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The normative and descriptive weaknesses of behavioral economics-informed nudge: depowered paternalism and unjustified libertarianism

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Abstract

The article aims to demonstrate that the nudge theory suffers from three main weaknesses stemming from its theoretical dependence on behavioural economics. The first two weaknesses endanger the paternalistic goal, whereas the third does not justify the libertarian attribute. The first weakness lies in the incomplete realistic characterisation of behavioural economics theory that is the central theoretical pillar of Nudge theory. The second weakness is even more relevant. The normative model of behavioural economics is neoclassical rationality. It can be applied to choices in conditions of risk, when it is possible to forecast the probability of the outcomes of one’s choices. On the contrary the real life problems are inside a complex and uncertain environment. In an uncertain environment the neoclassical algorithms are no longer valid, in that they postulate the knowledge of the probability of the outputs. Thus errors and bias, as observed in behavioural economics, are not such in many instances, but they are instead adaptive and therefore rational responses to the context of decision-making. Therefore nudge theory that pursues the normative paternalistic objective of neutralising the bias and judgement errors discovered by behavioural economics and putting paternalistically the citizen on the right track, is in fact proceeding in the wrong direction. The last weakness concerns an assumption of Nudge theory about the duality of mind. System 1 represents the intuitive mind, while System 2 corresponds to the analytical one. System 1 tends to make decisions quickly and unconsciously, while System 2 follows a slow and conscious process. Biases and judgement errors are mainly generated by System 1. However, System 2 may later intervene to correct them. From this premise, the Nudge theory affirms its libertarian character. In this paper I will argue that the dualism of the mind would not entail the reversibility of some nudges, particularly of default states. In this way the fundamental pillar is weakened to justify the libertarian character of the nudge theory.

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Notes

  1. The identification of biases and formal errors of judgement is not a recent phenomenon. Adam Smith (1759) highlighted both the phenomena of “loss aversion” and “hyperbolic discounting” as explanatory factors for human behaviour. Niccolò Macchiavelli also drew attention to the decision-making power of both the “endowment effect” and “loss aversion” (1532; Italian Ed., 1961). Lastly, David Hume (1739) underlined the danger of “present bias” and the myopic nature of human judgement.

  2. For economic rationality I mean the Maximization of Susbjective Expected Utility. This model of rationality is based on canonic deductive logic, probability calculus and utility theory.

  3. According to Simon (1990), rationality is not bounded because of the computational failures of the mind with respect to the canons of economic rationality. Human rationality is bounded by the interactions between the mind and the environment. Mental computations may be considered failures in terms of the normative canons of economic rationality, but they are an adaptive success because they provide a good solution to a given complex task characterized by uncertainty. Therefore bounded rationality is a form of ecological and adaptive rationality (Gigerenzer and Selten 2001).

  4. Large worlds are those characterized by ontic uncertainties. According to Frank Knight (1921), they are situations that do not allow any probabilistic prediction but only estimation. Estimation corresponds to simple and intuitive heuristic decision making. Examples of these worlds are the environment and climate, natural disasters, diseases, financial, political, social and military crises, and so on. In reality most of our everyday life corresponds to large worlds.

  5. Descriptive methodology of economics aims at generating theories that are realistic representation of the cognitive procedures in economic decision making and that are supported by empirical data. Instrumentalist and anti-realist position might be also acceptable, from a pragmatic point of view (which I do not share), provided the theory produces good predictions and successful technological applications and no better theory exists with regard to empirical accuracy and computational simplicity. But, faced with the empirical failures of neoclassical economics, even Friedman’s “as if” fiction no longer works and therefore we must confront the problem of building a different representation of the economic phenomena which we want to explain and predict. In Blaug’s (1980) opinion neoclassical economics does not fit the methodological desiderata of an empirical theory. For example, consumer theory is full of economic laws that are only ad hoc and ex post facto rationalizations of all final demand outcomes. Therefore the only way to increase the empirical adequacy and predictive power of an economic theory is to open the black box of cognitive procedures generating the decision making and action (Viale 2012).

  6. Individuals were presented with 4 cards which were marked with an A, a D, a 2 and a 7 respectively on the visible side. On the hidden side, there might be letters or numbers.

  7. Most subjects almost never chose the card with a 7 on it which, if it had an A on the other side, would have falsified the rule. Many correctly chose the card marked with an A which, if it had a 7 on the other side might have disproved the rule. In general, however, this choice was guided by the expectation that the hidden side would have a 2 on it.

  8. Autonomy is based on conscious deliberation of choices according to personal preferences. The libertarian attribute may be attributed to policy making that empowers autonomy. If an individual is nudged by a policy maker or an architect of choice in a default state that he has not the psychological power to change, the nudge weakens the individual’s autonomy and it may not be considered libertarian.

  9. In Viale (submitted) I argue that the Sistem 1 and 2 model of mind, main pillar of the reversibility tenet of Nudge theory, is undermined by psychological and neural data on incubation and mind wandering.

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Authors and Affiliations

  1. Department of Economics, University of Milano – Bicocca, Milan, Italy

    Riccardo Viale

  2. Cognitive Insights Team, Collegio Carlo Alberto, Turin, Italy

    Riccardo Viale

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  1. Riccardo Viale
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Viale, R. The normative and descriptive weaknesses of behavioral economics-informed nudge: depowered paternalism and unjustified libertarianism. Mind Soc 17, 53–69 (2018). https://doi.org/10.1007/s11299-019-00207-2

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