Law and Economics Article 127 Harv. L. Rev. 1593

How Behavioral Economics Trims Its Sails and Why

The tension between policy and social science in behavioral law and economics



The preference of behavioral law and economics (BLE) for regulatory approaches that preserve “freedom of choice” has led to incomplete policy analysis and inefficient policies.  BLE has been broadly regarded as among the most promising new developments in public policymaking theory and practice.  As social science, BLE offers hope that better understanding of human behavior will provide a sounder foundation for policy design.  As politics, BLE offers a possible political consensus built around minimalist forms of government action — “nudges” — that preserve freedom of choice.  These two seductive dimensions of BLE are, however, in deep tension.  Put simply, it would be surprising if the evidence documenting the failure of individual choice implied a turn toward regulatory tools that preserve individual choice.

Developing BLE fully along its social-scientific dimension would reveal two categories of recurring limitations in BLE.  First, BLE often artificially excludes traditional regulatory tools, such as direct mandates, from its analysis of policy options.  However, BLE’s preferred nudges are, in important cases, not likely to be effective — ironically, for reasons BLE itself identifies.  BLE has also neglected the ways in which behavioral failures interact with traditional market failures and the implications of this interaction for policy design.  A more complete framework generates policy recommendations beyond both nudges and neoclassical economic prescriptions.

Second, BLE does not properly evaluate, at times, how its own regulatory tools actually function.  Many of these seemingly choice-preserving tools are not nearly as light touch as advertised.  The default rules so central to BLE are often better viewed as preserving the formality of choice while, for many individuals, functioning as effective mandates.  The view that people can always rationally opt out has led policymakers to set these powerful defaults at the wrong levels, resulting in counterproductive policies.

We illustrate the costs of BLE’s commitment to freedom of choice by analyzing three of the most important areas for current policy: retirement savings, consumer credit, and environmental protection.