The Limits Of Obama’s Favorite Economic Theory

Economic theories don’t usually get their own executive orders. But last summer, President Barack Obama changed that.

In September, the president issued an order, titled “Using Behavioral Science Insights to Better Serve the American People,” that essentially requires the federal government to use what Cass Sunstein, a Harvard Law professor, and Richard Thaler, a University of Chicago economics professor, call “nudges.” What’s a nudge? Basically, it’s a decision you make about the way choices are presented. In what order do you list someone’s options? How do you describe each one? If you are asking someone to fill out a form, how long is it? How easy is it to understand? Where do you get it and where do you turn it in? And, crucially, what do you make the default option? Is it “click here to subscribe,” or “click here to unsubscribe”? Opt-in or opt-out?

Some policymakers are strongly pro-nudge because they can be a cheap, simple and effective way to steer people in a particular direction, and help them make better choices — or, anyway, what the policymakers believe to be better choices. Other people are uncomfortable with nudges, objecting to the whole idea of officials trying to exert a subtle influence in the name of advancing a policy agenda. But there’s no such thing as no nudges: As soon as you try to present someone with options, you have to communicate those options somehow. And every possible method carries a nudge of some kind.

Obama has faith in the power of nudges. But how far do they actually get you? In a new paper, John Campbell, a professor of economics at Harvard, argues that sometimes a nudge is not enough. In many cases, strong, explicit regulation — especially when it comes to consumer finance — —> Read More