Tuesday, April 15, 2008

Who Decides Easy?

"In all kinds of situations, governments and employers can nudge people towards making better decisions simply by making better choices easier to adopt."
Richard H. Thaler and Cass R. Sunstein, Easy Does It, New Republic, April 9 2008. (subscription required)

This hopeful notion is further explicated in the author's, Nudge: Improving Decisions About Wealth, Health, and Happiness. They believe that "choice architecture" or behavioral economics offers tools to reform laissez-faire or progressive capitalism, depending upon your point of view.

The basic problem is that human beings and their decisions are subject to inertia, limited self control, and cognitive overload. Our decisions are sometimes, maybe frequently, less than optimal and even irrational. Simply, given too many options, we shut down; given too big a step, we avoid.

One solution, the authors submit, is a version of painting a black fly in men's urinals to promote good aim and less splash. A little help, guidance, built in choices, and nudges in the right direction make life a lot easier and less messy, whether saving, choosing health plans, or doing good. A good example is changing default options with employer-based, tax-exempt savings plans so that new employees have to opt out versus opt in. Magically, employee participation goes up. Recently, the IRS agreed to refund splitting on tax returns, allowing taxpayers to have refunds directed to multiple accounts, hopefully to one with savings options. This change means that people can make a savings choice a lot easier than getting the check or deposit and then redirecting it to savings.

The question the authors don't address, at least in their New Republic article, is the huge opportunity to do harm with "choice architecture." Think of all the predatory and potentially predatory financial products and services we are flooded with daily. What we see is easy -- money now, no downpayment, get your tax refund instantly, take the car home today, and so many more delightful scams that have fueled our debt and foreclosure crises. "Johnny Cash" offers every financial service you need, under one roof, with friendly service, open 24/7. Is this choice architecture or greed? Or is this where we throw up our hands and blame it on the consumer for not reading the small print and being financially literate. The problem is, Who is in charge of easy? Who would we trust with such responsibility? Maybe channeling good things has to be coupled with regulating the bad stuff and informing consumers about the underlying complexities. Check out: Stop Predatory Lending: A Guide For Legal Advocates, from the National Consumer Law Center.

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