2014.05.19 - oecd-eclac workshop_session 3_martin binder

Beware of (Behavioural) Economists Bearing Advice!

Why Libertarian Paternalism Is A Dangerous Policy Tool

Prof. Dr. Martin BinderProfessor of Economics, Bard College Berlin

OECD-ECLAC Workshop, Paris 19th May 2014

Prof. Dr. Martin Binder 08.04.2023 | 2

Behavioural economics

• Standard view of economics: “Homo Economicus”= individuals as highly rational beings

• Behavioural economics:(Homer Simpson)– Individuals = “situational idiots” (Camerer et al.)– Framing, biases– Heuristics

• Relevance for policy-making– Today: consumer protection– Intervention not only for market failures


“Libertarian Paternalism”

• Paternalism is “inevitable”: help not-fully rational individuals for their own good

• Goal: welfare-increasing interventions (“nudges”) while at the same time allowing reversibility

= minimal costs for rational individuals• But not: hard paternalism

“…influence choices in a way that will make choosers better off, as judged by themselves. Drawing on some well-established findings in social science, we show that in many cases, individuals make pretty bad decisions…” (Thaler/Sunstein, 2008, p. 5, emphasis: MB)“...our emphasis here is not on blocking choices, but on strategies that move people in welfare-promoting directions while also allowing freedom of choice.” (Sunstein/Thaler, 2003, p. 1170, emphasis: MB)


Examples

• Healthy food in “Carol‘sCafeteria” (Sunstein/Thaler, 2008)

• Pension schemes (Choi et al., 2004, Thaler/Benartzi, 2004)– Individuals under-save (68% admit to saving not enough)– Opt-in: 26-43% 57%-69% (despite “free money“)

Opt-out: 85% 98%– 75% do not want to save today;

but of these 78% “Save More Tomorrow“• Defaults for organ donations• Many more…


Three essential problems

(Public choice objections, LP-specific objections, ...)

① Unclear and ad hoc definition of what is in the individual’s best interest

② Focus on preserving nominal freedom of choice instead of substantial freedom or autonomy

③ Systematic neglect of dynamic/evolutionary aspects: a nudge today has consequencestoday and tomorrow


(1) What‘s in people‘s interests?• “if they had complete information, unlimited

cognitive abilities, and no lack of willpower” (Thaler/Sunstein, 2003, p. 175) = informed preference view– Inconsistent with behavioural economics: Herculean– Normative: requires value judgments (how much

information, self-control, will-power, etc.?)– Countless definitions Ad hoc!!!

• Better: clear, operable, systematic and substantially specified notion of welfare necessary: subjective well-being (a.k.a. “happiness”)– Advantage: not ad hoc– Empirical evidence, substantive definition (vs. formal)– Plausible: difficult to contest relevance for one’s interests


Subjective well-being

• X• X• X– X– X– X

Kahneman/Krueger, 2006, S. 13


(2) Preserve autonomy, not freedom of choice• Moral objection to Libertarian Paternalism• Very restrictive idea of freedom as nominal freedom

of choice Nudges are acceptable even if individual is not able to reverse them (limited abilities/awareness)– Reversibility not possible for main addressees of the

approach – Manipulation easily permissible: framing allowed so long as

the choice set remains intact (“lying policy-makers?”)• Individuals remain unaware of the nudge, cannot

learn from their mistakes– If the nudge is omitted in the future, behaviour may revert

back to non-rational/sub-optimal pre-nudge behaviour– Or (maybe) worse: individuals learn behaviour through

nudges without conscious reflection = heteronomous


„Autonomy-enhancing paternalism“ (Binder/Lades, 2014)

• Freedom: autonomy (positive liberty)= the ability to critically reflect one’s own

interests and approve of them may not be diminished (≥0; see Dworkin, 1988)• Autonomy criterion restricts intervention– No manipulation of individuals permissible– E.g.: Autonomy-enhancing “mandated choice” vs. “framing”

• Prefer these nudges that allow the individual to become more autonomous through reflected learning of better behaviour for future decisions


Summary

• Behavioural economics necessitates revision of economic world-view

• Policy implications: paternalism might be necessary• LP dangerous Autonomy-enhancing paternalism– Systematic view of individuals’ interests: subjective well-

being– Respects autonomy: educate consumers, don‘t manipulate

them– Understanding of dynamic aspects needed

@Martin_Binder; [email protected]

http://de.linkedin.com/in/bindermartin/

2014.05.19 - oecd-eclac workshop_session 3_martin binder

Economy & Finance