Libertarian paternalism is an oxymoron

Remember those Sci-Fi movies from the '50s where the mad scientist, who only had the good of the world at heart and proceeded with his experiments despite much warning, winds up on his knees crying out to the sky "It wasn't supposed to be like this! This isn't what I wanted!"

Here's Richard Thaler on Mayor Bloomberg's ban on soda:

To state the obvious: a BAN is not a NUDGE.The opposite in fact. So don't blame Bloomberg's ban on large soda cups on us.
— Richard H Thaler (@R_Thaler) May 31, 2012

To which Justin Wolfers replied:

.@R_Thaler Disagree. Bloomberg's not banning Soda. Indeed, the big cup still exists--it's two little ones. So this IS really a nudge.
— Justin Wolfers (@justinwolfers) May 31, 2012

There isn't much distance from nudge to shove, especially when preference heterogeneity keeps nudgers from recognizing when they're shoving. Justin doesn't see it as too costly, likely because he isn't a soda-fan either. So how could it be costly? A religious nudger could similarly see it as pretty costless to encourage at-home parenting by banning having a nanny employed more than 3 days a week; a parent could always opt-out by hiring a second nanny.

Should we blame Thaler? Here's what he had to say two years ago when pressed on whether his libertarian paternalism wouldn't lead to bans and harder paternalism:

In short, the risk of the slippery slope appears to be a figment of Professor Whitman’s imagination, and clear evidence of his bathmophobia. To be fair to him, this phobia is hardly unique to him and Professor Rizzo. Slope-mongering is a well-worn political tool used by all sides in the political debate to debunk any idea they oppose.
...
Instead of slope-mongering we should evaluate proposals on their merits. (We devote a chapter of Nudge to an evaluation of the choice architecture used in Sweden’s social security experience.) Helping people make better choices, as judged by themselves, is really not a controversial goal, is it?

For all the protests that "nudge" was supposed to have strong opt-out provisions, it was awfully predictable that it wouldn't turn out that way in practice. I don't know how much time Thaler spent  working to ensure choice was preserved in his proposed choice-preserving architecture, but he did spend a bit of time telling libertarians that this sort of thing couldn't happen.

I still like my old review of Nudge, in which I proposed some nudges at the ballot-box:

While Sunstein worries about our decisions over investment plans or our weakness of will at the buffet table, I worry about our decisions at the voting booth. We vote infrequently, there’s no feedback from our personal voting decision to any policy outcome (unless you happen to hit Lotto by breaking a tie), the voting decision is complex and we may have little grasp of the issues at stake let alone our own positions on those issues. In my own research, I’ve found that only about half of voters in 2005 could place National, United Future, and Labour correctly on a left-right spectrum, for example, and that individuals’ political knowledge independently affects their policy and party preferences even after controlling for income, education, race, employment, gender, and other demographic characteristics. And so I think we (by which I mean you) need a nudge. Under my libertarian paternalistic voting system, your electoral enrolment would be linked to your census details. You’d then answer a brief questionnaire when entering a computerized voting booth, and I’d tell you, through the computer’s algorithms, for whom you should vote. Trust me: I’d be choosing the option that really would be best for you, if you only understood all of the policies supported by each of the parties and had a PhD economist’s understanding of the likely effects of these policies. You’d still be free to pick some other candidate or party, but you’d have to first reject the default choice I’d pick for you. The remaining options would then be presented in an order designed to maximize the chances of your choosing the next best option.

I trust that you find this kind of scheme repugnant. I’d find it great, so long as I got to be the choice architect. But opinions surely would vary, and I’d surely oppose the scheme if anyone other than me got to be the architect. The problem is that most of the arguments against my scheme cut similarly against Sunstein’s. More worrying, Sunstein seems pretty happy to blur the line between nudges and shoves: increasing cigarette taxes to discourage smoking is surely paternalistic, but is a bit stronger than a nudge. And, honestly, even the choice preserving nudges, like cars that nag you about the petrol you could save by easing up on the pedal, sound thoroughly unpleasant: I’d be nudged into learning enough automotive electronics to cut the right wires.

Update: It's occurred to me that I can't assume that everybody in the world has read the brilliant piece that started all this: Sunstein and Thaler's "Libertarian Paternalism Is Not An Oxymoron". Restricting it to choice of defaults, it's pretty tough to fault their argument. Except it never gets restricted to choice of defaults, now, does it?

Tyler Tweets

If you hacked Tyler Cowen's twitter account, with almost 20k followers, surely you'd do something more interesting than send out a generic spam note about some new diet.

An amazing new weight loss product! It worked for me and I didnt even change my diet! [link redacted]
— tylercowen (@tylercowen) May 31, 2012

What a waste. Given this opportunity, you could either go for lulz or for money.

On the money side, I have a hard time seeing a better play than shorting Spanish or Italian debt and then claiming that you have it on good authority from a central bank insider that default is imminent. There's a slight risk you cause the default by setting a run, but that's more a feature than a bug. Update: On second thought, pushing a penny stock likely gets more cash but fewer lulz.

If you're in it for the lulz, @ModeledBehavior delivers up gold at #TylerTweets - the hashtag Justin Wolfers suggested. I'd put up this:

Tucked away in a strip-mall off Columbia Pike, found a place that serves "long pig". Better than you'd think. Go! #TylerTweets
— Eric Crampton (@EricCrampton) May 31, 2012

But @ModeledBehavior's offerings are much funnier:

Its hard to imagine spoons will exist in their current form in 30 years. What does this tell us about the social discount rate? #tylertweets
— Modeled Behavior (@ModeledBehavior) May 31, 2012

Given what we know about the money illusion, should the moon be destroyed or doubled? The answer is not clear to me. #tylertweets
— Modeled Behavior (@ModeledBehavior) May 31, 2012

#tylertweets cannibalism is wrong, but not for the reasons it's critics say. We ignore the wisdom of cannibals at our peril.
— Modeled Behavior (@ModeledBehavior) May 31, 2012

#tylertweets careful viewers will note Big Momma's House 3 is biting satire of modern central banking. Most underappreciated drama of 2011?
— Modeled Behavior (@ModeledBehavior) May 31, 2012

@ModeledBehaviour, I salute you and your mad surrealist Cowenesque stylings. When you finally decide to make the end-game play with your growing Twitter and blogging audiences, it will be glorious.

Update: It gets better! While everybody who's anybody is playing #TylerTweets and often hitting @tylercowen in their updates, the spammer puts up another lame offering:

Lose 5 lbs of Fat in a week [link redacted]
— tylercowen (@tylercowen) May 31, 2012

What a waste.

Encouraging Arrow-Debreu worlds

Chris Dillow warns that economics only results in real-world changes when it serves the interests of the powerful.

This poses the question. How come economics is performative in some regards (option pricing, bosses’ pay) but not in others, such as contingent markets?

It’s certainly not because Arrow-Debreu theory is new or marginal. It is much older, and far more widely taught in universities than the work of Jensen and Murphy cited by Aditya.

Nor is it because state-contingent markets would be an obviously bad idea. Yes, we know from the theory of the second best that it is not necessarily efficient to remove a single market distortion, so it’s theoretically possible that the introduction of a few such markets would be sub-optimal. But whether this would be the case in practice takes some proving. And anyway, plenty worse ideas than these have been turned into economic reality.

There is, of course, a simple answer to this question. Economics is performative when it serves private interests, but not (necessarily) when it serves public ones. Traders immediately saw the usefulness of the Black-Scholes option pricing formula, and bosses quickly saw the use of Jensen and Murphy’s work. But the benefits of better state-contingent markets accrue to millions and cannot so easily be captured privately. They are an example of a Nordhausian innovation - one with high social benefits and low private benefits and which do not therefore exist. Paradoxically, markets are incomplete because of a market failure - that there’s a positive externality to creating complete markets.

I could, of course, put this more crudely. Economics is performative when it serves the interest of the powerful, and not performative when it doesn’t. In this sense, the problem is not with economics, but with a class structure that causes the “real world” to be a corrupted and perverted form of a market economy.

As powerful counterexample, here's Justin Wolfers working to push us closer to Arrow Debreu worlds in helping to get prediction markets legalized in the United States. Prediction markets are exactly the kind of Nordhausian innovation that shouldn't exist. The Case-Shiller markets also help move us to Arrow-Debreu.

It's fun to think about the market failure of there not being enough markets. One obvious solution is that governments support rather than oppress prediction markets. Three cheers for New Zealand's iPredict, and for the policy environment that allows it to exist.

But they're all subject to manipulation...*.

Justin Wolfers lauds the new Oscar voting system, also described here. He claims:

• The new system will see less manipulation
• The system picks Condorcet winners:
  

  “There cannot be a loser who would be preferred by more than 50% of the people to the winner. The winner will always be preferred by at least 50% of people to any other movie.”

Really?

Let's take Wolfers's example: 1997's win by Titanic over As Good As It Gets, The Full Monty, Good Will Hunting and LA Confidential. Wolfers says that someone expecting Titanic and As Good As It Gets to be the top picks would have an incentive to lie about his true preference for LA Confidential and to vote for his favourite among the two likely front runners. But mightn't folks have incentive to lie also under the elimination ballot?

Suppose we have 5800 Members of the Academy voting, with preferences as listed below.

The first set of voters, 2000-strong, prefers Titanic to anything else, followed by LA Confidential, followed by Good Will Hunting, followed by Full Monty, followed by As Good As It Gets.

The second set of voters, all 1400 of them, prefers Good Will Hunting followed by LA Confidential followed by The Full Monty, followed by Titanic, followed by As Good As It Gets.

The third set of 1000 voters prefers As Good As It Gets, followed by LA Confidential, followed by Good Will Hunting, Titanic, and The Full Monty.

The fourth set of 600 voters prefers LA Confidential, then Good Will Hunting, then Good As It Gets, then Full Monty, then Titanic.

The final set of 800 voters prefers As Good As It Gets followed by LA Confidential, Full Monty, Titanic, and Good Will Hunting.

On a straight plurality vote, Titanic wins with 2000 votes to As Good As It Gets's 1800.

Under a sincere elimination ballot, Full Monty is eliminated on the first round (nobody's first pick) followed by LA Confidential on the second (first pick of only 600), As Good As It Gets on the third (now the first choice of 1800), and Titanic on the fourth (now first choice of 2800), leaving Good Will Hunting as winner.

Is it then true that Good Will Hunting is preferred by a majority to any other film? Obviously not. LA Confidential is preferred over Good Will Hunting by all but the second group of voters: 4400 preferred LA Confidential, 1400 preferred Good Will Hunting. Indeed, LA Confidential is the Condorcet Winner in the preference ordering I've set up above. It's true that the winner on the elimination ballot is preferred by a majority to the film it beats out in the last round, but that's hardly the same thing as being majority preferred over all other nominees. I'm guessing that Wolfers here must have been misquoted.

As for manipulation, imagine that you're in the final group of voters and you've a decent idea of how things are going. You and the rest of your group will not be happy if Good Will Hunting wins: that's your last choice. How can you change the outcome? Lie about your preference between As Good As It Gets and LA Confidential! Doing so flips the outcome to LA Confidential, your group's second choice, from your group's last choice. The elimination sequence then runs Full Monty on the first round, Good As It Gets on the second (1000 votes), Good Will Hunting on the third (1400 votes), and LA Confidential beats Titanic in the final round, 3800 to 2000. Lying in this case helps in choosing a Condorcet Winner, so that's a decent result, but it doesn't have to be the case.

Now it's true that the informational requirements for productive preference misrepresentation under the elimination ballot may generally be higher than under plurality, but we can easily imagine rules of thumb that wouldn't be too bad. If your top-ranked option is likely to lose, push it down your preference ordering; if your last-ranked option is likely to win, claim to love anything that other folks are likely also to support. Since everybody else is likely to be doing the same thing, things will be messy. But that's also true under plurality. While Titanic won by plurality in our example above, it also was very low in everyone else's preference orderings. Titanic fans could easily imagine the fourth group supporting As Good As It Gets to stop Titanic, in which case they could flip to LA Confidential and encourage Group 2 to do the same; in that case, it's folks preferring one of the "big two" who do better by lying.

It's because social choice gets so messy that I went to the data to tell me which system gave better results. I can't see much difference between them in terms of retrospective critical evaluation of film quality. Don't get your hopes up too high....


*Except for dictatorship of course, unless reasonable homunculi disagree...