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Speaker: Cass Sunstein, Karl N. Llewellyn Distinguished Service Professor of Jurisprudence, Law School and Department of Political Science, University of Chicago
Summary by Ian MacMullen, Edmond J. Safra Graduate Fellow in Ethics
Professor Sunstein began a lecture rich in examples with two designed to illustrate the form and appeal of liberal paternalism. Employers in America have tried two strategies intended to increase employees' savings levels. The first automatically enrolls employees in a 401(k) retirement plan, with a simple opt-out procedure: such schemes have been seen to increase participation rates from 48% to almost 90%. The second strategy, called the "Save More Tomorrow" plan, entails similar automatic enrollment in and easy opt-out from a program that diverts a fixed percentage of future salary increases into savings. Sunstein claimed that these schemes are both paternalistic, because they are intended to influence people for the sake of their own welfare, and libertarian, because they respect freedom of choice by providing easy opt-outs. In the rest of his lecture, Sunstein set out to defend a "general program of libertarian paternalism."
The case for paternalism stems from a series of empirical observations that individuals consistently and predictably fail to make choices that advance their own welfare. Not only are people "boundedly rational," but they also lack clear preferences in many areas. As a result, the framing of a decision problem has a major influence on the choices we make. Patients who are advised that an operation has a 90% survival rate make systematically different choices than those who are told that the same procedure has a 10% death rate. People demand much ore money to give up something they have initially been allocated, such as vacation days above some legal minimum or the right to sue an insurance provider, than they would be willing to spend to purchase that same good if it were not initially allocated to them. And in a phenomenon called the "anchor effect," the first number suggested by a plaintiff seeking damages, a charity seeking contributions, or a researcher investigating a person's attitudes to risk, has a major effect on the outcome (the size of the award, the amount of the charitable contribution, or the risk profile).
Why does the initial allocation, or the default rule, or even the first amount proposed, have such an important and apparently irrational influence on outcomes when individuals are fully free to choose? Sunstein offered three explanations. First, there is the power of suggestion: people often seem to operate on the heuristic that the default specifies the reasonable thing to do, absent clear evidence to the contrary. Second is the force of inertia: even when transaction fees are very low, people are reluctant to make changes. Third, and perhaps most significant, is the endowment effect, whereby initial allocations affect one's valuation of a good: if you are arbitrarily assigned possession of a good (even a University of Chicago mug!), you will tend to value it more highly than someone who merely has the option to purchase the same good.
How should we respond to the risk that individuals' welfare will be diminished because their choices are irrationally influenced by default rules? One solution would be to eliminate the default position by forcing everyone to make a positive choice, but this would violate some people's second-order preference not to have to choose, and in some cases the costs of choosing might exceed the benefits. Rather, Sunstein suggested, we should design default rules and structure the range of options in a way that will tend to serve individuals' welfare in light of the inevitable flaws in their decision-making.
We should assign as the default a position that is welfare promoting for most people. If this position cannot be determined without significant controversy, we have two options. The familiar strategy is to assign as the defaul the position that most people actually choose. This may be wise, but it doesn't work well when the choices we observe are themselves already heavily influenced by pre-existing defaults and anchors. The alternative, less familiar strategy, is actually to try various default positions (or study analogous schemes where different defaults have been set) and choose the one which results in the lowest opt-out rate.
Once we have chosen the default position, how many options should we make available? When Sweden privatized its social security system, workers were offered an astonishing 456 funds in which to invest. How can we determine the optimal number of options? The general goals are to minimize the costs both of decision and of error (although there will often be some tension between these goals). In practice, we pursue these goals in a particular context by attending to four factors. If people have informed preferences in this context, they should be offered relatively more options. If it is easy for people to map their preferences onto the options, this also speaks in favor of providing more options. The more heterogeneous the population in its preferences, the more options will be appropriate. And if people attach positive value to making the choice, as opposed to finding it merely stressful and burdensome, we might increase the number of options.
Sunstein briefly considered two objections to the libertarian paternalist approach, one grounded in fears of the slippery slope towards ever greater paternalistic intervention, the other in mistrust of the planner who chooses the default rule and structures the options. But, he argued, neither of these objections takes seriously the fact that, in most cases, default rules have to exist and are sure to affect outcomes. Given this inevitability of influence, Sunstein proposed that we consciously fashion default rules in a way that is welfare-promoting rather than leaving them to historical accident or assigning them at random.
Finally, Sunstein offered two extensions to his proposal by asking how we might encourage Americans to be more benevolent rather than simply, as the libertarian paternalist proposes, more effective at promoting their own welfare. In Europe, where the default rule for organ donations is that people are presumed to consent to the harvesting and use of their organs after death, only 1-% of person opt out. In America, where the default is reversed, only 20% of people opt-in to be organ donors. Conservative estimates suggest that thousands of American lives could be saved each year by a simple reversal of the default rule. In addition, one might consider the charitable counterparts to the savings schemes Sunstein proposed as the outset: employers might automatically enroll employees in a program that gives a fixed percentage of their December salary to charity, or in a "Give More Tomorrow" plan that similarly allocates a certain portion of future salary raises to charity. In each case, opt-outs would be very easy and very low-cost. Like libertarian paternalist schemes, these proposals would be both choice-respecting and welfare-promoting.