Setting the 'Nudge Squad' on Unruly Consumers; A Free Market Provides Better Choices Than Behavioral Regulators

Article excerpt


The White House is in the initial stages of setting up what is already being dubbed a nudge squad with the goal of borrowing insights from behavioral economics to get people to make better choices.

The alphabet soup of agencies to which Congress has delegated vast power has already been experimenting with regulations aimed at correcting irrational consumer choice rather than confining itself to a more traditional role of correcting market failures. The result has been rules that limit choice and increase costs, particularly for the most vulnerable consumers. Constraining consumer choice is not a solution; it's the part of the problem.

With the rise of behavioral economics, there is now a substantial body of evidence that individuals do not always act rationally. Nonetheless, an equally substantial body of evidence from experimental economics, led by Nobel laureate Vernon Smith, demonstrates that even though individuals make errors, markets can and do very often achieve efficient results. The need for regulation, therefore, is questionable. In fact, these regulations often disproportionately burden low-income households. Any regulation based on debiasing or correctin irrationality should be subject to stringent scrutiny prior to implementation.

One of the more obvious ways in which people act irrationally is by exhibiting a lack of self-control: when they overeat, when they gamble and when they engage in abuse substance. Another form of error arises when people resist making changes, even when presented with evidence of what is arguably a superior alternative. There is, then, an argument for policy to correct these irrational errors, and regulation expands beyond its traditional scope of correcting market failure.

Federal agencies have been experimenting with such regulations for a while. The Food and Drug Administration has regulations that seek to correct irrational choices that lead to obesity, but they have been largely ineffective. The corporate average fuel economy (CAFE) standards, which involves the Department of Transportation and the Environmental Protection Agency in consultation with the Department of Energy, is based on a cost-benefit analysis that only regards fuel efficiency as a benefit to consumers and discounts cost factors. When a consumer is shopping for a vehicle, though, he will weigh many concerns, including safety, reliability, the number of passengers to be transported and freight space, in addition to fuel efficiency. …