Nudge – Review

A review from @orphanani:

Nudge introduced me to a new descriptor for myself: a libertarian paternalist. Nudge explains that libertarian paternalists believe in allowing people to make whatever choices they wish but strategically “nudging” them in the right direction – going “beyond simple opposition to government action”. The key aspect is that the libertarian paternalist doesn’t make it any more difficult for people to choose their own path. They just strategically set the default option to one that is deemed to be better for most people. In the introduction they say, “If incentives and nudges replace requirements and bans, government will be both smaller and more modest…we are not for bigger government, just for better governance”. As a capitalist with a heart, this sounds pretty great. Let the markets sort themselves out, let people have lots of choices, but try to look out for people. Keep them from falling into predictable traps (whether it be with retirement savings or prescription drug coverage).

The rest of the book follows this path down many examples and explains ways in which the default matters. They talk about many of the behavioral biases that people have been shown to possess. As a finance person who is interested in behavioral economics and finance, I find it fascinating when we can see the consequences of deviations from the “rational agents” models of classical economics. Overconfidence and the self-attribution bias are playing a big part in the finance literature these days and deserve a look when it comes to policy writing as well. Of course, the part about investing in pension plans was particularly interesting to me, since I think that I would have a hard time picking the optimal choice even for myself! I’ll be interested to hear what Molls has to say about school choice.

I really enjoyed this book. The idea of libertarian paternalism appeals to me. When I think about interventionist governing, I think about the law of unintended consequences and things like this.

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