Posner nudges Thaler; and vice versa
Richard Posner launched a broadside against so-called behavioral economics in the Wall Street Journal last week, and included some notably pointed remarks about his University of Chicago colleague Richard Thaler, a pioneer in the subfield and co-author of the bestseller "Nudge: Improving Decisions about Health, Wealth, and Happiness." Yesterday, Thaler nudged back, hard.
Posner, an appeals-court judge who also teaches at the University of Chicago Law School, charged that the proposed Consumer Financial Protection Agency, an Obama administration pet project influenced by the insights of behavioral economics, would end up treating consumers like children rather than "consenting adults." (Two Harvard law professors were caught in the crossfire: Cass Sunstein, Thaler's co-author on "Nudge" and president Obama's nominee for the post of "regulatory czar" and Elizabeth Warren, who has been mentioned as a possible chairwoman of the new agency.)
One goal of the Consumer Financial Protection Agency would be to warn people about the dangers of home mortgages that include low teaser rates, demand no down payments, or penalize consumers for early payoffs. Such complex mortgages have been widely blamed for the explosion in the number of foreclosures over the last year. The administration has suggested that the agency might put its stamp of approval on a small number of "plain vanilla" mortgages, with easy-to-grasp requirements. A bank that wanted to deviate from those simple mortgages would be required to flag and to carefully explain the extra risks being introduced.
The idea comes straight from the playbook of Thaler, a Chicago business professor, Posner noted, before turning up the heat. "Mr. Thaler … calls himself a 'libertarian paternalist.' But that is an oxymoron. He is a paternalist with a velvet glove -- as the agency will be." Consumers and banks will end up being bullied by the agency, Posner said: it might "outlaw" such useful offerings as variable-rate mortgages, in which buyers assume future risk for the benefit of lower rates. "Is the choice among such alternatives really beyond the cognitive competence of the average home buyer?" Posner asked.
It is hubristic, Posner continued, for people like Thaler to think they know better than American consumers, especially when they themselves are subject to cognitive errors. What sort of cognitive errors? Here comes the "gotcha": Thaler, he pointed out, had argued up until shortly before the stock-market crash that equities were undervalued and, as a result, that many Americans would be better off pouring more of their savings into stocks. If you'd stuck to that advice, you'd have gotten soaked.
Granted space to respond on the PBS Web site by Paul Solman, a PBS correspondent, Thaler also deployed some charged rhetoric, leading off with the suggestion that opposing restrictions on risky mortgages is analogous to opposing restrictions on the sale of cribs known to kill toddlers. (Free choice, consenting adults.)
He went on to call Posner's summary of the Obama proposal "seriously misleading." For one thing, Thaler said, the administration has made clear that a variable-rate mortgage will be included among the vanilla offerings. Riskier products would not be outright banned either, although consumers might have to demonstrate that they understood the risks.
Finally, he proposed that Posner's syllogism -- Thaler makes mistakes, therefore Thaler should not try to help people avoid mistakes -- was fundamentally flawed:
No government agency (or judge) will be error-free. The goal of the Nudge agenda sketched out in my co-authored book of that title was to create decision-making environments in which it is easier for error-prone human decision makers to choose well. The Agency proposed by the administration is a good example of this kind of thinking. Even imperfect experts can help us achieve better outcomes, just as imperfect judges can help us enforce the law fairly.
But, yes, he wishes he'd unloaded more stocks before last summer. (Don't we all.)
(Via The Volokh Conspiracy)
