Behavioral economics and paternalism.

• Author: Sunstein, Cass R.
• Position: Introduction through II. Paternalisms, p. 1826-1867 - Storrs Lectures

FEATURE CONTENTS INTRODUCTION I. OCCASIONS FOR PATERNALISM? A. Two Systems in the Mind: Of Humans and Econs B. Behavioral Market Failures 1. Present Bias and Time Inconsistency 2. Ignoring Shrouded (but Important) Attributes 3. Unrealistic Optimism 4. Problems with Probability II. PATERNALISMS A. Working Definitions 1. Choices and Welfare 2. The (Important but Troubled) Distinction Between Means and Ends 3. The (Important but Troubled) Distinction Between Hard and Soft 4. A Very Quick Summary 5. On Welfare B. The Paternalist's Large Toolbox III. AGAINST PATERNALISM: WELFARE A. Five Welfarist Objections: An Antipaternalist's Quintet B. Welfare: Normative Issues C. Welfare: Empirical Problems D. Imaginable Worlds and Rule-Consequentialist Antipaternalism E. Choice Architecture and Inevitable Nudges IV. AGAINST PATERNALISM: AUTONOMY A. Autonomy: The Thin Version B. Autonomy: The Thick Version C. Thin, Again D. Thick, Again E. An Accounting V. PROBLEMS WITH SOFT PATERNALISM: IMAGINARY AND REAL A. Of Transparency and Political Safeguards B. Of Easy Reversibility C. The Legitimate Claims of System 1 D. A Real Concern: Impermissible Motivations CONCLUSION [T]he only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinion of others, to do so would be wise, or even right.

--John Stuart Mill (1)

The central conundrum has been referred to as the Energy Paradox in this setting (and in several others). In short, the problem is that consumers appear not to purchase products that are in their economic self-interest. There are strong theoretical reasons why this might be so.

[1] Consumers might be myopic and hence undervalue the long-term;

[2] [Consumers] might lack information or a full appreciation of information even when it is presented;

[3] [Consumers] might be especially averse to the short-term losses associated with the higher prices of energy efficient products (the behavioral phenomenon of "loss aversion");

[4] [E]ven if consumers have relevant knowledge, the benefits of energy efficient vehicles might not be sufficiently salient to them at the time of purchase....

--U.S. Environmental Protection Agency (2)

INTRODUCTION

From 2009 to 2012, I was privileged to serve under President Obama as Administrator of the White House Office of Information and Regulatory Affairs, sometimes described (hyperbolically to be sure) as the nation's "regulatory czar." When I served in that position, the President stressed the need to consider flexible approaches that reduce costs and maintain freedom of choice for the American people. In fact, the President specifically charged me with promoting that goal, emphasizing its special importance in a period of serious economic difficulty.

In the Obama Administration, many of us were concerned about reducing regulatory costs, but we were alert both to the existence of standard market failures and to the findings of behavioral economics. We sought to identify approaches that would remedy those failures and respond to those findings, while surviving cost-benefit analysis and without imposing unjustified burdens on the private sector. (3) We knew that there were many opportunities for using regulation to save both lives and money, by, among other things, promoting safety on the highways, cleaning the air, reducing smoking, increasing the fuel economy of cars, combating childhood obesity, and reducing health risks from food.

Executive Order 13,563--a document of signal importance, a kind of mini-constitution for the regulatory state--contains a key provision called "Flexible Approaches," which states in no uncertain terms that "each agency shall identify and consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. These approaches include warnings, appropriate default rules, and disclosure requirements as well as provision of information to the public in a form that is clear and intelligible." (4) This provision can be understood as an explicit recognition of the potential value of low-cost, freedom-preserving approaches, or nudges. (5)

Behavioral economists have emphasized that in important contexts, people err. (6) Human beings can be myopic and impulsive, giving undue weight to the short term (perhaps by smoking, perhaps by texting while driving, perhaps by eating too much chocolate). (7) What is salient greatly matters. (8) If an important feature of a situation, an activity, or a product lacks salience, people might ignore it, possibly to their advantage (perhaps because it is in the other room, and fattening) and possibly to their detriment (if it could save them money or extend their lives). Human beings procrastinate and sometimes suffer as a result; (9) they are greatly affected by default rules, potentially to their detriment. (10) They can be unrealistically optimistic and for that reason make unfortunate and even dangerous choices. (11) People make "affective forecasting errors": they predict that activities or products will have certain beneficial or adverse effects on their own well-being, but those predictions turn out to be wrong. (12)

It is important to emphasize that free markets provide significant protection against such errors. Most important, markets often deter exploitation of human fallibility. If companies provide unhelpful default rules, steering consumers in directions that harm them, they may be punished as a result of competition. Companies that shroud expensive attributes, costing consumers a lot of money, may find themselves without customers before long. In addition, companies offer countless services to help people counteract self-control problems. The market itself creates strong incentives for companies to respond to these and other behavioral problems. With new technologies, those responses will become increasingly helpful, frequent, inventive, and personalized; (13) helpful "apps," of countless sorts, are proliferating, (14) and in the future, we will see unimaginably more. The market for protecting people against their own mistakes is flourishing. (15)

But there is another side. In free markets, some sellers attempt to exploit human errors, and the forces of competition may turn out to reward, rather than punish, such exploitation. In identifiable cases, those who do not exploit human errors will be seriously punished by market forces, simply because their competitors are doing so and profiting as a result. Credit markets provide many examples in the domains of cell phones, credit cards, and mortgages. (16) More generally, some policies will not be designed well if they are not informed by what we know about human behavior. (17)

It is true, of course, that a great deal remains to be understood about the nature of human error in disparate contexts. Research is continuing, and more is being learned every day; some behavioral findings are highly preliminary and need further testing. There is much that we do not know. Randomized controlled trials, the gold standard for empirical research, must be used much more to obtain a better understanding of how the relevant findings operate in the world. (18) Even at this stage, however, the underlying findings have been widely noticed, and behavioral economics and related fields have had a significant effect on policies in several nations, including the United States and the United Kingdom.

In the United States, a number of initiatives have been informed by relevant empirical findings, and behavioral economics has played an unmistakable role in numerous domains. These initiatives enlist tools such as disclosures, warnings, and default rules, and they can be found in multiple areas, including fuel economy, energy efficiency, environmental protection, health care, and obesity. (19) As a result, behavioral findings have become an important reference point for regulatory and other policymaking in the United States. (20)

In the United Kingdom, Prime Minister Cameron has created a Behavioural Insights Team with the specific goal of incorporating an understanding of human behavior into policy initiatives. (21) The official website states that its "work draws on insights from the growing body of academic research in the fields of behavioural economics and psychology which show how often subtle changes to the way in which decisions are framed can have big impacts on how people respond to them." (22) The team has used these insights to promote initiatives in numerous areas, including smoking cessation, energy efficiency, organ donation, consumer protection, and compliance strategies in general. (23) Other nations have expressed interest in the work of the team, and its operations are expanding. (24)

Behavioral economics has drawn attention in Europe more broadly. The Organisation for Economic Cooperation and Development has published a Consumer Policy Toolkit that recommends a number of initiatives rooted in behavioral findings. (25) In the European Union, the Directorate-General for Health and Consumers has also shown the influence of behavioral economics. (26) A report from the European Commission, called Green Behavior, enlists behavioral economics to outline policy initiatives to protect the environment. (27)

These developments, and the relevant findings, raise a natural question, which is whether an understanding of human behavior opens greater space for paternalism, supplementing the standard accounts of market failures by providing grounds for government action even in the absence of harm to others or some kind of collective action problem. (28) We know, for example, that people are greatly affected by choice architecture, understood as the social...