Academic journal article Missouri Law Review

Utilizing Behavioral Insights (without Romance): An Inquiry into the Choice Architecture of Public Decision-Making

Academic journal article Missouri Law Review

Utilizing Behavioral Insights (without Romance): An Inquiry into the Choice Architecture of Public Decision-Making

Article excerpt

I. INTRODUCTION

It should be no surprise to learn that humans behave in ways that are far from optimal. Be it from poor planning or untoward circumstance, we rarely, if ever, experience the idyllic fantasy of optimality in our various day-to-day activities. Or as David Byrne of the Talking Heads once sang:

Heaven, Heaven is a place
A place where nothing
Nothing ever happens. (1)

Economists have spent decades investigating just how day-to-day choices can be improved. The older welfare economics research program, for example, sought to improve competition in the marketplace by correcting perceived market failures, with the intended result of reducing prices and improving product quality. (2) The Chicago school of economics, on the other hand, tended to emphasize the role of fiscal policy and regulation in creating bad incentives and misallocating market resources. (3) Smaller and smarter regulation could therefore unleash dormant market potential. Despite their different orientations, both of these approaches rely on the canons of neoclassical price theory and highlight institutional factors as the source of observed shortcomings. Individuals choose optimally within the constraints produced by prevailing institutions, and thus undesirable outcomes could easily be avoided by "getting the rules right."

In a different vein, starting with Nobel laureate Daniel Kahneman and his co-author Amos Tversky, behavioral economics has exposed dozens of behavioral "anomalies" through extensive laboratory investigation of behavior. (4) These anomalies constitute observed behavioral deviations from the predictions of neoclassical economic theory, and behavioral economists have sought to explain the sources of such anomalous choices by identifying and cataloging a variety of cognitive limitations and psychological biases. Building on these findings, behavioral economists have even begun to export their psychological findings into policy prescriptions. (5) This research program--led by such luminaries as Richard Thaler and Cass Sunstein and known as behavioral law and economics--seeks to apply the insights gleaned from studies of human behavior to improve existing institutions by designing rules to compensate for (or take advantage of) people's various biases. (6) Given that observed choices are inconsistent with neoclassical theory, behavioral economists argue that "getting the rules right" with respect to neoclassical decision-makers will be insufficient to generate desirable outcomes. If people are not rational to begin with, in the neoclassical sense of the word, then solutions designed for rational agents will not necessarily lead to desired outcomes.

Thaler et al. provide a cogent outline of how we, as observers, might conceive of this dilemma. (7) Their phrase "choice architecture" encapsulates the notion that choice itself is affected by the context in which it is made. Providing one set of incentives elicits certain responses, even when the actor is unaware of how they are being affected. Developing better choice architecture, defined as that which allows for optimal decision-making, could potentially improve choice outcomes. While this choice architecture can be manipulated through a variety of means, it is often policy prescription through the public sector that is proposed by behavioral economists.

This has led to the creation of several public agencies, such as the Behavioural Insights Team (8) in the United Kingdom and the Consumer Financial Protection Bureau (9) in the United States. Furthermore, an executive order in September 2015 signed by President Obama created a new Social and Behavioral Science Team mandated with the task of combing regulatory and other public activities for opportunities to improve choice architecture. (10) Clearly, public policy guided by the insights of behavioral economics is on the rise. (11)

But as Boettke et al. indicate, this framework puts the cart before the horse in prescribing policy purely due to anomalous behavior. …

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