Productivity in a Changing World seminar series: Nudges: past, present, future

John Beaglehole:

Good morning, everyone.

[speaking in te reo Māori 00:00:24] E ngā iwi, e ngā mana, e ngā hoa mahi. Tēnā koutou katoa. E mihi ana ki a koutou, kua tae mai ki te tautoko tēnei kaupapa. Ngā mihi nui ki a Professor Cass Sunstein te kaikōrero o te rā. Tēnā koe. Kō John Beaglehole tōku ingoa. Nau mai, haere mai ki Te Tai Ōhanga.

Welcome, everybody. I'm John Beaglehole. I'm a director here at The Treasury, and it's great to see everyone online joining today's Treasury Guest Lecture series. I'm really looking forward to this talk and the discussion that we'll follow. As you know, this seminar is part of our current series Productivity in a Changing World. We chose this theme a year ago as a focus for our guest lectures as productivity continues to be important for New Zealand's living standards in the context of a number of significant economic, social, and environmental shifts. And with the help of our wide-ranging expert speakers, we explore how these trends will impact New Zealand's economic performance, productivity, as well as the sustainability and resilience of our economy. Goodness.

Now, today we are really privileged to have Professor Cass Sunstein with us. Cass is currently the Robert Warmsley University Professor at Harvard. He's the founder and director of the Programme on Behavioural Economics and Public Policy at Harvard Law School. Before that he was a Professor of Law at the University of Chicago for 27 years. He was known there not only for the excellence of his lectures, but also for the excellence of his dog, which was an enormous shaggy dog that lived in his office. Much to the delight of all of the students. Beyond that, in 2020, the World Health Organisation appointed him as chair of its technical advisory group on Behavioural Insights and Sciences for Health. From 2009 to 2012, he was the administrator of the White House Office of Information and Regulatory Affairs, and after that he served on the President's Review Board on Intelligence and Communications Technologies and on the Pentagon's Defence Innovation Board. He's currently a senior counsellor in DHS, but he is speaking solely in his academic capacity to us today.

Beyond all of these important public service positions, he's the author of hundreds of articles and dozens of books. I think the one that he is most well-known for is probably the one that people will be most familiar with, is called “Nudge: Improving Decisions about Health, Wealth, and Happiness” with Professor Thaler, which is an excellent book and now has come out in many editions. So, if you've only read the first, you can now read subsequent.

During today's session, Cass is going to share his insights on how nudge theory has developed over the last 15 years. Now, nudge and the theory of nudging has been really influential across the world in highlighting the opportunities to change behaviours and support policy objectives without spending lots of money. And in the fiscally constrained world that we live in, those sorts of insights on how we improve the effectiveness of policy interventions are really invaluable. I'm looking very much forward to gaining new insights from Cass' presentations that we were discussing with him just before this, how New Zealand is going through a very fiscally constrained period of time, how the government really is focused on making sure that we get value for money out of every dollar of public spending, and things like nudge and making sure that we don't spend money to get outcomes. We are very interested in hearing more about that.

Look, I'll now hand over to Cass who will present for 45 minutes, give or take. We'll then have the remainder of the time for questions and discussions. I invite you to use the Q&A function in Teams for moderating our discussion. Get your questions in there, and we'll run the Q&A from here. If you've got technical queries, please use the standard chat function. So, without any further ado, over to you Cass, and welcome to the series.

Cass Sunstein:

Thank you so much. It's a joy and an honour to get to speak to you all. I was actually slated to go to your country right before COVID hit, and that compromised our plans. But I hope in the fullness of time to be able to visit. Maybe we can put up the slides. I can speak without them, but I'm afraid the articulateness will be diminished. Even further. Slides are coming, prepare yourself.

Okay, so see the happy people? They are celebrating, nudging past, present, and future. In fact, they're so celebratory, this represents humanity and not merely college graduates. Next slide.

Okay, so because I'm thrilled to be able to speak to you, I've written a little book for you. It has just four chapters. The first is called Humanity, the second is called Nudges, the third is called FEAST, and yes, that's an acronym, and the fourth is called Sludge and Scarcity. Of these, the fourth may be the most fun, but please remember all four titles. There will be a test. Next slide.

Okay, any book needs a preface, and I've got one for you. Next slide. That's the Oval Office with yours truly and President Obama, and I want to say three things about our discussion in the Oval Office then. The first is, when President Obama became president, there was a very severe economic, I think crisis is the word, the Great Recession. And I used to go around the White House saying it's not regulation time, it's economic growth time. The focus on economic growth wasn't a left of centre thing or a right of centre thing; it was a shared need given the economic challenges. And consistent with some of the remarks in the very kind introduction of the fiscal challenges, loomed foremost, both costs imposed on the private sector and costs faced by taxpayers were extremely salient, which meant it's not regulation time, it's economic growth time was said with a little bit of humour and mischief, but also as an orientation that the president shared.

The second thing I want to say is that the notion of, let's call it smart regulatory pause button was something that was part of the repertoire of the Obama administration. When I say smart regulatory pause button, I mean not a kind of regulation must go whatever its content, but that a kind of pause button on costly regulation was consistent with the overall goal of getting the economy going again, and that was compatible with a number of regulatory steps to protect public safety, to protect public health, to protect the environment. But the word smart is a placeholder for careful consideration of costs and benefits. So quantitative cost-benefit analysis loomed very large in the minds of both of the people you're seeing, and the fact that it loomed large in my mind is less interesting than the fact that it loomed large in President Obama's mind.

The third thing I'd like to say about that senior witnessing is that we talked in that very conversation about the elimination of administrative burdens imposed within government on other government officials and imposed by government on the private sector. So administrative burdens, you can take your preferred term, I'm going to have something to say about this, but administrative burdens were a little bit of a bad term, meaning we wanted to reduce them and that was something the president personally was keenly interested in. Next slide.

Okay, so you've heard the preface. Now you're about to hear the book, and I'm hoping all of you are ready. Not that it's particularly exciting, but it does require some readiness. Chapter 1: Humanity. We can go to that next slide. Okay, once upon a time, there was a rational actor model, and in Treasury departments all over the world, the kind of rough and ready sense was that human beings are responsive to incentives and if you want economic growth, you should incentivize activity that will do that. And if you want economic growth, you should remove incentives that are incompatible with economic growth. It might be that these are subsidies and taxes. It might be that there are implicit taxes consisting of regulatory impositions, and basically human beings are rational and responsive to incentives and to adapt John Keats, that is all you need to know on Earth. Next slide.

Okay. You're seeing here the friendship that changed the world, as it's sometimes called. On the left is Amos Tversky, and on the right is Daniel Kahneman who recently died. The Big Bang, as it's sometimes referred to, I think this should be part of the repertoire of every government official, occurred in 1969 when the question was, what would happen if the two people you're seeing on screen met? And that was an interesting question because the one on the left, Tversky, was believed by all to be the most charismatic and probably the smartest person around. He was a little like an Olympic athlete who would win gold in every event. He was also magnetic, he was humorous, he was irresistible. When he walked in a room, everyone shortly thereafter was smiling and in awe.

I know of a time, because I was around at a time, when there was a widespread international intelligence test that was regarded as infallible. Your intelligence could be measured by how long after meeting Amos Tversky you realise that he was smarter than you are. That was the intelligence test. Tversky was also hilariously funny. He was a little like Elvis Presley or Taylor Swift. He was charismatic. He said he was an optimist, and it's rational to be an optimist because if you're a pessimist, you suffer twice. Told by professor colleagues that they were studying artificial intelligence, he said, "Oh, I don't study artificial intelligence. I study natural stupidity." Kahneman, by contrast, was, until very recently, and he was a dear friend of mine, so I say this with some grief, he was recessive, self-critical, pessimistic. He said, "It's rational to be a pessimist because if you're a pessimist, you're never disappointed." Kahneman was thought by the people who knew him to be maybe almost as good as Tversky, and the question is, what would happen if they met?

Kahneman, on one fateful day, invited Tversky to speak at his seminar about humanity, our topic in chapter one. Tversky explained that people, whether they are corporate executives or taxpayers or ordinary people trying to go about their business, would rationally update as they received new information. And it was a dazzling presentation about how people incorporate new information. If the government says, "X," people say, "Oh, X," and they will incorporate that, maybe discounting it depending on what their prior beliefs were, but it would be a rational form of updating. Kahneman, after hearing this, said, "That was amazing. That was spectacular, and I don't believe a word of it," and Kahneman went after Tversky really hard. Think of this as a boxing match between titans.

Tversky, the charismatic one, the one who was dazzling, lost the argument, maybe for the only time in his life, and he went around on the day saying, "You won't believe what Danny said," and Tversky said it with exhilaration rather than anger. He thought this was opening up a universe. This inaugurated a research programme for 12 years approximately in which their wives were jealous of the two. They would be at parties, hang out together at the expense of everyone else. They were so intensely engaged in the research programme that gave us a new account of humanity, that basically everyone felt amazed and excluded. Next slide.

Okay, so there are two papers above all, and I'm going to note, I'll just note preliminarily, that our White House's Economic Constitution incorporates, and this is 2023 December, the Treasury Department was indeed involved, our Economic Constitution incorporates everything I'm about to tell you. The first paper refers to heuristics. That is rules of thumb that people use that produce systematic error. It's the case, for example, the doctors in deciding what to do are influenced by what readily comes to mind, even though that can lead to systematic errors. If what readily comes to mind is, let's say a set of diseases they've recently learned about that aren't really statistically likely to happen, doctors are outperformed by algorithms in deciding whom to test for heart attacks. Those algorithms do better. One reason is that doctors overweigh the current symptoms. That's the availability heuristic, what's available.

People come in saying, "I have chest pains." The doctors overweigh that and more likely to test than the algorithm, and then we get a lot of wasted cost because there's too much testing if people are just fine, and also some bad health outcomes because people who don't have the current symptom aren't tested. The algorithm's saying, "Test, test, test." The doctor is saying, "No, nothing current," and those people might end up having very severe health problems. It's also the case that people emphasise the similarity between the cause of the thing and the thing. So, if people come to a doctor with, let's say they're old men who are a little overweight, doctors say, "We should test," the algorithm will say, "Maybe not." That's heuristics and biases. I'll say a little bit more about that in a moment.

Prospect Theory is probably the most cited paper in academic social science ever. It's a spectacular success. It's reoriented the field. It says, people really don't like losses, and if that seems obvious, it's relevant to why France went wrong with the carbon tax and it's also relevant to how to handle losses that disturb people. I'll have something to say about that. A loss is typically regarded as twice as painful as a gain is pleasant. That defies rational choice theory but suggests the rational actor model is wrong. A loss is twice as painful as a gain is pleasant. That has a lot of policy implications, it says that a little tax for plastic bags, people will hate and maybe not pay the amount. They'll say, "Okay, I'll carry my toothpaste home." Whereas a little bonus for bringing your own bag, we'll say, "I don't care. I don't need a bonus." Our data actually shows a bonus for not using a plastic bag has no effect. A little tiny tax for using a plastic bag, that has a very significant effect. That's loss aversion in action. Next slide.

Okay. Here are five findings, which in the policy world are the most important of the research on heuristics and biases. And I should say that I worked for four years in the White House. I've had occasional government experience since including now, and all of these are very much on our view screen. Secretary Yellen, who was married to a Nobel Prize winning behavioural economist and a behavioural economist herself, is very alert to all of these. Present bias means the short term really matters, the long term is a foreign country, called the later land, people aren't sure they're ever going to visit. That suggests a short-term negative or positive effect is very impactful. Typically, a long-term effect might not have a lot of consequences for behaviour. There's some good evolutionary reasons why people should be present biased. If you're fleeing a tiger, you probably ought to run as fast as you can and not worry about your retirement, but present bias can cause serious problems.

Most people, 80 to 90% of people, are optimistically biased. They tend to think that they're less likely to get in economic or health trouble than most people. 90% of people have been found to think that they're better than the average driver. Entrepreneurs are really optimistically biased. They have an unrealistic sense of the likelihood they'll do well. That's probably good for performance, but it's not good for prediction. About 94% of college professors, I say with despair, believe they're better than the average college professor. I won't tell you whether I fall within the 94% or the 6%. Approximately 100% of people believe that they have a better than average sense of humour. That's because they know what's funny. Smokers have an accurate sense of the statistical risks of smoking, but they've been found to think that they themselves are less likely to get lung cancer and heart disease than the average nonsmoker. Pause over that if you would. Accuracy about statistical risk, inflated sense of personal immunity for risk even compared to nonsmokers. Present bias and optimistic bias can create productivity and economic energy. They can also create a lot of trouble.

Inertia means that changing from the status quo is often more painful, have you so observed, than it ought to be, and changing from the status quo always involves a cost. But the status quo often has a magnet associated with it. It has a halo around it. There's something even called status quo policy bias, which suggests if you merely describe a status quo as the policy, people tend to like it better on average. That's a very peculiar finding. It suggests that moving from an existing state of affairs inside government or outside government will often attract more negativity than it ought to. I'm expecting that you have all observed that. I certainly have. And it's because inertia is a powerful force.

Loss aversion, as noted, means a loss from the status quo has a big red light associated with it, a gain from the status quo has a nice green light, but it's not as green as the red light associated with a loss is red. Limited attention may be the master concept here. It suggests that the number of things to which even extremely intelligent, informed people can attend is a subset of the things that matter. This can create problems for companies. It can create challenges for economic growth. It can mean that tax subsidies are going to have less of an effect on behaviour than is anticipated just because people aren't attending to them as much as rational choice theory would expect.

Now, what's cool, that is the technical word, maybe awesome is a better word for these five findings, is they suggest not that there's unpredictable and random departure from perfect rationality, but there's systematic departure from rationality in predictable directions. And that really is the reason that Kahneman won the Nobel Prize and why his relationship with Tversky is sometimes called the friendship that changed the world. It shows systematic departure from perfect rationality, not random departure. Next slide.

Okay. Here is OMB Circular A-4. That's our Economic Constitution produced by the Office of Management and Budget, with input from the Treasury Department from basically an assortment of parts of the U.S. government. I'm not going to read all the words here; I'm just going to put in bright letters and cry it from the rooftops without raising my voice. Everything I just told you is in OMB Circular A-4. It's in our government's repertoire. See loss aversion down toward the bottom? See inertia? See unrealistic optimism? See a preference for the status quo? See the reference to the availability heuristic? That's not yours truly. That's our government endorsing the research project I just described. Next slide.

Okay, Chapter 2: Nudges. Next slide. Okay, that's not the conversation in which President Obama told me in a meeting with the Treasury Department and White House economists “use behavioural science”, but it's within maybe six weeks and three metres of where he told me that. So, the White House's use of what I'm about to describe, as the government of the United Kingdom, the government of Ireland, the government of Singapore, the government of the UAE, this is pervasive and we're going to describe a little bit state of the art, which goes well beyond where Thaler and I were back in the ancient days of 2008. Next slide.

Okay, this Executive Order 13563 is, let's call it the Obama-Trump-Biden consensus. This is an executive order issued by Obama that Trump and Biden have completely taken on board, and it might be congenial to New Zealand. I have learned a little bit, New Zealand under the current economic circumstance. First sentence, consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. That's the core idea, approaches that reduce burdens maintain flexibility and freedom of choice for the public. Market-friendly approaches. Next slide.

Executive Order 13707, charmingly named, says, use behavioural science to design government policies. That has also been endorsed by both Trump and Biden. Next slide. Basically, this is putting that exclamation points next to that, so next slide.

Okay, here are two kinds of nudges. There may be 12 kinds of chocolates on that slide. This is the best slide, by the way, because it has really great chocolates. And why AI decided that the words two kinds of nudges should be accompanied by chocolates, I don't know, but I think AI made a very good decision here. Next slide.

Okay, some nudges are educative, and these can be friendly to economic growth and the project of, let's say smart regulation and smart regulatory pauses. So, you might think instead of having a mandate, we're going to have a warning. So instead of telling people they can't do X, tell them X is associated with certain risks. Instead of mandating maybe something that's with respect to climate change, very aggressive, and maybe that's a good idea, but there might just be labels that could be done instead. We could have information disclosure with respect to, let's say food, things rather than banning foods. We might have a reference to social norms saying most people are doing X rather than telling people everyone has to do X. Educative nudges are things that increase people's capacity for agency. In nations all over the world, very diverse nations, by the way, educative nudges get a lot of approval. I was recently in Argentina where there's a lot of regulatory reassessment. I'm sure you're aware of that. Educative nudges are more genial to the current government than mandates. Next slide.

Let's look at some, shall we? There's a nutrition facts net label, which is behaviourally informed. It's designed to promote healthier eating without mandating anything, and notice that there's an effort to counteract unrealistic optimism and also to counteract limited attention by putting calories in big letters. The new one is very, very determined to make calories salient, but if you want all those chocolates in the earlier slide, go for it. There's nothing here that forbids that. Next one.

This is our environmental label, which is maybe a little too cluttered, but it's designed to counteract present bias. Seeing the big letters, how much money you save over five years compared to the average new vehicle, that's designed to say, "Okay, you're buying a car. You're probably thinking about this month and next. You don't have to buy a fuel-efficient car if you don't want to. You don't have to be an environmentalist. But you save a lot of money if you get this car. Do you want to? It's up to you." It's a nudge that's educative, that has the big bang, the emphasis on departures from rationality in mind. Next slide.

This is our graphic warning for cigarettes. I know there's a lot of activity in New Zealand on that, and it's gone back and forth. Just take that as an educative nudge that has an emotional punch. Next slide.

This is the funniest slide I have, and I know you're not laughing yet, but I'm going to try to encourage at least a smile. There's a law designed to require disclosure of genetically modified or bioengineered foods. And this was sought by people who didn't like genetically engineered or bioengineered foods; it was a regulation sought by people who wanted to have something like a warning. Does this look to you like a warning? Does this look really scary? When you look at this, do you think, "Oh, my gosh, bioengineered, I better run"? Or does it look like it's kind of green and sunlight and there's nature associated with it?

Okay. I wasn't in government at that time. I think the theory of the case, that this particular label should not scare people, that the health effects of bioengineered food are not negative, that the environmental effects of bioengineered food are not negative. A label that would scare people would compromise economic growth and mislead people, that our technical people basically under both Republican and Democratic administrations have thought, "Don't worry about this." And the label is a nudge that isn't designed to scare people. It's designed to inform people and maybe make them smile a little bit. Next slide.

Okay. Some nudges are architectural. Some nudges do not educate, but they are designed to promote one form of behaviour rather than another. A true story from the District of Columbia, where I live about half of the time, is that parents of children have an opportunity to use an app on their phone that helps them keep track of their children's educational progress, and the app is really good. It's good for education, it's good for the economy. It gets children educated. It's terrific. But if parents are asked, "Do you want to opt in?" the percentage who do is about 1%. That's terrible. If parents are automatically enrolled, meaning they get the app on their phone unless they say they don't want to, the percentage who use it is over 95%. And the data suggests that using it is really associated with good educational outcomes for kids. That suggests opt in and opt out, the difference is often very significant.

In fact, on average, under an opt-out design, the percentage of participation is 26 percentage points higher than with opt-in. So, 40% with opt-in, 60 or 6% with opt-out, even if it's really easy to opt-in and really easy to opt-out. In Switzerland, the diminution of greenhouse gas emissions and environmental improvement have come in significant part from an initiative that didn't mandate anything. People were just automatically enrolled in green energy unless they want to opt out. That's the policy. Think of this as a story, a true story that can be used for many policies and the architectural intervention preserve freedom of choice. If you don't want green energy, you want to save some money, fine. Next slide.

Okay, so there are architectural interventions that involve making something salient. Maybe it's on a website, forcing people to choose. You can't, let's say, get access to some programme unless you make a choice. That should not come in inertia. Prompting choice, not forcing people, but saying, "Do you want this?" And that makes something visible, and if you have limited attention, you will attend to that because you're asked or just features of design. Next slide.

Okay. The current demand for behavioural expertise is off the charts because many of the interventions that are educative or architectural cost little or nothing and have a significant impact. There's a paper that has approximately 189 authors. I'm one of them I believe, but a very unimportant author. That test cost-effectiveness of nudges compared to other interventions and finds that the cost-effectiveness is really a lot higher. And that's not because the nudge interventions typically have a massive impact, they may or may not, but because they're so cheap that even if the impact is pretty small, the cost-effectiveness will be pretty high. Next slide.

Okay, Chapter 3: FEAST. This is an acronym, as I promised. It's based on decades of work, some of it coming from Europe, probably more than Europe, which has generated this acronym. Are you getting scared? What could he mean? What is FEAST? Here we go. Next slide.

Here's our guy, our White House guy. It's going to surprise you. Next slide. That's Danny Kahneman who recently died, and I saw him at the White House just a few years ago where he referred to research done in Germany in the 1930s by a social scientist who said, "When we want people to change, we often think, how do we push them? Certain directions?" And he urged it's often better to think why aren't they doing it anyway and to remove the obstacle. That's brilliant. Why aren't they doing it anyway and take away the obstacle, that often can orient work on deregulation. Next slide.

Okay, E in the framework is for easy. In Germany, in the United Arab Emirates, and in Ukraine, there have been sustained efforts to make desired conduct easier, just to take away the obstacles, and while that might seem kind of bland, it really isn't. In the U.S. government, we recently extended employment authorization from 180 days to 540 days, which made American employers who need those people essentially dance in the streets and made the relevant people who were authorised to work here not have to worry about a complicated reappointment reauthorization process. Not exactly dance in the streets but breathe a very large sigh of relief. In Ukraine, UAE, and Germany, there are sustained efforts to use E in the FEAST framework as a foundation for reform efforts. Take up of beneficial programmes is often in the range of 40 to 60%. The word yuck is, at least in my country, the word for kind of disgusting, and 40 to 60% is disgusting. Next.

S is for social. Just emphasising most people are now doing X. That can be a beneficial way of prompting the desirable behaviour. Next slide.

There are different kinds of norms, the majority and the emerging, and let's just notice that drawing people's attention to an emerging norm can often create a self-fulfilling prophecy. Next slide.

Okay, T is for timely in the FEAST framework, and there's a lot of research on this. But to give people clarity, about what's permitted or desired at the right time is awfully often highly desirable. I'm not telling you the A in the FEAST framework yet. It refers to attractive, and I know New Zealand has done a number of things that make desired conduct attractive, and that is often really effective. E for easy, that wins the gold medal. A for attractive, that doesn't win any medal, but it's important. S for social wins the silver medal. T for timely doesn't win any medal because the bronze medal goes to the F. Next slide.

Are you scared? Do you think he's going to use a bad word? No, I'm not going to use a bad word. Next slide. Fun, to make something fun. This has been done by Amazon with something called frustration-free packaging. That's really fun to get a shaver that works. I hope you see evidence that it works, the shaver, and the shaver comes in a package that has no paper and no wires and no plastic. There's the razor, frustration-free packaging. This is also a money saver for Amazon. And it's also green, no plastic, no solid waste, but they call it frustration-free packaging. Pepsi markets to drive diet drinks, Diet Pepsi and Pepsi Max. Guess which one typically does better? Pepsi Max. Is that because it's more delicious? Maybe. Is it because Max is fun and Diet isn't? I think so. Then we need Pepsi Max. Stanford in the United States has found that if you want to encourage people to eat healthy, to market it as delicious does better than marking it as healthy. Delicious greater than healthy. Next slide.

Okay. Let's just note that an intervention is more effective if it gives people a positive affect, a smile, and is also going to have a better impact on subjective experience. Next slide.

Okay, these are taxes and mandates, and let's just notice that soda taxes, cigarette taxes, fuel economy mandates, energy efficiency mandates, occupational safety mandates, and bans on hidden fees, all can have a behavioural logic, but please remember cost-benefit analysis as the gate, which can close to all of these or can open. Next slide.

Okay, we now have the best chapter. It's the shortest, and it's called Sludge. Next slide. Sludge consists of paperwork requirements, waiting times, in-person interview requirements, frictions and hoops, and administrative burdens of all kinds. Next slide.

A story from Washington DC is, someone whom I know tried to get help from the government on something and tried to ask me to help. I couldn't. This person is an important person in Washington, not an American, but an important person in Washington. Got very unhappy with me. I couldn't help her. It was an ethical issue. I told her to hire a lawyer. She did. She got the problem solved and she said, "What about the people who can't hire lawyers?" Good question. Next slide.

Okay. Sludge is very, very bad because administrative burdens would have a negative impact on fully rational people, but if people are present biassed, optimistic, procrastinating and suffering from limited attention, it's going to create a terrible, terrible obstacle. It's a wall. Next slide.

If people are busy like an entrepreneur or sick or poor or old or lonely, and particularly if people are female, the problem of sludge will loom very large. If you're busy to attend to, it is really difficult. If you're female, you're probably dealing with a lot more than men, at least if there are children in the situation, on average, at least in the countries I know, which means sludge can create both an obstacle to economic growth and an obstacle to fairness. Next slide.

Okay. Some data suggests that if people are busy or poor, there's a diminution in their intelligence and their capacity to exercise self-control. That suggests sludge will be particularly terrible for people who suffer from dizziness or from health problems or from poverty or from old age. Next slide.

Okay, here's a concept for you. Sludge audits. The United States, we've done one. The result of a recent one was 11 billion hours of paper requirements imposed on people. 11 billion hours. Next slide. A sludge audit for cancer revealed that screening for cancer is diminished because getting cancer screening involves lots of sludge, phone calls, forms, etc. Next slide.

Okay. Uh-Oh, cancer. Next slide. Okay. The OECD is basically creating an international sludge academy, which is seeking with particular focus on economic growth, see the reference to business permits, a diminution in administrative burdens designed to cut the magnitude of the burden. Next slide.

Okay, the Department of Homeland Security, where I work, I'm talking as an academic, not as a bureaucrat, but this is something I know about, I was involved in, but it's public, imposed on itself a 20-million-hour challenge. Let's eliminate 20 million hours in paperwork burdens. Next slide. And the result, which was to exceed the challenge, started by asking people what burdens should we eliminate? Getting people to say, "This is really harmful and silly." Next slide. And to eliminate, a part in response to public comments, to deregulate the process for getting assistance from natural disasters. Next slide.

We have a programme called Global Entry in the United States where you can get in really fast. The suggestion is, what about Global Entry for everything? Whoosh. Next slide.

This is my favourite slide. This is my wife, Samantha Power. She runs USAID, and not only is she a very nice person, she's also a very determined leader. Next slide. She wants to give staff three million hours back. These aren't my words. These are public words. She launched a new policy framework offering a set of priorities for an agency overwhelmed by a world in crisis. Think Gaza, think Ukraine, and the effort has been with engagement occasionally by the Treasury and the general project to give staff three million hours back. Next slide.

Here's a quiet revolution, an executive order from President Biden, which you might not have heard of because no one's shouting about it, because everyone likes it. They want to focus on things they're shouting about. This is an effort to reduce time taxes. That's the focus: time taxes. I think it's the most important behavioural intervention from North American governments actually ever. Next slide. This is imposing a direction on the Secretary of Treasury to do a bunch of things to reduce sludge, not only Secretary of Treasury, but the Secretary of State. Next slide. The Secretary of Health and Human Services, to use behaviourally informed strategies, to increase automaticity, and to reduce paperwork burdens. Next slide. And here's the best. The president told my wife, "You have to cut paperwork to make it so that USAID gets the resources out in a timely manner." Next slide.

Okay, there's much, much more. OMG is I think oh my gosh, that's what it stands for because we're a religious country and we don't take the Lord's name in vain. But oh my gosh, oh my gosh, oh my gosh. Next slide.

What is the most precious thing that people have? This is the epigraph to the little book, an effort to unify the chapters you've heard. Humanity, nudging, FEAST, and sludge. What's the most precious thing people have? After, I think after is the right word, the COVID pandemic, there's one answer that maybe beats all of them. Next slide. Time. Let's find, shall we, ways to give the people of our respective countries more of that. Thank you.

John Beaglehole:

Thank you very much, Cass. That was an outstanding and really interesting presentation. Much appreciated. We've got some questions in the Q&A, which we will start running through, and we'll just see how we go. General invitation to people. We've got some questions. I can't promise that we'll get to everything, but please just keep on putting questions in there. So, let's start with a question that is certainly top of the mind for a number of us at Treasury here, it's about status quo bias and loss aversion. How do we deal with those factors when we are helping ministers make decisions about reprioritizing public spending?

Cass Sunstein:

Great. So, this is a terrible challenge. My admiration to you all for working on this. It's fantastic and very challenging. If you can credibly characterise a loss as part of what is unbalanced, a gain or neutral, then people's opposition is softened. There's a terrific paper on bundling losses and gains, showing empirically that if people think, "Okay, I'm losing this, but I'm gaining this, so on balance, I'm better off," then the loss aversion tends to be eliminated because it's counteracted. Now, sometimes there's a programme that literally accompanies a loss with the gain so that on net, the losers are fine. In other cases, the gain is more diffuse and the economy's going to grow and you're going to be better off, and that's less obviously credible than the money you're losing, you're also getting back. But it might be true, and if people can be given clarity that it's probably true, that the loss is part of a package from which they will gain, then people tend to come down.

John Beaglehole:

All right. Thank you. I think the interesting question is that there are people who feel that some of the losses are ideologically driven, but having those discussions can be harder, but that's an extremely interesting insight. How do we deal with habit formation when we are thinking about nudges?

Cass Sunstein:

Okay, so if it's a habit we want to discourage, let's say it's alcohol consumption. Then there are two populations. There are people who might become problem drinkers, let's call them, and then there are educative nudges about drinking that can help that might be a form of just informing people about the risks associated with excessive drinking. I'm smiling, by the way, shall I tell you, my wife, in addition to working in the U.S. government, is Irish by childhood and by family, and I don't drink just because I don't like it. When I go to Ireland, it's a problem because I turn down the drinks and people think, "Oh, either he's an alcoholic," which is bad, "or he's really moralistic about drinking," and that's worse. The signal of not drinking is either I got a real problem, or I've got an even worse problem. I'm a terrible moralistic person.

So, we don't want to make people feel that they're surrounded by judgers, but if we can nudge them to think that excessive drinking is dangerous, that's one way to stop a habit from forming. To reduce a habit, you have to increase the costs of sticking with the habit. So, if people have a problem with respect to health or something, a tax on the behaviour of one or another kind, that's not a nudge, that's an economic incentive, can be helpful. Or with respect to take your pick of unsafe or unhealthy behaviours, often habits have switched because people are nudged to think this habit really isn't very good for me.

Think of, at least there's a lot of angst about things that didn't go well in the response to COVID in various countries, but in New Zealand, which I followed closely, a large number of things did go well, and they're crowded out sometimes in all other countries by the noise of what didn’t and look at how the habits changed. Whether it involves where you work or whether you wear a mask, whether it's social distancing, people were nudged, they were also incentivized, but they were nudged.

John Beaglehole:

I suppose related to that is, how do you assess whether a nudge has worked? There are some nudges where perhaps it's easier, but where you're looking to do longer term behavioural changes, how do you sort of work through the signal-to-noise ratio of that plus everything else that's going on?

Cass Sunstein:

What a great question. Thank you for that. So it might be that you try 17 things, some of which are nudges, some of which are incentives, and then lo and behold, things have changed and there's just no way of knowing what contribution the nudge made. Now, in experimental settings, you can have randomised controlled trials and you can isolate the nudges, and there's a tonne of things on that. Whether the experiment generalises to the real world, whether it has external validity is a fair question. There are a number of times where nudges have been piloted, and there's a population that's the same as another population, and we see whether the nudge has an effect. Sometimes it does, sometimes it doesn't. I regard the failure of a nudge to have an effect as a success. It shows either that freedom worked, or we've learned something.

Some of the cool kids, the teenagers who the other teenagers follow in terms of adults in government and in academics, the cool kids are very worried that nudges don't last. There's a new paper that talks about that. There's a paper by Thaler, my collaborator, called When Nudges are Forever, which shows that if you automatically enrol people in something, basically that lasts forever. So, default rules shifting from opt out to opt in, from opt in to opt out, that typically has a very long-lasting effect. If people are automatically enrolled in some kind of plan as a first approximation, that just lasts. If people are incentivized to save money with energy conservation strategies, let's just say it's their nudge rather than incentivize by being told they can save money, etc.

That won't last if you do it once. You have to do it basically for 18 months, and then they develop the habit, then you don't have to do it anymore. So, it depends on, an architectural nudge will typically have a long-lasting effect. An educative nudge is less reliably going to have that until it becomes part of the repertoire that people have in their mind. So, it's like brushing your teeth. It's what you do. You don't have to be. I am pleased to say I don't have to be nudged to brush my teeth. My children don't have to tell me, "Hey, dad." It's just part of what I do.

John Beaglehole:

Okay, that's useful. There's several questions that will be useful to turn to around sort of the structural background to nudges. So, I think the first one, a critic might argue that nudges allow the government to save people from themselves without having to tackle harder structural issues around poverty, education, housing affordability. A nudge is a bit of an easy out for policy makers. You can do this stuff, which might be sort of the icing on the cake without dealing with the underlying issues that have perhaps driven the behaviour that we think is undesirable or we'd like people to change from.

Cass Sunstein:

Okay, this is a great question. So, I'm thinking that it's very important to specify the problem we're focused on. So, if we're thinking, let's suppose we have a certain view on climate change, a view associated with let's say the left, then nudges are desirable because they will increase resilience if there's good ones and if they will reduce greenhouse gas emissions. But from the standpoint of people who are very, very concerned about climate change, they're pretty small potatoes. If you share the substantive view of the people I'm holding, then it's completely right to say that you want not just nudges but other things. That's fair.

It's also the case that nudges and the stronger stuff, let's call it, can march hand in hand or they can be alternatives, and it's a policy decision which you want. In my country, can you tell from my barbaric accent what my country is? Hearing your much more elegant voice, I think that I sound like those people on TV who have American accents. That's how I sound. That's terrible. Who knew? But you could think with respect to smoking, I know New Zealand has had a range of thoughts about that, but you could think a prohibition is too strong and nudges are just right. Nudges with respect to smoking aren't easy. To get various interventions in some countries that discourage smoking, that's hard. The fuel economy label you saw, that wasn't easy. That was hard. That took a long time.

Take your pick of problems. And I think abolishing, I'll put my cards on the table here, abolishing gas-powered cars in 2024 is a really not good idea. Nudging people to move in the direction of electric cars is a good idea. And it depends on our policy. Suppose you have a country where there's a lot of murder, and any amount of murder is too much murder, you don't want to just tell people, "Please don't murder," or, "Murder is awful." You want to prohibit murder. So, both are good for some things. In some cases, you want nudges, and you don't want mandates or bans or taxes.

John Beaglehole:

And I suppose even if you do have mandates or bans or taxes, there's a question around how do you encourage people to comply or make it easy for people to comply with those? And that may be where some of the behavioural economics insights can come in.

Cass Sunstein:

That's a great point. Thank you for that.

John Beaglehole:

Sorry, go ahead.

Cass Sunstein:

No, your point is great. Think of tax compliance. In many countries, tax compliance is imperfect and tax compliance is mandated, but nudges to promote tax compliance or low cost and sometimes big revenue producers.

John Beaglehole:

Yeah. If I can, from my own personal reflection on this, moving from New Zealand to the States for a while, in New Zealand, tax compliance is extremely, extremely easy and there's a very large percent of New Zealanders who never file a tax return. It's all done for them in the back office as it were. Inland Revenue looks after it. Compared to my experience in the States where I was one of the people rushing along to get their envelope franked by the post office before the deadline closed off. It felt it was quite a different kettle of fish.

There've been several people who've raised George Loewenstein's work around behavioural insights and suggesting that it focuses too much on individuals and less on systems. How do we reset that balance?

Cass Sunstein:

Okay, so George Loewenstein is a hero of mine, I should say. I think his paper makes one fundamental error, and it's a fatal error, and he almost never makes an error, so I say this with admiration and a little sadness. He thinks that nudges have discouraged more systematic reforms. I'm unaware of any country in which that's even a little bit true. In the United Kingdom, where there's a lot of nudging and behavioural science, the inside view is, that does not come at the expense of more structural interventions and that they either march hand in hand, or the structural interventions are the behaviourally informed tool. In the United States, I've worked in our government a lot, we did fuel economy labels. You saw them. We also did fuel economy regulations, and we also did a series of things to regulate power plants. We did a number of things, and are doing now a number of things, to try to discourage unsafe driving, but also doing a number of things that are structural with respect to cars.

I'm smiling right now because we had two extremely powerful behavioural approaches just the other day with respect to transportation. One which says, if the flights are cancelled or the airline companies have done something as a result of which they owe you money, they have to pay you automatically. That's structural. That's not about individuals. That's kind of exactly what behavioural economics would counsel, where people get the money automatically, they don't have to apply for it, they don't have to deal with sludge. On the same day, there was an intervention where there can't be any hidden fees. All the fees have to be transparent. Now, that's kind of individually oriented, kind of, but it's an imposition on the airline companies not to hide any of the fees so that people can make choices.

So, the idea of structural change is often a good idea. It's often not a good idea. To have structural change instead of a nudge might be just right. To have structural change and, as you say, with a nudge, that's also a really good idea. So, I wholeheartedly endorse the idea that behaviourally informed structural interventions are often the way to go, but not always. Empowering people to make informed choices is often preferable, and using architecture to default people into something that's good is sometimes better than mandating that thing for people.

John Beaglehole:

All right, that's really useful. I think one of the interesting things that we face as perhaps a smaller public service is time and resource constraints. How do we think about the balance of nudges as opposed to perhaps blunter, but perhaps more effective instruments like taxes or prohibitions or broader regulation? How do we make that balance? How do we think about that balance and the trade-offs implicit in that?

Cass Sunstein:

That I think has a straightforward answer. What has higher net benefits? So, if you ban gas-powered cars now, I say it would be very surprising if the benefits exceeded the costs. If you did nothing about greenhouse gas emissions from air pollution in, say Canada, I say you highly likely have left high net benefits on the table. If there's a nudge, let's say, that saves X number of lives a year, and X isn't tiny, and that prevents the following and economic costs, the costs of the nudge are likely to be really low. So, the net benefits are likely to be positive. Are they high enough to make the thing worthwhile? Well, you might have to speculate a little bit.

So, when I was in the White House, net benefits were my church, they were my lodestar, and if you had a regulation that had billions of dollars in net benefits, then you're going to do that. A nudge would be surprising if it had billions of American dollars in net benefits, but it wouldn't be surprising if it had millions of dollars in net benefits. If the costs are really low, go for that. But if you have something else that has much higher net benefits, by all means, that's the thing to do. And this is similar for deregulation. Often deregulation can be accompanied by let's say an informational intervention that achieves at least some of the goal of the regulation without imposing as much of a toll on growth.

John Beaglehole:

That's just a pretty heavy reliance on cost-benefit analysis. And thinking about some of your other work, how much noise is there likely to be in the cost-benefit analysis work that we do and how do we manage that given all of the cognitive limitations and the time pressures and the attention pressures that we are also under?

Cass Sunstein:

Well, I completely defer to you about your situation, but I've emerged from all of my government experiences being more enthusiastic about cost benefit analysis than I was before I started. So, take an energy efficiency requirement, it's going to cost money. That's knowable how much money it's going to cost. There will be some noise, but if the variation between the lower and the upper bound is like this, then people haven't worked hard enough. It's probably going to be more like this. And then the benefits of energy efficiency regulations, it's just an example, they will be partly consumer savings, that's knowable. The band is typically going to look like this, not like this. And then there's going to be environmental savings. And to specify what those are, it's not that challenging in terms of reduced pollution. To turn the benefits of reduced pollution into economic equivalence also isn't that hard. They're standard operating procedures.

So many governments have found that the amount of noise is hardly zero and sometimes it's very loud. But what are you going to do if you don't know the cost and benefits? How would you know there's a regulation that involves something? How would you know whether to do it unless you have a sense of how much it's going to cost and what it's going to provide? I had a very illuminating discussion with a Canadian regulator who said, "We don't really do cost-benefit analysis." I said, "What do you do?" They said, "We get the relevant stakeholders together and ask them to discuss what they could live with." And he thought of me, I guess, with my interest in cost-benefit, as being not that democratic and kind of economistic in a bad way. His approach, I really liked him, but I thought it would be a miracle if what the stakeholders agreed to was the thing that was the interest of Canada. They might agree to something that is terrible for Canada.

I have worked on some things I should emphasise where it's really challenging to come up with an assessment of cost and benefits. But you might say, just acknowledge that there, or you might have a strategy saying the costs we know are X, the benefits we don't know, but at a lower bound, the benefits are this, and that's higher than the cost, so let's do it. Or an upper bound, the benefits are that, and that's lower than the cost, so let's not do it.

John Beaglehole:

Yeah. All right. That's a really nice way of framing it. I think for our final question, there's been interest from a number of people about what might be the most effective types of nudges that overcome the strong present bias to not take action to lower greenhouse gas emissions. And you've touched on this a wee bit, but be interested to hear, expand on that.

Cass Sunstein:

Yes, automatic enrolment or switching to default. So, a homely example, in the sense of home rather than an ugly thing, as my computer has automatic double-sided printing. In Southern California, people are automatically enrolled in green energy. That's just, they're automatically green. And that is very, very effective way of overcoming present bias and inertia.

John Beaglehole:

All right, great. Look, thank you very much. I think we have unfortunately run out of time. It's been an extraordinarily interesting presentation and delighted to have you with us. I'm looking forward very much to reading your paper about becoming famous and seeing what Taylor Swift has done that others might not have done. So, I'll add that to our repertoire at the Treasury. And thank you so much, everyone, for both being here and for participating in the talk.

Let me just quickly discuss. Next week, we've got two presentations coming up. On Tuesday, we’ll hear from Professor Dani Rodrik, who's also from Harvard. We'll talk about the new economics of industrial policy. And on Wednesday, we're hosting Clare Lombardelli, who's the Chief Economist of the OECD. She's going to be drawing on empirical evidence and policy insights around reviving productivity growth. That one will be a hybrid session. Clare is going to be here. Love to see you at those. Please visit the Treasury website to visit for both events.

And we'll close the seminar today and farewell you all with a whakataukī a saying, which says that discussion, learning, understanding, and knowledge underpin the well-being of all people.

[speaking in te reo Māori 01:13:36] Mā te kōrero, ka mōhio. Mā te mōhio, ka Mārama. Mā te mārama, ka mātau. Mā te mātau, ka ora te iwi. Haumi e, hui e, tāiki e!

Thank you once again, Cass. It's been a real pleasure, a delight having you here. Thank you all for participating today.

[speaking in te reo Māori] Mā te wā