Dynamist Blog

More on Choice

Professor Postrel's colleague Suzanne Shu has a series of posts on the subject: here, here, and here. Suzanne is a behavioral economist (a student of Richard Thaler) and marketing professor whose research focuses on how increased temptation and the need for self-control changes as choices increase. Her work nicely combines insights on how the mind works with a dynamic understanding of markets.

Suzanne points me to this profile of Thaler, which includes a discussion of what his research on the Swedish experience suggests about private social security accounts in the U.S. It does not suggest we shouldn't have them:

Although Thaler and Cronqvist acknowledge that "three years of returns does not prove anything," they believe the United States can draw several lessons from Sweden's experience. First, a default fund must be devised carefully, because human nature dictates a large portion of investors' money will go there. With a U.S. economy 30 times the size of Sweden's, free-market entry for funds could result in thousands of choices, paralyzing the average consumer. Instead, the authors recommend offering a small number of funds, perhaps three, investing in index funds and bonds, with varying levels of risk. The funds would be managed by private firms subject to competitive bidding.

President Bush's proposal for Social Security reform, a 256-page document titled "Strengthening Social Security and Creating Personal Wealth for All Americans" (available for downloading at csss.gov) offers evidence of behavioral economics' move into the mainstream. Though no behavioralists sit on the bipartisan commission that wrote the report, its plan, Thaler admits, "is not much different from what we would propose." The document outlines three possible models through which 2 to 4 percent of a worker's wages would be invested in private accounts. Each model includes a "standard fund," akin to the Swedish default. A two-tier system allows initial contributions, say up to $5,000, to be invested in a limited number of funds, between three and five; once the first-tier threshold is reached, a still-to-be-determined number of second-tier funds will be available for investment. Fund managers must meet certain standards and compete to be included in the second tier. A governing board would be created to provide workers with "informative advice, and to implement reasonable changes in either tier that it believes is in the best interest of workers and retirees."

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