His first column is on behavioral economics and mortgages; excerpt:
Some critics contend that behavioral economists have neglected the
obvious fact that bureaucrats make errors, too. But this misses the
point. After all, wouldn’t you prefer to have a qualified, albeit
human, technician inspect your aircraft’s engines rather than do it
yourself?
The owners of ski resorts hire experts who have
previously skied the runs, under various conditions, to decide which
trails should be designated for advanced skiers. These experts know
more than a newcomer to the mountain. Bureaucrats are human, too, but
they can also hire experts and conduct research.
False analogy. His “technician” is more akin to a blood-letter, those old-timey doctors who practiced a particularly deadly kind of medicine probably since the other relevant branches of science were not nearly as developed as they needed to be. Good intentions, sure, but the brutal hummer of government bureaucracy and top-down legislation is hardly the proper manner of effecting positive (and lasting) change.
“Bureaucrats are human, too, but they can also hire experts and conduct research.”
Doesn’t this also apply to non-bureaucrats? What makes bureaucrats better at hiring experts than people who work in the industry and stand to lose money if they don’t know what they are doing?
The problem with the bureaucratic “technicians” is not that they are necessarily less competent than those in the business worls. The problem is that the incentives are wrong. Government regulators have an incentive to reward the administration’s supporters. Business practitioners have an incentive at least to make sure their firm doesn’t go bankrupt.
-dk
What drives an airline to hire qualified technicians to inspect the engines? A great desire to do the right thing, or the profit-and-LOSS motive. Loss is capitalized because market critics don’t seem to understand the power of losses as an incentive.
What exactly drives bureaucrats to hire qualified technicians? Thaler argues that they *can.* Well that’s helpful. I suppose I *can* repair an aircraft engine.
His actual book, Nudge, explained his ideas much better than this post. Basically, the commenters here are right about incentives. What Thaler would like to do, if I grasped his book at all, would be to require some form of lets say simple Excel spreadsheet that had all possible information/points/sources for expenditure to be required by law to be filled out by the loan officer.
This sheet would be created by the third party technician, and be required by law. The whole idea is that he doesn’t want to remove choice, he wants to make the complex choices less confusing.
Now this sheet still wouldn’t protect anyone of there was abject fraud, but it would protect home-owners who didn’t realise that in 5 years they would be paying X + 50 instead of X. Or they didn’t realise that would incur penalties for early payment.
On this blog, based on my past reading of comments, I would expect the same people to object to his ideas, not necessarily this article which doesn’t explain them well, to be the same ones who object to calories being put on menus. We wouldn’t want to give consumers easy access to critical data to help them make an informed choice….that would be bad…for those who know they are making terrible products but don’t want to be subject to a free-market without asymmetrical information concerns…
Thaler misses his own point. The type bureaucratic error we should fear is not a technical ‘mistake’ due to a lack of perfect expertise or slight behavioral irrationalities. Rather, we should fear the human ‘error’ of self-serving motives, neglect, and corruption.
I think everyone so far has pretty much stated my feeling on the matter. Incentives matter, in bureaucracy (NOT JUST THE GOVERNMENT KIND) your incentives are CYA and also to build a structure under you. You get fired for mistakes and you generally get paid depending on how many people you have under you and how big the structure you employ. These incentives lead to huge bureaucracies that don’t take risks.
This risk aversion is itself a form of risk, not just because of missed opportunities but because the nature of being risk adverse means that large systematic risks can be caused by attempting to control other risks beyond the point they are actually controllable, then treating the situation as low risk. This can be seen in the recent financial crisis.
Another systematic problem in bureaucracy is that the pay structures lead to bloat, but thats an entirely different topic.
to Dan C:
You are right that no one, yet, has made the common arguments along the line of ‘buyer beware’. Thaler believes that ‘buyer beware’, if I understand him, is not good enough for overly complex situations where it is not expected that a layman will have the knowledge to make an informed decision.
Based on what has happened recently in the world, is it really a good thing that there might be rapid ever evolving financial services that we can’t factor into a spreadsheet for something like mortgages because the government wasn’t nimble enough?
Does the potential downside (massive gambling on unknown/untested financial products) against the ‘nimble-ness’ of the free market really outweigh a world where it would take extra time to get a new financial mortgage option into the hands of the public?
Hell, if you actually established a psychological association with the aforementioned spreadsheet and sense of understanding/fairness/no nasty surprises, then you could let people jump on any old mortgage they wanted, with the understanding that they were not entitled to said spread-sheet because no one had any idea what their new-fangled options might lead to
The argument that ‘we’ were actually nudging people to the breaking point with respect to loans says that those of us skeptical of “experts” are not missing the point.
So, is Thaler arguing for better experts? I argue for better consumers. Because, at the end of the day we would still, as consumers of public policy, have to know how to watch the watchmen.
With analogies like “Aircraft technicians” and “ski slope experts” I take it he doesn’t read Arnold Kling very often.
I will give him credit for one thing, the marginal home borrower is indeed “Homer Simpson”. Would he say that government policies pushing more of them into the housing market is the work of “qualified technicians”? What does he think the incentives are for elected politicians when it comes to people borrowing more money then they can afford?
Tony Cohen seems to be interpreting Thaler’s position as “Let no new thing arise”. I’m not seeing that.
Interesting comments.
So, substitute for “bureaucrats”, the following and see if the comments made in response to Thaler still stand:
- policemen
- prosecutors
- judges
- generals
- soldiers
What is the difference between the function of the regulator and the function of the policeman or prosecutor?
mulp,
Some differences are the alternatives available and the incentives faced by each group named. The incentives of bureaucrats are different from those of judges. The alternatives to bureaucrats are different than the alternatives to judges.
“So, substitute for “bureaucrats”, the following and see if the comments made in response to Thaler still stand:
- policemen
- prosecutors
- judges
- generals
- soldiers”
Yes, most of the comments still do stand, unfortunately.
AS for Thaler’s “Bureaucrats are human, too, but they can also hire experts and conduct research.”:
I’m afraid these experts will end up like the two recently fired IGs or the EPA whistle blower.
Forget nudges. How about simply improving personal financial literacy, by requiring a high school course on the subject. This would seem to be as useful a subject as, say, history or chemistry.
Comments on this entry are closed.