Question: Do our rational choices speak to something less tangible?
Paul Krugman: Well in a lot of ways sure. I mean in a lot of ways the . . . looking at the way people make choices tells us both the extent and the limits of rationality. And you can learn a lot about how people really think by looking at . . . actually looking at the mistakes they make. I mean it’s one of the really interesting things – looking at the mistakes people make when choosing a retirement plan; or choosing . . . making healthcare choices, which are very much economic analysis. And you learn a lot about where . . . how the human psyche works by looking at how people behave in those real world situations.
Question: What do our mistakes say about us?
Paul Krugman: What you learn a lot. I think it’s terribly . . . Actually I think it’s important and very relevant for policy debates is the limited ability of people – all of us – to process information. So for example if you’re given something like a 401k scheme, and people are given . . . There are two ways you can do this. One is to have an opt in, and the other is to have an opt out. And in each case it’s really just a question of checking a box on a form. That ought to make no difference, right? This is trivial. If it’s a good idea, it’s a good idea. And you should opt in if it isn’t automatic. You should opt out if you don’t want it. In fact it turns out to make a huge difference. People are much more likely to go along with a retirement scheme if it’s opt out, or it takes a much more conscious action to . . . to come out. Even though the apparent cost of that action is very small, that’s telling you that limited decision making capacity is very, very important to people’s behavior. And that in turn tells you a lot if, you know . . . if you’re thinking about how . . . should we rely upon individual initiative to receive routine healthcare. Or should that be something that’s sort of automatically paid for and scheduled in. You learn a lot from the way people behave on 401k plans that probably you’ll want to not count on people making that decision even if it appears low cost.
Because people will, in fact, skimp on necessary care if it isn’t automatically paid for. It’s just the thought of . . . that the decision involved in saying, “Oh, it really is time for my . . .” I was about to say . . . Well my GI examination . . . is probably not a really good idea because people will tend to skimp on it. And so the idea that we can trust people to make these rational decisions is probably wrong. In fact you know I was just thinking of the risks of . . . A medical test I should’ve gotten I forgot because . . . because it wasn’t automatic.
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