Saturday, 3 April 2021

Behavioural economics and flawed paternalism

I've been reading a very interesting paper by Charles J. Delmotte and Malte F. Dold who discuss the problem with using sin taxes to tackle so-called internalities. Paternalists argue that taxes are not only needed to address negative externalities - costs and harm to others - but negative internalities - ie. costs that people impose on their own future selves which they are not always fully aware of. Classic examples include teenagers taking up smoking without realising how addicted they are going to get and students taking on debt without realising how little their degree is going to be worth.
The latter example is a fairly recent problem largely created by government policy and it doesn't lend itself to sin taxes, but nicotine products, alcohol, food and cannabis do. 

Economists want resources to be distributed efficiently and this requires people to make rational choices. Behavioural economics has shown that people do not always make rational choices (although we already knew that). But much of the paternalist argument relies on the paternalist making assumptions about what people's 'true' preferences are and then showing that people do not always follow them. A lot of this is based on comparing stated preferences with revealed preferences. Delmotte and Dold give an example:

Consider for instance alcohol consumption: a hyperbolically discounting drinker might promise today not to drink at the party on Saturday but then she reverses that decision once Saturday has become today. In such a scenario, following a behavioral welfarist logic, sin taxes on alcohol would help as a commitment device to align individual choice with one’s ‘true’, long-term preferences.
I have always found this kind of reasoning problematic. It seems weird to assume that what people say they want in the future is their true preference, but the choices people actually make in the present are illegitimate. I discussed an example from the behavioural economics literature in Killjoys... 
In Inside the Nudge Unit, David Halpern (2015: 139) details the results of two behavioural experiments that appear to show ‘time-inconsistency’, with people making different decisions in the here and now than they would make for their future selves::

‘Around three-quarters of (Danish) workers chose fruit over chocolate when the prize was due to be delivered the following week, yet the majority instead chose chocolate when offered the choice at the point of delivery. Similarly, most people choose a healthy snack option over an unhealthy one for later in the day - especially if they have just eaten - but the reverse is true when asked immediately before the snack is available. The same appears to be true for other forms of consumption: most people choose a ‘highbrow’ movie (such as Schindler’s List) over a ‘lowbrow’ one (such as Four Weddings and a Funeral) when deciding what to watch next week, but the reverse when thinking about the evening.’

What should we conclude from this? Halpern says it shows that we are ‘trapped in our present’ and links it to hyperbolic discounting in which ‘the further into the future a cost or benefit, the disproportionately smaller it becomes relative to immediate costs and benefits’. So it does, but it also shows something else. People have a tendency to think - or hope - that they will have a different outlook in the future. If you have ever agreed, months in advance, to do something in which you are not very interested - such as going to a conference that is likely to be dreary - you will be familiar with this cognitive bias. Like an elephant in the distance, it seems very small when it is only a date in the diary. You think that you will be eager and ready when the day comes, but when it does you wonder why you ever agreed to it. This is a cognitive bias, but it tells us more about second-order preferences than it does about being ‘trapped in the present’. You wish you were the kind of person who enjoyed going to tedious conferences, eating healthy food and watching highbrow films. You hope that in the near future you might become that person. But you are not.

In the experiments above, the participants were given a straight choice. They did not have to pay for their food and films. There was nothing to sway them in the choice architecture, no nudging, no default option. Given that they opted for chocolate and Sleepless in Seattle, it would take a leap of faith to conclude that what they really wanted was celery and The Piano. Yes, they chose healthy food and highbrow films for their future selves, but putting something off until tomorrow is only one step removed from not doing it at all. At best, these experiments show that people know what an idealised version of themselves ought to do. Awkwardly, though, they also show what people really want to do.

Stated preferences are fairly worthless because people don't have to balance any costs or benefits. They are not making a real decision. We are all familiar with the experience of going to the pub with the intention of having just one pint and ending up having significantly more. It is not obvious that one pint is the welfare-maximising amount, nor is it obvious that your wellbeing would have been enhanced by being kicked out off the pub before you could have the second. 

It seems to me that there is nothing special about the stated preferences of your past self and that paternalists only hold these preferences in high regard because they tend to be less hedonistic than people's revealed preferences. Sin taxes designed to tackle negative internalities are also going to reduce positive internalities, AKA benefits.

Moreover, people's preferences change over time. That is the point Delmotte and Dold make in their paper and it has significant implications.   

The idea of dynamic preferences surfaces prominently in chapter three of On Liberty, entitled “On Individuality as one of the Elements of Well-Being.” Therein, Mill ([1859]2003, 124) states that “(h)uman nature is not a machine to be built after a model, and set to do exactly the work prescribed for it, but a tree, which requires to grow and develop itself on all sides.”4 Mill uses the metaphor of a tree to describe the transformational nature of human choice: over time, individuals develop into a more mature version of themselves. What is required for such a personal growth path, Mill argues in reference to Wilhelm von Humboldt, is the exposure to “experiments in living” ([1859]2003, 122). 

 According to Mill, a person obtains individuality – they develop their own preferences – when they have been exposed to a variety of situations, they have been free to think about who they want to be and discuss freely with others what matters to them. Importantly, this process of individuation has to be an active process in which individuals pursue what they perceive to be their own good, in their own way. In other words, active choices on behalf of the individual are necessary for processes of individuation which are, in turn, the prerequisite for individual well-being.

And so, in conclusion...
Rather than choosing taxes that target specific lifestyles, individuals with dynamic preferences have a common interest in rules that secure an important degree of freedom for future preference development. Moreover, as individuals cannot predict their future preferences, we argue that they will opt for a tax code that is neutral with regard to today’s and tomorrow’s preferences.

The study is paywalled but you can read a pre-print version here. 
Reading that paper nudged me towards this video of Mario Rizzo talking about the flaws of behavioural paternalism. It's worth a watch. I don't know who kicks things off with the introduction but I like his style too.

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