First of all, many thanks to Eugene for his kindness and generosity in supporting this discussion. While Richard Thaler and I have been working on the topic of libertarian paternalism for a long time, we continue to think of our project as a work-in-progress, and we are eager for suggestions and criticisms.
The basic idea is that private and public institutions might choose approaches that a) fully maintain freedom of choice (and are in that sense libertarian) but b) gently steer people's decisions in directions that will make their lives go better by their own lights (and are in that sense paternalistic).
In writing Nudge, Thaler and I have been much influenced by libertarian challenges to our earlier efforts. Many of our proposals operate as a kind "one-click paternalism," in the form of approaches that allow people to opt out at minimal burden or cost. Think, for example, of a default option for a cell phone setting or a rental car contract, which you can change with a click or a stroke of a pen.
We are hoping that in many domains, libertarian paternalism might be able to provide a real Third Way, one that goes beyond the mandates and bans often favored by the left and the simple enthusiasm for markets often favored by the right.
In the private sector, a poster child for libertarian paternalism is automatic enrollment in 401(k) plans. The idea is that when people start working, some percentage of their earnings automatically goes to savings -- but they can opt out if they want. Thaler is also a codesigner of the Save More Tomorrow plan, by which workers are asked if they want to enroll in a program that devotes some percentage of their future wage increases to savings. Both automatic enrollment and Save More Tomorrow have produced large changes in savings rates, and most workers are satisfied with the plans.
Of course a major impetus for libertarian paternalism is a series of empirical findings showing, not that people are "irrational," but that they are (in Thaler's term) quasi-rational, departing from rationality in predictable and specified ways. There's a ton of research on this question, but many of the proposals in Nudge rely on the immense power of default rules.
If a private company, or the government, offers something as the default, a lot of people will stick with it, even if a change is ridiculously simple to make. People often use what we call the "yeah, whatever" heuristic.
Why do defaults have such power? One reason involves inertia. People have a lot of things to think about, and especially when the choice is complicated, they're might well decide not to decide or to procrastinate. Another reason involves suggestion. When an option is described as a default, people often think, someone sensible thought that this is the way to go, and I might as well go along with what they thought.
Natural questions are: Who sets the default? Aren't they quasi-rational (or worse)? Why should we trust them? I'll turn to these questions soon. For now, the only point is that if we think creatively about the uses of default rules, we should be able to come up with many new possibilities for private and public institutions, which might be able to influence people's behavior without requiring anyone to do anything.