Cognitive-Based Regulation: New Challenges for Regulators?

Abstract

The paper explores the impact of cognitive insights on the regulatory process and toolkit.

Findings from cognitive sciences are a turning point for rule-making theory and practice, anytime a "behavioural element" is present. Evidence on how people decide and make choices may indeed enable better formulation of rules (in terms of proportionality, necessity, residuality and effectiveness) and the provision of more adequate responses to the public interest regulation is intended to satisfy.

The paper contends that bringing cognitive insights into rule-making has at least two main consequences. Firstly, it requires the rule-making process to become cognitive-based. This principally means that consultations and information gathering process should be designed in a way to bring about potential biases (eventually with the support of cognitive sciences experts) and that cognitive experiments should be conducted prior to regulation enactment. Furthermore, impact assessment (whenever justified) should be enriched by a risk analysis that takes into account biases as risks to be assessed in terms of probability and effects. Finally, monitoring and ex post evaluation should be carried out in order to check if a given cognitive-informed rule is really justified, and, in any event, reason-giving for final rules should be accordingly enriched.

A second contend is that the regulatory toolkit should be revisited, to both enrich traditional tools (such as C&C or incentive regulation), and adopt truly cognitive-based regulation, consisting of nudging and empowerment. In the presence of biases that might cause regulation to fail, the choice between the two strategies depends on whether rule-makers want to help individuals overcoming their biases and enhance their capabilities, or if they prefer to take advantage, somehow in an undisclosed manner, of such biases (that we suggest to consider the unique true nudges).

Our conclusion is that to choose between empowerment and nudging, regulators need assessing (on a case-by-case basis and in a well-designed cognitive-based regulatory process) if recurrent biases might be overcome or not. In the first case, empowerment should be preferred, being more transparent and more preservative of regulatees' conscious decisions. In the latter, or if empowerment is ineffective, nudging might prove more effective.

Keywords: Consumer, Nudge, Empowerment, Libertarian Paternalism, Behavioral, Lifestyle, Regulation, Cognitive

JEL Classification: I12, I18, I28, J18, K00, K20, K23, K32