156 – Between markets and regulation

Posted on August 25, 2012 by


New York’s Mayor Michael BLOOMBERG wants to ban the sale of soft drinks in super-sized containers. He argues that this will cut down on obesity, which is rampant in the city.

On the surface the Mayor’s “bright idea” smacks of old-time regulatory religion: tell the people what they can and cannot do. No wonder the proposal was greeted with hoots and ridicule. Libertarians holler: “Get City Hall off our back! People know what’s best for them, and they should be free to buy drinks in any size of containers they prefer!” Market fetishists argue smugly: “If people ought to drink less – well, just tax them, and consumption will be reduced.”

It turns out, as James SUROWIECKI explains[1], that Mayor BLOOMBERG has a clever scheme in mind. He does not want to boss people around – after all, one can always buy the soft drink twice and get his fill. His proposal is a good example of “nudging” a crowd in the right direction.

The term “nudging” is tied to the work of Richard H. THALER and Cass R. SUNSTEIN[2]. They call it “libertarian paternalism” and a “third way” between regulation, and the market. “Libertarian paternalism is a relatively weak, soft, and non-intrusive type of paternalism because choices are not blocked, fenced off, or significantly burdened” argue the authors.

“A nudge is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” (pg. 6) This definition is somewhat obscure, so let me explain.

First a crucial point on nudging. Nudging does not aim for meticulous individual compliance – just a significant shift of the crowd in the right direction. Nudging is tolerant of contrarians and minority views – they don’t affect the overall outcome.

Whether we need fully compliance or whether nudging is “good enough” (my favorite policy goal!) depends on the situation. Which side of the road we drive on is a matter for full compliance – one can’t have 60% driving on the left, the rest on the right, and the Italians anyway they like, including swerving back and forth. If the aim is to lover obesity, just moving the median weight of people in the right direction brings big health benefits – good enough to be worth a try even if we won’t succeed to influence each individual.

Now to the specifics of nudging: how does this work in the New York case? We must make many (mostly repeat) decisions every hour. Decisions are tiresome. For repeat situations we develop “default” behavior, and this reaction becomes sort of instinctive. Applying “pre-cooked” behavior is much faster than rationally going through situational analysis each time; it is less absorbing and distracting – I can concentrate on the unexpected; it reflects my accumulated wisdom, hence it is probably safe; and it feels comfortable. My driving is 90% default – it’s called “Aldo’s style” and some hate it.

What “habits” or “default” choices people adopt and apply depends very much on the situation – in the case of drinks on what is on offer. Why? It is difficult each time to translate one’s subjective feeling of thirst into ounces of soft drink. If I’m offered a range of choices, however, I’ll easily fall in for a “default” choice which “feels all right”. For many people it is the option in the middle – the “popular” choice. So if the largest container is forty ounces a twenty-ounce soda feels sensible. This kind of easy triangulation is a good “default” position to have – it works in most situations; it also avoids dithering and harassing other thirsty clients. Social pressure leads you to have “default” positions at the ready.

Look at yourself in a restaurant. You won’t order the cheapest dish – unless it just happens to be your favorite. You won’t normally plunge for the most expensive. You’ll mostly go for something in the middle price range. Here is the catch, however: if this is your “default” position, your choice is going to be influenced by the spread. Inn-keepers know. Put an expensive dish on the menu: no one will order it, but customers’ choices will drift toward more expensive dishes. It’s situational, and even minimal, only verifiable statistically, but at the end of the day there is more money in the till – every time. Extend the range of choices at the top end, and the median choice will drift upward. Many social psychology experiments have verified this feature of crowd behavior.

Now back to drinks: in 1974 the largest-sized drink on offer was 21 ounces – now it is forty. In response to this drift people have asked for larger servings and the sales have sky-rocketed. There is no indication that thirst has increased meanwhile – well at least not physiologically.

Mayor BLOOMBERG is not after the big drinkers (they can buy two drinks). As he forces a reduction in spread of drink servings he nudges the crowd ordering by “default” toward ordering less. If most people drink less, time and again, obesity will be affected.

Funnily enough, the largest obstacle to nudging is likely to be the political system: the method is far too subtle for the coarseness of populist partisan discourse.

We can’t make reasoned choices every time, so having a reasonable “default choice” at hand makes lots of personal and social sense. Influence ever so minimally the “default choice” and the social effect can be significant. The individual’s liberty is not significantly affected; each individual is free to override the nudge. “Crowd behavior” is likely to change: small cause – large cumulative effect. Nudging measures encourage adaptive behavior.

I love nudging: it respects my rational choice, but subtly moves the crowd of which I’m willing part. Where would I use it? Anthropogenic climate change is a fact. We must adapt. Bully everyone? No – most likely counterproductive and time-consuming. But we may experiment with nudging firms and people into more adaptive behavior. Think about it.

[1]           James SUROWIECKI; (2012): Downsizing supersize. The New Yorker, August 13th.

[2]           Richard H. THALER – Cass R. SUNSTEIN (2008): Nudge. Improving decisions about health, wealth, and happiness. Yale University Press, New Haven.

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