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Behavioral Economics

Behavioral Economics and Biased Regulators

Behavioral economics (BE) examines the implications for decision-making when actors suffer from cognitive flaws documented in the psychological literature. Broadly, BE replaces the assumption of rationality—that errors tend to cancel out over time and across populations, so on average firms and consumers act as if they were rational—with one of “bounded rationality.” When actors are boundedly rational, their cognitive flaws lead to systematic errors and self-control problems. It should come as no surprise that BE has become an increasingly common justification for regulatory intervention.

Are You Too Irrational to Choose the Right Appliance?

New energy-efficiency regulations are sold to the public as a benefit to the environment. Regulatory agencies’ own estimates, however, demonstrate that the environmental benefits are only a fraction of the total benefits of these rules and are often exceeded by the societal costs they impose. These costs are passed on to consumers in the form of higher prices on everyday appliances such as microwave ovens, clothes dryers, refrigerators, and room air conditioners.

Setting the ‘Nudge Squad’ on Unruly Consumers

Regulators, after all, are human and, therefore, subject to the same biases and irrational errors as everyone else. Supreme Court Justice Stephen G. Breyer has pointed out that regulators are particularly vulnerable to “tunnel vision,” where they lose sight of the larger picture as they focus on low-probability risks. Government should not be in the business of making or shaping choices for adults. Regulations should preserve choices. Limiting options should never be counted as a benefit in the strict benefit-cost analysis that is part of any rule-making initiative. Nudges and shoves hurt — and the poor suffer the most.

Empirics and Psychology: Eight of the World’s Top Young Economists Discuss Where Their Field Is Going

To get the pulse of a field in flux, I asked eight of the world’s top young economists to identify the biggest unanswered questions in economics and predict what breakthroughs will define it a decade or two hence. The interview features BB&T Professor for the Study of Capitalism at the Mercatus Center Peter Leeson.