By Barkley Rosser, Professor of Economics at James Madison University in Harrisonburg, Virginia. Originally published at Angry Bear
Last weekend I attended a conference at NYU Law School on “Behavioral Economics and the New Paternalism, organized by Austrian economist Mario Rizzo and classical liberal law professor Richard Epstein. It included economists, lawyers, philosophers, and a couple of psychologists. While there was a range of views present a theme for many and especially of the organizers was bashing the ideas about “libertarian paternalist” nudging advocated by Richard Thaler, winner of the most recent economics Nobel Prize, and Cass Sunstein. In particular, Rizzo and participant Glen Whitman have written a book charging the nudgers with advocating a creeping totalitarianism with their advocacy of governments nudging people to do what governments think is best for them. While there were no full-blown Thaler defenders at the conference, the more philosophically oriented attendees rose to the bait and argued against the anti-nudgers, with an especial sharp debate happening between Epstein and Robert Sugden a philosophical economist from East Anglia in England.
Pethaps the most substantial anti-nudge and also critical of behavioral economics paper came from George Mason law professor, Todd Zywicki. While he overdid it a bit he argued with some good reason that most legal decisions in the US relying on claimed behavioral economics foundations, especially on matters involving credit and consumer finance issues, have been seriously flawed. They have either relied on misinterpretations or else mere assertions that have not been empirically demonstrated. He raised a point of more general interest in charging that there has been a problem of “citation cascades,” where a string of decisions have been based on people citing people citing other people in a cascade that eventually boils down to an initial claim that has no clear basis. He noted several of these where the original argument was mere speculation in a paper by Thaler for which no empirical support was provided, but then people quoted his opinion as proof and then quoted each other quoting him, and so on.
Much less polemical but more serious intellectually were papers by Gerd Gigerenzer and Nathan Berg. The former directs a branch of the Max Planck Institute in Berlin and has written an important book with the late Reinhard Selten. Berg was a professional jazz musician before he became an economist, now based in Otago, New Zealand. I have published a paper in my journal, ROBE, on their general themes, which draw on ideas of Herbert Simon and his bounded rationality. In particular Gigerenzer pointed out lots of cases where people doing things that look supposedly irrational for one reason or another in fact lead them to perform better than supposedly rational actors. So there may be a hot hand after all and the “gambler’s fallacy” may actually make money. One point is that sample parameters may not be the same as population ones. Even being inconsistent may actually allow one to perform better than consistently. So to the extent nudge paternalism is supposed to help people overcome hurtful damaging of themselves, well, it may not really help them.
The philosophical defenders of the nudge agenda appealed to multiple selves theory, among other things. One problem was that some of the nudge critics denied findings of behavioral economics that hold. So Richard Epstein denied the endowment effect, noting that most experiments about it have involved undergrads and coffee mugs, demanding more for ones they have been given than they are willing to pay for ones they do not own. Epstein argued that coffee mugs are not a big part of the economy. Also, he and others cited papers by Plott and Zeiller that showed it is possible to structure these experiments so that the effect disappears. However, Sugden and others noted that this is a special case, and that generally the endowment effect holds and does so in important and large scale situations. So people will demand much more compensation for giving up some wilderness area than they are willing to pay for more of it.
I noted that this is like the matter of the ultimatum game, where people tend to refuse what they consider unfair offers, even though it costs them money to do so. Over 30 years ago Ken Binmore showed that it was possible to set up ultimatum game experiments where the usually found effect disappears. But the oddity of that result in the end shoed that Binmore’s result was an exception. The ultimatum game result is very robust. People really do care about fairness.