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E
SSAY
Empirically Informed Regulation
Cass R. Sunstein†
Our regulatory system . . . must measure, and seek to improve, the
actual results of regulatory requirements.
...
[E]ach agency shall identify and consider regulatory approaches
that reduce burdens and maintain flexibility and freedom of
choice for the public. These approaches include warnings,
appropriate default rules, and disclosure requirements as well as
provision of information to the public in a form that is clear and
intelligible.
1
Executive Order 13563
I
NTRODUCTION
In recent years, a number of social scientists have been
incorporating empirical findings about human behavior into economic
models. These findings offer useful insights for thinking about
regulation and its likely consequences. They also offer some
suggestions about the appropriate design of effective, low-cost, choice-
preserving approaches to regulatory problems, including disclosure
2
requirements, default rules, and simplification.
Administrator, Office of Information and Regulatory Affairs, Office of Management
and Budget, Executive Office of the President.
1
Executive Order 13563 §§ 1, 4, 76 Fed Reg 3821, 3821–22 (2011).
2
See generally William J. Congdon, Jeffrey R. Kling, and Sendhil Mullainathan,
Policy
and Choice: Public Finance through the Lens of Behavioral Economics
(Brookings 2011)
(describing implications of behavioral economics for public finance); Peter Diamond and Hannu
Vartiainen, eds,
Behavioral Economics and Its Applications
(Princeton 2007) (examining
behavioral dimensions of public economics; economic development; law and economics; and
health, wage determination, and organization economics); Hugh Schwartz,
A Guide to
Behavioral Economics
(Higher Education 2008) (providing an introduction to behavioral
economics for a general audience). The Office of Information and Regulatory Affairs (OIRA)
has provided guidance on disclosure and simplification as regulatory tools. See Cass R. Sunstein,
Administrator, OIRA, Memorandum for the Heads of Executive Departments and Agencies,
Disclosure and Simplification as Regulatory Tools (June 18, 2010), online at
†
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A general lesson is that small, inexpensive policy initiatives can
3
have large and highly beneficial effects. The purpose of this Essay is
to explore relevant evidence, to catalogue recent practices and
reforms, and to discuss some implications for regulatory policy. And
while the primary focus is on small, inexpensive regulatory initiatives,
there is a still more general theme, which involves the importance of
ensuring that regulations have strong empirical foundations, both
through careful analysis in advance and through retrospective review
of what works and what does not.
I. F
INDINGS AND
C
ONCERNS
A. Findings
For purposes of regulation, the central findings of recent social
science research fall in four categories. What follows is not meant to
be a comprehensive account of recent empirical findings; the focus is
on those findings that have particular importance to regulatory policy.
1. Inertia and procrastination.
a) Default rules often have a large effect on social outcomes.
Both
private and public institutions often establish “default rules”—rules
that determine the result if people make no affirmative choice at all.
In part because of the power of inertia, default rules can be extremely
important. In the domain of retirement savings, for example, the
default rule has significant consequences. When people are asked
whether they want to opt in to a retirement plan, the level of
participation is far lower than if they are asked whether they want to
5
opt out. Automatic enrollment significantly increases participation.
4
http://www.whitehouse.gov/sites/default/files/omb/assets/inforeg/disclosure_principles.pdf
(visited Jan 15, 2011). This memorandum is provided as Appendix B.
3
For a similar claim in another context, see Abhijit V. Banerjee and Esther Duflo,
Poor
Economics: A Radical Rethinking of the Way to Fight Poverty
267–73 (PublicAffairs 2011).
4
See generally Thomas Gilovich, Dale Griffin, and Daniel Kahneman, eds,
Heuristics and
Biases: The Psychology of Intuitive Judgment
(Cambridge 2002) (compiling research on how
people make judgments); Daniel Kahneman and Amos Tversky, eds,
Choices, Values, and Frames
(Cambridge 2000). For a recent discussion of many relevant findings, see generally Daniel
Kahneman,
Thinking, Fast and Slow
(Farrar, Straus and Giroux 2011).
5
See Brigitte C. Madrian and Dennis F. Shea,
The Power of Suggestion: Inertia in 401(k)
Participation and Savings Behavior,
116 Q J Econ 1149, 1184 (2001). For a discussion of the effect
of inertia on choice of travel modes, see Alessandro Innocenti, Patrizia Lattarulo, and Maria
Grazia Pazienza,
Heuristics and Biases in Travel Mode Choice
*20 (LabSi Working Paper
No 27/2009, Dec 2009), online at http://www.labsi.org/wp/labsi27.pdf (visited Apr 3, 2011).
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Empirically Informed Regulation
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More generally, people may decline to change from the status
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quo even if the costs of change are low and the benefits substantial. It
follows that complexity can have serious adverse effects by increasing
the power of inertia, and that ease and simplification (including
reduction of paperwork burdens) can produce significant benefits.
These benefits include increased compliance with law and greater
participation in public programs.
b) Procrastination can have significant adverse effects.
According
to standard economic theory, people will consider both the short term
and the long term. They will take account of relevant uncertainties; the
future may be unpredictable, and significant changes may occur over
time. They will appropriately discount the future; it may be better to
have money, or a good event, a week from now than a decade from
now. In practice, however, some people procrastinate or neglect to
take steps that impose small short-term costs but that promise large
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long-term gains. People may, for example, delay enrolling in a
8
retirement plan, starting to exercise, seeing a doctor, ceasing to
9
smoke, or using some valuable, cost-saving technology.
See William Samuelson and Richard Zeckhauser,
Status Quo Bias in Decisionmaking,
1 J Risk & Uncertainty 7, 8 (1988); Madrian and Shea, 116 Q J Econ at 1176–77 (cited in note 5).
With respect to the effects of complexity, consider the finding that efforts to ease and simplify
household water connections in Morocco, and thus to create a private tap at home, produced
substantial time gains and improvements in self-reported well-being. See Florencia Devoto, et al,
Happiness on Tap: Piped Water Adoption in Urban Morocco
*3–6 (MIT Department of
Economics Working Paper No 11-05, Apr 2011), online at http://papers.ssrn.com/sol3
/papers.cfm?abstract_id=1803576 (visited Aug 24, 2011). A noteworthy finding here is that the
mere reduction of informational and administrative barriers produced large benefits, thus
“underscor[ing] the power of the status quo and the potentially high returns of designing
programs with simplicity and ease of access in mind.” Id at *6. See also Peter Tufano,
Just Keep
My Money! Supporting Tax-Time Savings with US Savings Bonds
*26 (Harvard Business School
Working Paper No 09-059, Aug 2010), online at http://www.hbs.edu/research/pdf/09-059.pdf
(visited Aug 24, 2011) (finding that savings products, in particular US savings bonds, are
significantly more likely to be chosen if the process for choosing them is eased and simplified).
7
See Ted O’Donoghue and Matthew Rabin,
Choice and Procrastination,
116 Q J
Econ 121, 121–22 (2001); Richard H. Thaler and Shlomo Benartzi,
Save More Tomorrow™: Using
Behavioral Economics to Increase Employee Saving,
112 J Pol Econ S164, S168–69 (2004). In the
context of poverty, see Banerjee and Duflo,
Poor Economics
at 64–68 (cited in note 3). For a
popular treatment, see generally Piers Steel,
The Procrastination Equation: How to Stop Putting
Things Off and Start Getting Stuff Done
(Harper 2011).
8
See Dean Karlan, et al,
Getting to the Top of Mind: How Reminders Increase Saving
*1,
14 (Yale Economics Department Working Paper No 82, 2010), online at http://karlan.yale.edu/p
/Top-of-Mind-April2010.pdf (visited Apr 3, 2011).
9
See Esther Duflo, Michael Kremer, and Jonathan Robinson,
Nudging Farmers to Use
Fertilizer: Evidence from Kenya
*4–5 (NBER Working Paper No 15131, 2009), online at
http://econ.arizona.edu/docs/Seminar_Papers/DufloS09.pdf (visited Apr 3, 2011) (finding that
farmers in western Kenya do not make economically advantageous fertilizer investments, but
that a small, time-limited discount on the cost of acquiring fertilizer can increase investments,
thus producing higher welfare than either a laissez-faire approach or large subsidies).
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One implication is that some people make choices that have
short-term net benefits but long-term net costs (as is the case, for
many, with smoking cigarettes). Another implication is that some
people fail to make choices that have short-term net costs but long-
term net benefits (as is the case, for some, with choosing more energy-
10
efficient products). Procrastination, inertia, hyperbolic discounting,
11
and associated problems of self-control are especially troublesome
when the result is a small short-term gain at the expense of a large
long-term loss. There is a close connection between procrastination
12
and myopia, understood as an excessive focus on the short-term.
When procrastination is creating significant problems, automatic
enrollment in relevant programs might be helpful. Moreover, complex
requirements, inconvenience, and lengthy forms are likely to make the
situation worse and perhaps unexpectedly so.
c) When people are informed of the benefits or risks of engaging in
certain actions, they are far more likely to act in response to that
information if they are simultaneously provided with clear, explicit
13
information about how to do so.
For example, those who are informed
of the benefits of a vaccine are more likely to become vaccinated if they
14
are also given specific plans and maps describing where to go.
Similarly, behavior has been shown to be significantly affected if people
are informed, not abstractly of the value of “healthy eating,” but
specifically of the advantages of buying 1 percent milk as opposed to
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whole milk.
In many domains, the identification of a specific, clear,
unambiguous path or plan has an important effect on social outcomes.
Complexity or vagueness can ensure inaction, even when people are
See David Laibson,
Golden Eggs and Hyperbolic Discounting,
112 Q J Econ 443,
445 (1997).
11
See Richard H. Thaler and H.M. Shefrin,
An Economic Theory of Self-Control,
89 J Pol
Econ 392, 404 (1981). For an interesting application, see Jonathan H. Gruber and Sendhil
Mullainathan,
Do Cigarette Taxes Make Smokers Happier?,
5 Advances in Econ Analysis &
Pol 1, 20 (2005).
12
See Shlomo Benartzi and Richard H. Thaler,
Myopic Loss Aversion and the Equity
Premium Puzzle,
110 Q J Econ 73, 88 (1995).
13
See Howard Leventhal, Robert Singer, and Susan Jones,
Effects of Fear and Specificity of
Recommendation upon Attitudes and Behavior,
2 J Personality & Soc Psych 20, 27 (1965); David
W. Nickerson and Todd Rogers,
Do You Have a Voting Plan? Implementation Intentions, Voter
Turnout, and Organic Plan Making,
21 Psych Sci 194, 198 (2010) (showing that people are
significantly more likely to vote if asked to identify when and where they will vote). For a
popular treatment with citations to the academic literature, see Chip Heath and Dan Heath,
Switch: How to Change Things When Change Is Hard
15–17 (Broadway Books 2010).
14
See Leventhal, Singer, and Jones, 2 J Personality & Soc Psych at 22, 27–28 (cited in note 13).
15
See Heath and Heath,
Switch
at 15–17 (cited in note 13) (describing the effects of a
targeted milk marketing campaign in West Virginia, which changed the local market share of
low-fat milk from 18 percent to 35 percent over a six-month period).
10
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Empirically Informed Regulation
16
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informed about risks and potential improvements. What appears to
be skepticism or recalcitrance may actually be a product of ambiguity.
2. Framing and presentation.
a) People can be influenced by how information is presented or
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“framed.”
If, for example, people are informed that they will
gain
a
certain amount of money as a result of using energy efficient products,
they may be less likely to change their behavior than if they are told
that they will
lose
the same amount of money as a result of not using
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such products. When patients are told that 90 percent of those who
have a certain operation are alive after five years, they are more likely
to elect to have the operation than when they are told that after five
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years, 10 percent of patients are dead.
It follows that a product that is labeled “90 percent fat-free” may
well be more appealing than one that is labeled “10 percent fat.” It
also follows that choices are often not solely on the basis of their
See Jason Riis and Rebecca Ratner,
Simplified Nutrition Guidelines to Fight Obesity,
in
Rajeev Batra, Punam Anand Keller, and Victor J. Strecher, eds,
Leveraging Consumer
Psychology for Effective Health Communications: The Obesity Challenge
333, 334 (ME Sharpe
2011) (discussing the importance of simplicity for health-related communications). For examples
of relevant advice in connection with dietary guidelines, see also
Selected Messages for
Consumers
(Department of Agriculture Jan 2011), online at http://www.cnpp.usda.gov
/Publications/DietaryGuidelines/2010/PolicyDoc/SelectedMessages.pdf (visited Apr 4, 2011).
These take the form of relatively specific guidance, such as, “Make half your plate fruits and
vegetables,” “Switch to fat-free or low-fat (1%) milk,” and “Drink water instead of sugary
drinks.” Id. See also Katherine L. Milkman, et al,
Using Implementation Intentions Prompts to
Enhance Influenza Vaccination Rates
*4–7 (NBER Working Paper No 17183, June 2011), online
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1879044 (visited Aug 24, 2011) (finding
that people are significantly more likely to become vaccinated if they are given a prompt that
asks them to write down the date and time when they will do so, while also finding that a
prompt that simply asks them to write down the date has no such effect). See also the discussion
of the replacement of the “Food Pyramid” with the “Food Plate” accompanying notes 118–20.
17
See Irwin P. Levin, Sandra L. Schneider, and Gary J. Gaeth,
All Frames Are Not Created
Equal: A Typology and Critical Analysis of Framing Effects,
76 Org Behav & Hum Dec
Processes 149, 150 (1998).
18
See Marti Hope Gonzales, Elliot Aronson, and Mark A. Costanzo,
Using Social
Cognition and Persuasion to Promote Energy Conservation: A Quasi-Experiment,
18 J Applied
Soc Psych 1049, 1062 (1988). For a demonstration that people’s decisions about when to claim
social security benefits are affected by framing, see Jeffrey R. Brown, Arie Kapteyn, and Olivia S.
Mitchell,
Framing Effects and Expected Social Security Claiming Behavior
*4–5 (NBER Working
Paper No 17018, May 2011), online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id
=1833155 (visited Aug 24, 2011) (finding that use of “breakeven analysis” leads people to claim
early and that people are more likely to delay claiming when later claiming is framed as a gain
rather than a loss).
19
See Donald A. Redelmeier, Paul Rozin, and Daniel Kahneman,
Understanding Patients’
Decisions: Cognitive and Emotional Perspectives,
270 JAMA 72, 73 (1993). For a discussion of the
efforts by the Department of Agriculture (USDA) to inform consumers about nutrition by
preventing potentially confusing framing of fat content (for example, if a label says that meat is
90 percent lean, it must also say that it contains 10 percent fat), see text accompanying note 89.
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