Emerging Scholars Lecture Featuring Cass Sunstein on Hayekian Behavioral Economics

Cass Sunstein joined the Mercatus Center for the inaugural Emerging Scholars Lecture to explore the intersection of Hayekian economics and behavioral science. His talk examined how knowledge, choice, and human biases shape decision-making—and what that means for public policy. Drawing on both Hayek's insights about dispersed knowledge and modern behavioral economics, Sunstein outlined a "neo-Hayekian" approach that emphasizes learning from informed, unbiased choices while remaining cautious of centralized planning. The lecture highlighted how market processes, individual behavior, and policy design can work together to reduce preventable harm and better support individual welfare and freedom.

Transcript

Well, it’s a fantastic and incredible honor to be here. I’ve gotten to know a number of you in the last hours, which has been a great pleasure. I can report from the hinterlands that you all are changing the world, and no pressure. I’m very conscious that what you’re doing now and what you’re going to be doing in the near future will promote the cause of liberty, not as a slogan but as lived reality with concrete ideas that instantiate it, and that makes it amazing to be on this floor. This set of remarks is an ongoing project that’s a constellation of three things, which I guess are in the form of stories which converge. The first is, as an advanced teenager early in college, I read The Road to Serfdom.

As happened for so many people, including I know some in this room, it almost literally knocked my socks off. The sunlight that burst in the sky as I read chapter after another was incandescent. The framework that Hayek introduced stayed with yours truly, as with so many others, and it is ingrained in the DNA of all those, I think, who read the book. The second tale is a somewhat older, young law professor at the University of Chicago, Hayek’s own institution for a long time. I was surrounded by people who were 7’4”. Gary Becker must have been 7’4”. George Stigler, who, according to the height charts, was 6’5”, was actually, in person, 9’8”.

They were all giants, and they were, in some sense, Hayek’s younger siblings. What they added, among other things, was something that Hayek didn’t stress and maybe didn’t believe, which is a commitment to human rationality. For the Chicagoans, the loosely Hayekian giant colleagues, it seemed, to tiny me, there was a theory of human behavior, which was imperfectly matched to the literature that I had studied in college, literal literature like novels and poems, and also imperfectly matched to their own tennis games, which seems to suggest overconfidence, unrealistic optimism, a use of heuristics about what shots to hit when.

This is a polite way of saying they weren’t very rational tennis players, and some of them were getting divorced, meaning they’d made choices that had gone wrong. This led me, Hayekian-inspired though I was, to think that departures from perfect rationality were all around and causing problems. This needed to be analyzed. I started to write a paper on departures from perfect rationality and pre-commitment strategies and the endogeneity of some preferences.

The paper was well underway in the midst of a squash game with a law and economics follower of Hayek. I told him, actually, after the game that I was working on this paper, and he said, “This is a terrible paper. You shouldn’t publish it. It’s doomed to failure. The central idea is all wrong, and not just wrong but destructive, but there’s someone else working on this topic who’s actually published a paper almost as bad as yours.”

“His name is Richard Thaler.” I thought it was T-H-A-Y-L-O-R, and it took me a long time to find the paper. When I did, it was toward a positive theory of consumer choice. The paper helped get Thaler the Nobel Prize many years later. At the time, it was an obscure paper. I got a sunburst that wasn’t as violent as the Hayek sunburst, meaning it wasn’t as explosive, but it was, nonetheless, a sunburst in which Thaler cataloged departures from human rationality in a way that overlapped greatly with my primitive effort to systematize what I had learned from Shakespeare and James Joyce and Samuel Beckett as departures from perfect rationality.

There’s a conflict here, isn’t there, between the devil and the angel, or the two angels? Hayek and Thaler. What I’ve been trying to work out in the last three or four years is whether it’s possible to create a Hayekian behavioral economics, that is, a form of economics that is self-consciously and proudly and insistently Hayekian, but is alert to departures from perfect rationality. What would that look like?

This is going to be a cut at it and to presage the heart of it. If human beings often lack information as individuals, and if that replicates itself in the price system as it sometimes does, if human beings show unrealistic optimism like tennis players and occasional investors, if people show present bias in the sense that the short-term matters a lot, the long-term not so much, and if there’s a catalog of these things complementing informational deficits, then what are regulators to do?

We have a problem. The solution is not to ask planners just to figure it out. The solution must take another Hayekian form. I’m not going to spoil the surprise quite yet. I’m going to say that’s the enterprise. Let’s just notice the stakes are large in the sense that there are people who die too young, get sick when they ought not to. 125,000 Americans die prematurely because they don’t take prescription drugs, which if they took them, they wouldn’t die prematurely.

We have tens of thousands of deaths on the highway. Those aren’t as easily preventable as those that come from a failure to take medicines that are prescribed. Surely, they are preventable. What are we going to do about this kind of thing? This is a project for freedom lovers everywhere to take super seriously. Okay. You all are sufficiently familiar with Hayek to know that his description of the price system as a marvel meant to shock the reader out of complacency for taking the price system for granted was based on the sense that the market is a system of telecommunications that no one sees until Hayek quite as such.

What the price system does better, even than the great Habermas thought democracy did, is to register collective intelligence. It’s the day after the 34th, I think, anniversary of Hayek’s death. It’s just a few days after Habermas’s literal death, and these are the great theorists of collective intelligence, with Hayek emphasizing the price system, Habermas emphasizing democracy, and I think Hayek wins that argument.

In light of modern behavioral findings, we might object that the price system is not always so marvelous. If consumers show limited attention, they might be subject to manipulation on the part of those who hide features of a transaction. If people are subject to unrealistic optimism, it might be that savvy sellers can exploit that and create an equilibrium that embeds unrealistic optimism, and then the price system is going to be giving the wrong messages.

We might agree with Hayek’s arguments about planning and prices while thinking that certain forms of regulation, actually pretty aggressive ones, aren’t out of bounds. Hayek said, and you can feel the irritation on the page, “Probably nothing has done as much harm to the liberal cause as the wooden insistence of some liberals on some rough rules of thumb above all the principle of laissez-faire.”

Hayek didn’t choose his words carelessly, and it’s worth pausing over that claim. Probably nothing has done as much harm to the liberal cause, or more specifically, these words, to prohibit the use of certain poisonous substances, notice the P word, “prohibit,” or to require special precautions in their use, to limit working hours, or to require certain sanitary arrangements, is fully compatible with the preservation of competition.

The only question here is whether, in the particular instance, the advantages gained are greater than the social costs that they impose. Those of you who know some of my scribbling will know that my affective reaction on reading that sentence was a bit over the top. While dancing in response to a sentence like that is a little excessive, something in my legs really wanted to dance in reading those sentences.

Maybe, in view of the endorsement of occupational safety and health restrictions, limitations on working hours, maybe a mandatory seatbelt law, a ban on trans fats, amply justified by benefit-cost analysis, the benefits crush the costs, would be unobjectionable. Maybe Hayek’s arguments create a bridge towards cigarette taxes or taxes on sugar-sweetened beverages. I say “maybe” because the answer isn’t entirely clear about the right Hayekian approach to those issues.

Focused on coercion, Hayek didn’t much love paternalism. While he didn’t discuss paternalism as such, his most stunning words on liberty stand against it. This is an un-Hayekian sentence written by the man himself. Coercion is evil precisely because it eliminates an individual as a thinking and valuing person, and makes him a bare tool in the achievement of the ends of another.

Pause over that and maybe engrave it somewhere. What makes it not a characteristically Hayekian sentence is it’s strikingly Kantian. It’s not welfarist. Nothing there about costs and benefits. It doesn’t speak about welfare at all. Notice the use of the word “evil” and the objection to treating people as means rather than as ends. Indeed, Hayek seemed to embrace something like a Kantian non-welfarist foundation for freedom in his less famous passages.

In the introduction to The Constitution of Liberty, he wrote, “Some readers will perhaps be disturbed by the impression that I do not take the value of indisputable liberty as an indisputable ethical presupposition, and that in trying to demonstrate its value, I am possibly making the argument in its support a matter of expediency. That would be a misunderstanding,” Hayek says, though he never spelled this out.

At pivotal points, Hayek’s argument was epistemic, not ethical. Thus, he urged the argument for liberty, its chief basis, his words, is the awareness of our irremediable ignorance. If it appears that the market mechanism leads to an effectuation and utilization of more knowledge, that is the chief foundation of the case for economic liberty. Notice the dual-mindedness of this. There’s the Kantian beating heart, but the epistemic, maybe conceptual framework.

“The case for individual freedom,” Hayek writes in The Constitution of Liberty, “rests chiefly on the recognition of the inevitable ignorance of all of us, considering a great many of the factors on which the achievement of our welfare depends. Thus,” he says, in his least Kantian moment, “if there were omniscient men, if we could know not only all that affects the attainment of our present wishes, but also our future wants and desires, there would be little case for liberty.”

I think he couldn’t have meant that entirely. It contradicts the early sentences, but he said it. Hayek, there, roots his claim for liberty, his most cherished ideal, in the absence of omniscient men. “If there were such men, we would be able to offer little case for liberty.” I don’t agree with that for many reasons, and I doubt that Hayek believed it either. Let’s not let that detain us here.

Emphasizing human fallibility and the propensity to blunder, some people have questioned the marvelousness of the price system. I’m thinking of Akerlof and Shiller, Nobel Prize winners both, who write on this topic. Other people have been asking whether new institutional arrangements involving mandates and bans have fresh justification. This seems anti-Hayek on the Kantian and the welfarist ground, but the motivation for this enthusiasm for paternalism isn’t obscure.

If we know that people’s choices lead them to poverty and ill health, why should we insist on freedom of choice? Ought not institutional design to take behavioral biases into account? Hayek, as always, was a bit of the head of the game here. In speaking of the dispersed nature of knowledge, he also defended nudges before the word came to have its current meaning. “Where,” wrote Hayek, “most individuals do not even know that there is useful knowledge available and worth paying for, it will often be an advantageous investment for the community to bear the cost of spreading the knowledge.”

We all have an interest in our fellow citizens being put in the position to choose wisely. If some have not yet awakened to the possibilities which developments offer, a comparatively small outlay may often be sufficient to induce the individuals to take advantage of new opportunities, and then to advance further on their own initiative. What Hayek is defending here is educative nudges in the form of information provision that overcomes both a lack of knowledge and a behavioral market failure in the form of identifiable behavioral biases by which people’s choices make their lives go less well by their own lights.

“When this is so,” Hayek urges, “a corrective response might be put on the table, at least in the form of information that helps people not to blunder.” We have to emphasize the word “might.” Planners might claim to find identifiable behavioral bias when there is no such thing, the knowledge problem on the part of the choice architect. Planners might have bad incentives of their own. You’ve heard about that, yes? They might be subject to the influence of well-organized private groups.

Can I tell you a story? In my White House experience, there was a big movement to try to get labeling of genetically modified organisms. This was an effort to nudge consumers away from same. The problem, of course, was the effort came from guess who? The organic industry, which was trying to get a competitive advantage in the face of repeated disclaimers from people whose business it is to know these things, suggesting that genetically modified organisms don’t cause health or environmental problems.

It was purely an interest group-driven effort at a nudge. The Obama administration resisted the effort. Trump won, went forward. Trump forward didn’t go forward because he loved it. He went forward because Vermont had endorsed the labeling requirement. It looked like we were going to get a national mess of labeling requirements. The labeled industry went to Washington and said, “Please get us a label that won’t cause inconsistency or mass terror.” If you look at the label that emerged, it’s the most cheerful, sunny label. It nudges exactly no one not to go for genetically modified food.

Here’s the large question. Suppose we’re in search of a behavioral economics for policy purposes that is taking on board everything Hayek said about liberty and knowledge. If we’re in search of that, we would firmly reject the idea that planners should be content to identify behavioral biases and declare victory. Instead, we would want to engage in something like comparative analysis. [coughs] How costly would the errors that the planners introduced be compared to the errors that would be introduced by an alternative approach?

A Hayekian initiative. [coughs] I read a book about public speaking that said, if you’re getting into really complicated territory, you should pretend to cough [laughter] and drink some water so you can assemble your thoughts. Is it working? You don’t know yet. Okay, so the question is whether we can adopt an approach, which is Hayek in his Kantian phase and Hayek in his welfarist phase, that tries to reduce the knowledge problem faced both by the planners and by the people whom the planners are trying to help by asking a single question, which is, what do individual choosers do under epistemically favorable conditions?

That’s going to be the rabbit out of this hat where the planner does not ask an unanchored cost-benefit question and does not ask, “Do I have a superior assessment about what consumers should do than consumers?” Does not even ask, “Do consumers suffer from a behavioral bias?” but asks, “What do actual choosers do under conditions that are epistemically favorable?”

What does epistemically favorable mean? It means that people know things, and it means that people don’t suffer from an identifiable bias, such as, for example, availability bias, which can lead people to exaggerate the likelihood that a salient risk is going to come to fruition, and to downplay the likelihood that a risk that isn’t salient will come to fruition. What we’re trying to do is isolate, not by imagination, but by data, what people actually do under epistemically favorable conditions.

The beauty of this is that we are in the midst of maybe year six of a Hayekian research project that tries to answer exactly these questions, and to develop policy on the basis of what we know. Year six is early, but here are some examples of the kinds of questions that a Hayekian behavioral economics would put front and center. First, what do informed choosers choose as opposed to people who don’t know a thing about the context in which they are making choices? Do you have any data on that?

Second, what do consistent choosers choose, unaffected by clearly irrelevant factors or frames? Suppose it’s the case that if you frame a question saying 90% of people are fine after a certain operation, do you want to get the operation? People say, “Absolutely.” Then, if you ask a similar population, 10% of people aren’t fine after the relevant period. Do you want to have the operation? They give a different answer. That’s a problem.

Maybe there’s a class of people who give a consistent answer who aren’t affected by the frame, and they would have at least a degree of authority that the inconsistent choosers lack. What do active choosers choose? In some cases, people end up in a situation just because there’s a default with which they stick. It might be something that says they’ll give $10 a month to someone whom they barely know because they didn’t unclick a box that was clicked.

I think that just happened to me last week, but I was too busy to pay attention. I’ll tell you when my credit card bills arrive. If active choosers who actually make choices rather than passively accepting things make a certain stream of choices, then they have authority. We know what the relevant population thinks. In circumstances in which people’s view screen is broad and they’re seeing a full set of ingredients of a transaction, what do they select as opposed to people whose view screen is small and they’re focusing on three of seven factors?

We might be able to know from context whether people’s viewpoint is broad or narrow by making salient seven things where a manipulative, let’s say, seller is making salient three things. That might be a profit-maximizing strategy. Suppose we know or can work to know what people choose when they’re free of present bias and unrealistic optimism. Maybe people who lack present bias and don’t suffer from unrealistic optimism think, “I don’t want to be in that darn savings plan.” Maybe the reason they don’t want to be in the darn savings plan is, A, they have plenty of savings.

They have no need for it, or B, that they have an urgent current need. It’s not a matter of unrealistic optimism. It’s epistemically sensible. They know what their situation is. Those are, let’s say, Hayekian subjects of the best kind, and they have authority. The claim is that policymakers ought, in cases in which there’s reason to think human distress is occurring and a product of informational deficits or behavioral biases, to ask these questions. If public institutions can learn what consistent and informed and active choosers, less influenced by present bias or limited attention, choose, they might have real guidance.

The submission is these questions can be answered empirically. That’s not just a promissory note. We know some things about this. There’s data suggesting, for example, that if consumers are flooded with information about the fuel economy of vehicles, they don’t make different choices from the choices they make if they’re not so flooded, which is strong evidence that informed choices are choosing the vehicle mix we basically observed, and that the fact that we observe less in the way of electric cars and less in the way of hybrid sales than a planner’s cost-benefit analysis would seem to suggest isn’t a product of a lack of information because information provision doesn’t alter choices.

In other words, that’s not a problem. We have data consistent with that. Should employers offer opt-in savings plan or opt-out savings plan? We have data suggesting that many employees are affected by the frame. If you’re automatically enrolled, people stick. If they have to sign up, at least in the first few years, they don’t sign up. We also have data suggesting lots of people aren’t affected by the frame.

The people who aren’t affected by the frame typically end up in a savings program. Not everybody. We don’t want a mandate here, in my view. We want freedom to be preserved. Opt-out has advantages over opt-in insofar as we know that people who are consistent generally opt-in. That’s the right default. If the consistent choosers, there’s a qualification, aren’t different from the inconsistent ones, except that they’re affected by the frame, we have a reason to think that the choices of the consistent choosers are the correct ones.

If the consistent choosers are a different population from the inconsistent choosers, then this just isn’t going to work, so it has to be randomized. Suppose we know that consumers make an active choice to enroll in certain insurance programs when those programs are designed so as to promote active choosing. If so, we have some reason to suppose that a default in favor of the insurance program makes some sense because we have some reason to think that if people aren’t choosing to enroll, it’s not because they don’t want to, but because of inertia or inattention.

That’s the central point. If, under circumstances of active choosing, people go for it, then we have reason to think that’s the thing that people want. If they are actively engaged and if they don’t enroll, it’s not because they don’t want to. It’s just because they are inattentive or suffering from inertia. Okay. We know that from experiments about energy-saving appliances that if you not only inform people but you make it highly salient to them, what the savings are? We don’t observe a change in choices, not much of one.

If the question is what kind of light bulb to get, one that is environmentally a little better or one that is environmentally a little worse, and let’s stipulate what’s true, then the environmentally better one is less expensive in the long run, but it’s not as bright. People choose when informed of the economic benefit of the environmentally better one, they choose the one that’s brighter.

Even when they are given clear information that should overcome present bias or inattention, still they get the brighter one. That’s highly suggestive that a plan or response to the supposed behavioral bias would be ill-advised, because we know from the data that if you counteract the supposed behavioral bias, people do the same thing, which is strongly suggestive that there is no behavioral bias. People just want the product that has the brighter light.

Now, you might be thinking about externalities. That’s completely fair. Hayekian style and externality might justify the environmentally preferred light, but it would be because of the externality, not because people are making the wrong choice. Okay, there might be heterogeneity in the relevant population. If there weren’t, that would be shocking, making it challenging to generalize from what part of the population does.

At least we now have a framework by which to embark on empirical tests and on policy initiatives in which planners are building not from their own convictions, but from the observed behavior of informed and behaviorally unbiased choosers. The reason is that planners are building on the choices of the right choosers. If we look at fuel economy and energy efficiency, which is we can see what a Hayekian research program and what a Hayekian set of policy initiatives would look like, and what is a thing of, to me, surpassing beauty, is both the Biden administration and the Trump administration have really earned their keep on these issues.

The technical people have done splendid work. We have a lot of research on fuel economy choices and on whether people are suffering from a behavioral bias, inattention, maybe a form of myopic loss aversion when they buy cars that aren’t fuel efficient and that aren’t electric. There is data consistent with the idea that people don’t perfectly internalize the economic consequences of a low fuel efficiency car. The data is suggestive that people aren’t taking on board 100% of the economic cost.

That’s the data that the Biden administration has emphasized. The Biden administration was impressively cautious about the data, knowing that the informed consumers don’t make radically different choices from the uninformed ones. Knowing that once you try to counteract the behavioral bias by throwing gas prices in people’s faces, as the market frequently does, people start buying different cars, which is testimony to the less-than-very bounded rationality, meaning quite excellent rationality of consumers in this domain.

The Biden administration noticed that when there is a correction of a miles-per-gallon error so that the overstated fuel efficiency of a set of cars is fixed, consumers don’t respond a whole lot, which is consistent with the people are making mistake choices. The Trump administration has some plausible responses to that evidence and has been very cautious about accepting the claim that consumers are making systematically wrong choices, by reference to data of the sort I’ve been describing, while noticing and emphasizing that the jury is still out on this question.

Okay, time to summarize and wrap up. The price system, even with the behavioral findings, remains an extraordinary system of telecommunications. In some areas, including occupational safety, food, as Secretary Kennedy is emphasizing, and other areas, the marvel is not unerring. If people are suffering from limited attention, a problem of self-control, unrealistic optimism, or a focus on the short-term, prices might not capture important factors.

If the consequence is a serious welfare loss for people, Hayek’s ears prick up in his welfarist incarnation, there’s an argument for some kind of public response. If people are running risks of mortality or otherwise ruining their lives, then the Hayekian machinery is, in play, consistent with the premises I’m trying to endorse. In the end, as Hayek appeared to know, occupational safety and health regulation, which he was okay with, has to be justified on behavioral grounds.

They forbid workers from facing certain risks. That’s what they do. On Hayekian grounds, and according to Hayekian behavioral economics, the best response might well be for public institutions to provide information in a way that is attuned to rather than unaware of behavioral biases. It’s true, yes, that the best approach might be to do nothing on the theory that the cure might be worse than the disease.

Remember, if you would, the questions that I wanted to isolate as answerable in principle questions and appealing in theory questions to orient a research program and a program of behaviorally driven policy that is responsive to the limits of planners and that founds itself on what people in epistemically favorable conditions actually do. In the first instance and probably in the last, behaviorally informed policy has to be based not on the values of social planners, but on learning from the actual choices of informed and unbiased choosers. We’re increasingly able to identify what those choices are.

If so, we’re on a good and starting to be paved road, which is toward identifying appropriate interventions, probably focusing on freedom-preserving nudges, but conceivably involving economic incentives, too. “It might be extravagant to claim,” he concedes, “that those interventions defended by references to people’s choices, informationally full enough and free from behavioral biases, it might be extravagant to claim that those interventions are Hayekian.” I’m going to deny that and say that it’s not extravagant to insist that they are fully in Hayek’s Kantian as well as Benthamite incarnations and respectful of his fundamental concerns. Thanks.