Of nudges, path-dependent outcomes, and niche construction

I like nudges[1] – soft paternalism – because they sometimes make life easy for me. In matters that do not excite me, I tend to “go with the flow.” I cannot decide everything, so I’m happy to leave what I consider “subordinate” decisions to “the system” (firms and government), or circumstances – whatever. If someone nudges me paternalistically – for my own good – he is welcome to my silent assent. I still reserve the right to countermand the choice, if aroused. This is far better than being told sternly (and worst ignorantly) what to do or “else”. Even if the rule is in my best interest, I have an instinct of rebellion.

The “soft” approach is possible because those behind the nudge do not aim at full compliance: they only want to influence the crowd as a whole, though some people may go through the net and become outliers. “Good enough” is the benchmark, not perfection. Where to use nudging and where to be prescriptive depends on the situation. “Good enough” is not enough when deciding on which side of the road cars should drive –hence the need for regulation. By limiting the maximum size of servings at food stands, on the other hand, at the end of the day on average clients may have drunk and eaten less junk. The nudge would have been successful.

Store-keepers have developed nudging to lucrative art. The “cheapest price” items are placed up on top of the rack, or down at the very bottom. I have to exert myself to see them at all, and the price for comparison in out of sight. At eye level, I have the catchy and expensive products – they beckon and nudge me: if I’m in a hurry, I take what is at eye level. This is the supermarket’s extra profit. Fast food outlets have been re-sizing servings in the last 30 years: what was “jumbo” in my youth, today is just “standard”. It is not that we have become hungrier: vendors know from experience that customers will eat what’s on the plate, irrespective of hunger. By changing the size the throughput swells, and so does the clients’ belly.

Governments use nudges to make it easy for hurried and harried people to do what is (most of the time) in their best interest. Here are a couple of examples. When signing up for a job, for instance, a regulation may determine that my “default” position is automatic enrolment in the firm’s chosen health or pension plan; fees being deducted from the paycheck. So the simple fact of a “default” position choosing the right thing for me will improve my life in the long term.

When should we use nudges? As I was clearing away the infinite fruits of the blood beech in the garden, it occurred to me that a nudge works best in given, short-term “situation” and result in a predictable “path-dependent outcome.” This is not surprising; nudges rely on social psychology – the science of the person in the situation.[2] Nudges work best when the target is “neutral” about the intent of the nudge, the choice is simple, the nudge subliminal, and the ensuing outcome immune from interferences. Nudges aim at predictable outcome by influencing a random or inattentive choice.

Incentives are often assimilated to nudges: shareholders offer the CEO rewards linked to the good performance of the firm. Incentives, however, are at the other end of the spectrum from nudges. Incentives trigger “niche construction.” [3] Niche construction is a neglected aspect of ecology, but also of biological as well as cultural evolution. In niche construction organisms bring about changes in the environment in seeking “optimization.” The tool is “problem solving”, and this is an inherently creative, hence unpredictable process.

The CEO will react to the bonus incentive by “optimizing” his profit seeking behavior. The reaction is deliberate and long term. In fact, the CEO’s “optimizing” behavior may go against the intent of the incentive. What we have seen repeatedly in the financial sector is:

“[M]any economists still [do] not understand that a combination of circumstances in the 1980s made it very easy to loot a [bank] with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution?”[4]

An incentive aims for predictable effect; it triggers an unintended and unpredictable outcome as the actor seeks “optimization” in response to the incentive over time. Economists and political scientists have a hard time with time.[5] They tend to ignore it, and see the world as flat. Alternatively, they assume – in mechanic fashion – that the “principal” can motivate the “agent” to act on his behalf and with his intent. This is nonsense, for the “agent” is never passive and subject to the incentive the way we are subject to gravity. The agent ignores, resists, or “optimizes” the effect of the incentive on his own goals. The result is unforeseeable because it emerges as a creative response. Bureaucracies often bend legitimate legislative intentions to their base and self-serving ends.

I have come across an interesting suggestion for a “nudge.” In lieu of an estate tax, the state could create a “default” rule, making itself legatee (all or in part), unless the donor decides otherwise. The attraction lies in the “facilitated voluntary character” of the measure, which could replace the estate tax.[6]

The poor die intestate. The state is already residual legatee for people without heirs. Whether making itself “default” legatee ahead of legitimate ones would be popular, is a question I’d flag but refrain from debating (personally, I’d view taking advantage of increasingly senile people – even in a good cause – as dicey). The core issue for me, however, is whether, for estates say above the (admittedly arbitrary) threshold of 2 million €[7] (where revenue worth the effort would start kicking in), estate planning allows the default rule to work its fiscal magic. I much doubt it. Deeding the family house and family jewels (and beyond) is a deliberate (if at times arbitrary) activity – it is an exercise in “niche construction”, where nudges have no place. Legitimate heirs would coalesce in making sure the state is excluded, even though they may bicker over the spoils. I may be wrong, but I do not see an estate lawyer, when drawing up a will, forgetting to ask the question whether the state should be “default” legatee or not. In fact, it may be viewed as “unethical.”

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