Advertisement

Social Choice and Welfare

, Volume 28, Issue 2, pp 337–359 | Cite as

Psychology Implies Paternalism? Bounded Rationality may Reduce the Rationale to Regulate Risk-Taking

  • Nathan Berg
  • Gerd Gigerenzer
Original Paper

Abstract

Behavioral economists increasingly argue that violations of rationality axioms provide a new rationale for paternalism – to “de-bias” individuals who exhibit errors, biases and other allegedly pathological psychological regularities associated with Tversky and Kahneman’s (in Science 185:1124–1131, 1974) heuristics-and-biases program. The argument is flawed, however, in neglecting to distinguish aggregate from individual rationality. The aggregate consequences of departures from normative decision-making axioms may be Pareto-inferior or superior. Without a well-specified theory of aggregation, individual-level biases do not necessarily imply losses in efficiency. This paper considers the problem of using a social-welfare function to decide whether to regulate risk-taking behavior in a population whose individual-level behavior may or may not be consistent with expected utility maximization. According to the social-welfare objective, unregulated aggregate risk distributions resulting from non-maximizing behavior are often more acceptable (i.e., lead to a weaker rationale for paternalism) than population distributions generated by behavior that conforms to the standard axioms. Thus, psychological theories that depart from axiomatic decision-making norms do not necessarily strengthen the case for paternalism, and conformity with such norms is generally not an appropriate policy-making objective in itself.

Keywords

Behavioral Economic Libertarian Paternalism Paternalistic Intervention Behavioral Hypothesis Paternalistic Policy 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Aaron HJ (1999) Behavioral dimensions of retirement economics. Brookings Institution PressGoogle Scholar
  2. Arthur WB (1994) Inductive reasoning and bounded rationality: The El Farol problem. Am Econ Rev 84:406–411Google Scholar
  3. Berg N, Lien D (2003) Tracking error decision rules and accumulated wealth. Appl Math Finance 10(2):91–119CrossRefGoogle Scholar
  4. Berg N, Lien D (2005) Does society benefit from investor overconfidence in the ability of financial market experts?. J Econ Behav Organization 58:95–116CrossRefGoogle Scholar
  5. Bernheim BD, Rangel A (2006) Behavioral public economics: How to do welfare analysis when individuals can make mistakes. In: Diamond P, Vartiainen H (eds) Economic institutions and behavioral economics. Princeton University Press, Princeton (in press)Google Scholar
  6. Bookstaber R, Langsam J (1985) On the optimality of coarse behavior rules. J Theor Biol 116:161–193CrossRefGoogle Scholar
  7. Buchanan JM, Wagner RE (1977) Democracy in deficit: the political legacy of Lord Keynes. Academic Press, New YorkGoogle Scholar
  8. Caldwell B (2004) Introduction adapted from Hayeks challenge. Ama-Gi 6(2):16–18Google Scholar
  9. Camerer C, Babcock L, Loewenstein G, Thaler R (1997) Labor supply of New York City cabdrivers: One day at a time. Q J Econ 112(2):407–441CrossRefGoogle Scholar
  10. Camerer C, Issacharoff S, Loewenstein G, O’Donoghue, Rabin M (2003) Regulation for conservatives: behavioral economics and the case for asymmetric paternalism. Univ Penn Law Rev 151:1211–1254CrossRefGoogle Scholar
  11. Caplan B (1999) Rational ignorance versus rational irrationality. Working Paper, George Mason UniversityGoogle Scholar
  12. Caplin A, Leahy J (2003) Behavioral policy. In: Brocas I, Carrillo J (eds) Essays in psychology and economics. Oxford University Press, OxfordGoogle Scholar
  13. Choi JJ, Laibson D, Madrian BC, Metrick A (2005) Optimal defaults and active decisions, NBER Working Paper W11074Google Scholar
  14. Chou YK (2002) Testing alternative models of labor supply: evidence from cabdrivers in Singapore. Singapore Econ Rev 47:1747CrossRefGoogle Scholar
  15. Cosmides L, Tooby J (1994) Better than rational: evolutionary psychology and the invisible hand. Am Econ Rev 84(2):327–332Google Scholar
  16. Elster J (1992) Local justice: how institutions allocate scarce goods and necessary burdens. Sage, New YorkGoogle Scholar
  17. Epstein R (1995) Simple rules for a complex world. Harvard University Press, CambridgeGoogle Scholar
  18. Epstein R (2004) The optimal complexity of legal rules. Olin Working Paper 210, University of ChicagoGoogle Scholar
  19. Farber HS (2003) Is tomorrow another day? The labor supply of New York cabdrivers. NBER Working Paper 9706Google Scholar
  20. Frey B, Stutzer A (2004) Economic consequences of mispredicting utility. IEW Working Paper 218, University of ZurichGoogle Scholar
  21. Gigerenzer G, Todd PM, the ABC Research Group (1999) Simple heuristics that make us smart. Oxford University Press, New YorkGoogle Scholar
  22. Goette L, Fehr E, Huffman D (2004) Loss aversion and labor supply. J Eur Econ Assoc 2:216–228CrossRefGoogle Scholar
  23. Gruber J (2002) Smoking’s ‘internalities’. Regulation 25(4):52–57Google Scholar
  24. Hayek F (1945) The use of knowledge in society. Am Econ Rev 35(4):519–530Google Scholar
  25. Hayek F (1952) The sensory order: an inquiry into the foundations of theoretical psychology. University of Chicago Press, ChicagoGoogle Scholar
  26. Herrmann-Pillath C (1994) Evolutionary rationality, “homo economicus,” and the foundations of social order. J Soc Evol Syst 17(1):41–69CrossRefGoogle Scholar
  27. Iyengar SS, Lepper MR (2000) When choice is demotivating: can one desire too much of a good thing?. J Personality Soc Psychol 79:995–1006CrossRefGoogle Scholar
  28. Kirman AP (1983) Mistaken beliefs and resultant equilibria. In: Frydman R, Phelps E (eds) Individual forecasting and collective outcomes. Cambridge University Press, CambridgeGoogle Scholar
  29. Kirman AP (1993) Ants, rationality and recruitment. Q J Econ 108:137–156CrossRefGoogle Scholar
  30. Kopcke RW, Sneddon Little J, Tootell GMB (2004) How humans behave: Implications for economics and economic policy. New England Econ Rev 2004 (Final Issue):3–35Google Scholar
  31. Kysar DA, Ayton P, Frank RH, Frey BS, Gigerenzer G, Glimcher PW, Korobkin R, Langevoort DC, Magen S (2006) Are heuristics a problem or a solution? In: Gigerenzer G, Engel C (eds) Heuristics and the Law. MIT Press, Cambridge (in press)Google Scholar
  32. Lesourne J (1992) The economics of order and disorder. Clarendon Press, OxfordGoogle Scholar
  33. McGeorge J, Aitken CK (1997) Effects of cannabis decriminalization in the Australian capital territory on university students’ patterns of use. J Drug Issues 27(4):785–793Google Scholar
  34. Ng Y-K (1999) Utility, informed preference, or happiness?. Soc Choice Welfare 16(2):197–216CrossRefGoogle Scholar
  35. Ng Y-K (2003) From preference to happiness: towards a more complete welfare economics. Soc Choice Welfare 20(2):307–350CrossRefGoogle Scholar
  36. O’Donoghue T, Rabin M (2003) Studying optimal paternalism, illustrated by a model of sin taxes. Am Econ Rev 93(2):186–191CrossRefGoogle Scholar
  37. Österberg E (1990) Would a more liberal control policy increase alcohol consumption? Contemporary Drug Problems 17:545–573Google Scholar
  38. Popham RE, Schmidt W, De Lint J (1972) The effects of legal restraint on drinking. In: Kissin B, Begleiter H (eds) The biology of alcoholism vol 4. Plenum, New YorkGoogle Scholar
  39. Raiffa H (1982) The art and science of negotiation. Harvard University Press, CambridgeGoogle Scholar
  40. Rossi P (2004) The risk of paternalism. Ama-Gi 6(1):10–13CrossRefGoogle Scholar
  41. Schneider CE (1998) The practice of autonomy: patients, doctors, and medical decisions. Oxford University Press, CambridgeGoogle Scholar
  42. Schwartz B (2004) The paradox of choice: Why more is less. Harper CollinsGoogle Scholar
  43. Sheshinski E (2002) Bounded rationality and socially optimal limits on choice in a self-selection model. Working Paper, Hebrew University of JerusalemGoogle Scholar
  44. Sheshinski E (2003) Optimal policy to influence individual choice probabilities. Working Paper, Hebrew University of JerusalemGoogle Scholar
  45. Simon HA (1978) Rationality as process and as product of thought. Am Econ Rev 68(2):1–16Google Scholar
  46. Simon HA (1982) Models of bounded rationality. MIT Press, CambridgeGoogle Scholar
  47. Slovic P (2000) The Perception of risk. Earthscan, LondonGoogle Scholar
  48. Smith VL (2003) Constructivist and ecological rationality in economics. Am Econ Rev 93(3):465–508CrossRefGoogle Scholar
  49. Suber P (1999) Paternalism. In: Gray CB (ed) Philosophy of law: an encyclopedia. Garland, NewyorkGoogle Scholar
  50. Sunstein CR (1997) Behavioral analysis of law. Univ Chicago Law Rev 64:1175–1195CrossRefGoogle Scholar
  51. Sunstein CR, Schkade D, Kahneman D (2000) Do people want optimal deterrence?. J Legal Stud 29:237–249CrossRefGoogle Scholar
  52. Sunstein CR, Thaler R (2003) Libertarian paternalism is not an oxymoron. Univ Chicago Law Rev 70:1159–1202CrossRefGoogle Scholar
  53. Surowiecki J (2004) The wisdom of crowds. Doubleday, New YorkGoogle Scholar
  54. Thaler RH, Benartzi S (2004) Save more tomorrow: using behavioral economics to increase employee saving. J Polit Econ 112:164–187CrossRefGoogle Scholar
  55. Thaler RH, Sunstein CR (2003) Libertarian paternalism. Am Econ Rev 93:175–179CrossRefGoogle Scholar
  56. Tisdell C (1996) Bounded rationality and economic evolution: a contribution to decision making, economics and management. Elgar, NorthamptonGoogle Scholar
  57. Tversky A, Kahneman D (1974) Judgment under uncertainty: heuristics and biases. Science 185:1124–1131CrossRefGoogle Scholar
  58. VanDeVeer D (1986) Paternalistic intervention: the moral bounds of benevolence. Princeton University Press, PrincetonGoogle Scholar
  59. Vriend NJ (1995) Self-organization of markets: an example of a computational approach. Comput Econ 8(3):205–231CrossRefGoogle Scholar
  60. Weber M (1958) The protestant ethic and the spirit of capitalism. Scribners, New YorkGoogle Scholar

Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  1. 1.School of Social SciencesUniversity of Texas at DallasRichardsonUSA
  2. 2.Center for Adaptive Behavior and CognitionMax Planck Institute for Human DevelopmentBerlinGermany

Personalised recommendations