Paternalism David Laibson Economics 1030 Harvard University April

Paternalism David Laibson Economics 1030 Harvard University April 25, 2017

1. Paternalism: a system under which an authority undertakes to supply needs or regulate conduct of those under its control in matters affecting them as individuals as well as in their relations to authority and to each other. Merriam-Webster

My preferred definition Paternalism: an attempt to influence or control people’s conduct for their own good – in other words, when the motivation for the intervention is not about externalities. David Laibson

Soft paternalism • libertarian paternalism: policies that constructively influence behavior, while preserving, or nearly preserving, freedom of choice (Sunstein and Thaler) • asymmetric paternalism: policies that help people who make mistakes, while interfering minimally with people who behave optimally (Camerer, Issacharoff, Loewenstein, O’Donoghue, and Rabin).

Arguments in favor of paternalism • People often don’t understand how to optimize • Even when people are clear on the best course of action, they often don’t follow through • Society can influence people’s decisions by manipulating the choice architecture (e. g. , defaults, active choice, simplification, endorsement, advice) without denying people choice. – Soft paternalism. – Asymmetric paternalism (Camerer et al) – Libertarian paternalism (Sunstein and Thaler; Nudge) • Even strong paternalism is often very popular – Social Security and other defined benefit pension plans

Arguments against paternalism • Is the government more rational than the citizens? • If not, who should play the role of paternalist? • Even if the government is more rational than the citizens, does government have other distorted incentives (e. g. , corruption and other forms of self-dealing)? • Is paternalism a slippery slope? How do we draw a line and prevent good paternalism from turning into bad paternalism? Do we all agree on the difference? • Even if you embrace paternalism, how would the paternalist determine the true preferences of the citizens? (Will we end up with empty opera houses? ) • Do people resent being treated paternalistically?

• We have pre-selected 100 different bottles of alcohol, covering all popular categories -- beer, wine, rum, gin, vodka, whisky, etc. Another person (who remains anonymous) is going to take one (regular-sized) drink, poured from one of the 100 bottles. Call him/her the recipient. • You will pick the number of bottles that the recipient will be able to choose among. To give the recipient complete choice, you would pick N = 100. To simplify the recipient’s decision, you would pick N < 100. You can pick any N value from 1 to 100. • If you pick N < 100, a robot will randomly determine which of the original 100 bottles the recipient will receive (with no repeats). You don't get to pre-select the specific bottles the robot will choose. The N bottles will be presented to the recipient in categories (like whiskies or vodkas), so the recipient can easily sort through them. • Your job is to pick N so as to maximize the happiness of the • Version A: The recipient receives the N bottles without knowing that N could have been chosen as high as 100. What’s your N?

(Large scale survey in 2013)

• We have pre-selected 100 different bottles of alcohol, covering all popular categories -- beer, wine, rum, gin, vodka, whisky, etc. Another person (who remains anonymous) is going to take one (regular-sized) drink, poured from one of the 100 bottles. Call him/her the recipient. • You will pick the number of bottles that the recipient will be able to choose among. To give the recipient complete choice, you would pick N = 100. To simplify the recipient’s decision, you would pick N < 100. You can pick any N value from 1 to 100. • If you pick N < 100, a robot will randomly determine which of the original 100 bottles the recipient will receive (with no repeats). You don't get to pre-select the specific bottles the robot will choose. The N bottles will be presented to the recipient in categories (like whiskies or vodkas), so the recipient can easily sort through them. • Your job is to pick N so as to maximize the happiness of the • Version B: The recipient knows that you could have chosen N as high as 100. What’s your N?

“Don’t be a paternalist if you can’t keep it secret. ”

Popular paternalism • • • Social Security (strong paternalism) Health program for retirees, like Medicare (strong paternalism) Default enrollment in 401(k) plans (soft paternalism) Ban junk food in school vending machines (soft paternalism) Calorie disclosure laws (soft paternalism) Restrict investment menu in 401(k) plans (strong paternalism) Consumer safety regulations (e. g. , Food and Drug Admin. ) Mandatory education (strong paternalism) Cigarette sin taxes (strong paternalism) Banning prostitution (strong paternalism) Banning polygamy (strong paternalism)

State Cigarette Taxes (per pack) Note too that the federal tax is an additional $1. 01. In NYC, the total tax burden (local, state, and federal) is $6. 86.

Relatively unpopular paternalism • • • Helmet laws (strong paternalism) Seatbelt laws (strong paternalism) Junk food bans (strong paternalism) Junk food taxes (strong paternalism) Other kinds of sin taxes (strong paternalism) Alcohol bans (strong paternalism) Pornography laws (strong paternalism) Gambling laws (strong paternalism) New York City’s ban on 16+ oz sodas (soft paternalism)

Even if you want paternalism, it’s not clear what form it should take. • • Minimum non-zero 401(k) savings rate Active Decision Default of non-participation Default of participation (savings rate? ) Default + web-based advice Default + limited menu of easy alternatives? Personal financial planner sits down with you Something else? Remember that strict “non-paternalism” is also problematic. • Is it possible to truly be non-paternalistic? • What does that mean?

Final Problem Set • Reevaluate the laptop policy. 1) Take a qualtrics survey. 2) Write an essay explaining your evaluation of the policy, using evidence and models from the class.

How can we judge paternalism? There is no gold standard. • Does it reproduce what citizens would (eventually) choose on their own (with the wisdom that comes with experience)? • Does it reproduce the choices that informed/educated citizens would make? • Do citizens endorse it after the fact? • Do the experts endorse it, especially experts without a conflict of interest? • Is the paternalism addressing/undoing some known set of biases? • Does the paternalism raise subjective wellbeing? • Is the paternalism what altruistic third parties would do?

2. Course Overview Basic principles of research in psychology and economics. • Use of experiments and analysis of field data • Interest in the microfoundations of behavior – preferences, beliefs, cognition • Interest in the psychological factors that influence economic behavior – social psychology, cognitive psychology, neuroscience

Homo Economicus is too extreme. • Too rational – Bounded rationality, heuristics and biases, quasi. Bayesian, salience, persuasion, prospect theory, naïve forecasts, emotional (affective) decisionmaking, system I and system II • Too willful – Dynamically inconsistent preferences, quasihyperbolic discounting, procrastination, failures of self control • Too selfish – Inequity aversion, altruism, positive and negative reciprocity, Rawlsian preferences

Big challenge: identifying the boundaries of these psychological effects. Can we measure these effects in the field? Which quantitative models usefully predict these effects? How should we think about the mechanisms (like arbitrage and learning) that partially limit the scope and magnitude of these psychological effects? When does market competition dampen psychological biases and when do markets multiply these biases? Hard question: what is the scope for policy? How do we know what is in people’s best interest if we can’t rely upon their choices to reveal those interests.

Challenge: generalize the concepts in this course. Apply (develop and challenge) the ideas in your research. Apply the ideas to your own decision-making. Behavioral economics is a young field and there are many ways for you to make significant contributions to knowledge.

3. Exam logistics • closed book • know lecture notes, problem sets, and readings (prioritize in that order) • calculators not allowed • 60% on David • 40% on Tomasz