Profile: Colin Camerer

Colin Camerer is a rather unusual man. For a start, at the age of 14, while we were all learning to eat peas with a fork, Camerer was studying mathematics at Johns Hopkins. He’s 46 now, an economist at Caltech, and one of the fathers of neuroeconomics, which might mean little to you but is turning out to have considerable significance for the defined contribution industry. PLANADVISER tracked Camerer down to understand why. 

First of all, what is neuroeconomics? 

Neuroeconomics is the attempt to develop a mechanistic analysis of how the neurons in our brains actually fire—in other words, how we make decisions. It’s a subset of behavioral economics. 

The net of that analysis would indicate that most of us can’t make rational economic decisions? 

Right, and that’s particularly true when it comes to savings, as we appear particularly ill-equipped to make trade-offs that involve putting a big weight on the future versus the present. 

As far back as 2003, you coined the term “asymmetric paternalism.’ Is the current movement toward “opt-out’ solutions in the 401(k) market an example of that phenomenon? 

Indeed. Economists hate paternalism—the general feeling is that the consumer or market knows what it wants, and the government should get out of the way. However, asymmetric paternalism doesn’t necessarily conflict with this view of the consumer as sovereign; instead, it allows the determined consumer to have his way but saves a lot of others from making a serious mistake. Warning labels on cigarettes is one such example, and so is the concept of automatic enrollment in a 401(k) plan. 

Interesting. During the whole debate surrounding the Pension Protection Act, which embodies these very things, I never once heard the term “asymmetric paternalism.’ Is it like the love that dare not speak its name? 

Paternalism is a word often used by libertarians who like to accuse people of it, so it definitely has an edge but, like it or not or name it or not, the pension legislation that has just passed is a perfect example of asymmetric paternalism. Perhaps libertarian paternalism would be a more acceptable term. Either way, our intention was to give the term a bipartisan spin—it should be an unobjectionable stratagem no matter where you are on the political spectrum.  

Whatever you call it, is it a straw in the wind or could it really come to affect how government looks at particular issues? 

I think it could. There are limits to its application, of course, but there is a range of places it can have application. Emotion gets in the way of myriad intelligent decisions, and there are mechanisms—cooling-off periods, for example—that you can use to effect more intelligent outcomes for most people. 

Emotion seems to govern how American workers react to lump-sum payouts. That’s a place you don’t see too many intelligent outcomes. 

That’s right. Up until now, the focus on retirement has been on savings but, over time, attention also will have to be paid to the forms in which benefits are paid out. People love lump sums over annuities, and generally for all the wrong reasons—the same reasons we postpone visits to doctors and so on. We’re either going to have to find different ways of showing individuals the true costs of taking a lump sum, or have some sort of imposed cooling-off period, or even default people into annuities. 

We don’t seem to have been very good at educating people not to take lump sums. 

No, that’s right. We’ll have to find some way, something visual and not abstract, that actually taps into the emotional areas of the brain that make these judgments. Somehow, we have to get them to imagine how horrible their lives could be when their money runs out. 

You must have been encouraged for the future application of asymmetric paternalism by how much the PPA adopted the spirit of your thinking. 

I wish I could take more personal credit. I think what really did the trick was some of the practical work by other academics that really showed that these default decisions made a difference when it came to savings rates. The fact is that automatic enrollment and other defaults are the combination of a theoretically good idea that is shown to work in practice, and nobody suffers—after all, no one can go around saying “Woe is me, we save too much.’ 

On a personal level, some of this stuff is pretty dry. I also understand that, at the age of 14, you already were enrolled in Johns Hopkins, with your head buried in mathematics tomes. That doesn’t sound like a fun adolescence. 

As a kid, I was nerdy and introverted, and I really wasn’t challenged in high school, but college was very different, as was grad school. I think I managed to catch up on those pleasures of adolescence a little later than most kids, but I did catch up. College is not a bad place to be an adolescent, after all.