.

At least, this is the reasoning behind nudge theory, a concept that justifies gentle paternalism by public and private institutions to guide individuals towards making better choices.

For those unfamiliar with nudging, the idea was proposed by American academics Richard Thaler and Cass Sunstein in a 2003 paper, Libertarian Paternalism is not an Oxymoron. The theory is rooted in behavioural economics, a field that lies somewhere between the economic principle that people respond to incentives, and the psychological stance that people do not always act rationally.

The idea rests on the assumption that humans are inherently flawed and, as such, are prone to poor decision-making that may not always be welfare-promoting.

According to behavioural economists, we are not rational utility-maximisers and might require gentle ‘nudges’ towards making better decisions. Sunstein and Thaler contend that this form of temperate paternalism is, in any case, far preferable to the coercive ‘shove’ policies that eliminate personal choice, deplored by advocates of individual freedom.

Rearranging carbonated drinks in a supermarket aisle to encourage healthier consumer choice is a nudge. Banning fizzy drinks outright is a coercive shove.

Respecting and allowing individual choice is a fundamental tenet of modern societies. But does it rely unduly on the presumption that we are capable of making good choices for ourselves – or at least better choices than anyone else could possibly make on our behalf?

Sunstein and Thaler argue it is foolish to assume that “almost all people, almost all of the time, make choices that are in their best interest or at the very least are better by their own lights”.

They claim individuals lack clear preferences, are ill-informed and vulnerable to cognitive biases. The consequence is that individuals make inferior decisions that then impede their own welfare. Of course, many of these decisions would change if only individuals had complete information, unlimited cognitive abilities and endless willpower.

One obvious example of ‘poor individual choice’, as cited by Sunstein and Thaler, is the high rates of obesity in North America. There are copious volumes of evidence warning of the serious health risks caused by obesity, not to mention the information-overload aimed at improving dietary choices. Yet, more than 60% of Americans are considered either obese or overweight. If people’s main goal were bodily health, we could likely conclude that the wrong dietary choices were being made. A nudge towards improving these choices could be something as simple as placing the fruit before higher-calorie desserts in a cafe.

Some would be inclined to contend that this is all still rather paternalistic. But Sunstein and Thaler argue that a major misconception is that there are viable alternatives to paternalism. In most situations, it is necessary for some kind of third party to make a choice that will inevitably affect the behaviour of others.

But herein lies the problem.

Sunstein and Thaler assume in this example that bodily health is the highest priority of each individual. Certainly, good health may be a broad objective of the aggregate population. But nudge theory risks neglecting consideration of individual preferences.

Should an external party nudge an individual towards consuming an apple over cake in pursuit of personal health, when cake would have made that individual far happier?

Nudging rests on the premise that it is possible for organisations and institutions to steer individuals toward welfare-improving decisions without blocking or fencing off choices. The decision to opt-out of default choices must be available, and the costs of doing so must be virtually non-existent.

You’d be mistaken if you thought you had never seen nudge theory in practise. Consider the voluntary long-term savings scheme, KiwiSaver.

Many New Zealanders have unwittingly been nudged along in their choice of KiwiSaver fund. Most Kiwis, upon joining the scheme, are automatically entered into a conservative fund. These are investment portfolios in cash and bonds that are low risk – and low return.

The justification for KiwiSaver was the low average rate of saving by New Zealanders, and the concern that many would be unprepared for retirement as a result.

However, this has created a presumption among some commentators and economists that third parties should introduce more nudges to encourage people to make the best decisions for the majority without resorting to outright paternalism. Without nudges, oversimplification of policy initiatives and greater limits to freedom might otherwise be necessary.

Nevertheless, we need to be cautious about turning a nudge into a shove.

KiwiSaver is again an example of how this can occur. Many financial advisors will tell you that you need to take on some portion of risk if you are to grow your pension nest egg to adequately support you in retirement. This means shifting some investment towards a balanced growth fund with an exposure to equities that are higher risk, but also higher return.

Despite this, the KiwiSaver scheme nudges all savers into conservative schemes. Sunstein and Thaler would argue a third-party nudge toward improving savings rates is better than the alternative, which is likely less people saving anything at all. The corollary is that many New Zealanders remain in the default conservative scheme, which potentially makes them worse off in the long-run.

Consider a 22-year old graduate about to enter the workforce and KiwiSaver scheme. With many decades of earning potential and savings potential ahead, it seems unwise to automatically allocate a young person a conservative KiwiSaver portfolio. And yet, this is precisely what happens in practise.

A 2011 Treasury paper found KiwiSaver had had no effect on aggregate savings rates. Evidence on the long run effect on net national savings of the scheme has been marginal at best. Given the peripheral outcome, it is quite possible that the scheme has made many savers worse-off through overly-conservative default settings.

Contentious though the idea is, nudges can occasionally work. But this “nonintrusive” conception of paternalism must be treated with extreme caution – there is a fine line between a paternalistic nudge and a coercive shove.

Paternalism by any other name, still doesn’t smell sweet. Especially if it moves the dessert too far away.

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*Khyaati Acharya is a research assistant at the New Zealand Initiative, which provides a weekly column for interest.co.nz.

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Like anything nudging can be positive or negative.......kiwisaver was pushed as a positive when in fact it has many negative attributes for many individuals........The whole concept of kiwisaver tells me more about the financial skills of the Politicians and bureaucrats who nudged this along!!

At least its only 3+3%
Currently...

Kiwisaver is generally positive I think. However it is handing significant sums of money to an industry that I think is full of ppl who seem questionably competent. It is a pity that the system lacks flexibility such as an allowance to do what I do, pay down the mortgage faster as its 6% tax free, no top skimming fees etc.

A good thought provoking article.
With the early examples I was wondering where it was going...
Ah, so its the suggestion that conservative kiwisaver funds are not appropriate for most people.
When the suggestion is made that a paternistic party steers people in the "right" direction, the alarm bells go off.
I must ask, what is in it for the paternistic party?
To suggest that "balanced" or "growth" funds are better in the long term in my view is an extremely bold statement given the starting position that we find ourselves in today. When Kiwisaver first started, conservative funds massively outperformed the higher risk ones for many years. I would hazard a guess that a large financial market correction is around the corner....

If like me you see Peak oil as a disaster for "risky" funds then it is bad advice, extremely bad.

As an example I took out a fund at 17 projected to pay $100,000 as a lump sum at 65, after 2008's debacle its projection is now 60,000 and this mess isnt over yet by a long way.

Indeed I thought somewhere I came across a comparison for shares v bonds and long term ie 30 years there was little difference?

Conservative funds allocate about 20% into shares (depending on who you're with).

So it's misleading to say :

"These are investment portfolios in cash and bonds that are low risk – and low return."

I can't help thinking that someone, somewhere, can't stand the fact that all this KiwiSaver money is invested in pesky Default Funds with their tiny investment management fees. That's why these items pop up from time to time in the hope that this may be seen, eventually, as collective academic consensus to kick them into touch.

Maybe the writer should get out a little more, An apple vs cake, There are whole areas where there is no place to get an actual apple at all. So it is going to need a pretty big nudge. What is really needed is a change in the environment we live in. An environment low in sugar means that we consume less sugar. What would such an environment look like?

What a load of self serving waffle, but I wouldn't expect less from the NZ Initiative.

So should NZ only nudge, not shove when we have the 3rd highest rate of obesity in the world, obesity which may become the leading cause of premature death in NZ, 36% of NZ children are overweight or obese (60% of Pacific, 40% maori children - see NZ nutrition foundation website), where the most vulnerable (children, low income, maori/pacific) are most impacted and least protected. Public policy and industry self regulation has failed, our obesity rates are increasing, the human cost and health costs are a massive drain on society and the taxpayer.

Thanks for the nudge NZ Initiative - we don't want to restrict consumer choice/ freedom so perhaps we should "rearrange the carbonated drinks to promote healthier choices. Oh and of course corporate profit from selling cheap sugar versus real food, not that corporates' pay much tax through their offshore tax "minimisation" schemes (not avoidance).

Or maybe we should get real, get a backbone, show some care for our children at least - try getting an 8-10 year old to understand food labelling! We know what we should do but unfortunately our government takes minimal action (perhaps encouraged by corporate lobbyists...?) - clear traffic light labelling on food, ban advertising of unhealthy food to minors, tax sugar, ban rubbish food/drinks from schools, spend more on public education& exercise. Ban some foods - e.g kids cereals >40% sugar etc etc. Make fruit and veg more accessible to those that need it.

Have you any nudge advice Khyaati for the obese school kids I regularly see on the train...maybe the NZ initiative should direct their lobbying, $ and resources to advocating for the public good.

"We have to remember that the obese and smokers tend to die earlier and the healthy incur very expensive 24 hour care later in life for diseases such as dementia."

The main economic argument for “fat taxes” and other paternalistic measures to reduce obesity is that obesity causes social costs to be borne by the National Health Service.

However, research suggests that additional health costs from obesity are offset by reduced costs elsewhere, partly because obese people live shorter lives. Denmark is the only country to have imposed taxes on some products – butter, crisps and mince meat – and the Prime Minister David Cameron, at the Conservative Party Annual Conference in 2011, raised the possibility of a similar tax in the United Kingdom.

It is hoped it will persuade people to eat more healthily and save money for the state.

But the report said that I would not only be more costly but would be unfair.

Fat taxes are regressive and would fall disproportionately on low income groups, it claims.

There are generally unforeseen consequences of “sin” taxes, it adds."

http://www.telegraph.co.uk/news/health/news/9359212/Obese-and-smokers-le...

" is the high rates of obesity in North America. " I believe Nixon said something along the lines of "take hunger off the political debate"? The food industry responded and produced cheap food using cheap ingredients. Poor ppl are poor because they are not the sharpest in the pack and hence are incapable of making sound decisions even if handed the information which the food industry tries to avoid plus dont have the $s to buy better food. So what to do tax these "bad foods" so leave ppl hungry? lop GST off? fruit and veg? where to recover that lost revenue? plus food is priced where ppl will pay, so that 15% might end up as profit and not discounts.

"we" sure eat some crap. HCFS is a classic, maybe GMOs? jury still out on good or bad. However there are signs that the populace is questioning and demanding good labeling so ppl can make choices hopefully turning towards healthier options.