Category: Nudge – Sunstein and Thaler

Epistemic Optimists & Pessimists - Joe Abittan

Epistemic Optimists & Pessimists

Posted on by jabittan
A little while back I did a mini dive into cognitive psychology and behavioral economics by reading Thinking Fast and Slow by Daniel Kahneman, Nudge by Sunstein and Thaler, Risk Savvy by Gerd Gigerenzer, Vices of the Mind by Quassim Cassam, and The Book of Why by Judea Pearl. Each of these authors asked questions about the ways we think and tried to explain why our thinking so often seems go awry. Recognizing that it is a useful but insufficient dichotomy, each of these authors can be thought of as either an epistemic optimist or an epistemic pessimist.
In Vices of the Mind Cassam gives us the definitions for epistemic optimists and pessimists. He writes, “Optimism is the view that self-improvement is possible, and that there is often (though not always) something we can do about our epistemic vices, including many of our implicit biases.” The optimists, Cassam argues, believes that we can learn about our mind, our biases, and how our thinking works to make better decisions and improve our beliefs to foster knowledge. Cassam continues, “Pessimism is much more sceptical about the prospects of self-improvement or, at any rate, of lasting self-improvement. … For pessimists, the focus of inquiry shouldn’t be on overcoming our epistemic vices but  on outsmarting them, that is, finding ways to work around them so as to reduce their ill effects.” With Cassam’s framework, I think it is possible to look at the ways each author and researcher presents information in their books and to think of them as either optimists or pessimists.
Daniel Kahneman in Thinking Fast and Slow wants to be an optimist, but ultimately is a pessimist. He writes throughout the book how his own knowledge about biases, cognitive illusions, and thinking errors hardly help him in his own life. He states that what he really hopes his book accomplishes is improved water-cooler talk and better understanding of how the brain works, not necessarily better decision-making for those who read his book. Similarly, Sunstein and Thaler are pessimists. They clearly believe that we can outsmart our epistemic vices, but not by our own actions but rather by outside nudges that smarter people and responsible choice architects have designed for us. Neither Kahneman nor the Chicago economics pair believe we really have any ability to control and change our thinking independently.
Gigerenzer and Pearl are both optimists. While Gigerenzer believes that nudges can be helpful and encourages the development of aids to outsmart our epistemic vices, he also clearly believes that we can overcome them on our own simply through gaining experience and through practice. For Gigerenzer, achieving epistemic virtuosity is possible, even if it isn’t something you explicitly work toward. Pearl focuses how human beings are able to interpret and understand causal structures in the real world, and breaks from the fashionable viewpoint of most academics in saying that humans are actually very good and understanding, interpreting, and measuring causality. He is an epistemic optimist because he believes, and argues in his book, that we can improve our thinking, improve the ways we approach questions of causality, and improve our knowledge without having to rely on fancy tricks to outsmart epistemic vices. Both authors believe that growth and improved thinking is possible.
Cassam is harder to place, but I think he still is best thought of as an epistemic optimist. He believes that we are blameworthy for our epistemic vices and that they are indeed reprehensible. He also believes that we can improve our thinking and reach a more epistemically virtuous way of thinking if we are deliberate about addressing our epistemic vices. I don’t think that Cassam believes we have to outsmart our epistemic vices, only that we need to be able to recognize them and understand how to get beyond them, and I believe that he would argue that we can do so.
Ultimately, I think that we should learn from Kahneman, Sunstein, and Thaler and be more thoughtful of our nudges as we look for ways to overcome the limitations of our minds. However, I do believe that learning about epistemic vices and taking steps to improve our thinking can help us grow and become more epistemically virtuous. Simple experience, as I think Gigerenzer would argue, will help us improve naturally, and deliberate and calibrated thought, as Pearl might argue, can help us clearly see real and accurate causal structures in the world. I agree with Cassam that we are at least revision responsible for our epistemic vices, and that we can take steps to get beyond them, improving our thinking and becoming epistemically virtuous. In the end, I don’t think humanity is a helpless pool of irrationality and that we can only improve our thinking and decision-making through nudges. I think we can and over time will improve our statistical thinking, decision-making, and limit cognitive errors and biases as individuals and as societies (then again, maybe its just the morning coffee talking).
Navigating Uncertainty with Nudges

Navigating Uncertainty with Nudges

Posted on by jabittan
In Risk Savvy Gerd Gigerenzer makes a distinction between known risks and uncertainty. In a foot note for a figure, he writes, “In everyday language, we make a distinction between certainty and risk, but the terms risk and uncertainty are used mostly as synonyms. They aren’t. In a world of known risks, everything, including the probabilities, is known for certain. Here statistical thinking and logic are sufficient to make good decisions. In an uncertain world, not everything is known, and one cannot calculate the best option. Here, good rules of thumb and intuition are also required.” Gigerenzer’s distinction between risk and uncertainty is important. He demonstrates that people can manage decision-making when making risk based decisions, but that people need to rely on intuition and good judgement when dealing with uncertainty. One solution to improved judgement and intuition is to use nudges.

 

In the book Nudge, Cass Sunstein and Richard Thaler encourage choice architects to design systems and structures that will help individuals make the best decision in a given situation as defined by the chooser. Much of their argument is supported by research presented by Daniel Kahneman in Thinking Fast and Slow, where Kahneman demonstrates how predictable biases and cognitive errors can lead people to making decisions that they likely wouldn’t make if they had more clear information, had the ability to free themselves from irrelevant biases, and could improve their statistical thinking. Gigerenzer’s quote supports Sunstein and Thaler’s nudges by building on the research from Kahneman. Distinguishing between risk and uncertainty helps us understand when to use nudges, and how aggressive our nudges may need to be.

 

Gigerenzer uses casino slot machines as an example of risk and for examples of uncertainty uses stocks, romance, earthquakes, business, and health. When we are gambling, we can know the statistical chances that our bets will pay off and calculate optimal strategies (there is a reason the casino dealer stays on 17). We won’t know what the outcome will be ahead of time, but we can precisely define the risk. The same cannot be said for picking the right stocks, the right romantic partner, or when creating business, earthquake preparedness, or health plans. We may know the five year rate of return for a company’s stocks, the divorce rate in our state, the average frequency and strength of earthquakes in our region, and how old our grandfather lived to be, but we cannot use this information alone to calculate risk. We don’t know exactly what business trends will arise in the future, we don’t know for sure whether we have a genetic disease that will strike us (or our romantic partner) down sooner than expected, and we can’t say for sure that a 7.0 earthquake is or is not possible next month.

 

But nudges can help us in these decisions. We can use statistical information for business development and international stock returns to identify general rules of thumb when investing. We can listen to parents and elders and learn from their advice and mistakes when selecting a romantic partner, intuiting the traits that make a good (or bad) spouse. We can overengineer our bridges and skyscrapers by 10% to give us a little more assurance that they can survive a major and unexpected earthquake. Nudges are helpful because they can augment our gut instincts and help bring visualizations to the rules of thumb that we might utilize.

 

Expecting everyone’s individual intuition and heuristics to be up to the task of navigating uncertainty is likely to lead to many poor choices. But, if we help pool the statistical information available, provide guides, communicate rules of thumb that have panned out for many people, and structure choices in ways that help present this information, then people can likely make marginally better decisions. My suggestion in this post, is a nudge to use more nudges in moments of uncertainty. When certainty exists, or even when calculable risks exist, nudges may not be needed. However, once we get beyond calculable risk, where we must rely on judgement and intuition, nudges are important tools to help people navigate uncertainty and improve their decision making.
Asymmetric Paternalism

Asymmetric Paternalism

Posted on by jabittan
While writing about the book Nudge by Richard Thaler and Cass Sunstein, I have primarily focused on an idea that the authors call Libertarian Paternalism. The idea is to structure choices and use nudges (slight incentives and structural approaches) to guide people toward making the best possible decision as judged by themselves. Maintaining free choice and the option to investigate or chose alternatives is an important piece of the concept, as is the belief that we will influence people’s decisions no matter what, so we should use that influence in a responsible way to help foster good decision-making.

 

But the authors also ask if it is reasonable to go a step beyond Libertarian Paternalism. Is it reasonable for choice architects, governments, and employers to go further than gentle nudges in decision situations? Are there situations where decision-making is too important to be left to the people, where paternalistic decision-making is actually best? Sunstein and Thaler present an introduction to Asymmetric Paternalism as one possible step beyond Libertarian Paternalism.

 

“A good approach to thinking about these problems has been proposed by a collection of behavioral economists and lawyers under the rubric of Asymmetric Paternalism. Their guiding principle is that we should design policies that help the least sophisticated people in society while imposing the smallest possible costs on the most sophisticated.”

 

This approach is appealing in many ways, but also walks the line between elitism, the marginalization of entire segments of society, and maximizing good decision-making. I hate having to make lots of decisions regarding appropriate tax filings, I don’t want to have to make decisions on lots of household appliances, and I don’t really want to have to spend too much time figuring out exactly what maintenance schedule is the best for all of my cars. However, I do want to get into the weeds of my healthcare plan, I want to micromanage my exercise routine, and I want to select all the raw ingredients that go into the dinners and lunches that I cook. On some decisions that I make, I want to outsource my decision-making and I would often be happy with having someone else make a decision so that I don’t have to. But in other areas, I feel very sophisticated in my decision-making approach, and I want to have maximum choice and freedom. Asymmetric Paternalism seems like a good system for those of us who care deeply about some issues, are experts in some areas, and want to maintain full decision-making in the areas we care about, while exporting decision-making in other areas to other people.

 

Of course, prejudices, biases, and people’s self-interest can ruin this approach. What would happen if we allowed ourselves to deem entire groups of people as unworthy of making decisions for themselves by default? Could they ever recover and be able to exercise their freedom to chose in important areas like housing, retirement, and investment spaces? Would we be able to operate for long periods of time under a system of Asymmetric Paternalism without the system devolving due to our biases and prejudices? These are real fears, and while we might like to selectively trade off decision-making when it is convenient for us, we also have to fear that someone else will be making decisions for us that are self-serving for someone other than ourselves.

 

The point, according to Sunstein and Thaler, would be to maintain the freedom of decision-making for everyone, but to structure choices in a way where those with less interest and less ability to make the best decisions are guided more strongly toward what is likely the best option for them. However, we can see how this system of asymmetric paternalism would get out of control. How do we decide where the appropriate level is to draw the line between strong guidance and outright choosing for people? Would people voluntarily give up their ability to chose and overtime hand over too many decisions without an ability to get their decision authority back? Transparency in the process may help, but it might not be enough to make sure the system works.
Influence is Unavoidable - Joe Abittan

Influence is Unavoidable

Posted on by jabittan
The last several years has seen the rise of social media influencers across the globe. Regular people have been able to amass large numbers of followers on social media, gaining status, earning contracts with brands and advertisers, and of course, influencing people. Their influence is often times out in the open, like when they endorse a brand or product, but is often hidden, in messages about how life should be, about how one should look, and about the things that people should focus on in life. These hidden and secondary influences may also be intentional, but may also be subconscious, and ultimately, they are unavoidable. To go even deeper, these types of influences are not just limited to bona fide social media influencers, they are unavoidable aspects of all our lives and actions.

 

Whether we want to or not, we influence people’s choices. Some of us are in spaces where we are explicitly asked and expected to influence people’s choices, but many of us are not. Nevertheless, our conversations, decisions, and actions can still influence how people make choices. If we deliberately shape choice environments via a position of authority, we are a choice architect. Human resource managers, club leaders, and parents are all choice architects, with the direct mandate to shape the choices of employees, club members, and children respectively. Nevertheless, fellow employees, adjacent club members, and other kids also influence the decision spaces that choice architects create, regardless as to whether they ever intended to.

 

Cass Sunstein and Richard Thaler consider the implications of unavoidable influence in their book Nudge. The authors believe that choice architects have the responsibility to nudge individuals toward specific decisions and choices that the individuals themselves would deem to be the best outcome. That responsibility, according to Sunstein and Thaler cannot be shirked, because influence cannot be avoided. “It is not possible to avoid choice architecture, and in that sense it is not possible to avoid influencing people.”

Sunstein and Thaler are specifically writing about the impossibility of choice architects to try not to influence people. Most of this post has been about inadvertent influence from people who are not trying to influence others. The two ideas are separate, but important to directly connect and discuss. Choice architects still influence people and their decisions even if they try to pull back completely. Sunstein and Thaler would argue that in doing so they often end up creating decision situations where people make worse choices than if the choice architect had deliberately intervened in an attempt to help people make a better choice. One reason for this is that unintentional influence will play a greater role in the absence of choice architects actively trying to improve people’s decision-making. Imagine that your HR representative had gone through the effort of trying to map out possible health benefits scenarios for employees based on age, family dynamics, and potential health concerns. The way that employees select health insurance plans could be shaped by these mapping scenarios, deliberately trying to help people make better choices. Or, the rep could decide not to try to influence decisions and step back. By doing so, employees might hear from colleagues about a great option that worked for someone else, and select that option even if it doesn’t fit their family and health needs. Other employees may not have been encouraging everyone to select an option, but they still have the ability to indirectly and unintentionally influence the choices of others, potentially for the worse. The choice architect who tried not to influence the decision created a situation where outside uneducated voices were louder – their actions still influenced the decision space.

Choice architects don’t exist in a vacuum. They are part of a larger ecosystem and the context for each choice matters. Choosing not to influence someone doesn’t mean that you don’t still influence them or their choices. Neither does being unaware that you influence others. Influence is unavoidable, and Sunstein and Thaler would argue that it is important that we therefore think about how we intentionally and unintentionally influence others, and for choice architects to be active in helping people understand the best option for themselves in a given choice.
Open Default Nudges

Open Defaults

Posted on by jabittan
Our society has a lot of defaults, and for many of us, we only opt out of the default in a narrow set of circumstances. Whether it is our mode of travel, how we pay for goods, or the type of health insurance plan we are enrolled in, the default option makes a big difference in our lives. Actors within our political and economic systems know this, and the choice of default can matter a lot to individual actors, political groups, and companies. Consequentially, what default is selected, and what story we tell about the default, is a constant point of argument and debate in our country.

 

In their book Nudge, Cass Sunstein and Richard Thaler discuss the importance of nudges and the ways that responsible choice architects should think about them. Choice architects may face pressure to select a default option that in one way or another benefits them personally or benefits the group or ideology they identify with. A state government may favor a default Medicaid option that is confusing and hard for individuals to use, meaning that fewer people will access services, and the state won’t have to pay as much for medical services for low income individuals. A corporate HR representative might feel pressured from a boss to have the default retirement savings rate for employees set at 2%, knowing that the company will spend less through retirement savings matching if the rate is lower.

 

But these types of defaults are not in the best interest of individuals. A health plan that is easy to use and facilitates access to necessary medical care is clearly in the best interest of the individual, but it may cost more for the government agency or corporation sponsoring the plan. A retirement plan that helps save above the rate of inflation is also clearly in the best interest of the individual, but might be more costly to a company’s bottom line.

 

As a guide for setting defaults, following with previous advice of ensuring that deliberate nudges employed by governments or corporations can survive open transparency, Sunstein and Thaler write, “The same conclusion holds for legal default rules. If government alters such rules – to encourage organ donation or reduce discrimination – it should not be secretive about what it is doing.”

 

The defaults we chose, and the reasons we select defaults should be open and transparent. If a choice architect cannot defend a default choice, then they should set an alternative default that can be defended in the open. Defaults that clearly benefit the choice architect or their interests at the expense of the individual making (or failing to make) a choice should be excluded. It is important to note that this means that choice architects have to actively make a decision with the default. Setting the default for a retirement savings plan if an individual never makes a selection to 0 is not in the best interest of the individual. An argument could be made that the choice architect attempted to remove themselves from the choice setting as much as possible by not providing a default, but that is still a choice, and will leave some people worse off than if the choice architect had selected a more defensible choice. Choosing not to set a default can be as indefensible as selecting a self-serving default.
Acknowledging Nudges

Acknowledging Nudges

Posted on by jabittan
In the book Nudge, Cass Sunstein and Richard Thaler argue that it is impossible to avoid and eliminate nudges. Whenever people have a choice to be made, someone else has a hand in shaping how that choice is presented and structured. Even if a choice architect were to strive to maximize choice and decision-making autonomy in the chooser, subtle factors will influence the chooser and nudge them in particular directions. Striving to eliminate nudges is likely to lead to worse potential outcomes and choices than acknowledging nudges and trying to employ them in ways that help people make good choices.

 

But how does a choice architect judge when a nudge is appropriate versus when a nudge goes too far? Again, Sunstein and Thaler recommend that first a choice architect acknowledge their nudge, and then ask themselves whether they could discuss the way they use nudges in public. The authors reference an idea from John Rawls called the publicity principle. If a choice architect feels comfortable with publicly acknowledging nudges and their choice to employ a given nudge, then their nudge is probably going in an appropriate direction. If however, the discovery of their nudges would lead people to shame them or if they would be embarrassed about their actions, then they have overstepped the bounds of an acceptable nudge.

 

Sunstein and Thaler write, “The government should respect the people whom it governs, and if it adopts policies that it could not defend in public, it fails to manifest that respect. Instead, it treats its citizens as tools for its own manipulation.”

 

Nudges are effective tools because we can understand how human psychology works and we can predict situations in which people are likely to make biased judgements or judgements based on cognitive errors. Appropriate nudges seek to improve decision-making by helping people overcome these biases and errors. Manipulative nudges are those which seek to exploit such biases. Governments are expected to be transparent, and more laws exist for transparency in the public rather than the private sector, meaning that government officials must be more considerate about their explicit nudges. If oversight bodies, reporters, or the general public were to learn of a practice that made an agency or official look good while failing to actually benefit the public, then it would be clear that an abuse of power took place. Choice architects who wish to serve the public rather than manipulate it should always consider acknowledging nudges, and whether they can safely do so publicly.
Public vs Private Choice Architects - Joe Abittan

Who to Fear: Public vs Private Choice Architects

Posted on by jabittan
A question that Cass Sunstein and Richard Thaler raise in their book Nudge is whether we should worry more about public or private sector choice architects. A choice architect is anyone who influences the decision space of another individual or group. Your office’s HR person in charge of health benefits is a choice architect. The people at Twitter who decided to increase the character length of tweets are choice architects. The government bureaucrat who designs the form you use to register to vote is also a choice architect. The decisions that each individual or team makes around the choice structure for other people’s decisions will influence the decisions and behaviors of people in those choice settings.

 

In the United States, we often see a split between public and private that is feels more concrete than the divide truly is. Often, we fall dramatically on one side of the imagined divide, either believing everything needs to be handled by businesses, or thinking that businesses are corrupt and self-interested and that government needs to step in to monitor almost all business actions. The reality is that businesses and government agencies overlap and intersect in many complex ways, and that choice architects in both influence the public and each other in complex ways. Regardless of what you believe and what side you fall on, both choice architects need to be taken seriously.

 

“On the face of it, it is odd to say that the public architects are always more dangerous than the private ones. After all, managers in the public sector have to answer to voters, and managers in the private sector have as their mandate the job of maximizing profits and share prices, not consumer welfare.”

 

Sunstein and Thaler suggest that we should be concerned about private sector choice architects because they are ultimately responsible to company growth and shareholder value, rather than what is in the best interest of individuals. When conflicts arise between what is best for people and what is best for a company’s bottom line, there could be pressure on the choice architect to use nudges to help the bottom line rather than to help people make the best decisions possible.

 

However, the public sector is not free from perverse incentives simply by being elected, being accountable to the public, or being free from profit motives. Sunstein and Thaler continue, “we agree that government officials, elected or otherwise, are often captured by private-sector interests whose representatives are seeking to nudge people in directions that will specifically promote their selfish goals.” The complex interplay of government and private companies means that even the public sector is not a space purely dedicated to public welfare. The general public doesn’t have the time, attention, energy, or financial resources to influence public sector choice architects in the ways that the private sector does. And if private sector influences shape choice structures via public elected officials, they can create a sense of legitimacy for ultimately selfish decisions. Of course, public sector choice architects could be more interested in keeping their job or winning reelection, and may promote their own selfish goals for self-preservation reasons as well.

 

We can’t think of public sector or private sector actors as being more trustworthy or responsible than the other. Often times, they overlap and influence each other, shifting the incentives and opinions of the public and the actors within public and private sectors simultaneously. Sunstein and Thaler suggest that this is a reason for maintaining the maximal choice freedom possible. The more people have their own ability to make choices, even if they are nudged, the more we can limit the impact of self-serving choice architects, whether they are in the public or private sectors.
Selfish Choice Architects

Selfish Choice Architects

Posted on by jabittan
“So lets go on record,” write Cass Sunstein and Richard Thaler in their book Nudge, “as saying that choice architects in all walks of life have incentives to nudge people in directions that benefit the architects (or their employers) rather than the users.”

 

Choice architects are those who design, organize, or provide decision situations to individuals. Whether it is the person who determines the order for food on the buffet line, the human resources manager responsible for selecting health insurance plans for the company, or a bureaucrat who designs an enrollment form, anyone who influences a situation where a person makes a decision or a choice is architecting that choice. Their decisions will influence the way that people understand their choice and the choices that they actually make.

 

As the quote above notes, there can always be pressure for a choice architect to design the decision space in a way that advances their own desires or needs as opposed to advancing the best interest of the individual making a given choice. Grocery stores adjust their layouts with the hopes that displays, sales, or conveniently located candy will get customers to purchase things they otherwise wouldn’t purchase. A company could skimp on health benefits and present confusing plans to employees with hurdles preventing them from utilizing their benefits, saving the company money while still appearing to have generous benefits. A public agency could design a program that meets a political objective and makes the agency head look good, even if it gives up actual effectiveness in the process and doesn’t serve citizens well.

 

Nudges are useful, but they have the capacity to be nefarious. A buffet manager might want patrons to fill up on cheap salad, eating less steak, meaning that the buffet does better on the margins. Placing multiple cheap salads at the front of the line, and not allowing people to jump right to steak, is a way to nudge people to eating cheaper food. Sunstein and Thaler acknowledge the dark side of nudges in their book, and encourage anyone who is a choice architect to strive to avoid the dark side of nudges. Doing so, they warn, risks leading to cynicism and in the long run is likely to create problems when employee, customer, or citizen trust and buy in is needed.

Avoiding Complex Decisions & Maintaining Agency

Posted on by jabittan
Two central ideas to the book Nudge by Cass Sunstein and Richard Thaler are that people don’t like to make complex decisions and that people like to have agency. Unfortunately, these two ideas conflict with each other. If people don’t like to make complex decisions, then we should assume that they would like to have experts and better decision-makers make complex decisions on their behalf. But if people want to have agency in their lives, we should assume that they don’t want anyone to make decisions for them. The solution, according to Sunstein and Thaler, is libertarian paternalism, establishing systems and structures to support complex decision-making and designing choices to be more clear for individuals with gentle nudges toward the decisions that will lead to the outcomes the individual actually desires.

 

For Sunstein and Thaler, the important point is that libertarian paternalism, and nudges in general, maintain liberty. They write, “liberty is much greater when people are told, you can continue your behavior, so long as you pay for the social harm that it does, than when they are told, you must act exactly as the government says.”  People resent being told what to do and losing agency. When people resist direct orders, the objective of the orders may fail completely, or violence could erupt. Neither outcome is what government wanted with its direct order.

 

The solution is part reframing and part redirecting personal responsibility for negative externalities. The approach favored by Sunstein and Thaler allows individuals to continue making bad or harmful choices as long as they recognize and accept the costs of those choices. This isn’t appropriate in all situations (like drinking and driving), but it might be appropriate with regard to issues like carbon taxes on corporations, cigarette taxes, or national park entrance fees.  If we are able to pin the cost of externalities to specific individuals and behaviors, we can change the incentives that people have for harmful or over-consumptive behaviors. To reach the change we want, we will have to get people to change their behavior, make complex decisions, and maintain a sense of agency as they act in ways that will help us as a collective reach the goals we set.
Incentives for Environmentally Responsible Markets

Incentives for Environmentally Responsible Markets

Posted on by jabittan
When it comes to environmental issues, no single actor is completely to blame, and that means no single actor can make the necessary changes to prevent catastrophic climate change. This means we can’t put all the weight on governments to take actions to change the course of our climate future, and we can’t blame individual actors either. We have to think about economies, polities, and incentive structures.

 

In their book Nudge, economists Cass Sunstein and Richard Thaler look at what this means for markets and regulation as we try to find sustainable paths. They write, “markets are a big part of this system, and for all their virtues, they face two problems that contribute to environmental problems. First, incentives are not properly aligned. If you engage in environmentally costly behavior next year, through consumption choices, you will probably pay nothing for the environmental harms that you inflict. This is what is often called a tragedy of the commons.”

 

One reason markets bear some of the blame and responsibility for the climate change crisis is because market incentives can produce externalities that are hard to correct. Climate change mitigation strategies, such as research and development of more fuel efficient vehicles and technologies, are expensive, and the costs of climate change are far off. Market actors, both consumers and producers, don’t have proper incentives to make the costly changes today that would reduce the future costs of continued climate change.

 

A heavy handed approach to our climate change crisis would be for governments to step in with dramatic regulation – eliminating fossil fuel vehicles, setting almost unattainably high energy efficiency standards for furnaces and dishwashers, and limiting air travel. Such an approach, however, might anger the population and ruin any support for climate mitigation measures, making the crisis even more dire. I don’t think many credible people really support heavy handed government action, even if they do favor regulation which comes close to being as extreme as the examples I mentioned. Sunstein and Thaler’s suggestion of improved incentives to address failures in markets and change behaviors has advantages over heavy handed regulation. The authors write, “incentive-based approaches are more efficient and more effective, and they also increase freedom of choice.”

 

To some extent, regulation looks at a problem and asks what the most effective way to stop the problem is if everyone is acting rational. An incentives-based approach asks what behaviors need to be changed, and what existing forces encourage the negative behaviors and discourage changes toward better behaviors. Taxes, independent certifications, and public shaming can be useful incentives to get individuals, groups, and companies to make changes. I predict that in 10-15 years people who are not yet driving electric cars will start to be shamed for continuing to drive inefficient gas guzzlers (unfortunately this probably means people with low incomes will be shamed for not being able to afford a new car). In the US, we have tried to introduce taxes on carbon output, but have not been successful. Taxing energy consumption in terms of carbon output changes the incentives companies have with regard to negative environmental externalities form energy and resource consumption. And independent certification boards, like the one behind the EnergyStar label, can continue to play an important role in encouraging technological development of more efficient appliances. The incentives approach might seem less direct, slower, and less certain to work, but in many areas, not just climate change, we need broad public support to make changes, especially when the costs are high up front. This requires that we understand incentives and think about ways to change incentive structures. Nudges such as the ones I mentioned may work better than full government intervention if people are not acting fully rational, which is usually the case for most of us. Nudges can get us to change behaviors while believing that we are making choices for ourselves, rather than having choices forced on us by an outside authority.