The Case for Behaviorally Informed Regulation

If you’re interested in “choice architecture” or “libertarian paternalism” this paper is for you.

Introduction (Via Tobin Project)

Policymakers approach human behavior largely through the perspective of the “rational agent” model, which relies on normative, a priori analyses of the making of rational decisions. This perspective is promoted in the social sciences and in professional schools, and has come to dominate much of the formulation and conduct of policy. An alternative view, developed mostly through empirical behavioral research, provides a substantially different perspective on individual behavior and its policy implications. Behavior, according to the empirical perspective, is the outcome of perceptions, impulses, and other processes that characterize the impressive machinery that we carry behind the eyes and between the ears. These proclivities, research has shown, intrude upon and shape behavior, often quite independently of deliberative intent, and in contrast with normative ideals that people endorse upon reflection. The results are systematic behaviors that are unforeseen and misunderstood by classical policy thinking. A more nuanced behavioral perspective, such research suggests, can yield deeper understanding and improved regulatory insight.

Excerpt (Via Tobin Project)

For example, while the causes of the recent mortgage crisis are myriad, a central problem was that many borrowers took out loans that they did not understand and could not afford. Their behavior is inconsistent with a model of rational agents with perfect information and perfect foresight, and good regulation ought to take their rather common behavior into account. As discussed below, an opt-out home mortgage plan, such as one that provides a standard fixed-rate loan with straightforward terms, could be a start. A person could then choose to opt out in favor of another mortgage plan, but only after being shown comprehensible disclosures about the risks involved. Lenders will have an incentive to make such disclosures properly because they will bear greater liability or other costs in the case of default among those who have opted out. In what follows, we outline the main tenets of the behavioral perspective, we provide some examples of relevant policy applications, and we discuss the implications of this analysis for the conduct of policy, particularly in the context of a market economy.

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28. August 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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