Friday, February 22, 2008

Stupid spending: Everyone does it?

[Cross-posted from Beyond Red & Blue]

Elizabeth Kolbert writes in The New Yorker about all the ways we don't behave as rational consumers. According to "behavioral economists" (as opposed to the old-fashioned economists who believe that human beings are just calculators with arms and legs), we're constantly doing making dumb choices like paying an outrageous amont for a car just because it comes with "free" oil changes for a few years. Kolbert admits that she's padded Amazon.com orders with stuff she doesn't need in order to qualify for free shipping. I've done that, and I've also got a box full of subway fare cards from various cities because I always take the "buy five rides, get one free" kind of deal even when I know I won't be in the city long enough to use my free ride.

The public policy angle in Kolbert's piece comes with she discusses Richard H. Thaler and Cass R. Sunstein's Nudge: Improving Decisions About Wealth, Health, and Happiness. As Kolbert explains:

[People are] effort-averse. They hate having to go to the benefits office, pick up a bunch of forms, fill them out, and bring them all the way back. As a consequence, many eligible employees fail to enroll in their companies' retirement plans, or delay doing so for years. (This is the case, research has shown, even at companies where no employee contribution is required.)

Thaler and Sunstein suggest that companies enroll employees in retirement plans without their consent but give them the option of filling a lot of paperwork to get out. This point makes me think about the debate between Democratic presidential candidates over universal health insurance. Barack Obama seems to operating on the assumption that if insurance premiums are low enough, everyone will get health coverage because it will be irrational not to do so. And Hillary Clinton's idea to require all individuals to get health coverage seems to rest on the assumption that it would be irrational not to get insurance if there's a penalty (a tax fine, or the garnishing of wages) for failing to do so. But maybe the best approach would be to automatically enroll all uninsured people into a health insurance plan and then say, "If you don't like it, there's a long, complicated procedure for withdrawing from the program." In other words, there would be a de facto mandate, but without the need to come up with a mechanism to enforce it.

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