Last week, I blogged
about Richard Posner’s Wall Street Journal critique of the Consumer
Financial Protection Agency Act of 2009, Treating
Financial Consumers as Consenting Adults, in which he also took on
behavioral economics and leading behavioral economist, Richard Thaler:
The plan of the new agency reveals the
influence of “behavioral economics,” which teaches that people, even when fully
informed, often screw up because of various cognitive limitations. A leading
behavioral economist, Richard Thaler of the University of Chicago Booth School
of Business, wrote “Nudge: Improving Decisions About Health, Wealth, and
Happiness” last year with Cass Sunstein, who is President Barack Obama’s
nominee for “regulatory czar.”
Mr. Thaler, whose views are taken
seriously by the Obama administration, calls himself a “libertarian
paternalist.” But that is an oxymoron. He is a paternalist with a velvet
glove—as the agency will be. Through the use of carrot and stick, the agency
will steer consumers to those financial products that it thinks best for them,
whatever they naïvely think.
. . .
Behavioral economists are right to
point to the limitations of human cognition. But if they have the same
cognitive limitations as consumers, should they be designing systems of
consumer protection?
This week, Thaler responded to Posner in a long post that is
worth reading in its entirety, here:
Posner does not stop at
mischaracterizing the proposal. He launches a second line of attack based on
the following logic. 1) Behavioral economists such as Thaler have endorsed this
plan. 2) Thaler has been known to make mistakes. 3) Therefore, he should not be
in the business of helping consumers avoid mistakes. Of all the evidence
readily available that I am not perfect, he concentrates on the fact that I
have written about the well-known puzzle in economics that the difference in
returns between equities and bonds (the "equity premium") has, in the
past, seemed to be too large. With the market now down, presumably he thinks
this writing makes me look foolish. I plead guilty to joining the hundreds of
other economists (most of whom are not behavioral economists) who have written
about this historical puzzle. . . .
But, given that I do not claim to be
infallible, what does this have to do with whether we should try to help people
make better choices? The premise of behavioral economics is that humans are not
perfect decision-making machines. We are busy and distracted. We have fields
that we know well, but are amateurs in most other domains. If our car breaks
down, we go to a trained mechanic. Even the best mechanics will make some
mistakes (they are human), but for most of us they still have a better chance
of getting our cars to work than doing it ourselves. Even Judge Posner is
human, and given the number of books he has written, he must have made a few
mistakes in print. But our legal system needs judges, and one of the reasons we
have a layered judicial system is so that mistakes by one judge can be
corrected by others. Should we abolish our legal system because judges are
known to make mistakes?
(HT: Mark
Thoma)