Behavioral Economics, the Law, and the Regulators

Truth on the Market is hosting an online forum on behavioral law and economics, the “Free to Choose?” symposium. So far, people like David Levine, Ronald Mann and Christopher Sprigman have taken their turns. “Behavioral economics itself has made a significant contribution to increasing our understanding of when individual decision-making deviates from the rationality assumption at the heart of the conventional microeconomic theory,” writes Josh Wright in the Introduction. “Behavioral law and economics now reaches all corners of the law. The rise of behavioral economics raises interesting sets of questions both within the domain of economics itself: what are the costs and benefits of the intersection of psychology and economics? What explains the remarkable success of behavioral economics in the behavioral law and economics literature? Will the phenomenon have staying power? Is it in fact the case that behavioral law and economics is gaining traction in the current regulatory landscape?” Related: see Matt Ridley‘s very good Wall Street Journal piece about Slavisa Tasic‘s very interesting paper asking whether regulators are as irrational (if not more so?) than the rest of us. [%comments]


Ian Kemmish

If anything is going to do for behavioural economics, it is that it's going to be (or already is being) prematurely exposed to politicians.

For example, in the run up to the UK general election, there was a week in which it was the official position of the Conservative Party that putting smiley faces on utility bills was good, because it had been endorsed by a behavioural economist, but putting them on school reports was bad, because that had been introduced by the Labour government. Nobody in the party seemed bothered either by the contradiction, or by the implication that adults are stupider and more easily manipulated than six year olds.

It seems likely that any policies inspired by behavioural economics which actually get implemented will also not have been thought through for more than a few seconds, and if they fail the public is likely to react in the same way it always reacts.

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frankenduf

for starters- referencing the wall street journal on industry regulation is irrational- the level of bias and incompetence makes it slightly better than fox

Alex in Chicago

Of course they are rational. They rationally try to keep their jobs, so they make choices that will make them look the least bad. Regulators know that it takes about $3 of gain for a human to offset $1 of loss, so they engage in extremely risk-averse policies.

Need proof? Just look at all the wonderful drugs that the FDA does not allow on the market.

Plain Jane

Why millions Americans KNOWINGLY take on mortgages they can't repay? Is this due to the mentality of Keep up with the Jonese? Why so many Americans insist on project a FALSE wealthy image in their daily lives??

Shane

The piece by Slavisa Tasic is absolutely fascinating. I'm wondering now about the implications of it.

Yes, he explains that regulation can have unintended side-effects, so that would suggest a low-regulation society is better. However the unpredictability of society and markets means that the actual process of DEREGULATION must also carry the risk of unknown side-effects.

In Ireland now there is controversy over a plan to reduce minimum wage. Supporters of the reduction say it will reduce unemployment, opponents disagree. The complexity of the marketplace, with all its hidden processes, makes it difficult to know what will result from this action.

tungbo

Tasic's paper is an interesting perspective. And some of his insights are well aimed. However, the conclusion suffers from that most typical of Austrian fallacious arguments. I'll paraphrase him from the point of view of a mideval healer.

"Your body is a complex system in which your organs continually change their behavior to adapt to new conditions. The adverse unintended consequences are pervasive across organs (aspirin might cure your headache, but give you an ulcer), and yet when they are recognized, the typical answers are new attempts
to fix the omissions of the previous medication. But every attempt to improve the previous medication must also be based on the illusion that the problem is well understood,
perhaps better now than in the previous situation."

So who needs antibiotics? Let your body heal itself.

The problem with the Austrian argument against an omniscient regulator is that it assume an omniscient Austrian economist. Otherwise, how can he know that the regulation would produce a worse result if everything is uncertain?

Tasic says, "It reminds us of human fallibility, and jointly with the economics of collective decision-making warns us that government intervention is the area where such mistakes are more likely to occur than in private decisions."
Really? How many banks failed due to bank run before Deposit Insurance was instituted? How many bank runs occured afterward?

I concur with the call for humility on the part of the regulator as well as the econmists of whatever school.

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