Introduction: Behavioral Economics and New Paternalism

Abstract

The articles in this special issue of the Review of Behavioral Economics were originally presented at a conference at the New York University School of Law on April 13 and 14, 2018. The conference was sponsored by the Classical Liberal Institute at NYU Law which is directed by Richard A. Epstein and Mario J. Rizzo. We are especially thankful to our program manager, Laura Cresté, for her invaluable help in organizing this conference. The rise of behavioral economics over the past thirty years or so has opened up new areas of public policy. Previously, most economists defended government intervention in cases of monopoly power or other forms of restrictions on competition, activities where externalities were present, public goods, and cases of asymmetric or deficient information, as well as a ragbag of other cases that could be characterized as forms of “market failure.” Today behavioral economists emphasize the presence of more endemic forms of failure, that is, “decision-making failures.” Collectively, these refer to the failure of ordinary individuals and government decision-makers alike to follow the traditional neoclassical standards of rationality. These individuals, whether ordinary people, government officials, or private professionals, may be systematically biased in their cognition; or they may conduct their work under inconsistent preference structures. For example, it is commonly asserted by behavioral economists that two logically equivalent ways of framing a problem may elicit different choices. A doctor may say that an operation has a survival rate of 90% or a fatality rate of 10%. In the former case, more people may choose to have the operation than in the latter case. People may also overestimate small probabilities and under-estimate large probabilities. Similarly people’s preferences may be greatly affected by nudges, even though the nudge does not change the relative costs of or information regarding the different options. Behavioral economists point to the profound effects of automatic enrollment in employer-sponsored retirement savings programs, in contrast to programs for which only those individuals who chose to actively enroll participate.