Behavioral Economics

By Van Doren, Peter | Regulation, Winter 2012 | Go to article overview

Behavioral Economics


Van Doren, Peter, Regulation


* "Are People Probabilistically Challenged?" by Alex Stein. March 2012. SSRN #2015075.

* "Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty," by Joshua D. Wright and Douglas H. Ginsberg. September 2012. SSRN #2147940.

The most important intellectual challenge to the belief that adults in market settings make decisions that improve their welfare is behavioral economics. Behavioral economics claims that people commit cognitive errors in choice settings. The result is reduced, rather than improved, welfare.

Many who advocate government regulation of markets use results of behavioral economics as a rationale. The ascendancy of behavioral views as rationales for regulation was confirmed by the appointment by President Obama of Cass Sunstein to head the Office of Information and Regulatory Affairs, the agency that analyzes the cost effectiveness of major federal regulations. Sunstein is the coauthor with Richard Thaler of Nudge (Yale University Press 2008), a popular exposition of behavioral thought.

Another important book advocating behavioral approaches to economics is Thinking Fast and Slow (Farrar, Strauss, and Giroux 2011) by Daniel Kahneman, one of the first scholars to criticize neoclassical economics from the behavioral perspective. Before this book, the behavioral critique was just a list of cognitive errors, each of which had a name such as "the endowment effect" (people demand more to part with something they already have as compared to what they would pay to get the same good), "hyperbolic discounting" (placing an extremely high weight on present costs and benefits as compared to future costs and benefits), and "optimism bias" (a person believes that bad events are far less likely to happen to him than to others). Kahneman's book provides an explanatory theory for these errors. …

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