Wednesday, July 15, 2015

The Behavioral Paradox Of Government Policy

Here is a link to a paper by Viscusi and Gayer titled "Behavioral Public Choice: The Behavioral Paradox Of Government Policy".

It does a good job of putting behavioral economists claims and policy recommendations in perspective.  The claims are overstated and the policies ignore their own claims when it comes to concluding that irrational individual behavior leads to worse outcomes than government behavior.

Here is the paper's Conclusion.

In recent years, there has been a shift in the traditional economics approach of justifying government interventions based on the existence of market failures such as externalities, public goods, asymmetric information, and market power. Influenced by psychological studies that find systematic biases in how individuals make decisions, the field of behavioral economics has led to recommendations for government policies. These recommendations frequently come in the form of soft regulations or “nudges,” to correct behavioral shortfalls that lead individuals to make decisions that cause themselves harm.

The behavioral economics findings that document systematic anomalies that lead to irrational decisions are important contributions to the field of economics. While these biases can be justifications for government intervention, our evidence suggests that a framework of behavioral public choice should take into account that policymakers and regulators are themselves behavioral agents subject to psychological biases, and further, that they are public agents subject to political pressures and biases endemic in the political process. The behavioral paradox is that government policies are subject to a wide range of behavioral failures that in many cases become incorporated in the overall policy strategy. We have documented many instances in which government policies institutionalize rather than overcome behavioral anomalies, and in some cases, attempt to justify inefficient “hard” regulations, such as mandates, based on the weakly supported need to correct individual irrationality.

Given that government policymaking is not immune to behavioral failures, we suggest a more cautious approach, one that incorporates the insights of behavioral economics in a way that is less dismissive of the merits of individual choice. Rather than assuming that any class of behavioral anomalies constitutes a sufficient rationale for overriding consumer preferences, government agencies should assess the empirical prevalence and magnitude of the behavioral failings as they specifically pertain to the policy context. If there are apparent anomalies, there should also be an exploration of whether these deviations from economics norms stem from legitimate differences in preferences or are in fact errors that, if corrected, would enhance welfare. Thus, in the design of subsequent interventions, there should be increased recognition of the legitimate differences in consumer preferences that may account for purported behavioral failings. Policymakers should also recognize the behavioral failings likely to be incorporated in their policy responses due to public pressure or the behavioral failures of policymakers. Fundamental behavioral failures are often embedded in the current policy strategies. Any critical review of private behavioral failures should be accompanied by a comparable assessment of government failures.

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