Seminar 5: Choice (9 February)

One of the premises of the way in which markets are analysed is that people make rational choices. Nobody’s ever really believed this premise but it was for long considered a workable assumption. More recent work in behavioural economics suggests that absence of rationality can be analysed more systematically, and has led some to take the view that you can regulate based on the assumption of irrationality.

 

Reading

Sunstein ‘The Storrs Lectures: Behavioral Paternalism’ 122 Yale Law Journal 1826 (2013)

Joshua D. Wright & Douglas H. Ginsburg ‘Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty’ (2012) 106 Northwestern University Law Review 1033 (2012)

Baldwin ‘From regulation to Behaviour Change: Giving Nudge the Third degree’ (2014) 77(6) Modern Law Review 831

 

12 comments on “Seminar 5: Choice (9 February)

  1. Ola Innset says:

    Reading about behavioral economics was interesting for an outsider like myself. I think Wright and Ginsburg have a good point at the end of their article about how behavioral economics is the modern day, less radical version of CLS, and the whole conversation really seems to be happening safely within their Austrian-libertarian ballpark. Cass Sunstein’s article and the idea of “libertarian paternalism” is directed explicitly at this fringe view, allowing them to set the terms of what should be a much wider discussion about the role of democracy, what markets really are, and how society actually works.

    That being said, the post-2008 wish to “regulate”, (which is itself indicative of an a-priori admittance that there is such a thing as a naturalized market order in which governments can or can not interfere), combined with new insights into neoruscience and psycology, the suggestion in Baldwin’s article that nudges “typically work best in the dark”, and something hugely important that isn’t even mentioned in any of the articles: the rise of “big data”, is enough to have even me begging for a modern “The Road to Serfdom”. And that is exactly what Wright and Ginsburg’s article is – a quite succesful continuation of Hayek’s arguments against against central planning in 1944 to effectively disarm behavoural economics and the idea of libertarian paternalism.

    Still, alarm bells should go off when an argument about these things can be won (on an intellectual level, that is, behavioral economics seems to be very popular in policy circles and we should ask ourselves why) by people who seem to have no problem with the enormous power of companies like Google, but see it fit to muster all their intellectual energy against for instance public intitatives against widespread obesity, and that with reference to totalitarian dictatorships and the associations those words have to events like the holocaust.

  2. Maybe you will find this incomprehensible, but whenever anyone starts talking about past selves and future selves and parts of the brain, I can’t help but think of this highly incisive critique of the psychological subject, my favourite piece of writing from 2014:

    http://thenewinquiry.com/blogs/454/psychologys-one-and-only-thesis/

    It’s a bit dense, only 600 words or so long, and highly elliptical.

    Sunstein’s uncriticial dragooning of the psychological literature to his argument, his treatment of desire, expectation, self and market as real, stable things that simply need to be connected up to each other in the right way so that we can live the way our future selves will want us to have lived: more than anything else, it makes me understand why people vote Republican.

    • Uncritical dragooning? Can we dismiss Kahnemann so easily?
      dmp

      • It’s Sunstein’s conscription of Kahneman’s ideas, not Kahnema’s ideas, that are implied by my attempt at “uncritical dragooning.” I think we can believe the results of the psychological literature, especially in aggregate, as a representation of how people act in certain circumstances. I think that Kahnemann is great. The question is what lawyers and legislators and especially legal scholars should do with those results. My point is that Sunstein, and much of the behavioural law and economics literature, seems uncareful about how easy it might be (or should be) to use these results to design or redesign laws and policies. You could read this as a simple restatement of Hume: is does not imply ought. But I think that my point is slightly more complicated: I start with a great deal of distaste and distrust of the rational actor model of the individual, and I think that part of my discomfort with Sunstein comes from a sense that maintaining the ontological core and adding some extra limbs and branches leads to a model that I am even less satisfied with.

        Here’s a parallel. Imagine we had an explanation of what the point of Hamlet was, but that was based only on the lines that Hamlet says in the play. It’s not clear to me that an explanation which, say, added Ophelia’s lines would give us a clearer sense of what the play is about. I think that our picture of it could easily get much worse. And that’s setting aside the horrific premise that we might design state law around either ideal.

  3. Interesting analogy. Is there a fact of the matter about what the play is about? There seems to be facts of the matter about cognitive biases. The hal effect is real, no?

  4. There are only ‘cognitive biases’ by reference to i. a rational actor model that is incompatible with, let’s say, my experience of the world ii. a “human capital” ideal of the individual that assumes that people should conduct themselves in the present in accordance with their (known-in-the-present) future ends; iii. a willingness to universalize or generalize or smooth over diversities of human experience across contexts and cultures. So, with reference to the Halo Effect, I would say, I believe that some people, e.g. buy more Coca-Cola than they would if Coke and other colas were both sold without labels and without advertising–though a measurable portion respond differently. Put differently, we might say “the advertising industry and marketing departments aren’t just a scam on the real economy.” On the other hand, the particular picture of the person that we get by laying this grid on human character does not tell us anything about the universe, though the fact that we can this picture from laying this grid may tell us something. Think of this way. The rational actor model of the individual is like the Ptolemaic model of the universe, and behavioural insights like the discovery of epicycles; we can say, in some sense, that the addition of behavioural epicycles provides a more accurate picture. But it does not necesssarily mean that our picture of the individual is better.

    A quick caveat: I am relatively capable of performing practices that seem to accord with ideals of market behaviour. I’ve switched credit cards because one seemed a better deal in my particular situation than another. But for the most part, when it comes to transactions coded as ‘market’ transactions, I just follow some heuristics. If there are lots of choices and you don’t know anything about them, buy the second cheapest; if something ‘feels’ expensive, don’t buy it;

  5. Fabrizio says:

    Against the core of Wright and Ginstein’s article I have the following comment. Welfare economics describes preferences as means for the end of individual utility (this raises the problem of why would we care about total surplus in market analysis). Traditionally, economists (among others) consider the individual an “epistemic authority” (the best judge of his own interest). Sunstein’s framework claims that often the individual is not an epistemic authority and regulation can better foster the individual’s interests. Liberty is a means and can count as a preference, but its value as preference depends again on its dispositional capacity of improving individual utility.
    About rhetoric, their 2015 menu for social arrangements is between entrepreneurial initiative and the socialist state (p. 1073 and following); lots of granularity indeed. Moreover, the slippery slope examples they make backfire: at most these examples (seatbelts, health, smoking) show that the Authors’ view is inconsistent with the current pattern of regulation.
    In Sunstein’s framework there are clearly some problems. In particular, the idea that soft paternalism implements the preferences of the individual avoiding or reducing internalities. The problem is weak in the case of cost-savings because the argument rests on the assumption that people want to minimize certain costs. Albeit reasonable, the argument is however inductive: you do not nudge me because I have a certain preference; you nudge many because of a generalization. The problem is strong in the case of retirement. I save now for consuming in many years from now. If one claims I am not saving enough, his claim is grounded in a complex prediction based on i. how much I am likely to save given how much I have saved so far and ii. how much I will need. The latter is a quite complicated inference based on many things. None of these things are my future preferences simply because my future preferences do not exists yet. The normative framework therefore does not build on “true preferences”. This is a misunderstanding. Revealed preference approaches do that, but under the RCT assumption that true preferences are utility optimizing.
    As a derivation, I see a rhetorical move in distinguishing means and ends paternalism. Means paternalism is based on what the decision-maker believes “people want”, which is not what I want, so it is end paternalism. Is this a problem? Probably for libertarian paternalism. But for others it is not, unless one can argue that a normative system based on pure act-utilitarianism is workable. Already Rawls stressed the impracticability of such a system because of its unbearable functioning costs. Sunstein’s move seems to reconstruct a rule-consequetialist position which is tantamount to public choice skepticism (p. 1878); unsurprisingly, he quotes Glaeser as reference for this rule-consequentialism. Example: longevity is end paternalism but behavioural economics is about means paternalism (so it is more friendly, don’t worry!). Well the complete title of Sunstein and Thaler’s best seller is Nudge: Improving Decisions About Health, Wealth, and Happiness. So improving decisions about health is means paternalism but about longevity is end paternalism? And what about improving decisions about happiness? Indeed, at p. 1876 “happy” and “ends” have become synonyms. Finally, when cases are not tractable with this distinction the move is to assume that people care about aggregate welfare? This is a move I just cannot understand. Under Sunstein’s definition of behavioural market failure, the consumer harms himself or is exploited by firms. Sunstein wants to preserve freedom of choice and the distributive effects of heterogeneity matter too. Sunstein knows that people care about distribution and not only aggregate value.
    Last point. Under his definition of behavioural market failure and paternalism, protecting consumers from firms’ exploitative conducts is not paternalistic. In this vein, a personalized default rule (tailored on you) does not make sense: the default should be tailored on the features of both involved parties. I see the following problem: the whole discussion is poorly founded in focusing on individual autonomy rather than party autonomy. What is the foundational value in regulating party autonomy? Individual welfare cannot be the complete answer because you have two individuals involved, so individual welfare yields undetermined results.

  6. Haukur says:

    I found Sunstein’s explanation about his project being about influencing the means people choose to achieve their desired ends make good sense. The normative aim of welfare is however a bit blurred and it is hard to make the case for a choice architecture that is not premised on a objective welfare standard, rather than a pluralistically subjective one. The creep into paternalism occurs due to this problem and Sunstein fails to convincingly overcome it in this article.

    Wright and Ginsburg give a good overview of the literature and the trend developments in US legal academia since the 1960s. They make a largely failed attempt to show that behavioural economics do not matter for legislative policy purposes. They use various rhetoric devices to these ends, such as inventing standards of academic merit that Sunstein and co must supposedly overcome to prove their worth, and by alleging that Sunstein’s proposal is Marxist (and thus by implication evil) and something that has already been tried unsuccessfully under the totalitarian regime of the Soviet Union. These kind of arguments are good soundbites on Fox News, but have no value in serious academic discussion. The main argument of the article, that Sunstein’s paternalism violates the liberty of choice, is very simplistically motivated and I am surprised that it survived peer review.

    In my mind the question of paternalism in the context of law and behavioural economics is blown out of all proportions in both of these articles. I suspect that this is a problem that has more to do with US political discourse than anything else. I could not imagine for example Swedish academics invoke the example of the Soviet Union over something as trivial as this. The difference probably has a lot to do with how we perceive the State and its role. In Scandinavia we are the State, and the State is us. There is thus nothing paternalistic about the State’s decisions; it’s simply a question of what people decide to do together.

  7. stavros says:

    In this post I would like to comment on certain arguments presented by Wright and Ginsburg (WnG) against Libertarian Paternalism or Behavioral Law and Economics (BLE) in their article Behavioral Law and Economics. My main point is that their approach should be read as a radical libertarian polemic against BLE. However their polemic remains unconvincing, for, first, it does not fully rebut the main theoretical assumption of the BLE, and second it misrepresents it by ignoring certain important caveats already introduced by the BLE. Thus, a better way to read this polemic is, in a “Baldwinean fashion”, namely as a constructive critique of the BLE aiming at determining and improving the shortcomings of the BLE, while locating it in its proper position within the regulatory toolbox.

    The core thesis of BLE is that certain cognitive biases (systematic failures to act in one’s own interest because of defects in one’s decision-making process) trigger irrational behavior, which breaks the link between revealed preference and individual welfare upon which neoclassical economic theory depends. Thus, BLE aims at (1) making a catalogue of the cognitive biases (systemic departures from rational choice); (2) testing whether these biases are generalizable to markets; (3) inform state intervention respectively. In this regard, state intervention should seek to (a) manipulate the way choices are framed for consumers so as to increase their welfare as defined by them, (b) achieve that without impeding individuals’ liberty.

    WnG highlight that they will evaluate BLE by its own criterion: by how successfully it solves the constrained optimization problem while respecting liberty; and they would favor BLE should they have greater predictive power and their underlying assumptions are more realistic. However, at the same time they seem biased in favor of the simplifying neoclassical model of rationality, which enables modeling of economic interactions among firms and consumers. Yet nothing excludes that BLE could develop more sophisticated mathematical models.

    In addition WnG maintain that certain cognitive errors such as the framing effect or the discounting bias have been proven in laboratory conditions but disappear when exposed to market discipline and the profit motive. However, this is already recognized by the BLE. Sunstein highlights that behavioral market failures are an important supplement to the standard account of market failures, thus libertarian paternalism is a merely a complementary form of state intervention which also “should be not worse than the disease”. Therefore BLE remains always open to reconsiderations pursuant to upcoming data.

    In the same line, WnG argue that framing effects can be reduced or eliminated at low cost without the extensive interventions proposed by BLE. Yet, this is not accurate since BLE urges to compare the costs of any proposed corrective intervention against the social benefits produced by reducing the rate of error and then make up our minds regarding the relevant intervention. Likewise it is inaccurate to assume that BLE fails to distinguish between rational and irrational errors, and it assumes that error reduction is always efficient.

    Furthermore, GnW recognize that BLE seeks to regulate so as to improve economic welfare by more closely aligning each individual’s actual choices with her true or unbiased preferences, and then they ask how BLE could identify true preferences. Based on the neoclassical assumption that only actual behavior reveals evidence of welfare they negate the very possibility of BLE identifying individuals’ true preferences. Nevertheless, BLE clearly defines what a true preference is: what would be the individual choose if she has no cognitive bias? BLE’s moderate position is merely to remove the hurdles on the shaping of rational behavior. More importantly, BLE recognizes that rational decision-makings is scarce resource and the institutions could assist individuals economize by providing them with heuristic devices (the latter could be seen as crystalizing the collective experience of the society as historical time passes by, so the individual would not have to engage in the whole enterprise on its own and from scratch).

    Moreover, WnG underplay the claim that choice architecture is inevitable (See B Kennedy, The Stakes of Law, or Hale and Foucault). Given that there is always a specific choice context, established by power relations, culture, institutions etc, there is always a nudge from some direction. As a result people’s preferences and choices are inevitably structured and influenced, and therefore, what matters is which nudge is welfare enhancing while respecting liberty (i.e. the cost of opt-out option is the lowest possible). At this point Baldwin’s critique is much more helpful, since he asks whether there is a framework under which we could separate out unacceptable from acceptable choice structures.

    In addition, the argument that BLE bears a government intervention bias is equally misguided. BLE recognizes that bounded rationality may characterize the conduct of regulators as well as market players. However, the regulatory intervention functions as a modifiable filter. It can change via legislature procedures and it incorporates the so far accumulated knowledge; a task unbearable for an individual. In this regard neither state intervention, nor the market (WnG seem to conceptualize the market in a naturalistic way) are immune to errors. However, through deliberative procedures we may choose as society on which side we would prefer to err. The aim is always to create a decision-making environment in which it is more likely for bounded-rational agents to make the best choice for their interests.

    The last part of the WnG article focuses on the “autonomy objection”. Paradoxically they cite Kant and Sen but they interpret them in Hayekean terms. For the former, freedom presupposes certain conditions or capabilities under which decision-making rationality could develop and function. Public and private operators also could curtail freedom as well. For WnG “freedom to err requires sufficient independence from the state that individuals bear the costs of their choices”. This is correct. But freedom to err requires also independence by powerful private actors, which can easily impose burdens to individual’s free conduct and exploit her decision-making flaws, which could derive from cognitive biases or even from the imbalance of power within society.

    Also, BLE is not corrosive for individual’s decisional autonomy, for choices are always embedded in a specific context and under a nudge individuals can always reflect on their choices and modify them. In other words, both the default option and the opt-out option bear certain costs. The simple claim of BLE is that the default rule should be the one more likely to benefit the majority of the individuals, while anyone who disagrees would be able with the least possible cost to deviate. And of course in this framework individuals have the freedom to err.

    The autonomy objection bears two additional flaws. First, its slippery slope argument does not hold. Specifically, WnG argue that paternalistic policies relieve individuals from their responsibilities and thus they diminish their decision-making ability. This imposes a type of moral hazard, which in the long run would raise error rates because people would invest less in error correction. Simultaneously, the regulatory enterprise will expand without limitation leading to an oppressive regime. Easily one may see that this cold-war reminding argument misrepresents BLE and ignores its inherent guarantees. The second flaw of the autonomy objection is that it defines liberty as entrepreneurship. By that (a) it represents a conception of liberty as the concept itself; (b) it confuses the entrepreneur with the consumer, and as a result raises consumer’s liability while reducing companies’ liability, (c) ignores that BLE’s scope is constrained to certain kinds of human conduct.

    In light of the above, WnG critique against BLE is misguided for it seeks, without success, to radically deconstruct its theoretical assumptions and it leads us back to a more traditional and less sophisticated neoclassical or Law and Economics approach. The main flaw of this critique is that both its strands of argumentation ignore certain aspects of BLE and ultimately do not achieve to rebut its cardinal concepts. On the other hand, Baldwin’s approach could be proven much more fruitful since he offers a constructive criticism of BLE and a conceptual framework capable of evaluating the main tool of BLE, the nudge, and determining its limitations. In this respect, while Wright and Ginsburg try to kill BLE, Baldwin much more constructively attempts to show its shortcomings and where it should be complemented by other regulatory tools or abandoned in favor of other means of intervention.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s