Nudging in an Evolving Marketplace: How Markets Improve Their Own Choice Architecture

31 Pages Posted: 3 Apr 2016 Last revised: 29 Apr 2016

See all articles by Adam Christopher Smith

Adam Christopher Smith

Johnson & Wales University

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty; PERC - Property and Environment Research Center

Date Written: April 1, 2016

Abstract

Behavioral economics claims to have identified certain systematic biases in human decision-making with the implied assumption — sometimes leading to an explicit policy proposal — that these biases can only be corrected through centralized planning. While the appropriateness of policy corrections to perceived biases remains an open debate, far less attention has focused on the role markets already play in “nudging” consumers toward more mutually beneficial outcomes. We describe a process by which markets evolve over time to satisfy consumer preferences — or risk failure and removal from the marketplace. By organizing our understanding of markets in this dynamic, evolutionary sense, we expose a basic logic that dominates market transactions as they occur in practice; that is, the mechanisms that ultimately survive market competition tend to compensate for, limit, or otherwise reduce the incidence of bias. We explore empirical evidence for this argument in the market for consumer financial products.

Keywords: behavioral economics, law and economics, nudge, Consumer Financial Protection Bureau, public choice, regulation

JEL Classification: K23, H11, A12

Suggested Citation

Smith, Adam Christopher and Zywicki, Todd J., Nudging in an Evolving Marketplace: How Markets Improve Their Own Choice Architecture (April 1, 2016). George Mason Law & Economics Research Paper No. 16-21. Available at SSRN: https://ssrn.com/abstract=2757712 or http://dx.doi.org/10.2139/ssrn.2757712

Adam Christopher Smith (Contact Author)

Johnson & Wales University ( email )

8 Abbott Park Pl.
Providence, RI 02903
United States

HOME PAGE: http://adamc-smith.com/index.html

Todd J. Zywicki

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8091 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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