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The Limits of Nudges

- July 15, 2010

George Loewenstein and Peter Ubel have an interesting op-ed in this morning’s New York Times arguing that insights from behavioral economics have been abused by policy makers in order to avoid hard choices. The policy implications from many behavioral economics studies are often relatively pain-free from a political perspective. For example, they suggest that simply giving consumers a bit more information can encourage them to eat healthier, save energy, and make better health care choices. The problem, Loewenstein and Ubel assert, is that these solutions often have only tiny effects compared to the size of the problem they seek to address. Ultimately, changing relative prices is much more likely to meaningfully impact behavior deemed socially undesirable. So, making healthier foods cheaper is much more important than labeling unhealthy food. Meaningful reductions in CO2 emissions require increasing the cost of traditional sources of energy. Giving people more information about their energy consumption helps a little at the margin but should not be thought of as a solution to the problem. The op-ed has many more examples.

Loewenstein and Ubel’s op-ed is mostly aimed at warning people that behavioral solutions are no panacea. I am only a modest consumer of this research so I cannot evaluate all their claims. Yet, it strikes me that if they are right, their argument is really quite damning for the behavioral economics revolution. Essentially, they assert that traditional economic analysis has ultimately much more relevance for the analysis of major social problems and for finding solutions to them. Behavioral economics can complement this but cannot be a viable alternative. Within political science and other social sciences the insights of behavioral economics are sometimes interpreted as undermining the very foundations of classical economic analysis and warranting an entirely different approach to social problems. At the very least, the op-ed is a useful reminder that careful scrutiny of effect sizes matters greatly.