NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS by Richard H. Thaler and Cass R. Sunstein Penguin Books, 2009, 312 pp, ISBN 978-0-14-311526-7This book is best described formally as a general explanation of and advocacy for libertarian paternalism, a term coined by the authors in earlier publications. Informally, it is about how leaders, systems, organizations, and governments can nudge people to do the things the nudgers want and need done for the betterment of the nudgees, or of society. It is paternalism in the sense that "it is legitimate for choice architects to try to influence people's behavior in order to make their lives longer, healthier, and better", (p. 5) It is libertarian in that "people should be free to do what they like - and to opt out of undesirable arrangements if they want to do so", (p. 5) The built-in possibility of opting out or making a different choice preserves freedom of choice even though people's behavior has been influenced by the nature of the presentation of the information or by the structure of the decisionmaking system. I had never heard of libertarian paternalism before reading this book, and I now find it fascinating.Written for a general audience, this book contains mostly social and behavioral science theory and models, but there is considerable discussion of structure and process that has roots in mathematical and quantitative modeling. One of the main applications of this social system is economic choice in investing, selecting and purchasing products and services, systems of taxes, banking (mortgages, borrowing, savings), and retirement systems. Other quantitative social choice systems discussed include environmental effects, health care plans, gambling, and organ donations. Softer issues that are also subject to a nudge-based approach are marriage, education, eating, drinking, smoking, influence, spread of information, and politics. There is something in this book for everyone.The basis for this libertarian paternalism concept is in the social theory called "science of choice", the study of the design and implementation of influence systems on various kinds of people. The terms Econs and Humans, are used to refer to people with either considerable or little rational decision-making talent, respectively. The various libertarian paternalism concepts and systems presented are tested and compared in light of these two types of people. Two foundational issues that this book has in common with another book, Network of Echoes: Imitation, Innovation and Invisible Leaders, that was also reviewed for this issue of the Journal are that 1 ) there are two modes of thinking (or components of the brain) - an automatic (intuitive) process and a reflective (rational) process and 2) the need for conformity and the desire for imitation are powerful forces in human behavior. …

Nudge: Improving Decisions about Health, Wealth, and Happiness

We investigate conditions sufficient for identification of average treatment effects using instrumental variables. First we show that the existence of valid instruments is not sufficient to identify any meaningful average treatment effect. We then establish that the combination of an instrument and a condition on the relation between the instrument and the participation status is sufficient for identification of a local average treatment effect for those who can be induced to change their participation status by changing the value of the instrument. Finally we derive the probability limit of the standard IV estimator under these conditions. It is seen to be a weighted average of local average treatment effects.

Evolution and Rationality Some Recent Game-Theoretic Results. Identification and Estimation of Local Average Treatment Effects

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The Theory of Industrial Organization

The Environmental Protection Agency (EPA) provides access to information on a variety of topics related to the environment and strives to inform citizens of health risks. The EPA also has an extensive library network that consists of 26 libraries throughout the United States, which provide access to a plethora of information to EPA employees, scientists, and researchers. The EPA implemented a reorganization project to digitize their materials so they would be more accessible to a wider range of users, but this plan was drastically accelerated when the EPA was threatened with a budget cut. It chose to close and reduce the hours and services of some of their libraries. As a result, the agency was accused of denying users the “right to know” by making information unavailable, not providing an adequate strategic plan, and discarding vital materials. This case study explores the background of the digitization project, the practices implemented, and the critiques of the project.

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The Environmental Protection Agency

This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.

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The Economic Importance of Financial Literacy: Theory and Evidence

School choice programs are intended to improve student achievement, by allowing for better matches between students and schools. It is not clear, however, that academic achievement will improve if parents make school choice decisions over both academic and nonacademic school attributes (Justine S. Hastings et al., 2005, 2006). Indeed, many randomized studies of impacts of school choice find little or no effect of school choice on academic outcomes. For example, initial evaluations of randomized voucher experiments in Milwaukee and New York City found modest academic impacts on eligible students (John F. Witte et al., 1995; Daniel P. Mayer et al., 2002). More recently, evaluations of public school choice lotteries in Chicago and Charlotte have found no difference between the average lottery winner and loser in academic outcomes such as test scores (Julie Cullen et al., 2003; Hastings et al., 2006). When parents are choosing schools for academic and nonacademic reasons, school choice may increase utility but not necessarily improve academic outcomes. There is growing evidence that educational interventions may have heterogeneous treatment effects by gender. Analysis of the Moving To Opportunity demonstration, in which parents were randomly given the opportunity to move to nonpoverty neighborhoods, found improvements in education, mental health, and criminal behavior for females, but negative effects on males (Jeffrey R. Kling and Jeffrey B. Liebman, 2004). Similarly, Michael Anderson (2005) reanalyzed data from three randomized trials of early childhood education and found that all of the long-term benefits accrued to girls and not to boys. We use data from a public school choice program, with school assignment by lottery, to estimate the impacts on academic outcomes by race and gender of attending a first-choice school. Our data come from the CharlotteMecklenburg school district (CMS) in North Carolina, which introduced district-wide public school choice in the fall of 2002 after a racebased busing plan was terminated by the courts. The data include students’ choices, lottery numbers, school assignments, demographics, and academic achievement for the years surrounding implementation of school choice. We compare outcomes for those making similar choices, whose school assignment was determined solely by lottery number. Overall, there was no gain in academic achievement for those winning the lottery. White females did experience significant improvements in test scores when randomized into their first choice school, however. White females were also more likely to choose academically focused magnets and, among those who won the lottery, reported significant increases in time spent on homework. Our evidence suggests that school choice programs may have heterogeneous treatment effects by gender, which are related to differences in the factors driving parental choices.

Gender and Performance: Evidence from School Assignment by Randomized Lottery

There is much discussion in the popular press about how consumers adjust their purchase decisions for items from lattes and restaurant meals to which type of meat to purchase for dinner during times of rising fuel prices. 1 While analysts ascribe declines in retail sector profits when fuel prices rise to changes in demand elasticity, most empirical analysis of consumer choice for such daily items abstracts from inter- temporal income effects. Instead, fuel prices are used in demand estimation as exogenous shifters of production costs, and therefore valid instruments for identifying demand parameters. Though introspection and popular press suggest that sharp changes in fuel costs may shift price sensitivity in nonfuel purchases through an income effect, little empirical work has been done to estimate or quantify this effect. 2

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Investigating Income Effects in Scanner Data: Do Gasoline Prices Affect Grocery Purchases?

We study the privatized social security system of Mexico, in which firms offering account management services compete based on prices and advertising. Using detailed administrative data on individual retirement accounts, we estimate Mexican workers’ demand for account management services. We find very low price elasticities, and that advertising increases demand for the advertised product, while reducing price sensitivity. We also find considerable heterogeneity across system participants’ sensitivity to both price and advertising. In particular, we find that higher income participants are typically more responsive to prices and less responsive to advertising. We then combine the estimated supply‐side parameters with the demand estimates to run counterfactual policy experiments. In particular, we investigate what market outcomes would be if the Mexican government forbade advertising, forcing more competition through the price channel.

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Advertising and Competition in Privatized Social Security: The Case of Mexico ∗

Two competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement wellbeing would do well to consider the importance of both factors.

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How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors.

We formulate a test of the fungibility of money based on parallel shifts in the prices of different quality grades of a commodity We embed the test in a discrete-choice model of product quality choice and estimate the model using panel microdata on gasoline purchases We find that when gasoline prices rise consumers substitute to lower octane gasoline, to an extent that cannot be explained by income effects Across a wide range of specifications, we consistently reject the null hypothesis that households treat "gas money" as fungible with other income We evaluate the quantitative performance of a set of psychological models of decision-making in explaining the patterns we observe We also use our findings to shed light on extant stylized facts about the time-series properties of retail markups in gasoline markets

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Justine S. Hastings

Papers

Gender and Performance: Evidence from School Assignment by Randomized Lottery

Investigating Income Effects in Scanner Data: Do Gasoline Prices Affect Grocery Purchases?

Advertising and Competition in Privatized Social Security: The Case of Mexico ∗

How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors.

Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks