Wednesday, August 19, 2009

The IPA and "choice"

It is becoming increasingly clear that the selection process at the Institute of Public Affairs simply is based on how often the candidate can say "choice", "freedom" and "Hayek". There is absolutely no requirement to be able to engage intellectually with the subject matter and certainly no need to understand economics.

The latest example is a piece by Julie Novak responding to the fact that Lindsay Tanner had some nice things to say about the book Nudge.

Her spray boils down to little more than the claim that the kind of "paternalistic libertarianism" being promoted is but a short step from paternalism. It misses three main points. The first is the importance of dealing in econmic models with agents as they are, not as we would like them to be; the second is that inaction is action; and the third is that the authors already deal with the question of the "slippery slope".

The first issue is with the question of how real people behave. The IPA concern is that the magical efficiency of markets to communicate consumer preferences and producers costs wil get distorted through the kinds of "choice architecture" or nudges described. However, this makes assumptions that real world agents are up to the task of making the complex rational choices that economists assume. As Daniel McFadden (who won the Nobel Prize for Economics in 2000) is quoted in the book as saying;

If consumers are not up to this task, then their choices will ensure that the [products and suppliers] that succeeed in the market are the ones that meet their needs. However, if many are confused or confounded, the market will not get the signals it needs to work satisfactorily.

The nudge theorists are not saying that "choice architecture" needs to be implemented by an all knowing Government to supplant individuals choices with those of the Government, but to be concious of the factors that we have learnt from studying real people and be concious of tose in choosing the design of real world systems. Most importantly "maximisining choice" is seldom the same policy presecription as facilitating "effective choice".

The law of misleading and deceptive cnduct makes it clear that you can mislead by inaction. The same is true in desighning the way consumers or citizens are presented with the opportunity to choose somethig. The design of "do nothing" is a concious decision that will affect choices.

Finally the authors own response to the "slippery slope" concern is (a) that it ducks the question of whether the proposals have merit in themselves, (b)that their requirement that choices should include low-cost opt-out choices works against over-reach and (c) whatever you do in presenting the choice has an effect, so it might as well be exercised conciously.

Let's quickly recap on what the basic recommendations of the book are;

1. Recognise that how the option to make a choice is presented to a decision maker/consumer affects what they will choose.
2. Design the choice so that the consumer is really required to choose. Forced choice is the best option, if not possible ensure the default is the one that with the admittedly more limited knowledge of the designer is likely to be best for the consumer.
3. Ensure changing choices is as frictionless/costless as possible.
4. nsure consumers of "renewable" choices are provided with annual summaries of how their choice has worked out for them and in such a way that it can be used to assist in making the next choice.

That much sounds like sensible ideas to make real world markets actually behave more like theoretical ones.

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