economia del comportamiento transformando a la economía

Cambridge Journal of Economics 2011, 35, 705–728doi:10.1093/cje/beq049Advance Access publication 5 January 2011

Behavioural and experimental economics:are they really transforming economics?

Ana C. Santos*

Behavioural and experimental economics are part of an increasingly pluralisticmainstream economics, sharing with other recently established research pro-grammes the revision of fundamental assumptions of the previously dominantneoclassical economics research programme. The recent proliferation and consol-idation of these new approaches creates the possibility for the emergence of a neworthodoxy of economics, i.e. a new general research programme capable of replacingneoclassicism. The goal of this paper is to investigate the potential contribution ofbehavioural and experimental economics to help build a general research pro-gramme capable of supplanting neoclassical economics and thereby transformingeconomics. To this end, it focuses on two influential applied fields of behavioural andexperimental economics—choice architecture and design economics.

Key words: Anomalies, Choice architecture, Design economics, Market design,Recent economicsJEL classifications: A12, B52, C90

1. Introduction

Behavioural and experimental economics are part of recent mainstream economics,

sharing with other emergent research programmes the rejection of fundamental assump-

tions and commitments of the previously dominant neoclassical economics research

programme. The recent proliferation and consolidation of the new approaches, with

overlapping areas of research and concerns, is now raising the possibility for the emergence

of a new orthodoxy of economics, i.e. a new general research programme capable of

replacing neoclassicism (Davis, 2006, 2008). The goal of this paper is to investigate the

potential contribution of behavioural and experimental economics to transform econom-

ics. I focus, in particular, on their capacity to carry out two major transformations that are

deemed as characterising the ongoing process of change in the discipline: (i) the revision of

the neoclassical economics model of human action, homo economicus; and (ii) the new

economic approach to market building. In order to do this, I look at two recent applications

Manuscript received 11 October 2009; final version received 17 November 2010.Address for correspondence: CES, Center for Social Studies, University of Coimbra, Colegio de S. Jeronimo,

Apartado 3087, 3001-401 Coimbra, Portugal; email: [email protected]

* University of Coimbra, Portugal. I acknowledge financial support from Fundacxao Calouste Gulbenkian(n� 21-107001-S). I would also like to thank the comments of Joao Rodrigues and Jose Castro Caldas andthose of three anonymous referees. Usual disclaimers naturally apply.

� The Author 2011. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.

All rights reserved.

by Robert Looney on July 2, 2011

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of these research programmes—choice architecture and design economics—which, as we

shall see, focus on each one of these features in turn.

The new research programmes, also comprising, among others, game theory, evolu-

tionary economics and neuroeconomics, have a common denominator. They all are

relatively recent developments whose emergence relied on conceptual contents imported

from other disciplines, such as psychology, biology and neuroscience (Davis, 2006, 2008).

Their trajectories thus stand in stark contrast to that of neoclassical economics, which is

consolidated around a fairly well-delimited analytical toolkit that has been widely applied

to other fields of research. The model of human action, homo economicus, and the model of

the competitive market have been particularly instrumental to the expansion of the

neoclassical approach outside the conventional realm of economics. They have been

pivotal in the so-called ‘economics imperialism’ movement, contributing to universalising

and naturalising a particular version of the market and the egotistic and rational attributes

of human beings (Carvalho and Rodrigues, 2008).

That the new fields of research have relied on content imported from disciplines with

radically different principles, presuppositions and conceptual frameworks, making up

a rather heterogeneous and pluralistic mainstream economics, naturally fuels the

expectation of change in economics. John Davis (2008), for example, considers that the

recent approaches carry a great transformative potential, superior to that of the traditional

heterodox approaches. Notwithstanding the fact that both recent and traditional heterodox

approaches depart from key assumptions of neoclassical economics and have close ties with

sciences outside economics, only the new research programmes are moving inwards

toward the core of economics in a deliberate attempt to redirect it. This is taken to be the

case of current behavioural economics. Having its origins in psychology and its primary

focus on the critique of homo economicus, behavioural economics is now attempting to

incorporate new behavioural assumptions into new models of human action (cf. Camerer

and Loewenstein, 2004). Traditional heterodox approaches, in contrast, remain oriented

toward the periphery of economics, rejecting core neoclassical principles rather than

attempting to reform them, and insisting on an alternative foundation for economics, one

more based on closer ties to other social sciences. The greater transformative potential of

the new approaches is further supported by the higher professional status that the

practitioners of the new approaches seem to be enjoying, as testified by the award, in 2002,

of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel to Daniel

Kahneman, ‘for having integrated insights from psychological research into economic

science, especially concerning human judgment and decision-making under uncertainty’

and to Vernon Smith ‘for having established laboratory experiments as a tool in empirical

economic analysis, especially in the study of alternative market mechanisms’.1

Choice architecture and design economics are policy applications that provide

a privileged vantage point from which to assess the potential of the new approaches to

transform economics. This is so because, as we shall see, policy proposals render

particularly salient economists’ conceptions of economics and of the social world.

Choice architecture and design economics unequivocally depart from the research

strategies of neoclassical economics. Rather than assuming at the outset that human beings

are homo economicus, i.e. that they are always capable of maximising their individual utility,

choice architecture takes as a starting point how people actually deal with particular forms

of decision-problems. The purpose of choice architecture is to prepare contexts of choice

1 http://nobelprize.org/nobel_prizes/economics/laureates/2002/

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to help individuals make better choices, as judged by individuals themselves, or by society

as a whole (Thaler and Sunstein, 2003, 2008). Design economics is in turn devoted to the

conception of specific allocation mechanisms that aim at coordinating individual actions

for the accomplishment of the goals set by the designer (Roth, 2002). Rather than

assuming that markets emerge spontaneously and automatically generate efficient

allocations of resources, design economics puts at the forefront the complex social

engineering processes involved in the building of markets and market-like allocation

mechanisms that determine individual outcomes and the aggregate results that are

obtained by having people interacting under those mechanisms.

Yet it is not clear that the reform of the core principles of economics is under way. Both

choice architecture and design economics seem to retain two fundamental principles of

neoclassical economics—rationality and efficiency. Having observed that economic agents

are not always rational and that their actions in market and non-market contexts do not

always produce desirable outcomes, economists seem now to be dedicated to the

fabrication of the conditions of rationality and efficiency. And there is a clear division of

labour. While architect-economists are devoted to the creation of contexts of choice that

make rational choices viable, designer-economists are devoted to the construction of

market mechanisms that ensure socially efficient outcomes. Thus, while importing new

models of individual decision-making and new experimental technologies, choice

architecture and design economics still seem to retain the neoclassical view of rational

choice, defined in terms of the choice that confers the individual the highest net benefit

given constraints, and of the market understood as a mere allocation mechanism. This

might in fact explain the success of choice architects and design economists as policy

advisors. Notwithstanding the ongoing process of change in economics, economic

discourse and general perceptions about economics may lag far behind. Policy proposals

that appeal to the standard normative notions of rationality and efficiency might thus still

be well-received by policy-makers and the general public. However that may be, the fact of

the matter is that Richard Thaler, Cass Sunstein and Alvin Roth are all accomplished and

much sought after scholars to give advice and help reconfigure a variety of socioeconomic

institutions.2

If on the one hand, the rejection of key assumptions of neoclassical economics may entail

a transformative potential, the preservation of the neoclassical criteria of rationality and

efficiency, on the other hand, may suggest that neoclassical economics principles are still

very much present in the new approaches. The goal of this paper is to investigate this

tension so as to evaluate the prospects of change in economics and the emergence of a new

general research programme capable of replacing neoclassicism. Section 2 starts off by

briefly reviewing the recent transformations taking place in economics. Section 3 presents

and analyses choice architecture while Section 4 is given over to the presentation and

examination of design economics. Section 5 then discusses the tensions that arise from the

revision of the key assumptions of the neoclassical research programme that preserves its

normative criteria of rationality and efficiency. Based on the analysis of choice architecture

2 Thaler and Sunstein are from Chicago University and were famously advertised as campaign advisors tothe then Presidential candidate, Barack Obama. Sunstein is the current Administrator of the White HouseOffice of Information and Regulatory Affairs. Thaler was advisor to the leader of the British Conservativeparty, David Cameron, and continues to advise the institutional investment firm Fuller & Thaler AssetManagement, Inc., which he founded (see Chakrabortty, 2008; Lewis, 2008; Wilby, 2008). Roth is fromHarvard University and he too has been a consultant for various American public entities, such as TheNational Resident Matching Program and The New York City Department of Education.

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and design economics, Section 6 draws the main conclusions of the paper regarding the

potential of behavioural and experimental economics to transform economics.

2. Neoclassical dominance and the new mainstream pluralism

This paper appraises the departures of choice architecture and design economics from

neoclassical economics so as to assess the potential of behavioural and experimental

economics to transform economics. At this juncture, two caveats are in order. First,

controversy abounds regarding the implications of behavioural and experimental econom-

ics, within and between the practitioners of the two research programmes. The

experimental economist Vernon Smith (2008, pp. 155–6), for instance, seems to consider

behavioural economics to be outside the scope of economics, dealing with ‘the

performance consistency (choice rationality) of individual decision making’, which ‘is

not where the action is in understanding economic performance and human achievement’.

Economics is instead about how ‘wealth is created by task specialization across individuals,

groups, populations, regions and climates’, where ‘specialization is determined by the

depth and breadth of the market’. Smith thus seems to exclude from experimental

economics individual decision-making experiments. Experimental economics concerns

instead ‘market performance (market rationality), incentives in public good provision and

small group interactions, and other environments with dispersed individual valuations’.

Camerer and Lowenstein (2004, p. 3) consider instead that experimental economics is

defined by the laboratory method, as applied to both individual choice and market

behaviour. Behavioural economics is particularly devoted to improving ‘the realism of the

psychological underpinnings of economic analysis’, which is deemed to advance the field of

economics by ‘generating theoretical insights, making better predictions of field phenom-

ena, and suggesting better policy’. For the purpose of the analysis to be carried out, I will

focus on behavioural economics’ revisions to homo economicus, and on the contribution of

experimental market economics to the reconsideration of the neoclassical conception of

the market. Examination of the transformative potential of behavioural economics will be

based on the analysis of choice architecture and that of experimental market economics on

the analysis of design economics. This means, and this is the second caveat, that the

analysis to be carried out will be necessarily partial. Nonetheless, choice architecture and

design economics are taken to be particularly informative of the ongoing process of change

in the discipline, namely concerning: (i) the revision of the neoclassical economics model

of human action, homo economicus (e.g. Frey and Benz, 2004); and (ii) the recent economic

approach to market building (e.g. Mirowski, 2007).

Homo economicus is the neoclassical economics model of human action. Homo economicus

is rational and typically selfish. He chooses so as to maximise his utility and succeeds in

doing so. No cognitive limitation of any kind gets in his way when calculating the costs and

benefits of the alternatives at hand. Nor does he have self-control problems that impede the

selection and the pursuit of the alternative that benefits him the most. Because he is

generally guided by his narrow self-interest, choice depends on his individual subjective

preferences and the constraints he faces, in particular his income and the relative prices

(explicit or implicit) of the different choice alternatives. The natural habitat of homo

economicus is the market. The market, through its price mechanism, is deemed to provide

the relevant information and the required incentives for multiplying the range of choice

and thereby for maximising individual utility and social welfare, which is no more than the

sum of individual utilities.

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According to the neoclassical approach, governments should abstain from ‘intervening’

in the market; otherwise they will distort prices and thereby undermine rational decision-

making and social well-being. Government action should be restricted to so-called market

failures, for in these cases prices no longer reflect the costs and benefits of alternative

options. But even in these cases governments should avoid as much as possible restricting

individual choice through laws and regulation. They should instead try to mould individual

behaviour via the use of pecuniary incentives, attempting to align individual and group

interests by changing the costs and benefits of the various courses of actions. Pecuniary

incentives are deemed to be effective in a rational world where individuals react to changes

in their possibility space in a systematic and predictable way, refraining from pursuing

costly and undesirable actions, which do not need to be outlawed, and engaging in more

beneficial activities.

Even though the ‘market’ is the central institution of neoclassical economics, it has not

been constituted as an object of study on its own right. There has been little interest in

studying how specific markets operate and how prices are actually obtained. Instead, it has

been taken as a relatively homogenous and undifferentiated entity, to which are associated

vague notions of supply and demand that jointly determine the equilibrium price of

commodities (Hodgson, 2008).

The abstract model of human action and the vague conception of the market are two key

elements in economics imperialism, which has consisted of the extension of the economic

approach to a variety of non-economic fields of research in politics, law, history, the arts

and the family (Frey and Benz, 2004).3 This process has also been extended to public

discourse and to the conducting of public policy, resulting in an increased commodifica-

tion of social life. Neoclassical economics has in this way been part of a process of

universalisation of market-based social relations (Carvalho and Rodrigues, 2008).

Recent research challenges the homo economicus model and places a greater emphasis on

the role of institutions, specifically of market institutions, in guiding and shaping human

behaviour, as well as in determining aggregate outcomes. As Philip Mirowski (2007,

p. 211) summarises, we are moving ‘from a period when ‘‘the market’’ has been left implicit

and undefined to an era in which markets are becoming the center of attention’. Economics

has hence ‘become less fixated upon agency and more concerned to theorize the meaning

and significance of a diversity of (small-m) markets’. Recent change in economics has thus

consisted of the inversion of interest in the status and nature of agents in favour of the

specifications of markets.

These transformations are by and large the result of both behavioural and experimental

economics. The gradual establishment of these fields of research, most notably since the

1990s, has contributed to draw the profession’s attention to the study of the behavioural

deviations from the predictions of the rational model of human action, and to the role of

socioeconomic institutions in determining individual behaviour and aggregate outcomes.

Choice architecture and design economics derive the policy implications of the recently

acquired understanding of human behaviour and of the role of the overall institutional

setting. They rely on distinct resources, however. Choice architecture builds upon the

‘behavioural’ experiments of economics, as well as from evidence obtained from other

methods and from other disciplines (especially from cognitive psychology), which have

produced knowledge of individuals’ attributes (e.g. preferences, attitudes toward risk, and

so on) and of the processes by which people select and apply heuristics or abide by social

3 See Maki (2009) for a discussion on the notion of economics imperialism.




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norms when facing particular individual and collective decision-making problems. Design

economics builds instead upon the ‘technological’ experiments of economics that are

particularly tailored to study market institutions, namely their incentive compatibility

attributes, i.e. their capacity to induce self-interested individuals to take the actions that

achieve desirable results at the aggregate level (cf. Santos 2007; 2010, cap. 10).

Behavioural experiments have produced a substantial amount of evidence that shows

that human beings are prone to systematic error even in areas of economic relevance where

stakes are high (e.g. Thaler, 1992; Camerer, 1995). Rather than grounding individual

choice on the calculus of the costs and benefits of alternative options so as to choose the

alternative that provides the highest net benefit, individuals have recourse to a variety of

decisional rules and are influenced by various contextual factors that jeopardise the pursuit

of individuals’ best interests. The increased understanding of how people actually select

and apply rules for dealing with particular forms of decision problems and of the influence

of contexts on individual choices is the starting point of choice architecture devoted to the

study of choice setups that can curb human idiosyncrasies to good result, as judged by

individuals themselves, or by society as a whole (Thaler and Sunstein, 2003, 2008).

Technological experiments have produced a substantial amount of evidence of the

relative performance of various market mechanisms (e.g. Kagel, 1995). More recently,

they have been used as engineering tools for building new markets from scratch. That is,

they have been used for building ‘economic machines’, which ‘are supposed to work for

several years, in different contexts and without constant supervision of their manufacturer’

(Guala, 2001, p. 464) or as ‘testbeds’ of ‘a working prototype of a process that is going to be

employed in a complex environment’ (Plott, 1997, p. 605). These experiments have forced

economists to explicitly recognise that markets are the outcome of complex social

engineering processes that determine the rules under which individuals are to act and

the aggregate results that obtain by having economic agents interacting under these rules

(Roth, 2002). In the next two sections, I look in more detail into the policy proposals of

choice architecture and design economics so as to investigate the extent to which they

depart from neoclassical economics and thereby assess the potential of the recent

approaches to transforming economics.

3. The assumptions of neoclassical economic theory, behavioural anomalies

and choice architecture

The neoclassical economics model of human action, homo economicus, relies on two basic

assumptions—unbounded rationality and self-interest— which underlie the utility max-

imising analysis of human behaviour. Experimental work first carried out by cognitive

psychologists, and subsequently by economists, identified so-called ‘anomalies’,

i.e. patterns of judgment and choice that are inconsistent with utility maximisation,

challenging both assumptions.4 Behavioural economists have, then, attempted to replace

the standard assumptions of economics with more realistic descriptions of human

behaviour that could account for people’s bounded rationality and other-regarding

considerations. However, the revised conception of human action was not accompanied

by an equivalent change in economic theorising. While accommodating ‘anomalous’

4 Richard Thaler had an important role in introducing these results to economists in the column‘anomalies’ of the prestigious Journal of Economic Perspectives, between 1987 and 1990. His The Winner’sCurse: Paradoxes and Anomalies of Economic Life, published in 1992, brings together some of theseexperimental results. See also Camerer (1995).

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behaviours, an important part of theoretical work has maintained formal rigour and kept

the traditional fields of application and the disciplinary boundaries intact (cf. Camerer and

Lowenstein, 2004). This strategy allowed economists to retain the utility maximising

principle, considering, for example, that individuals simply have a richer set of preferences

than was traditionally considered, such as the so-called social preferences (cf. Camerer and

Fehr, 2004).5

But empirical research unequivocally challenges the standard rationality assumption.

People do make systematic mistakes, failing to choose what is best for them. Rather than

basing their decisions on the calculus of the net benefits of various choice alternatives, people

have recourse to simple rules of thumb, or heuristics, which help them cope with various

problems in a quick and satisfactory way, thus allowing saving precious time with time-

consuming deliberation (Tversky and Kahneman, 1974). However, sometimes these

heuristics lead to inferior choices, i.e. choices that would be corrected if people had

complete information, unlimited cognitive abilities and unbreakable willpower, and took

time to make their calculations. This body of evidence leads Thaler and Sunstein (2008, pp.

6–7) to conclude that rather than homo economicus, people are homo sapiens, that is, humans.

The psychologists Amos Tversky and Daniel Kahneman (1974) long ago identified three

pervasive heuristics—anchoring and adjustment, availability and representativeness—and

the biases they generate. The ‘anchoring and adjustment’ heuristic, to give one example,

leads to excessive influence of a particular feature of the problem (which works as an

‘anchor’) because individuals often fail adequately to take into account other relevant

elements of the decision problem. The psychologists have also noted that the framing of the

decision-problem, i.e. the way the problem is described and presented, has a strong impact

on the choices individuals make (Tversky and Kahneman, 1981; Kahneman and Tversky,

2000). This goes against the assumption that individual preferences and the inherent costs

and benefits of the alternatives at hand are the sole determinants of human behaviour. Not

only do people ignore features that economic theory takes as relevant, they are also

influenced by factors that economists do not consider.

The status quo bias is a particularly frequent behavioural pattern (Samuelson and

Zeckhauser, 1988) and of particular interest to choice architecture, as we shall see below. It

consists of the tendency to stick to one’s current situation, even when the risk of altering the

situation is low compared to maintaining the situation. This behaviour may be explained

by people’s aversion to losses, i.e. the tendency to place a greater negative value on losses

(e.g. letting go of the present situation) than on gains (e.g. the benefits of change). Status

quo bias may also be caused by what is known as the ‘omission/commission bias’—people’s

tendency to care more about errors of their own actions (commission) than about errors

that occur as a result of their inaction (omission) (Ritov and Baron, 1992). Another

possible cause of the status quo bias is procrastination, i.e. the tendency to delay beneficial

actions that involve immediate costs, such as dieting (O’Donoghue and Rabin, 1999).

Individuals’ excessive optimism and overconfidence in their own abilities may further

exacerbate this tendency.

The opposite behavioural pattern is also frequent and important. People are as well

prone to hasty decisions due to self-control problems, which may lead them to fall into

temptation, doing things that they later regret. This often occurs when the benefits of the

goods or actions are immediate and costs are delayed. This effect is even stronger if

5 See also Starmer (2000) for a review of theoretical developments prompted by experimental research onindividual decision-making under risk.




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individuals are in emotionally or biologically ‘hot’ states, which may provoke an

overestimation of the short-term benefits of falling prey to the temptation (Loewenstein

et al., 2003).

Notwithstanding the accumulated evidence, many (non-behavioural) economists re-

main sceptical. They argue that people do a better job of choosing in the ‘real world’,

especially in markets where they face problems that really matter to them and the stakes are

high (e.g. Binmore, 1999). But the anomalous phenomena have been replicated with

higher stakes, both in the lab (Camerer and Hogarth, 1999) and in the ‘real’ world, as in

financial markets (Shiller, 2000).

The consideration that individuals are boundedly rational and weakly willpowered is

now inspiring various versions of so-called ‘soft paternalistic’ approaches to individual

decision-making—asymmetric paternalism, cautious paternalism, libertarian paternalism

(cf. Camerer et al., 2003)—devoted to helping people make choices more in line with

maximising behaviour, while avoiding as much as possible placing limits on individual

choice and thus causing harm to those who behave rationally. Choice architecture,

proposed by Richard Thaler and Cass Sunstein, is a case in point.6

The starting point of choice architecture is the human propensity to err. Choice

architecture departs from the assumption that ‘almost all people, almost all of the time,

make choices that are in their best interest or at the very least are better than the choices

that would be made by someone else’ (Thaler and Sunstein, 2008, p. 9). As the empirical

studies mentioned above show, not so infrequently people make choices they would not

have made if they had relevant information, unlimited cognitive abilities to process it and

complete self-control. They are particularly vulnerable when they face complex and

infrequent decisions that offer poor feedback. Not only will they have difficulty in

translating aspects of the situation into terms they can easily understand, but they may also

be exploited by those who can profit from their vulnerability to make predictable mistakes.

Based on an informed view of actual human behaviour, the choice architect has, then,

‘the responsibility for organizing the context in which people make decisions’ (Thaler and

Sunstein, 2008, p. 3). The goal is ‘to steer people’s choices in directions that will improve

their lives’, that is, ‘‘that will make choosers better off, as judged by themselves’ (p. 5) A

critical aspect of choice architecture is that it emphatically avoids constraining the options

of the individual. Its aim is instead to alter ‘people’s behaviour in a predictable way without

forbidding any options or significantly changing their economic incentives’ (p. 6).7 As

Thaler and Sunstein put it, ‘[f]reedom to choose is the best safeguard against bad choice

architecture’ (p. 11).

Choice architecture is devoted to the design of what the authors call ‘nudges’ that

attempt to induce the choices that best serve individual (or collective) interests by taking

into account how people make decisions in particular contexts. Two key instruments of

choice architecture are default options and disclosure devices. Default options deal with

individuals’ status quo biases by carefully designing a solution that is automatically selected

if the individual fails to choose for him/herself. Thaler and Sunstein point out that default

options should only be proposed if it is unambiguous that they serve individuals’ best

interests. Automatic enrolment in the American 401(k) employee saving plans, to give an

example, is thought to benefit employees, since the costs of saving too little for retirement

are admittedly much greater and severe than the costs of saving too much. In any case,

6 Except when stated otherwise, this section refers to Thaler and Sunstein (2008).7 The authors are here referring to pecuniary incentives.

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those who do not wish to be part of the plan may always opt out. The authors consider that

the low rates of opt outs observed in the past suggest that most employees do benefit from

this measure, enrolling earlier than they would otherwise do, if they did so at all. These

measures would not be necessary in a fully rational world in which individuals always

choose the best option regardless of the default. But individuals’ inertia and tendency to

procrastinate more likely lead to no action. Default options have been shown to be

particularly effective, especially so if they also entail an explicit endorsement from the

default setter that it is the recommended course of action (Thaler and Sunstein, 2008,

p. 83).

The choice architect may also select the relevant information for decision-making and

design information disseminating devices that facilitate comparison of the alternative

options. This solution is proposed for decisions involving complex pricing schemes, such as

mortgages, cell phone calling plans and insurance policies. According to Thaler and

Sunstein, in these cases the government should regulate disclosure practices, requiring that

customers be informed of fees, in a legible format, and be given regular reports of the fees

that have been charged. These reports would provide consumers with feedback so that they

could shift their demand to the services that most adequately fit their consumption

patterns. Besides the design of defaults or information disclosure devices, choice architects

may have recourse to other tools to attenuate people’s propensity to err, say the framing of

the context of choice, which may be tamed to better capture the analytical structure of the

decision-problem; moreover, they may take advantage of people’s attributes, for instance,

people’s susceptibility to social influence, by making salient the prudent and beneficial

actions of others.

Consumption, saving and investment decisions constitute obvious areas for the

application of choice architecture. The high rates of household indebtedness in developed

economies (but not only) are to some extent explained by individuals’ failure to make wise

consumption/investment decisions, due to non-transparent and difficult-to-process in-

formation and to self-control problems, given that the temptation of immediate

gratification is too salient as compared with the costs of hasty/risky decisions that are

only suffered at a later time.

Matters are at present even more complicated by the highly sophisticated and complex

financial markets that have rendered credit and investment decisions increasingly more

difficult. Less educated individuals are in a particularly disadvantaged position because

they are more vulnerable to aggressive campaigns and marketing strategies deployed by

those who profit from consumers’ hasty decisions. This is explicitly recognised by Thaler

and Sunstein, when referring to mortgage markets:

When markets get more complicated, unsophisticated and uneducated shoppers will beespecially disadvantaged by the complexity. The unsophisticated shoppers are also more likelyto be given bad or self-interested advice by people serving in roles that appear to be helpful andpurely advisory. In this market, mortgage brokers who cater to rich clients probably havea greater incentive to establish a reputation for fair dealing. By contrast, mortgage brokers whocater to the poor are often more interested in making a quick buck. (Thaler and Sunstein, 2008,p. 134)

In this particular situation, Thaler and Sunstein’s proposal is to demand that mortgage

lenders provide the relevant information in a readable format so that all the fees and interest

rate provisions can be more easily compared. They argue that this will not only make it easier

to shop, but it will also allow independent third parties to offer much better advice, thus

making the mortgage market more competitive (Thaler and Sunstein, 2008, p. 138).




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Choice architecture thus mobilises the recently acquired understanding of how

individuals process information and make decisions, to design contexts of choice that

help people make better choices. The choice architect may focus on the design of default

options that protect individuals from inertia or conceive information devices to help

improve people’s ability to select options that make them better off. At the same time the

designer should avoid, as much as possible, changing the incentive structure of the

problem-situation. The authors stress ‘[t]he central goal would be to inform costumers of

fees rather than set prices’ (Thaler and Sunstein, 2008, p. 83).

It is by now clear that the neoclassical models of rational choice and of the competitive

market loom in the background of choice architecture. The problem, as Thaler and Sunstein

see it, is that individuals fail to conform to the rational choice model due to incomplete

information, cognitive limitations and weak willpower. Prevalent incentives in opaque markets

may even exacerbate this problem because it can be highly profitable to exploit people’s

bounded rationality. The choice architect should then help people with decision-making so

that they more closely align their demand with the actual benefits derived from consumption.

In this way, choice architecture also contributes to bettering the functioning of competitive

markets by reducing the detrimental effects of asymmetric information between buyers and

sellers. The more consumers make the right choices, the more markets become competitive.

Thaler and Sunstein thus work within the larger framework of the neoclassical research

programme trying to deal with the problems of asymmetric information and decision-

makers’ bounded rationality. Even though they acknowledge that in many circumstances

choice architectures are unavoidably designed by someone else for others to make their

choices, they do not address this key issue to choice architecture. They merely identify

complex and difficult decision-making as obvious areas for the intervention of the

benevolent choice architect. Thus, they do not consider the possibility that some of

people’s ‘errors’ might in fact be the result, intended or unintended, of current choice

architectures. This means that choice architecture only addresses those problems caused

by incomplete information, bounded rationality and weak willpower, leaving out those that

stem from faulty choice architectures. This is patent when Thaler and Sunstein discuss

mortgage markets, disregarding the participation of the wider financial system in growing

household rates of overindebtedness, limiting their focus on the complexity of these kinds

of decision, the main problem to be fixed by choice architecture.

The work of Robert J. Shiller (2000, 2008) on financial markets illustrates the interplay

between choice architectures and human behaviour showing that understanding individual

decision-making requires understanding the institutional structure inside of which people

act. Shiller interprets the so-called subprime crisis not so much in terms of the complexity

of the decision-making process, but instead in terms of an ‘epidemic of irrational

enthusiasm for housing investments’ caused by the perverse incentives of the financial

sector. On Shiller’s view, the unsustainable levels of mortgage borrowing in the USA were

ultimately caused by dramatic institutional changes in financial markets over the last three

decades, through deregulation and, more recently, financial innovation, culminating in

what is known as the New Financial Architecture. The new institutional setting, together

with rising housing prices and low interest rates, rendered mortgage lending a highly

lucrative investment fed by a new securitisation industry.8 When house prices collapsed

8 The feedback mechanisms are well-known: mortgage brokers sold loans, investment bankers packagedthe loans into securities, banks and specialist institutions serviced the securities, rating agencies gave their sealof approval, and insurance companies protected holders of such securities against loss through the use ofcredit default swaps.

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and interest rates rose, and borrowers started to default on their payments, the mortgage

market collapsed, impacting on other parts of the globe, since mortgage-based financial

products had been dispersed around the world. The end result was the greatest financial

crisis since 1929. According to Shiller, the ‘subprime solution’ must result in a profound

restructuring of the housing and financial economy of the magnitude of the New Deal.

This therefore suggests, at least as regards individual decision-making in financial markets,

that a more significant amount of institutional engineering than solving people’s status quo

biases or hasty decision making is required. Otherwise, governments will have to be called

upon to rescue financial actors with ever more massive bailouts to guarantee the sector’s

sustainability (Crotty, 2009).

The minimalist solutions of choice architecture contain an implicit acceptance of the

prevalent institutional arrangements. This is clear in Thaler and Sunstein’s rhetoric, where

choice architecture is to be subjected to the preservation of ‘freedom of choice’ and of the

free functioning of the market, which is deemed as characterising the present situation.

The solutions proposed, however mild, may nonetheless have effects on the status quo ante.

If the new choice architecture is to be effective, in the sense that it succeeds in steering

individual behaviour in desirable directions, it necessarily interferes with the interests in

place, reallocating economic opportunities among differently situated individuals. Those

most adversely affected by the new institutional setup will probably resist, depicting the

new policy as an unnatural ‘intervention’ into some natural state.

However, policy is not some alien ‘intervention’ into a naturally evolved reality. The

status quo ante is itself the result of past political processes—a point that has been made by

various generations of institutional economists, especially in the tradition of John

Commons (1931). It is only our ‘institutionalised mind’ that sees current practices,

choices and actions as normal, right and correct, and changes to that situation as artificial

‘interventions’ (Bromley, 2006). And people, as behavioural economists would now add,

have a tendency to resist change. To conclude with the wording of Warren J. Samuels

(1989, p. 432) ‘[w]hat is normally considered ‘‘intervention’’ is not the intrusion of

government in an area in which government hitherto has been absent but the change of the

interests to which government gives its support or which government is used to support’.

The objection that institutional change is coercive and inhibitive of individual ‘freedom’ is

therefore incoherent, as is the complaint that public policy creates ‘distortions’ in an

otherwise frictionless economy (Bromley, 2006). What institutional change does is alter

the previous allocation of economic opportunities among differently situated individuals,

advancing the economic and social agendas of some and impeding those of others. From this

it follows that the concept of efficiency cannot refer to some natural state of world. Efficiency

is always measured by reference to some institutional setup that indicates which instances of

costs and benefits are to be considered and recorded (Samuels, 1992). If the context

changes, what will count as rational and efficient will change too. This is illustrated in the

next section, where institutional change is more explicitly addressed in design economics.

4. Design economics and the expansion of markets

Design economics affords the economist a more active role in the (re)design of contexts of

choice. Design economics is in fact presented as the engineering field of economics. In

Roth’s (2002, p. 1341) account, it is ‘the part of economics intended to further the design

and maintenance of markets and other economic institutions’. And like any other

engineering field, design economics is taken to deal with the ‘natural’ complications that




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arise when applying theory to practical matters, for which end it mobilises the resources from

three emergent research programmes of economics: game theory, computational and

experimental economics. Game theory provides the general framework for addressing

design, in particular, for the definition of the ‘rules of the game’. The tools of computational

and experimental economics are instead used to ‘bridge the gap’ between theory and the

institutional details of particular markets. Computational methods, in particular, ‘will help us

analyze games that may be too complex to solve analytically’, while laboratory experiments

‘will help inform us about how people will behave when confronted with these environments,

both when they are inexperienced and as they gain experience’ (Roth, 2002, pp. 1373–4).

Design economics emerged in the 1990s when game theorists began to be hired as

consultants for the design of various allocation mechanisms that were soon to be

implemented in real world environments. The design and implementation of these new

mechanisms raised technical complications for which no theory or past experience could

suggest any solution, and new devices had to be designed from scratch. Two famous

exemplars of these allocations mechanisms are the design of labour clearinghouses for the

US National Resident Matching Program (NRMP) that would assign hospital positions to

young doctors, and the design of an auction mechanism for the US Federal Communi-

cations Commission (FCC) that would allocate licenses to use the electromagnetic

spectrum for various telecommunications services.

The NRMP clearinghouse called for the design of a matching algorithm that would

allocate applicants to residence programs based on preferences lists of both doctors and

hospitals, avoiding favouring one side of the market over the other, while producing

a stable matching (i.e. a matching on which both parties could agree). To this end, the

performances of alternative algorithms were assessed and compared in terms of the impact

on each side of the market, speed, stability and so forth. The FCC auction was intended to

allocate airwave spectrum rights in a transparent and efficient way. But while economists

were hired to design new allocation mechanisms the responsibility for selecting or deciding

whether to adopt the proposed design was retained by the public authority that hired them,

in consultation with its various constituencies.

The FCC auction provides a very useful illustration of design economics, which is worth

looking at more closely.9 The FCC auctions have been greeted as the biggest engineering

success of economics. In 1994, the FCC implemented what was to be known as the

simultaneous–multiple-round–independent auction, which would soon be praised as ‘the

greatest auction in history’ (McAfee and McMillan, 1996, p. 159). This auction launched

a market for thousands of spectrum licenses, and its success in raising billions of dollars for

the public treasury has been taken as evidence of the successful accomplishment of the

goals set by the regulator.

According to the official version, as recounted by the game theorists involved in their

design, the auctions aimed at creating a transparent and efficient market that would

allocate the airwave spectrum rights to highest value users—those who most valued and

made best use of them.10 Until 1982, spectrum licenses were assigned by an administrative

9 See Guala (2001) for a more detailed account of the engineering work involved in the construction of theFCC auctions.

10 This account is based on game theorists’ reports of events, after efficiency had been set as the main goalof the auction to the detriment of welfare goals defined by Congress, such as the expansion of public access tonew technologies, products and services, and the decentralisation of the licenses awarded to include smallbusinesses, rural telephone companies and minority groups. For a more complete account of the politicalprocess involving the FCC auctions see Nik-Khah (2008).

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hearing process (recognisably slow and non-transparent), which allocated licenses for free.

After 1982, licenses were sold and allocated via a lottery system, which significantly

improved the speed and transparency of the allocation mechanism, but it did not prevent

opportunistic behaviour. Licenses could be bought and resold by individuals who did not

want to use them and thus undeservedly appropriated revenue raised by the commercial

use of the public spectrum.

The auction mechanism seemed to offer a tremendous advantage over the alternatives. It

offered the possibility of identifying the firms with the highest use-values for the spectrum,

which would be in a position to pay the highest prices for using it and, as a result, maximise

the FCC’s revenue. This in turn required the design of an auction mechanism that

encouraged bidders to reveal their true valuations, while preventing opportunistic

behaviour on their part.

The building of the FCC auctions was a complex endeavor, best depicted as a patchwork

of various and partial solutions to the particular issues that arise when building new

markets. Auction design resembled ‘a kind of engineering activity’ that had recourse to all

sorts of resources ranging from ‘practical judgments, guided by theory and all available

evidence’ to ‘ad hoc methods to resolve issues about which theory is silent’ (Milgrom, 2000,

p. 271). Game theory merely assisted in ‘developing intuition’, in particular in ‘show[ing]

how people behave in various circumstances and [. . .] identify[ing] the tradeoffs involved in

altering those circumstances’ (McAfee and McMillan, 1996, p. 171).

The auction had to tackle three major technical issues. First, to ensure that the highest-

value users bought and paid for the licenses at their value; second, to allow the composition

of favoured combinations of licenses, which had to take into account licenses’ comple-

mentarities and substitutability; and, third, to prevent opportunistic behaviour on the part

of bidders, which would jeopardise the competitive gains obtained from instituting the

market. Theory would help look at the strategic structure of the decision-making problem

and anticipate ‘how bidders choose their bids, not knowing the value of the item for sale

and not knowing what their rivals know; and what the seller can do to stimulate the bidding

competition, not knowing how much any of the bidders is willing to pay’ (McMillan, 1994,

p. 146).

Based on advice from the game theorists, the FCC opted for the simultaneous–multiple-

round–independent auction, which gave bidders the possibility of operating in several

markets at the same time and thus of composing desirable aggregations of items or

adjusting their aggregation to a last-resort composition if their first-choice aggregations

became unattainable. The licenses would then be allocated to the highest bidder that paid

his/her bid price. Many detailed rules were then defined to organise the running of the

auction, namely how bidders were to engage in the transactions while attempting to

prevent the opportunistic exploiting of any gap.11

The next step consisted of gluing together these partial solutions and evaluating whether

they could be implemented in an operational environment. Laboratory experiments were

crucial in order to put the various pieces together into a workable mechanism and solve the

11 For example, an activity rule required the payment of deposits on the total number of desired licenses atthe beginning of the auction to ensure that market participants had actually intended to own and use thelicenses. Given the high stakes at play, the government was also concerned with simplifying procedures inorder to reduce the incidence of mistakes. To avoid the ‘winner’s curse’, i.e. selling of licenses to traders whooverestimated their value, or to avoid the extra-cautionary behaviour of risk-averse bidders, the bids wereannounced at every round so that traders could make better estimates of the licenses’ values. The incidence ofunpredictable mistakes was further taken into account by allowing bid withdrawal, though with a penalty.The auction rules in the end amounted to a 130 page document.




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complications that emerged while trying to do so (Guala, 2001; Nik-Khah, 2008). The

building of the FCC auctions thus followed a division of labour in which game theorists

proposed the auction form and the rules that would organise the functioning of the market;

and experimental economists implemented these rules in an electronic market. After

stabilising the auction rules, the experimenters subsequently tested the auction under

conditions that closely resembled the market to be implemented and thereby assessed the

combined effect of the auction’s rules, which could not possibly be predicted by non-

experimental means.

Even though the accounts of the game theorists make us believe otherwise, the success

story of the FCC auctions is not uncontroversial. In an evaluation of the results, Peter

Cramton (1998, p. 735), a successful design economist, states that ‘any auction would look

good relative to the FCC’s past experience with comparative hearings and lotteries’. At the

same time, he concedes that ‘[s]ince I do not observe the bidders’ actual valuations, it is

impossible to say exactly how efficient the auctions were’ and retreats to the more vague

claim that the auctions were successful for the government, as judged by the revenues

raised, and for bidders, as judged by the stability of license compositions (pp. 728–9).

Edward Nik-Khah, based on the archives of the FCC, tells a different story, concluding:

‘[o]verall, the allocation of licenses produced by the auctions proved to be unstable, as the

industry has gone through a spate of mergers, acquisitions, and bankruptcies, ultimately

leading to a high degree of license concentration’ (Nik-Khah, 2008, p. 90). Based on the

analysis of 10 years of FCC auctions, comprising the data of 58 auctions, Gregory F. Rose

and Mark Lloyd (2006) conclude that the auctions failed to maximise receipts and

promote efficiency in the sector because bidders managed to carry out manipulative

strategies (e.g. tacit collusion and pre-emptive bidding), which resulted in the auctioning of

licenses at significantly lower prices.

Yet game theorists were eager to wrap their contribution in the allure of science,

emphasising that ‘the auction design process was driven not by politics, but by economics’

(McMillan, 1994, p. 147). But the process of building the auction was marked by the

interests of the constituencies in place, namely those of the large telecommunications

corporations. Large corporations hired game theorists to help them to position themselves

in the policy-making process, first by lobbying for the most favourable architectures for the

auctions and then by assisting in defining their clients’ bidding strategies (Nik-Khah,

2008).12 As Charles Plott (1997, p. 606), one prominent consultant, candidly acknowl-

edged: ‘Business understood that the rules and form of the auction could influence who

acquired what and how much was paid’. Thus, the building of the FCC auction was not

a mere engineering exercise. It was a complex political process, where big companies

actively exercised their influence before and during its operation. Because the FCC failed

to prevent collusion and other anti-trust strategies, taking place both inside and outside the

market, the market became more concentrated in the hands of a few large corporations.

The FCC auctions thus make it plain that markets, and non-market allocation

mechanisms for that matter, are complex institutional arrangements that require the

engineering efforts of various social scientists and social actors, and that market outcomes

depend on the particular configurations of these arrangements. Rather than assuming at

the outset that markets ensure efficiency, via the symbiotic conjunction of agents’

12 To give just a few prominent names, Paul Milgrom, Robert Wilson and Charles Plott were hired byPacific Bell, Preston McAfee by Airtouch Communications, Peter Cramton by CI, John Ledyard and DavidPorter by the National Telecommunications and Information Administration and, finally, John McMillan bythe FCC.

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rationality and the information disseminated through prices, design economists are

devoted to the study of ‘the rules of the game’. In Roth’s wording:

The largest lesson in all this is that design is important because markets don’t always grow likeweeds—some of them are hothouse orchids. Time and place have to be established, related goodsneed to be assembled, or related markets linked so that complementarities can be handled,incentive problems have to be overcome, etc. (Roth, 2002, pp. 1373–4)

It is also clear that design economics is to be devoted to the ‘technical issues’ that arise in

market building. That allocation mechanisms are the outcome of difficult and complex

political processes is not adequately taken into account, especially the impact of these processes

on the ‘technical’ goals set beforehand. Design economists, qua specialised technicians, deal

with the technical complications that arise in social engineering, specifically with those that

stem from the strategic environment and the opportunistic behaviour of economic agents,

who will try to outwit the regulator, and from the cognitive limitations of real economic

agents that may compromise the goals set by the regulator. This means that design

economists also take into account the actual characteristics of economic agents. The

effectiveness of market mechanisms requires that the design setter be able to predict how

economic agents will behave under the new institutional setup. But in contrast to choice

architecture, design economists focus on the structure of incentives. The new arrange-

ments must be incentive compatible devices. They should align individual and collective

interests in such a way that individuals’ incentives correspond to what is needed to achieve

group optima, while making sure that economic agents understand the incentive structure

so that they behave predictably, like homo economicus. In the FCC auctions this meant that

the auction mechanism had to succeed in eliciting the subjective values of spectrum

licenses to ensure telecom companies acquired the desired licenses, while contributing to

an efficient allocation of the licenses, thus defined, and the maximisation of FCC revenue.

In sum, design economics is devoted to the (re)design of complex markets and other

economic institutions to be implemented in context-specific environments, to which end the

opportunistic behaviour of economic agents and their propensity to err must be taken into

account. The ultimate goal is to conceive a structure of incentives such that individual actions

can generate desirable social states. Insofar as it overlooks the political process involved in the

(re)building of new economic institutions, design economics risks failing on their own terms,

that is, it fails to pursue its narrowly defined goals of efficiency. The higher the stakes, the

more the (re)creation of a new market gives rise to an intense struggle for influence over the

collective definition of ‘the new rules of the game’. The outcome will contain a high degree of

uncertainty and it will depend on the correlation of power of those involved and their

capability to bring forward their favoured solutions. This means that market building frames

and shapes the interactions of individuals for the attainment of rather elusive goals, say the

allocation of resources in an operational way, while attempting to curb opportunistic

behaviour on their part. To put it in another way, the efficacy of design economics ultimately

hinges on determining the extent to which economists are able to implement their models in

the real world and make reality conform to their theoretical constructs, that is, on

determining the performativity of economics (to be further discussed in Section 5).13

13 This view is also shared by Vernon Smith (2008, ch. 6). While generally favourable to market design, hethinks that the ‘ecological fitness’ of ‘rational constructivist designs’ is only achieved, if at all, after a longprocess of trial-and-error that corrects behavioural incentives and strategic problems not considered indesign. Smith clearly does not think that the FCC auctions have already stabilised and achieved theirecological fitness.




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This exclusive concentration on ‘technical’ issues is even more salient when design

economists propose the extension of market relations to non-market domains of social life.

The introduction of market-like arrangements that set up contractual forms of exchange

involving the transfer of money and property rights has encountered severe resistance,

since this new form of exchange becomes ‘repugnant’, as Roth puts it, when money is

added to the transaction. This ‘distaste for certain kinds of transactions can be a real

constraint on markets and how they are designed, every bit as real as the constraints

imposed by technology or by the requirements of incentives and efficiency’ (Roth, 2007, p.

38). The challenge, from the point of view of the design economist, is to learn how to deal

with these constraints, which are perceived as part of a technical problem that needs to be

tackled. Roth then urges economists to understand better and engage more with the

phenomena of repugnant transactions. This is so because ‘attitudes about the repugnance

(or other kinds of inappropriateness) of transactions shape whole markets, and therefore

shape what choices people face’ (Roth, 2007, p. 38). When referring to the debate over the

creation of a market for the sale of kidneys, Roth (2007, pp. 53–4) makes this clearer by

contrasting the irrational reactions of its opponents to the frustration of economists ‘at the

failure to adopt what they see as a feasible solution that could be implemented quickly’. In

Roth’s view, design economists, qua rational technicians, should take on ‘the important

educational role of pointing to inefficiencies and tradeoffs, and costs and benefits’ (Roth,

2007, p. 53). They should nonetheless be aware that the sources of repugnance (such as

other-regarding motivations) may affect the efficacy of incentive schemes due to the crowding

out of altruistic motivations (cf. Frey, 1997; Frey and Jegen, 2001).14 In order to be effective,

new markets have to deal with all sorts of complications that arise in market building.

To sum up, design economics is devoted to the (re)design of complex market institutions

that deal with varied technical complications in context-specific environments. The

ultimate goal is to (re)align the structure of incentives so that individual actions can bring

about desirable social states. Design economics is not circumscribed to the market domain.

The expansion of markets or market-like forms of exchange to other domains of social life,

however, requires that the economist qua social engineer take on the pedagogic role of

pointing to inefficiencies and tradeoffs, as well as costs and benefits, in discussions

informed by taboo or visceral reactions.15 This brings into the analysis the impact of other-

regarding considerations on the efficacy of public policy. The underlying political processes

of market design and the struggle for political influence are left out, however.

5. Choice architectures and market designs are political constructs

Choice architecture and design economics convey two major transformations deemed as

characterising the ongoing process of change in the discipline: (i) the revision of the

neoclassical model of human action, homo economicus; and (ii) the recent economics

approach to market building. But while fully acknowledging that individuals are not always

rational and that markets are complex socially engineered institutions, these recent

developments retain the view of economics as the science of choice, which ought to

conform to the rational choice model, and select the market as the most adequate

institution to coordinate individual actions in various realms of social life. With minor or

14 To be further explained below.15 Roth’s account provides an unflattering caricature of critical reactions to the expansion of market forms

of social interaction. See the Journal of Economic Perspectives, vol. 21, no. 3, for the debate around the creationof a market for the sale of human kidneys, where both positions are more reasonably presented and discussed.

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major tinkering with the institutional setup, economists are committed to helping people

make rational choices and to coordinate their actions efficiently for the attainment of

socially desirable ends. Institutional change targets incentive structures, information

disclosure devices and other calculation tools to assist individuals when determining the

costs and benefits of alternative options. They will then make choices more aligned with

the maximisation of individual utility and with what is required to achieve socially desirable

outcomes.

Not only do these proposals retain the fundamental principles of neoclassical

economics—rationality and efficiency—they also continue to promote their expansion to

various domains of social life. Through the architecture of contexts of choice and the

design of market mechanisms, economists are putting their expertise at the service of

individual rationality and economic efficiency, within and beyond the traditional domain of

economics.

Choice architecture and design economics promote a particular version of economics

imperialism that goes beyond the mere export of its concepts to territories traditionally

occupied by disciplines other than economics. They actually aim at inculcating economic

calculus in human deliberation and introducing market-like forms of social interaction

where they have been absent. In other words, what is at stake here is the deliberate attempt

to make society more like its description in neoclassical economic theories, i.e. the

performativity of economics (Mackenzie, 2006; Callon, 2007; Mackenzie et al., 2007).

Whether or not they have succeeded in this endeavour is an empirical question that cannot

be addressed here.16 For now, it is suffice to note that while taking into account predictable

behavioural irrationalities and the opportunistic behaviour of economic agents in their

policy proposals, both choice architecture and design economics retain and promote the

expansion of the neoclassical concepts of rationality and efficiency in their market-based

solutions. This is problematic, however.

The recognition that context influences the choices people make and that the particular

institutional configurations determine individual and aggregate outcomes jeopardises the

ideal of freedom of choice, deemed as characterising the status quo, and the neoclassical

goals of rationality and efficiency. The acknowledgment that the contexts of choice and

social interaction require institutional change, moreover, opens the political Pandora’s box

that neoclassical economics kept closed. Institutional change is fundamentally political. It

requires the action of public authorities to carry it out and it impacts on the balance of

economic and political power among different social groups. As Daniel Bromley (2008,

p. 220) puts it, ‘public policy has but one purpose—to bring about changes in individual

behaviour’ and it does so ‘by altering the institutional arrangements that define the choice

sets—the fields of action—for individuals seeking their best advantage from inside of

a specific institutional structure’.

The dichotomy between the market, the locus of freedom of choice, and non-market

domains is now harder to sustain. Choice architecture and design economics make it plain

that both individual choices and their aggregate outcomes depend on extant institutional

arrangements, stemming from prior political processes that defined the range of admissible

action for different groups of people. As institutional economists have reminded us, it is

only our familiarity with extant institutions that creates the illusion that current

institutional set-ups are natural and fixed, and whence the perception that their change

is the outcome of an artificial ‘intervention’. This is the more so, the more institutional

16 This issue has, however, been addressed in (Santos and Rodrigues, 2009).




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change alters the distribution of resources, power and opportunities. Those most affected

by the new institutional setup tend to depict the new policy as an unnatural ‘intervention’

and will struggle hard to prevent it. But, as the FCC auctions illustrate, markets are the

outcome of complex political processes requiring the involvement of an organised power

capable of imposing a new set of rules defining who can participate and how. As Ha-Joon

Chang put it:

Emphasizing the institutional nature of the market [. . .] requires that we have to bring politicsexplicitly into the analysis of the market (and not just into the analysis of the state) and stoppretending that markets need to be, and can be, ‘de-politicised’. Markets are in the end politicalconstructs in the sense that they are defined by a range of formal and informal institutions thatembody certain rights and obligations, whose legitimacy (and therefore whose contestability) isultimately determined in the realm of politics (Chang, 2002, p. 553)

It is now clearer that choice architecture and design economics are not mere technical

solutions. Their proposals may affect the distribution of economic and political power and,

insofar as they do, they may see their legitimacy questioned on grounds that they violate

freedom of choice or introduce distortions in the market. That is, they may be faced with

the liberal rejection that they are unwarranted ‘interventions’ to solve problems that are

best corrected by the ‘free’ functioning of the market.17

The expectation of this kind of reaction may indeed explain the overly defensive tone of

Thaler and Sunstein and their insistence on the principle of ‘freedom of choice’, defined

negatively as the protection from interference by others. As we have seen, they have

repeatedly stressed that choice architectures are to leave the menu of choices unaltered and

grant individuals the exclusive power to use and dispose of things and services as they wish.

They thereby accept the status quo ante as legitimate and avoid, as much as possible,

altering it. By so doing they focus on people’s choices, leaving the analysis of the context

and the circumstances of the individual in the background, as is typical of neoclassical

economic theory (cf. Peter, 2004). This means that choice architecture is circumscribed to

problems of choice that stem from people’s bounded rationality. It cannot deal with those

problems that stem from the wider institutional setup where individuals act and interact.

Design economics, in contrast, proposes major institutional change, which may

substantially alter the relative position of different social groups. The proposal of the

expansion of markets to new spheres of social life has, moreover, forced design economists

to acknowledge that market relations can be coercive. The discussion around the creation

of a market for the sale of kidneys made the coercive power of pecuniary incentives more

salient for economists, acknowledging that the introduction of a monetary payment may

force the most deprived groups of the population to engage in unwanted transactions due

to extreme economic necessity (Roth, 2007). Design economists have therefore, if only

implicitly, recognised that the government does not have the prerogative of the use of

power to control people’s behaviour. Power can be exerted by various means and by

various actors.18 Nonetheless, design economists still advocate market-based solutions to

various kinds of social problem. Even when the legitimacy of these solutions is questioned,

bringing about ‘reactions of repugnance’, Roth, as we have seen, pushes economists not to

give up their traditional role of pointing to trade-offs and the costs and benefits of the

alternatives at hand, proposing that the coercive power of pecuniary incentives be tackled

17 See Sugden (2008) for a critique of choice architecture along these lines.18 See Grant (2006) for a comparative exercise on the various forms of power, including coercion,

bargaining and persuasion.

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by tuning in to their optimum level and by replacing part of monetary compensations with

in-kind rewards (Roth, 2007, p. 50).

An ample literature, however, exists in the area of political philosophy, which discusses

the need to block the expansion of markets so as to prevent so-called desperate transactions

(Walzer, 1983, 1984; Anderson, 1990, 1993). In this view, and unlike neoclassical

economics, restricting market expansion may, in fact, enhance individual freedom.

Keeping the various spheres of social life separated may be the most effective way to

ensure a range of options large enough actually to allow people to act in conformity with

their preferences and values. For, as Elizabeth Anderson (1990, p. 201) puts it, ‘the

realization of some values demands that certain goods be produced, exchanged, and

enjoyed outside market relations, in accordance with nonmarket norms’.19

On this view, not only may the introduction of market relations in realms of social life

traditionally protected from monetised exchanges create an unacceptable strain on

individuals and impede the realisation and expression of values important to human life,

but it may also have a detrimental impact on the values fostered. This is so because

preferences are endogenous (Bowles, 1998). They are affected by the institutional

arrangements that delineate the patterns of social interaction amongst the people who

make up society. The social norms and relations of the market, by conveying particular

ideals and nurturing specific values, may crowd out other fundamental values (Frey, 1997;

Frey and Jegen, 2001). Anderson’s (1993), for example, depicts market social relations as

impersonal and selfish, where individuals perceive their relations with others as a means to

satisfy their own ends, feeling free to pursue their personal advantage without consider-

ation for that of others.

In markets people are less compelled to follow non-market norms and values. By

aligning self-interest with the interests of others, market mechanisms moreover obviates

the need for ethical reasoning; as a result, individuals no longer have the opportunity, as

Steve Turnbull puts it, to ‘flex their ethical muscles’ (Frohlich and Oppenheimer, 2003,

p. 290). Individuals’ ability to behave in accordance with non-market norms and values,

then, will be seriously compromised. On the contrary, living with the tension between the

best strategy from a rational, self-interested point of view and the ethically best strategy

keeps the ethic imperative active.20

From this it follows that choice architecture and design economics are to be subjected to

ethical evaluation. Insofar as choice architecture and design economics alter the balance of

economic opportunities among people in order to control or influence their actions toward

the goals set by choice architects, by economic designers or by those who hire them, the

legitimacy of their proposals must be subject to ethical evaluation, like any other political

instrument or proposal. The market rhetoric of freedom of choice and economic efficiency

does not obviate the need for such ethical assessment. Indeed, if one takes Ruth Grant’s

(2006) criteria—legitimacy of purpose, voluntary response and the effect on the character

of the parties involved—one clearly comprehends that expanding the range of choice does

not ensure that the available options are equally legitimate, that individuals are capable of

pursuing their most preferred actions, or that the outcomes of individual actions are

19 See Rodrigues (2008) for a review on this literature.20 Frohlich and Oppenheimer (2003) describe a prisoner’s dilemma experiment where there is a conflict

between the best individual strategy and the best social strategy. The removal of this conflict through theintroduction of an incentive compatible device is effective in promoting the desirable behaviour. But when thedevice is removed, the level of cooperative behaviour reaches its minimum level, lower than the level observedin groups accustomed to the moral dilemma.




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morally innocuous to the parties in the transaction. This ethical assessment gains particular

relevance when considering, as the studies of behavioural economics have shown, that

people are not always aware of the role of the context and of the institutional arrangements

in determining their perceptions of it, and thus of their actions. This relevance is further

magnified by the scientistic discourse that often accompanies the proposal of economists’

solutions, which are purged of political content so as to appear innocuous to the parties

involved. As Grant (2006, p. 30) argues, in these instances it seems that ‘there is no need to

convince people that collective goals are good or to motivate them to pursue those goals by

appeals to rational argument, personal conviction or intrinsic motivations’. As a result,

‘[e]xperts and powerful elites [may] direct institutions and shape people’s choices without

the sort of public discussion and consent that characterizes democratic processes in

general’. But the ethical superiority of market and market-like solutions cannot be taken for

granted. It must be assessed and compared with other instruments of public policy.

To conclude, as long as choice architecture and design economics aim at altering

economic institutions and thereby the balance of power between individuals, they must be

part of a wider process of public discussion and consent; otherwise they risk being

instruments of manipulation. For they may deceive people into believing that they are

acting autonomously when they are actually being used for somebody else’s purposes. The

slogans ‘freedom to choose’ and ‘market efficiency’ are not substitutes of public discussion.

The economic and ethical benefits of public policies must be demonstrated rather than

assumed with the creation of new markets and market-like institutional arrangements.

6. Concluding remarks

Behavioural and experimental economics are part of the new mainstream of economics.

This is testified by the publication of behavioural and experimental research in top

economics journals and by the professional status their practitioners have acquired, inside

and outside academia. Policy makers are asking choice architects and design economists

for advice in the construction of various institutional setups that aim at steering human

behaviour in the directions set by policy-makers.

Both choice architecture and design economics depart from the neoclassical model of

human action, the homo economicus. The effectiveness of their policy proposals depend on

an accurate depiction of human beings, namely on their ability correctly to predict how

people will behave in the proposed institutional settings. And they both recognise the

relevance of the wider social and institutional context in people’s behaviour. This is in fact

their starting point. Choice architecture and design economics aim to improve the

institutional setting so as to help people make better choices for themselves and be more

aligned with what is required for the attainment of desirable socio-economic goals. These

proposals rely specifically on providing individuals with the required information and on

suggesting various devices that can help them to make the right calculations, thereby

preventing the detrimental effects of the bounded rationality of homo sapiens.

There is a crucial distinction between the two proposals, however. Whereas choice

architecture explicitly seeks to preserve the status quo ante, leaving the range of individual

choices and the structure of economic incentives intact, design economics may be

mobilised to produce major institutional change, altering the allocation of the set of

economic and political opportunities among differently situated groups of individuals. But

they are equally political constructs. They either protect or alter the balance of economic

and political power between different groups of people.

724 A. C. Santos



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Yet both proposals are presented as technical solutions to various kinds of socioeco-

nomic problems. While choice architecture deals with individual cognitive biases, helping

people the better to satisfy their wants, design economics deals with incentive problems,

trade-offs and other technical problems, to ensure the efficient allocation of goods, e.g. the

distribution of goods to those who value and are willing and able to pay the most for them.

They do not consider, much less address, how the new institutional arrangements will

impact on the distribution of economic and political opportunities and how interested

parties will react in turn. This omission may jeopardise the efficacy of proposed solutions

on their own terms. Institutional change may bring about an intense struggle for influence

over the collective definition of the new ‘rules of the game’ or may instill strong resistance

due to its impact on important values unprotected by the narrow neoclassical normative

principles of rationality and efficiency. Insofar as they have these impacts, the proposals of

choice architecture and design economics ought to be subjected to public discussion.

The implication of the foregoing analysis for the direction of economics is not

unambiguous. On the one hand, it may seem that the new research programmes are

adopting a rather conservative strategy, one that does not substantially change the nature of

economics. Economics is still largely about rational choice in efficient markets, where

human behaviour is still analysed in terms of the selection of the best alternative under

given constraints and goods are allocated to those who subjectively value, and are willing

and able to pay the most for them. On the other hand, the policy proposals make clear the

relevance of the institutional setup to individual and collective wellbeing, which cannot be

adequately dealt with within the neoclassical economics framework. Paraphrasing Chang

(2002), by emphasising the institutional dimension of human action, choice architecture

and design economics bring politics explicitly into economic analysis. And this may just be

the contribution of the recent research programmes to the building of a new orthodoxy

capable of replacing the old neoclassicism.

The analysis carried out thus suggests that the potential of the behavioural and

experimental approaches to transform economics lies in the consideration of the political

dimension of institutional change, a lacuna in the neoclassical economics approach. This

requires the explicit recognition that policy-making is not a mere technical exercise. The

economic and moral desirability of alternative socioeconomic institutions has to be

discussed and argued for. It also suggests that this research agenda can benefit from

collaborative work with heterodox economists, namely the tradition of old institutionalism,

who have addressed institutional change as part of a larger political process, and with

political philosophers who have studied the morality of markets, which must be subjected

to ethical scrutiny and democratic validation. Such a research programme would place the

analysis of institutions in a wider framework, one that explicitly recognises institutional

change as a political process, one that alters the distribution of economic and political

opportunities among individuals and that impacts on the motivations and values nurtured

in political communities. The possibility of reconciling these approaches would require of

traditional heterodox economists a greater interest in core topics, and of behavioural and

experimental economists a more receptive attitude toward the ethical appraisal of

alternative socioeconomic institutions.

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economia del comportamiento transformando a la economía

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