Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty
59 Pages Posted: 18 Sep 2012
Date Written: September 17, 2012
Behavioral economics combines economics and psychology to produce a body of evidence that individual choice behavior departs from that predicted by neoclassical economics in a number of decision-making situations. Emerging close on the heels of behavioral economics over the past thirty years has been the “behavioral law and economics” movement and its philosophical foundation — so-called “libertarian paternalism.” Even the least paternalistic version of behavioral law and economics makes two central claims about government regulation of seemingly irrational behavior: (1) the behavioral regulatory approach, by manipulating the way in which choices are framed for consumers, will increase welfare as measured by each individual’s own preferences and (2) a central planner can and will implement the behavioral law and economics policy program in a manner that respects liberty and does not limit the choices available to individuals. This Article draws attention to the second and less scrutinized of the behaviorists’ claims, viz., that behavioral law and economics poses no significant threat to liberty and individual autonomy. The behaviorists’ libertarian claims fail on their own terms. So long as behavioral law and economics continues to ignore the value to economic welfare and individual liberty of leaving individuals the freedom to choose and hence to err in making important decisions, “libertarian paternalism” will not only fail to fulfill its promise of increasing welfare while doing no harm to liberty, it will pose a significant risk of reducing both.
Keywords: Amartya Sen, bounded rationality, CFPB, Cass Sunstein, cognitive biases, Consumer Financial Protection Bureau, Demsetz, Elizabeth Warren, Friedrich von Hayek, happiness, health, information, John Stuart Mill, nudge, perfect competition, rational maximizers, Richard Thaler, transaction costs, wealth
JEL Classification: B13, B46, C91, D10, D60, D61, D62, D63, D91, E13, I12
Suggested Citation: Suggested Citation