PeterUbel

Suppose you are at the car dealer and have narrowed your choice down to two automobiles. One is a little nicer looking, and the other has a more comfortable interior. One gets twenty miles per gallon and the other gets twenty five. You typically drive about twelve thousand miles in a year, which means (queue Jeopardy Music) the annual cost of gasoline will be how much lower for the first car than the second?
Answer doesn’t leap to mind? No wonder. That is not a top-of-the-head kind of question. But wouldn’t having that answer at your fingertips help you make this difficult decision?
Currently, automobiles post mile-per-gallon stickers on their windows, in a large font, and then in a significantly smaller font they post the annual fund cost of driving the car.
So the Obama administration is proposing to redo the labels, to help make this job easier for consumers. One proposal is a “dollars per year” plan. Under this proposal, the sticker would indicate how much money a typical consumer would spend per year filling up the car in a big, open-space-large font; easy to see.
The other proposal would, instead, place a more intuitive label on each car- a grade of A+ to the most fuel-efficient cars, B’s and C’s for worse cars. You know: grade school revisited. I call this the “school grade” proposal.
I have spent my career taking insights from behavioral economics and applying them to public policy situations. So, I thought I’d tackle a few questions about these proposals from the Obama administration.
Are these proposals examples of behavioral economics being applied to public policy?
Behavioral economics is perhaps best understood in contrast to traditional neoclassical economics. In traditional economic theory, consumers are assumed to be rational decision makers. That means that typically, if a market is free, and consumers have adequate information about their choices, they will make consumer purchases that maximize their best interests. This is a simplified version of a more complex theory, but it suffices for the purposes of contrasting traditional economics with behavioral economics.
Those of us who work in behavioral economics tend to critique traditional economics by questioning the assumption of human rationality. In behavioral economics, we take insights from psychology -which has documented thousands of ways that people make irrational decisions-and we try to see what that means about the behavior of markets and the purchasing decisions of consumers.
One of the key insights of behavioral economics is that the way a decision is “framed” can strongly influence people’s choices. A patient might be more interested in a surgical operation with a 90% survival rate, for instance, than one with a 10% mortality rate. These two ways of framing the outcomes of the surgery change the way people feel about their alternatives. That’s not rational, because it’s really two ways of saying the same thing.
By this view, the dollars-per-year alternative seems to be a good example of behavioral economics at work. Miles per gallon should give consumers enough information to determine how much they’ll spend per year on gasoline. They’ve got the information; they should be able to make a rational choice. But since people can’t do the math, or don’t often do the math, framing this issue as gasoline costs per year may change people’s choices. It’s the same basic information, but framed in a way that might better advise people about the true costs of their decisions.
The school grade proposal is even more out of the behavioral economics playbook. It doesn’t appeal solely to people’s rational decision-making processes, to frame their choices. It actually puts a qualitative grade-an evaluative label-onto specific choices. I discussed this kind of issue in my book Free Market Madness, where I talk about the difference between a bottle that has the word “poison” on it versus one that has the skull and crossbones picture. Both inform people about an important aspect of a product, but the highly emotive picture does a better job of persuading people to be careful about products-such as keeping them away from children-than the word “poison” would do on its own.
Do these proposals violate the spirit of libertarianism?
The most prominent behavioral economics expert in the Obama administration is Cass Sunstein, a lawyer and coauthor of the influential book Nudge. Sunstein describes his take on behavioral economics as “libertarian paternalism.” He wants to use the insights of behavioral economics not to force people to make better decisions in their lives, but to set up choices in such a way that they’re more likely to make the right decision, even at the same time that they still have full freedom to choose whatever they want.
By this account, both of the car-labeling proposals are relatively libertarian. They’re not restraining anyone’s choices. People would still be free to buy any car they want to buy. At most, these new labels would gently influence people’s choices.
But wouldn’t such influence be a heavy-handed form of government paternalism?
If you believe that, then you’d have to think the same thing about the current stickers on automobiles, because the information about miles per gallon influences choice too. It just has a different influence on choice than a sticker which indicated gasoline costs per year. So would having no sticker. Whatever we do -sticker-no sticker, miles per gallon vs. costs per year – we are going to influence choice. The government’s job, then, is to choose the way of framing information that would help people make choices that maximize their best interests. I think it’s very plausible that considering gasoline costs per year would improve people’s choices. It would give them a better sense of what the true cost is of buying a gas guzzler.
But isn’t the school grade proposal too heavy handed to be libertarian?
I guess it depends on how you define libertarian. Does the skull and crossbones picture reduce people’s freedom to place poisonous materials within children’s’ reach? At what point does persuasion shift into coercion? I was a philosophy major in college, but I don’t feel philosophically gifted enough to parse out all these issues. I think the basic point remains: neither of these proposals constrains people’s choices. They are less heavy handed than taxing gas guzzlers. They’re less restrictive than forcing automobile manufacturers to abandon gas guzzling models. But they try, nevertheless, to change the kind of automobiles that are on American roads, so that Americans are more likely to drive fuel efficient vehicles. This seems like a laudable public goal, and if it can be achieved without unduly restricting people’s freedoms, all the better.
But will it change people’s behavior?
In a recent New York Times Op Ed, George Loewenstein and I argued that it’s important for public policies to take advantage of the insights of behavioral economics, but that we can’t expect such insights on their own to be enough to meet important public policy goals. Sometimes we simply need to change economic incentives to better align people’s behaviors with the public’s best interest.
I think either of the proposed automobile stickers would be an improvement over the current one. But I doubt that stickers alone are going to dramatically change people’s car purchasing behaviors. If we really think it’s socially important to use less gasoline-to improve our environment and reduce our dependence on the Middle East-then it would be far more effective for us to put a gasoline tax in place. Put that together with a more informative sticker, and I can imagine a real change in behavior.
Which of these proposed stickers is best?
I like the dollar per year sticker, because it gives people the information they need to make this kind of a decision. The school grade proposal is trickier. It doesn’t give great information. It takes a continuous measure -gasoline costs per year- and lumps it into a bunch of seemingly arbitrary categories. Nevertheless, I’ve done a bunch of research that shows these kinds of labels are very important. People often are insensitive to changes along a continuum.
But this school grade proposal is going to meet stiff resistance from industry. Nobody wants any of their cars to be given a grade of C, and that’s inevitable if this proposal is implemented. All large automobile manufacturers make gas guzzlers, so all of them will stand to lose sales of some of those vehicles under that kind of proposal.
Which raises the possibility that the Obama administration is using behavioral economics to promote behavioral economic policies.
What do I mean?
I think it’s possible that the Obama administration floated the idea of two proposals knowing well that the industry would vehemently oppose the school grade proposal. They might have done this to make the cost-per-year proposal more palatable.
If the administration had only floated the idea of the cost per year proposal, it too would have probably been opposed by industry. And that might have made the proposal go down in defeat.
By floating two ideas, one more objectionable to industry than the other, the Obama administration is possibly using a behavioral trick to promote a behavioral policy.
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