Francesco Guala and Luigi Mittone

Francesco Guala and Luigi Mittone A Political Justification of Nudging CEEL Working Paper 7-13 Cognitive and Experimental Economics Laboratory Via Inama, 5 38100 Trento, Italy http://www-ceel.economia.unitn.it tel. +39.461.282313

A"Political"Justification"of"Nudging " " FrancescoGuala * andluigimittone " " " Abstract:" Nudge policies are typically justified from paternalistic premises: nudges are acceptable if they benefittheindividualswhoarenudged.atacitassumptionbehindthisstrategyisthatthebiases ofdecisionthatchoicearchitectsattempttoeliminategeneratecoststhatarepaidmainlybythe decisionbmakers. For example, in the case of intertemporal discounting, the costs of preference reversal are paid by the discounters. We argue that this assumption is unwarranted. In the real worldthecostsofreversalareoftentransferredontootherindividuals.butifthisisthecase,the biasescreateexternalities,andnudgesarebestjustifiedfromapoliticalratherthanpaternalistic standpoint. ResearchforthispaperwassupportedfinanciallyandlogisticallybytheFondazioneBrunoKessler.Weare gratefultoparticipantsatthebehavioraleconomicsworkshopheldatfbkinoctober2013fortheircommentsand suggestions. * DepartmentofEconomics,ManagementandQuantitativeMethods,UniversitàdegliStudidiMilano,Italy. Email:francesco.guala@unimi.it DepartmentofEconomicsandManagement,andCEEL,UniversitàdegliStudidiTrento,Italy. 1

1. Introduction" According to behavioural economists, a better understanding of the psychology of decisionb makingcansignificantlyimprovebotheconomictheoryandeconomicchoices.onthefirstfront behavioural economics has scored many points, and has already become part of the scientific mainstream. The second project in contrast has come to the fore only recently, after policyb makers have realized that policies inspired by behavioural economics may deliver results at a lower cost than traditional interventions. 1 Most of the debate has centred around sobcalled Libertarian Paternalism, an approach to social policy advocated by influential economists like ColinCamerer,GeorgeLoewenstein,MatthewRabin,CassSunsteinandRichardThaler. 2 Sunstein andthaler,inparticular,haveadvertisedtheuseofbehaviouralpoliciesinnudge,awidelyread bookthatnotonlyillustratesanumberofactualandpotentialapplications,butalsotriestolay philosophical foundations for soft government intervention. This rise of interest in turn has stimulatedthediscussionabouttheprosandconsofbehaviouralpolicies,whattheycandeliver, andwhethertheyaregenuinelydifferent(andbetterthanthealternatives. 3 A nudge isapolicyinterventionthattargetstheenvironmentinwhichcitizens(theconsumersof privateandpublicgoodsmakedecisionsthathaveimportantimplicationsfortheirwealth,health, and happiness (to evoke the subbtitle of Thaler and Sunstein s bestseller. The environment in most cases is manipulated in such a way as to preserve the full range of options that citizens already have, that is, without reducing their freedom of choice. Subtle features of the choice architecture,however,arearrangedsoastofacilitatethechoiceofoptionsthatarebeneficialto the decisionbmakers. Nudge policies typically remove psychological biases that prevent people from making the right decision, or use the biases to direct behaviour towards the best option. Because choice architects aim at improving people s lives without reducing their freedom, the policy of nudging has been marketed using the seemingly paradoxical label of Libertarian Paternalism. PhilosophicaldiscussionsofLibertarianPaternalismsofarhavemostlyfocusedonthisoxymoron. Criticshavearguedforexamplethatthepoliciesadvocatedbynudgersarenotreallypaternalistic becauseeventhoughtheyareaimedatimprovingthewellbbeingofcitizens,wellbbeingisdefined with respect to the preferences of the citizens themselves. Genuine paternalism imposes a (superiorviewofwellbbeing on recalcitrant subjects, while nudges simply help people achieve what they want (e.g. Hausman and Welch 2010. Another line of criticism has focused on its libertarian credentials: nudges may preserve sobcalled optionbfreedom, but surely infringe the autonomybfreedom of individuals. Since option freedom without autonomy is hardly valuable, a 1 SeeforexampleDolanetal(2010. 2 Cf.e.g.Camereretal.(2003,LoewensteinandHasley(2008,ThalerandSunstein(2003,2008,Sunstein andthaler(2006. 3 Theliteratureisalreadytoolargetobereviewedhere,butseeforexampleGlaeser(2006,Bergand Gigerenzer(2007,AmirandLobel(2008,Sugden(2008,Bovens(2009,HausmanandWelch(2010,Selingerand Wythe(2010,BrennanandBrooks(2011,GruneBYanoff(2012,Rebonato(2012,Schnellenbach(2012,Qizilbash (2012,Wilkinson(2012,HaybronandAlexandrova(2013. 2

genuine libertarian should be unhappy with the policy of nudging (Hausman and Welch 2010, GruneBYanoff2012. Inthispaperwefollowadifferentlineofreasoning.Althoughwearesympatheticwiththepolicies advocatedbybehaviouraleconomists,weagreewiththecriticsthatnudgerssofarhavenotdone averygoodjobatjustifyingtheirpolicies.partoftheproblem,wethink,istheirattempttojustify nudgesinpaternalisticterms.atacitassumptionbehindthisstrategyisthatthebiasesofdecision that choice architects attempt to eliminate generate costs that are paid mainly by the decisionb makers. We argue that this assumption is problematic. In the real world the costs of biases are oftentransferredontootherindividuals.butifthisisthecase,thenthebiasescreateexternalities andnudgesarejustifiablefromapoliticalratherthanpaternalisticstandpoint. Thepaperisorganizedasfollows:section2providesaquickoverviewofstandardjustificationsof governmentinterventionintheeconomicrealm.thissectionislargelydescriptiveandpavesthe wayforthebehaviouraleconomicsaccountofmarketfailures,insection3.section4illustratesa specificexample,focusingontemporaldiscounting.themainthesisofthispaperisformulated anddefendedinsections5and6,wherewearguethatbiasesliketemporaldiscountingcancreate externalitiesandthereforenudgepoliciesarebetterjustifiedfromnonbpaternalisticpremises. 2."Market"failures"and"policy"intervention" We begin with some general remarks on the role of government intervention and regulation. Although most readers are probably familiar with these remarks, we repeat them because they will become important later in the paper.(impatient readers may want to skip this section and jumpdirectlytosection3. Thejustificationofgovernmentinterventionisacentraltopicincontemporarydebatesofpolitical economy.when,where,andhowmuchinterferencewithindividualchoiceislegitimate?onthe far right of the political spectrum, libertarians support the idea of a legal system exclusively concernedwithnonbeconomicmatters,andaminimalapparatusofstateregulationofeconomic matters.libertarianjustificationsrangefromthepurelypolitical todefendindividualfreedoms topurelyeconomicones.thelatterrelyespeciallyontheoremsprovingthat,in.the.appropriate. circumstances,freemarketsdeliverallocationsofgoodsthatareefficientinpareto ssense.the provisoisimportant,forneoclassicaleconomicshasdevotedsignificantresourcestothestudyof marketfailures. The theory of market failures is concerned with those circumstances in which a competitive marketdoesnotorcannottakeplacebecauseofsomeparticularfeatureofthecommoditiestobe exchanged.theclassiccasesstudiedbyeconomistsincludetheexistenceofnaturalmonopolies; the transaction costs caused by asymmetric information; externalities generated by the impossibility to attribute property rights; and the existence of nonbexcludable, nonbrival public 3

goods. 4 The neoclassical theory through the fundamental theorems of welfare economics suggeststhatstateinterventioncanbeextendedinordertocorrecttheseimperfections,withthe exclusiveaimtorestoreefficiency. It is important to stress that the neoclassical theory of market failures has little to do with Keynesian critiques of the market as an efficient allocation mechanism. According to Keynes (1936 markets can fail to assure full employment of the available resources even when they operate in ideal conditions, unencumbered by information asymmetries, externalities, or monopolies. Moreover, the theory of market failures is also independent from normative approachesthatcriticizemarketsfortheirdistributionalconsequences.neoclassicaltheoryinfact tries to steer away from politically contentious considerations regarding justice and inequality the use of the Pareto principle is aimed precisely at avoiding controversies about distributional issues. In practice, however, the political economic justification for the welfare state systems of contemporarywesterncountriesisablendofargumentstakenfromneoclassicaleconomicsand fromkeynesiantheory,withapinchofnormativeadvice(weoughttoredistributewealthsoasto reduceverticalinequality.thisisthebackgroundthatmustbekeptinmindtoframethedebate aboutlibertarianpaternalism. Behavioural economics and Libertarian Paternalism introduce a new set of considerations, in particulartheideathatmarketfailuresmaybecausedbybiasesofindividualdecisionbmaking.the idea that competitive markets are efficient allocation mechanisms in fact presupposes the existence of rational agents. A neoclassical competitive market is a sort of superborganism that derives its overall efficiency properties from the efficiency of each part. Strictly speaking, the market may deliver efficient allocations in spite of subboptimal agents, if agents interactions reducetheoveralleffectofindividualmistakes.butthisistrueonlyifthemajorityoftheagents adoptintrinsicallywellbbehavedstrategies,orifthebehaviouralerrorsaredistributedrandomly, so that they compensate one another. What if the mistakes are widespread and systematic? If severalagentschoosethesame(wrongbehaviour,themarketsgenerateaninefficientallocation ofresources.behaviouraleconomistsclaimthatthisisarealisticprospect,becausemanytypesof economic choice interbtemporal choice, choice under uncertainty and risk, strategic decisions, etc. aresystematicallyaffectedbycognitivebiases. Noticeanimportantdifferencebetweenbehaviouraleconomicsandstandardneoclassicalmarket failures:thesourceoftheproblemhereisnotanarchitecturalflawofthemarket(theexistenceof asymmetric information, externalities, etc. but a widespread failure of rationality. Individual agents fail to behave according to their true preferences. The interventions prescribed by 4 EconomistsusuallydistinguishbetweenpublicgoodsandexternalitiesonthebasisofthenonBrivalry criterion.whilegoodswithexternalitiesaremerelynonbexcludable(onceproduced,theirconsumptioncannotbe restricted,publicgoodsarenonbexcludableandnonbrival(consumptionbyoneindividualdoesnotprevent consumptionbyanotherindividual. 4

behavioural economists therefore are aimed at restoring the smooth operation of markets, by replacing irrational agents with wellbbehaved ones. The nudge approach, in this specific sense, maybeconsideredanallyoftheneoclassicalapproach. 3."Bounded"rationality"and" genuine "preferences" An irrational choice, according to behavioural economists, is a choice that does not reflect a consistent structure of preferences. This idea is fairly recent. The work of contemporary behavioural economists is in many ways a descendent of the theory of bounded rationality developedbyherbertsimoninthe1950s.butaccordingtosimon(1955,theboundeddecision makerisnotirrational;onthecontrarysheisconsistentbutforcedbyhercognitivelimitationsto consider only a subset of the available alternatives. Simon uses the analogy of a physical constraint:considerabirdthatcanonlyflyatupto70kilometresperhour;thesetofalternatives availabletoescapefromapredatordoesnotincludeflightat200km/h.analogously,adecision makercannotcomparemorethanacertainnumberofalternatives.shemustdefineaboundary forthecomparativeprocessandthenchoosewithinthisboundary.anotherwaytoputitisthat Simon s decision maker does not suffer from internal inconsistency of preference, and any apparentbehaviouralincoherencethatweobserveisduetoachangeinthealternativesthatare includedinherdecision(subset. Contemporarybehaviouraleconomists,incontrast,makestrongerclaims: Ourmajoremphasisisonthefactthatinmanydomains,peoplelackclear,stable,orwellB ordered preferences. What they choose is strongly influenced by details of the context in whichtheymaketheirchoice,forexampledefaultrules,framingeffects(thatis,thewording of possible options, and starting points. These contextual influences render the very meaning of the term preferences unclear. If social planners are asked to respect preferences,oriftheyaretoldthatrespectforpreferencespromoteswellbbeing,theyoften willbeunabletoknowwhattheyshoulddo.(sunsteinandthaler2006:233 While Simon s agent has a clear preference ranking but is bound to consider only part of the optionspace,sunsteinandthaler sagentcannotbesaidtopossessapreferenceatall.thisisa deeperfailureofrationalitythatcallsformoredrasticsolutions. Whatisthelinkbetweenchoiceinconsistencyandthelackofgenuinepreferences?Inhisrecent bookonpreference,.value,.choice.and.welfare,danhausman(2011definespreferencesastotal. comparative. evaluations of the consequences of actions. Intuitively a preference is a judgment that, all things considered, x is better than y. There are three important elements in this definition: first, a preference is an evaluation. Second, it is comparative, not absolute. It must involve at least two items that are compared (in economics, a preference is expressed via a 5

ranking. Third, it is a total evaluation: nothing that matters must be excluded. 5 The total evaluation requirement is a consequence of the principle of independence, which is crucial for the stability of the preference relation. 6 But the axiom of independence has been shown to be empirically violated in a number of experiments, which have fuelled behavioural economists scepticismconcerningpreferences. Failures of independence may be caused by failures to consider attributes that matter to the decisionbmaker. Intrinsic inconsistencies at the level of preferences therefore may result from a mechanismthatisinmanywayssimilartotheonediscussedbysimon.aboundedrationalagent in fact may not only be unable to search the full space of options; she may also be unable to searchthefullspaceofattributesofeachoption.thelatterisespeciallyrelevantiftheoptionsare complex, or if choices have ramifications with multiple future consequences. A limited human beinginsuchcircumstancesmayonlybeabletoconsiderthemostsalientcharacteristicsofeach option, overlooking others. If salience varies across time or across circumstances, choice inconsistenciesmayoccur. 7 " 4."An"example:"temporal"discounting" In this section we cast these general theoretical considerations in the context of a concrete example.inthecourseofthepaperweshalloftenrefertoabiasthatplaysaprominentroleinthe libertarianbpaternalisticliterature,namelytemporal.discounting.thalerandsunsteindevotemany pagestodescribeprogrammes like SaveMoreTomorrow designedtonudgepeopletoward puttingmoremoneyintheirpensionschemes.theseprogrammesrelyontechniquessuchasthe manipulationofdefaultoptions,thatinfluencechoicewithoutreducingsubstantiallythefreedom ofdecisionbmakers.ingeneral,thenudgestrytocurtailourtendencytosacrificefuturewellbbeing inordertosatisfyimmediatewants.thistendencyofcourseisnotnecessarilyproblematic,unless peoplecometoregrettheirpastdecisiontoconsumeratherthansave.butwhenthishappens, temporal discounting leads to temporal inconsistency of preference and, possibly, inconsistent choice. Temporalinconsistencycanbeexplainedalongthelinesillustratedintheprevioussection,using ConstrualLevelTheory(CLT,aframeworkdevelopedbyNiraLibermannandYaacovTrope. 8 When 5 Thisisquitedifferentfromthewaywetalkaboutpreferencesineverydaydiscourse.Ineconomictheory,itis impropertosay Iprefermeattofish,butsinceIamworriedaboutmycholesterollevelI llchoosefish.thesentence shouldratherberephrasedasfollows: Iwouldprefermeattofish,ifmycholesterollevelwasnotsohigh;butgiven thatiamconcernedwithmycholesterol,ipreferfishtomeatinstead. 6 Independencerequiresthattherankingoftwooptions(forexample,x>ydoesnotchangewhennew optionsbecomeavailabletothedecisionmaker.iftheadditionofanoption(say,zchangestherelativeorderingofx andy,theagentmusthaveoverlookedsomefeatureofxandy(forexampletheircomplementaritywithzthat mattersforthedecisionatstake. 7 Forageneralanalysisofthistypeofchoiceinconsistency,seeMongin(2000. 8 Seee.g.TropeandLibermann(2003,2010. 6

a choice produces consequences in the future, the decisionbmaker must construct a mental representationoffutureeventsthatmaybeinfluencedbyherdecision.thelevelofabstractionof thismentalrepresentation,accordingtoclt,dependsontemporaldistance:thefurtherintime the event is, the more abstract its representation. This cognitive process can be described by positingthatfutureeventsarecharacterizedbyseveralattributes which,insimon stheory,are equivalenttothealternativesincludedinthedecisionsubset.becauseofhercognitivelimitations, thedecisionmakercannotevaluatethemall,butwillratherselectasubsetthatshewillconsider forherdecision.ifweaccepttheempiricalevidencereportedbyclt,theselectionofthesubset ofattributesdependsatleastinpartontemporaldistance.astimepasses,thecompositionofthe subsetchanges,andchoicemaychangetoo.thisprocessmayleadtoaclassicalsituationofinterb temporalincoherence. SupposeforexamplethatAnnisfacingasavingdecisionearlyinherlife.Oneoptionistospend immediatelyalltheextramoneysheisearning,buyingforexampleholidaytripsaroundtheworld. Another option is to invest the money in a pension fund. Let us imagine that, if she decides to save,heryouthwillbefairlyboringcomparedtothefunshecouldhaveifshedecidedtospendit on holidays and other treats. But if she saves, she will be able to rest and enjoy a wealthy retirement later in life. If she spends it all, in contrast, she will face the alternative between workinguntilamuchlaterageorretiringwithalowpension. Ann sdecisionhasseveraldifferentimplications(attributes.tosimplify,welimittheanalysisto six attributes on three different levels or dimensions (fun vs. boring youth, wealthy vs. poor retirement,restvs.toilinoldage.letussupposethatann spreferencesalongeachdimension areorganisedasfollows: ShepreferstohaveFunratherthantohaveaBoringyouth(F>B; ShepreferstobeWealthyratherthanPoorlaterinlife(W>P; ShepreferstoRestratherthanToilwhensheisold(R>T. Arationalagentshouldbeabletoformacoherentpreferencerankingacrossallthecombinations oftheseattributes,orpossiblelifebstyles.butlikemostpeopleannhascognitivelimitations.letus assumethatshecanonlymanagetoconsidertwoattributesatatime.weshallalsoassumethat shesuffersfromthemyopiaofclt:whentheconsequencesofadecision(attributesarefaraway intime,theybecomelesssalientandtendtofade.asaconsequence,herchoicesaregoingtobe affectedbythesubsetofattributesthatarecognitivelysalient. Atthetimeofmakinghersavingdecision(t 1 onlythefirstdimension(forbissalient.butthe choicemadeatt 1 willdeterminewhichoptionsareavailablelaterinlife(att 2 : IfAnnchoosesB,thenthesetofoptionsatt 2 is{bwr},{bwt},{bpr},{bpt}; IfAnnchoosesF,thenhersetofoptionsatt 2 is{fwt},{fpr},{fpt}. 7

CLTpredictsthatatt 2 theattributesfandbwillceasetobesalient,andannwillfocusonthe second and third attributes only. Let us suppose her preference ranking over these pairs of attributesis {WR}>{WT}>{PR}>{PT}. Herpreferredoptionistobewealthywithouthavingtowork;secondBbestistotoilinordertobe wealthy;thentorestandbepoor;worstofallistobepoorandtoil.butnoticethattheoptionwr isnotavailable,ifshehaschosenfwhenshewasyoung.att 2 neverthelessanncanstillcompare theoptionfwrshehadatt 1 withthebestoptionshehasnow(bwt:sincebandfarenotsalient anymore,andwr>wt,att 2 sheregretsthechoiceshehasmadewhenshewasyoung. NoticethatAnn schoiceatt 1 hasnarrowedheroptionsatt 2.GivingupRisthecostthatshehasto payatt 2 inordertoreverseherpreviousdecision.initiallyshecouldhavehadbothwandr(at thecostoff;att 2 shecannot.ifshewantswshemustpayacostintermsofr.psychologists examples in the CLT literature tend to obscure this point, by focusing on seemingly reversible choices.butsomechoicesarestrictlyspeakingirreversible:youcannotgobackintime.theoption WRisunavailabletoAnnaftershehaschosenF.WhatAnncandoispayacosttoexchangePRfor somethingshelikesbetter(att 2.ButshecannotdecidetohaveFandRsimultaneously. ThesamestorycanbetoldinsuchawayastomakeitcompatiblewithsoBcalledMultipleSelves Theory(e.g. Ainslie 1992: in a multiple selves framework, each self only cares about selected attributes because these attributes(what happens now are the only relevant consequences for. her. The other dimensions concern events that do not happen to that decisionbmaker, but to someone else (to another self, at another time. Intertemporal choice then may give rise to problemsthatareformallyanalogoustothecondorcetparadox:att 1 self 1 isfacedwithbandf becausetheyaretheonlythingsthatmattertoher,andchoosesf.thenself 2 isfacedwithprand WT,andchoosesWT.Butifself 2 hadvotedfirstonthe wealth and rest dimensions,shewould havechosenwr.sotheorderofthepollsdeterminestheoutcome. 9 Ideally,arationalagentshouldbeabletoaggregateorarbitrateamongthevariousdimensionsof attributes,orherdifferentselves.sheshouldtaketheperspectiveofasuperior,unifiedselfthatis abletoattributemoreorlessweighttothedesiresofsomesubbselvesorothers.equivalentlyin termsthatarefamiliartoclt,theagentshouldbeabletobuildasingleutilityfunctionassigning specific weights to the various dimensions of the consequences.the problem is to find a justificationforthisprocedure.inamultipleselvesframeworkwemayseethechoicearchitectas athirdindividualwhoformsacoalitionwithoneoftheselves.forexample:shejoinstheolderself andvotesagainsttheyoungerself.thisisequivalentto putthechildintheadult sshoes,orto try to implement the point of view of the adult self in CLT theory. But it is not clear why one shouldformthis.coalitioninsteadofanother.whynottheopposite?wecouldjointheyounger 9 TheanalogybetweeninterBpersonalandintraBpersonaldecisionproblemswasfirstnoticedanddiscussedby Kavka(1991. 8

self and vote the elderly out. What is the justification for forming one coalition rather than another? ThechoicearchitecttypicallydecidestoendorsethepreferencesofoldAnn,nudgingyoungAnn to make decisions that will be more likeable to her future self. In a CLT perspective, one may reducetheeffectoftemporaldistanceenhancingthesalienceofsomeattributesthatwillbecome importantinthefuture.thisisequivalenttohelppeopleformacomprehensiveutilityfunction. Buttherearemanywaystodoit:inprinciplethechoicearchitectmightaswellputelderlypeople intheshoesofyoungerselves;afterallonehasalotmorefuntraveling,partying,spendingmoney when she is young than when she is old. Provided she keeps fond memories, old Ann might be helped or nudged to see her life choices in such a way that she feels no regret for her earlier decisions. Ofcourse we are not claiming that people should be encouraged to be irresponsible when they are young. The examples are only meant to show that, seen from a multiple selves or a CLT perspective, the choice between different nudges seems arbitrary. A younger self is just as recalcitranttobe votedout thananolderself.anoldselfmaybenudgedtoempathisewitha young self, or the other way around. The literature on choice architecture hides the problem underthecarpet,bysimplyassumingthatweoughttohelpyoungsterstosavemore.butnothing in the behavioural economics or libertarianbpaternalistic framework seems to justify this assumption. 5."The"politics"of"nudging" Wesuspectthatthisconundrumistheconsequenceoftakingthewrongperspective,rightfrom thestart.letusstepbackandreflectonwhatnudgershavebeentryingtodo:thesupportersof nudge policies seek a solution that is in some sense abpolitical. Libertarian Paternalism is paternalistic totheextentthatitspoliciespromotethewellbbeingofthenudgedindividuals. I saysthechoicearchitect intervenebecauseicareaboutyourwellbbeing.butunfortunately,as we have just seen, it is not entirely clear who is you (multiple selves problem, or what is the wellbbeing to be maximized (multiple attributes problem. If nudgers, like most economists, endorse a subjective view wellbbeing(as equivalent to the satisfaction of people s preferences, theyendupinadeadbendalley. Since we sympathize with the general spirit of nudge policies, we propose a simple change of perspective: we shall argue that nudges are best served by seeking a political justification. The idea,roughly,isthatchoicearchitectsarejustifiedtointervenetoprotectother.peoplefromthe damagethatmaybecausedbyirresponsibleindividuals.nudgepoliciesarenot(ornotonlyfor thegoodofthenudged,butforthegoodofthirdbpartiesthatotherwisearegoingtobeharmed. 9

Toreachthisconclusionwehavetoreconsiderthecostsofpreferencereversals.Alltheexamples examined so far presuppose that all the costs are internalised. Once Ann has chosen Fun, for example,shecanonlyhavewealthattheexpenseofrest.shepaysthefullcostofhermyopia. Buttherearereasonstobelievethatthingsmaynotalwaysgothisway.Realpeopleareskilfulat sharingthecostsoftheirmistakes.ifsomebodyelsecanbemadetopay,thenmyopicannmaybe abletohavefunandwealthandrest.thebestofallworlds. Howdoyoumakeotherspay?Thestandardwayinmoderndemocraciesistoformacoalitionand legislate.thisisparticularlyeasywhenthe others cannotvotebecausetheyarenotevenborn: irresponsiblespenderscanmaketheirchildrenandgrandchildrenpayforthedebtaccumulatedby previousgenerations.theonewhopaysforann spastmistakesneednotalwaysbeann sfuture self;itmayalsobesomebody.else sfutureself. Thisbringsanentirelynewphilosophicalperspectiveontheissueofnudging,becauseitopensthe doortotheclassicargumentsforpolicyinterventionthatwehavereviewedinsection2.theclaim thatpeopleoughttobenudgediseasilydefensibleoncewerealizethatsavingforthefutureis notentirelyaprivatematter.theproblemwithnotsavingenoughisnotmerelythatpeoplewill regretitwhentheywillbeold.itisalsothatwewillhavetodealwithplentyofoldpeoplewho cannotsupportthemselves.seenfromthisperspective,thefocusonpreferencesandpaternalism shiftsthespotlightawayfromsomekeyissues.thekeypoliticalproblemisthatasocietywitha largenumberofelderlypeoplewhocannotsupportthemselvesisnotviable.theelderlieswould burdenyoungerpeoplewithlargecosts,andthelatterwouldtrytoresist,generatingconflictand unrest. Theargumentisentirelygeneral,andappliesinprincipletoanypolicyinterventionthattriesto corrects biases of intertemporal choice. It is particularly relevant for behavioural economists, however,becausenudgeshavebeenmainlydefendedfromapaternalisticstandpoint.mostcases discussed by libertarian paternalists, including smoking and dieting, are potential sources of externalities. If these behaviours were entirely private, no one would bother very much about nudging. Imagine, for the sake of the argument, a new research demonstrating that there is a strong positive correlation between frequent sexual intercourse and wellbbeing. Would we approve of a governmental policy aimed at nudging people to have more sex? Regardless of its impact on wellbbeing, sex really is a private matter and most people would think that governmentalintrusionisunjustifiedinthisarea. Sohowissavingdifferentfromsex?Themaindifferenceisthatsavingbehaviourhasimportant externalities. Although undoubtedly it does affect the welfare of each individual worker, saving alsohasnonbnegligibleeffectsonothers.inourowncountry,totakeaconcreteexample,acouple of generations raised with unrealistic expectations of public welfare support have burdened another couple of generations with a mountain of public debt, plus the prospect of low employmentandlowpensions.thissituationisnoteasilyredressed,becauseasyoungerpeoplein 10

Italyhavelearntalltoowell,thevotesofanageingpopulationcansteerpoliticianstowardpolicies thataredetrimentalforthenewgenerations. When we say that people do not pay enough attention to their future needs, then, we are not making a normative moral. statement ( we must help myopic people, promote their own wellb being.wearemakinganormativepoliticalstatement,assumingimplicitlythepointofviewof society. 10 And we can do it because saving decisions have important externalities. But if externalitiesdoplayarole,thenthenudgesthatbehaviouraleconomistsareproposingshouldnot bedefendedsolelyonpaternalisticgrounds. " 6."Externalities"and"norms" An appeal for a political justification of nudging faces some potential counterbarguments. A libertariansceptic,forexample,mayarguethatinanidealfreesocietytheyoungstersshouldbe entitled to refuse welfare support for their parents and grandparents, if so they wish. Constitutionalarchitecturesshouldbedevisedtoprotectbornandunborncitizensfromthethreat oforganizedcoalitionsliketheoneswehaveenvisagedabove.inthisidealsocietynudgeswould besuperfluousbecausetheexternalitieswouldnotariseinthefirstplace. Anotherrelatedargumentchallengesthepoliticaljustificationasfollows:supposethatwecould createaninstitutionalarrangementwherethecostsofmyopiacannotbeexternalized.then,one may argue that we would still. have a moral duty to help those who have made mistakes in the past. Suppose for example that, as a matter of fact, all smokers were to die at the age of 60 without burdening the public healthcare system. Shouldn t we nudge young potential smokers towardsahealthierlifestyleformoralreasonsonly? 11 Ourreplyistwofold.First,letusconsidertheprospectofsettingupconstitutionalbarriersagainst coalitionsthatwanttoexternalisecosts.althoughtheideaseemsfairinprinciple,itmaybevery difficulttoimplementitinpractice.alargenumberoflowsaverscaneasilylobbypoliticiansand bendtherulesintheirfavour.constitutionaldefensivebarriersthusmustbeconstantlydefended, which requires an investment of time and resources. Even the preservation of liberties entails costs. A policy that corrects for myopia at low cost then may look very attractiveeven to the libertarianconstitutionalist. Oursecondpointisthatwemustbecarefulnottotakeanarrowviewoftherelevantcosts.Asthe secondargumentcorrectlypointsout,therearesocialtiesandmoralnormsnormsthatregulate insurance and costbsharing even where legislation does not reach. People may be under strong 10 By political herewemeanroughly contractarian,orthatrequiresarbitrationamongtheinterestsof severalparties.wedonotintendtodenythatpoliticalsolutions,inthisspecificsense,areindependentfrommoral considerations. 11 WeareindebtedtoLucBovensforthisexample. 11

social pressure to support the members of older generations, quite independently of any legal prescription.thisisanareawhereculturaldifferencesmayplayamajorrole.considerdieting anotherexamplethatfeaturesprominentlyinthelibertarianpaternalisticliterature.obesityisin many ways similar to irresponsible spending: although the consequences seem to be a private matter, in some situations they can constitute a social problem. However in North America the idea that medical insurance is an individual responsibility is largely (albeit not universally accepted.ineurope,incontrast,publicmedicalcareissuchanestablishedinstitutionthattheidea of letting people die if they cannot pay their medical bills would strike most people as strongly counterbnormative.sinceitwouldbepoliticallycostlytotransferallthecoststothepatients,an obesity epidemics might have significant negative externalities in Europe. In this context nudges are attractive because they lower the transaction costs of political bargaining: they prevent institutionsthatwevaluehighly,suchasdemocracy,frombeingsubjectedtoexcessivestrain.in theworstbcasescenariosuchinstitutionsmayevenfail,soweshouldallappreciatetheadvantage ofpreventingpoliticalstress,ifitcanbedoneatlowcost. Ourfinalpointinthispaper,then,isthattheconceptofexternalityiscontextBspecific,andmay depend heavily on local norms. The reason why we feel that people should save more is that a society that does not save enough may face catastrophic consequences in the future, and the costswillbesharedatleastinpartwiththosewhoaresavingnow.thedegreeofthissharingwill depend in part on the existence of social or moral norms that prescribe assistance towards the weakestmembersofsociety.wheresuchnormsarestrong asinthecaseofmedicalassistance ineurope itisreasonabletosaythatunhealthyeating,smoking,andsimilarbehavioursshould betreatedasexternalities. But if this is the case, then paternalism is a red herring. Coercion may be licenced even if the preferencesofindividualsregardingtheirownlifestylesarestableandconsistent.inthecaseof inconsistentpreferences,thepolicyofnudginghasthefurtherattractionofkeepingtheoptions opentothedecisionbmaker.butwehavearguedthatweshouldnotworryaboutpreferencestoo much:weshouldstoplookingforpaternalisticjustificationsofnudgepolicies.themainreasonwe thinkthatpeopleoughttotakecareoftheirfutureisthattheirfailuretodosowillprobablyaffect theirchildrenandthechildrenofothers.nudgepoliciesareattractivebecausetheytacklethese externalities in a cheaper and less intrusive ways than traditional alternatives. For all these reasonstheyshouldbewelcomedandputtousewhenevertheyhelpcreateamoreviablesociety. Thelibertarianpaternalistictagmaybeagoodsellingpointinthecurrentpoliticalclimate,butit failstocapturetherealreasonswhywefeelentitledtonudgesaving,dieting,andthelike. 12

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