Abstract
This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program. Such an extension could be related to the concept of robust political economy, according to which the case for paternalism should be subjected to “worst-case” assumptions, such as policymakers being less than fully rational.
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[W]e should not expect models based on the assumption of rational individual behavior to yield as fruitful a result when applied to collective-choice processes as similar models have done when applied to market or economic choices. – Buchanan and Tullock (1962)
1 Introduction
Recently, and especially since the publication of Nudge (Thaler and Sunstein 2009), a public debate about paternalism has emerged. By “paternalism” is meant conscious attempts to alter the “choice architecture” that people face with the purpose of helping them make better decisions, as judged by themselves or others.Footnote 1 One basis for the discussion is research findings in behavioral economics that make clear that economic decision-makers are often far removed from the rational homo economicus. They are rather characterized by cognitive limitations and biases, and they are affected or afflicted by such things as imperfect self-control, framing effects, loss aversion, endowment effects, choice bracketing, information and choice overload and a poor grasp of probability calculations.Footnote 2 Although this insight is not new—Ashraf et al. (2005) trace it back to Smith (1759), and Simon (1955) stressed the bounded nature of rationality early on—it has now been documented thoroughly through experimental research.Footnote 3
Here, we ask how paternalism on grounds such as these is treated in the scientific literature. More precisely, we present the results of a systematic analysis of all articles in behavioral economics dealing with limited rationality (in a wide sense) in the ten leading economics journals in the past ten years. The study has two main purposes. The first is to document the prevalence of policy recommendations of a paternalist kind in leading research in behavioral economics. To what extent do researchers draw normative conclusions from the insight that economic actors often behave irrationally?Footnote 4 The second is to investigate to what extent those behavioral economists that do offer policy recommendations analyze policymakers in the same way as they analyze economic decision-makers. Are the former also seen as suffering from cognitive imperfections and irrationality, or is it simply assumed that they are without such problems? To the extent that researchers do not apply assumptions about cognitive limitations and biases to policymakers, or motivate why such assumptions are superfluous, it could be argued that policy recommendations are based on an incomplete analysis. If policymakers are irrational just like others, the chances of success for the paternalist project can be put into question.
The main results are that 20.7% of leading articles in behavioral economics contain some kind of paternalist policy recommendation and that 95.5% of these (64 out of 67) do not contain any analysis at all of the potential problems with cognitive limitations and biases of policymakers. This, we suggest, is a finding of a methodological inconsistency that makes the policy recommendations less credible.
The present study has been inspired by the way in which public choice scholarship emerged. One important feature of that emergence was a critique of an asymmetry in much economic research at the time with regard to assumptions about the motivation of economic and political actors. Economic actors were assumed to be self-interested, whereas political actors were assumed (usually implicitly) to maximize a social-welfare function rather than their own utility functions. Hence, policy recommendations could proceed on the assumption that whatever welfare-improving advice was given to policymakers, they would want to implement it. Contra this, Buchanan (1949), Buchanan and Tullock (1962) and Brennan and Buchanan (1984, 1985) have played an especially important role in (re-)introducing a political economy approach into economics. Brennan and Buchanan (1985: 50) write:
The symmetry argument suggests only that whatever model of behavior is used, that model should be applied across all institutions. The argument insists that it is illegitimate to restrict Homo economicus to the domain of market behavior while employing widely different models of behavior in nonmarket settings, without any coherent explanation of how such a behavioral shift comes about.
One effect of the public choice argumentation has been the now widespread recognition that before policy advice is proffered, a comparative institutional analysis, of both market and government failures, needs to be undertaken.Footnote 5 As the present investigation demonstrates, such comparative analysis is largely missing in the realm of behavioral economics when policy recommendations are presented. This may be seen as unsatisfactory. We think, first of all, that policymakers should be explicitly analyzed in studies of this kind; second, that the default approach should be to apply symmetric assumptions about rationality and cognitive ability to economic and political decision-makersFootnote 6; and third, that asymmetric assumptions are fine if they are explicitly motivated. As Buchanan (1984: 13–14) puts it:
[T]he burden of proof should rest with those who suggest wholly different models of man apply in the political and economic realms of behavior.
Thus, when a coherent explanation for asymmetry can be given, asymmetry is in general not a problem.
The argument of this study is not, then, that paternalism is unwarranted—only that a thorough and complete positive analysis, which takes seriously the use of realistic assumptions for both market and government, should precede and inform (and sometimes put to a halt) policy recommendations of a paternalist kind. This argument can be related to the concept of robust political economy, by which is meant that in analyzing systems, institutions or policies, such as paternalism, their functionality and desirability should be investigated by subjecting them to “worst-case” assumptions for the relevant actors with regard to their motivation and cognitive ability (Boettke and Leeson 2004; Leeson and Subrick 2006). In part, this approach is inspired by scholars in the Austrian tradition, who stress the cognitive limitations of man, including policymakers.Footnote 7 One can mention Hayek’s (1937, 1945) analysis of how knowledge can be generated and used successfully, as well the argument by von Mises (1966: 696), on whether welfare-enhancing central planning is possible:
In terming the director society (as the Marxians do), state (with a capital S), government, or authority, people tend to forget that the director is always a human being, not an abstract notion or a mythical collective entity. We may admit that the director or the board of directors are people of superior ability, wise and full of good intentions. But it would be nothing short of idiocy to assume that they are omniscient and infallible.
The argument does not (unlike the public choice approach) question the motivation of these directors but puts into question whether they possess sufficient knowledge to carry out their task. While the focus of Hayek and von Mises is more on the issue of central planning than on paternalism, Holcombe (2009: 311) sees a clear connection:
Austrian economics rests on behavioral foundations that are not inconsistent with these behavioral “anomalies.”
One contribution of the Austrians is that they apply their insights about imperfect decision-making also to the political realm.
The paper proceeds as follows. The next section offers a brief sketch of the current debate on paternalism. Then, we describe the data and method used in this study in more detail, and the empirical findings are presented. Lastly, concluding remarks are given.
2 The current debate on paternalism
To get a feeling for what the debate is about, let us take a look at some of the arguments for and against policy interventions aiming to improve the decision-making of irrational persons. Such interventions have not least been advocated by Thaler and Sunstein (2003, 2009) and Sunstein and Tahler (2003).Footnote 8 Thaler and Sunstein (2003: 175) refer to their approach as libertarian, or soft, paternalism Footnote 9:
We believe that the anti-paternalistic fervor expressed by many economists is based on a combination of a false assumption and at least two misconceptions. The false assumption is that people always (usually?) make choices that are in their best interest. This claim is either tautological, and therefore uninteresting, or testable. We claim that it is testable and false—indeed, obviously false. The first misconception is that there are viable alternatives to paternalism. …The second misconception is that paternalism always involves coercion. … If no coercion is involved, we think that some types of paternalism should be acceptable to even the most ardent libertarian. We call such actions libertarian paternalism.
Another, related form of paternalism has been advocated by Camerer et al. (2003: 1212):
We propose an approach to evaluating paternalistic regulations and doctrines that we call “asymmetric paternalism.” A regulation is asymmetrically paternalistic if it creates large benefits for those who make errors, while imposing little or no harm on those who are fully rational.
Such paternalist ambitions based on results from research in behavioral economics have been criticized on several grounds. A basic theme in this critique is captured by Stigler (1982: 140) in his rendition of Adam Smith’s view:
Smith gave a larger role to emotion, prejudice, and ignorance in political life than he ever allowed in ordinary economic affairs.Footnote 10
That is to say, even if it is the case that the economic decision-makers often behave irrationally, it may be the case that political decision-makers and bureaucrats often do, too. If so, this weakens the case for paternalist policies. This line of argument is presented by Glaeser (2004: 412):
Evaluating government intervention requires us to weigh the relative losses from private folly and state malfeasance. After all, our leaders are subject to the same biases as private citizens, and people may select into politics on the basis of overoptimism and aggression. … The advent of democracy increases the hope that we can trust our governments. Psychological realism challenges this view and suggests that voters will be apathetic and, when they act, often enthusiastically support policies and politicians that are against their long-term interests.Footnote 11
Glaeser (2006: 133) develops the argument further, and claims:
With boundedly rational voters and politicians, democracy is no guarantee against political catastrophe. Moreover, as the three models in this Part emphasize, when cognitive errors are in some sense endogenous, then economic theory pushes us to think that private decisions will often be more accurate than public decisions.Footnote 12
Rizzo and Whitman (2009a) warn of a slippery-slope effect of soft paternalism, not least if policymakers are less than fully rational, such that hard paternalism might ensue. For instance, they argue that hyperbolic discounting, narrow framing, acceptance of passive framing, extremeness aversion and extension neglect by policymakers tend to reinforce such an effect. Rizzo and Whitman (2009b: 910) offer a tour de force of potential knowledge problems with government intervention in the light of the findings in behavioral economics:
If well-meaning policymakers possess all the relevant information about individuals’ true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough.
We suggest that this critique points at a need for behavioral political economy, to use DellaVigna’s (2009) term, which applies the tools of behavioral economics also to politicians and bureaucrats. If one is considering recommending political action to alleviate the effects of the cognitive limitations of economic decision-makers, it seems important to consider whether those envisaged to decide on and carry out the action have cognitive limitations as well. This clearly relates to the concept of robust political economy (Leeson and Subrick 2006). In describing this approach, Boettke and Leeson (2004: 101, 109) write:
Robust political economy requires that the system deal adequately with both motivation and information issues. Under ideal conditions of complete benevolence and omniscience, any political economic organization is workable; but, in a world of gods, the notion of economy, and with it the science of economics, disappears. What political economists in the real world should concern themselves with is how stable various modes of social organization available to us are under real-world incentive and information conditions.
This approach implies that before it can be assessed whether policymakers should be entrusted with the tools to take paternalist policy action, their cognitive ability to do so needs to be investigated.Footnote 13
Hence, the case for government paternalism could be said to hinge on several (necessary but not necessarily sufficient) conditions being met, as illustrated in Fig. 1.Footnote 14
One could argue for government intervention as soon as economic decision-making has been shown to exhibit instances of irrationality, cognitive limitations, or the like, but such a conclusion could be regarded as hasty, given the further considerations (highlighted in Fig. 1) that are relevant for assessing whether such intervention has a good chance of being successful.
First, there may be private solutions which render government action unnecessary. For example, some soft-paternalist proposals are directed towards private actors, such as Thaler and Sunstein’s (2009) oft-cited example with a cafeteria owner who arranges products in order to influence patrons to buy healthier options. If such a scheme works out, then there seems to be little need for government interventions.Footnote 15,Footnote 16 Second, it could be that political decision-makers and bureaucrats do not have the incentives to try to improve economic decision-making (as stressed by public choice research—see, e.g., Hayek 1960: 291; Mueller 2003; and Glaeser 2006).Footnote 17 Third, political decision-makers and bureaucrats could suffer from the same instances of irrationality and cognitive limitations that economic actors suffer from. Taken together, the second and third points here relate directly to the approach of robust political economy (Boettke and Leeson 2004).
If there are no private solutions, if there are no incentive problems in politics, and if there are no problems of irrationality or cognitive limitations in politics, then government paternalism could arguably be seen as justified in the presence of decision-making problems for economic actors. If any one of these conditions is not met, it is, at the very least, not clear without careful comparative analysis that political interventions, aiming to alter the “choice architecture” of decision-makers, will improve the situation. Without reasonable confidence in such a scope for improvement, the presence of irrationality or cognitive limitations in economic decision-making does not clearly justify paternalist policies. In our view, those proffering paternalistic policy recommendations therefore at the very least need to show what assumptions are being made about the cognitive powers of policymakers (voters, politicians, and bureaucrats), motivate them explicitly and make precise how they translate into policies that improve the initial situation.
This is where the present paper finds its motivation. First, it investigates to what extent leading articles in behavioral economics argue for paternalist interventions on the basis of research identifying economic actors as less-than-fully rational. Then it studies to what extent the articles that do argue for such interventions incorporate an explicit analysis of the rationality and cognitive abilities of “choice architects”—i.e., policymakers and other paternalist executors. In other words, is the methodological consistency that Buchanan (1984) identifies as central in the analysis of politics applied and, to the extent that it is not, are wholly different assumptions for the economic and political realms motivated?
3 Method and data
This study is based on a systematic investigation of all articles (including notes but excluding reviews and errata) in behavioral economics published in the period 2000–2009 in the top-ten journals of economics, viz., American Economic Review, Journal of Finance, Quarterly Journal of Economics, Econometrica, Journal of Financial Economics, Journal of Political Economy, Review of Financial Studies, Journal of Economic Theory, Review of Economic Studies and Journal of Econometrics.Footnote 18 The selection is based on the “within economics impact” ranking of Kodrzycki and Yu (2006).Footnote 19 Choosing the top-ten journals as opposed to other journals is to some extent arbitrary, but the idea is to capture the practice of the behavioral economics research frontier during the past decade. Results for publications in behavioral economics in other journals and in earlier time periods may of course differ from the ones produced in this study. For comparison, we have also categorized all articles in Review of Austrian Economics in the same period, using the same criteria.
“Behavioral economics” is defined, for the purposes of this study, as the analysis of economic actors with theoretical assumptions or empirical findings of cognitive imperfections, irrationality or problems with self-control in their decision-making. The definition also covers behavioral finance. Notably, the definition excludes articles that address whether economic actors are strictly self-interested or if they have social preferences and display altruism, which are generally seen as part of behavioral economics. The motivation for this exclusion is that the focus of this study is on whether policy recommendations of a paternalist kind could be seen as problematic on the terms of behavioral economics itself. For that reason, it would not be meaningful to see whether paternalist actors are assumed to have social preferences in behavioral economics research, since that would not constitute a problem for policy recommendations on the terms of behavioral economics itself. Another set of articles are also excluded from this investigation: those that study how individually rational actions produce socially suboptimal, or irrational, outcomes.
A “policy recommendation” is defined as a recommendation to undertake some form of conscious action aiming to enable economic decision-makers to behave less irrationally, with less cognitive imperfection or with more self-control. Such recommendations count as instances of paternalism. The conscious action could be more or less intrusive, ranging from a weak nudge (soft paternalism) to outright prohibitions (hard paternalism). The primary focus in this investigation is recommendations directed toward the government (in a broad sense, covering both politicians and bureaucrats), but we also cover cases where economic actors (typically companies), civil society or economists are urged to act. Recommendations, in our sense, can be given strongly or weakly. The former category covers explicit, clearly stated recommendations, while the latter category includes explicit but vague recommendations and implicit ones, e.g., in the form of hypothetical imperatives and general policy discussions.
Figure 2 Illustrates schematically how the categorization of articles has been undertaken.
The first step was to categorize all articles in the ten journals into one of two sets: being in behavioral economics or not. Of the former set, the share which contained a policy recommendation was identified and calculated. Lastly, the articles with a policy recommendation were sorted into one of three groups: those that applied the same assumptions of cognitive ability for policymakers and economic decision-makers, those that applied different such assumptions and those that applied no such assumptions.Footnote 20
The more precise way in which the search of journals was carried out is specified in the Appendix. Three examples of how articles were categorized are also given there.
4 Empirical results
4.1 Articles in behavioral economics
In Table 1, we first present the total number of journal articles that we have analyzed (i.e., the total number of published articles in the ten journals) and the total number and share of articles that were found to be in behavioral economics.
As can be seen, more than 8,000 articles have been analyzed for this study, and out of them, 323 (4%) were in behavioral economics (in our sense of the term—see Section 3). Interestingly, there is no increasing or decreasing trend for the share of articles in behavioral economics in the top-ten journals: it hovers around 4% throughout the period.
When comparing the journals, it is clear that some published more behavioral economics research than others during this period—see Table 2. The Journal of Finance and the Quarterly Journal of Economics published the most; the Journal of Economic Theory and the Journal of Econometrics the least. To some extent, this plausibly reflects the subject profile of some of the journals.
For reasons of comparison, we have also looked at Review of Austrian Economics. Out of a total of 182 articles, 19 (10.4%) are in behavioral economics—although it bears noting that the approach and methodology of these papers differ from those in the ten other journals. Typically, these papers make use of the knowledge-problem insights identified by von Mises and Hayek to argue that economic agents tend to have limited and local knowledge.
4.2 Articles with a policy recommendation
We next turn to the share of the articles identified as being in behavioral economics that contain a policy recommendation (as defined in Section 3). As is clear from Table 3, over all years, 20.7% of all the articles in behavioral economics in the top-ten journals contain some kind of policy recommendation.Footnote 21 This of course means that almost 80% of all the articles do not contain such a recommendation, implying that most of the leading behavioral economics research is about producing positive results, not affecting policy.
Out of the 67 articles with a policy recommendation, only 16 (23.9%) of the recommendations are of a strong and explicit kind, whereas the rest can be considered weak (for definitions of strong and weak, see Section 3). The share of articles in behavioral economics in the ten journals 2000–2009 with a strong policy recommendation is therefore 4.9% (20.7 × 23.9%).
When looking at the journals, large differences appear, according to Table 4. While the articles in behavioral economics in the Journal of Political Economy and the Quarterly Journal of Economics contain a policy recommendation in about 55% of the cases, the corresponding shares for the Journal of Financial Economics and the Journal of Econometrics are 5.7% and 0%.
One possible explanation may be that the journals differ with regard to how theoretical and abstract they are: it is plausible to expect Econometrica and the Journal of Econometrics not do deal with policy issues to any large extent, whereas the journals with a high degree of policy recommendations may have a general tendency to welcome more practically oriented and policy-relevant studies. It also seems to be the case the three journals with the highest shares are the most general and the least subject-specific.
4.3 Designated receivers of policy recommendations
A further question is: To whom are these policy recommendations directed? We distinguish between the government (broadly speaking), on the one hand, and private actors (in the market and in civil society), on the other. Over the whole time period, and for all journals, we find that out of all policy recommendations, 81.2% are directed toward the government and 62.4% toward the private sector. This means that some articles direct their policy recommendations to both government and private actors. But clearly, the government is involved in a large majority of the cases.
4.4 Behavioral analysis of policymakers
Lastly, we look at whether the articles in behavioral economics that contain a policy recommendation apply a behavioral analysis to the policymakers as well. We divide the articles into three groups: i) those that do not contain any explicit behavioral analysis of policymakers; ii) those that contain the same behavioral analysis (i.e., policymakers are analyzed, cognitively, in the same way as economic actors)Footnote 22; and iii) those that contain a different behavioral analysis (i.e., policymakers are analyzed in a different way than economic actors, viz., as having no or less severe cognitive limitations or biases, and this methodological asymmetry is incorporated into the analysis in an explicit way and is motivated or explained). The shares sum, for each journal, for each year and in total, to 100%.
Table 5 reveals that in 95.5% of the articles that contain a policy recommendation (64 articles), no behavioral analysis of policymakers is included. Of the remaining ones, 3.0% of the articles (two articles) contain the same behavioral analysis of economic and political actors, which means that policy recommendations are put forth in spite of taking into account the cognitive limitations of policymakers, and 1.5% (one article) contain a different behavioral analysis, which means that this study motivates why there is a methodological asymmetry in the analysis. Not assuming theoretically or not finding empirically that policymakers have cognitive limitations can be expected to be positively related to a propensity to advocate paternalism, since the analysis then implies that they are competent at mitigating the cognitive limitations of economic actors.
If we look at the journals, as reported in Table 6, we see that the differences are quite small (with the exception of the Journal of Econometrics, which contains no article in behavioral economics with a policy recommendation). The general pattern is that a negligible share of the articles that contain a policy recommendation also contains a behavioral analysis of policymakers.
As a comparison, while no articles in Review of Austrian Economics contain paternalist policy recommendations, 8.2% of its total number of articles contain behavioral political economy. Boettke et al. (2007) and Holcombe (2009) clarify the basis in Austrian economics for assuming policymakers to have cognitive limitations. We suggest that this line of research can serve as inspiration for practitioners of behavioral economics who wish to offer policy advice and who thus far have not incorporated behavioral political economy into their analysis.Footnote 23
4.5 Comments
Almost none of the articles with a policy recommendation include a behavioral analysis of policymakers. Until studies of this kind do, we suggest it is prudent to regard the policy recommendations with skepticism. Methodological consistency, in terms of assumptions of motivation and cognitive capacity, is not a necessity, but if different assumptions are used for economic and political decision-makers, which seems to be the case in almost all of the leading research in behavioral economics that contains policy recommendations, then these need to be argued for.
As noted above, the large majority of articles covered in this investigation do not contain paternalist advocacy. But it could be that the behavioral economics literature is used to motivate paternalist policies by others than the scholars themselves or by the scholars themselves in other contexts. For instance, it could be cited to justify paternalism in the media, in reports from organizations of various kinds, in the work of government commissions and government bureaus (e.g., Nudge author Cass Sunstein now heads the Office of Information and Regulatory Affairs at the White House) and in traveaux prépartoires to legislation. Hence, this investigation can be expected to underestimate the effect of behavioral economics research on the wider policy debate and on policy decisions.
As anecdotal evidence of whether our 323 articles in behavioral economics have had a wider influence on the public debate, we checked how many of them that were cited in Nudge (Thaler and Sunstein 2009), arguably the most influential book arguing for paternalism and covering large parts of our time period. The result: 13 (4%). Of these, 11 (85%) contained a policy recommendation, which means that 16% of the 67 articles in behavioral economics with a policy recommendation were cited in the book. We leave for the reader to decide whether this implies a small or large usage of research in behavioral economics in a policy-recommending book. In any case, this line of research may still be used in many other ways and settings, the investigation of which lies beyond the scope of this study.
5 Concluding remarks
In recent years, there has been a renewed interest in paternalism, not least after the publication of the Thaler and Sunstein (2009) book Nudge. The authors advocate a new kind of paternalism, largely based on findings in behavioral economics that document that economic decision-makers do not readily conform to the homo economicus model. Decision-makers are unable to process information perfectly; they are affected by short-term factors; they lack in knowledge—in brief, they make mistakes of various kinds. Soft or libertarian paternalism is proposed as a solution, whereby the government or other actors step in and design schemes with a default alternative that most can be expected to abide by and benefit from.
In this study we ask: Is the possibility that those who devise, implement and manage paternalist policies and schemes themselves suffer from cognitive limitations etc. taken into account? That is, are the insights of behavioral economics in the economic sphere taken seriously in the political sphere when paternalist policy recommendations are proffered? If policymakers are not analyzed, or if they are analyzed differently than economic actors without there being a motivation for it, this could be seen as weakening the case for paternalism. It does not seem satisfactory to simply assume that one set of actors is free from irrationality, without grounding this in psychological realism, while at the same time stressing such grounding as paramount for another set of actors.
This can be related to the setting in which public choice emerged as a research field. At that time, political actors were assumed by many economists to be benevolent maximizers of a social welfare function. As a reaction, public choice scholars argued for symmetry in assuming that both political and economic actors maximize their own utility functions, with the same degree of self-interest.
In order to investigate the issue at hand, we have categorized all articles in behavioral economics in the ten most highly ranked journals in economics during the period 2000–2009. We have then looked closer at the articles that contain a policy recommendation, in order to see if the rationality or cognitive ability of policymakers has been addressed, and in what way.
Our main findings are that 20.7% of all articles in behavioral economics in the ten journals contain a policy recommendation and that 95.5% of these do not contain any analysis at all of the rationality or cognitive ability of policymakers. In fact, only two of the 67 articles in behavioral economics with a policy recommendation contain an assumption or analysis of policymakers of the same kind as that applied to economic decision-makers. In the remaining 65 articles, policy recommendations are proffered anyway.Footnote 24
There is arguably room for scientific improvement by expanding the research program into incorporating behavioral political economy. As stressed by the concept of robust political economy, rooted in the public-choice and Austrian-economics traditions, it is otherwise hard to know whether suggestions of paternalism offer scope for actual welfare improvement or not. With it, comparative analysis becomes possible, so that conditions for successful paternalism can hopefully be identified.
What might research in behavioral political economy entail? Although the precise details will arguably be made clear in the actual work carried out in the future, some possible (and, in our view, desirable) broad features of such research can be identified. First, the most natural extension would be to offer an explicit and well-motivated modeling of political actors in theoretical models and to conduct experiments that investigate the rationality of voters, politicians and bureaucrats. These findings would then be incorporated into the overall analysis, together with the explicit modeling of economic agents and experimental results of economic decision-making. As in behavioral economics, not only lab but also field experiments could be conducted. Second, in addition to the study of individual decision-makers, the research field could benefit from system-level analyses as well that take into account how political institutions affect behavior. As mentioned above, economic decision-makers, although cognitively limited on an individual basis, may act as if they were rational in market exchange governed by certain institutions. Boettke et al. (2007) give us reason to doubt that there is a similar effect in politics, but this is still a question that could fruitfully be addressed. Clearly, there is work to be done.
Notes
See Dworkin (2009) for more on paternalism.
The study of how cognitive processes and decision-making are carried out in practice is not limited to behavioral economics, narrowly conceived. One could mention groupthink mechanisms (Bénabou 2009; Klein and Stern 2009), institutional and cultural lock-in (Klein 1994; Kuran 1996; Pierson 2004) as well as the use of heuristics (Berg and Gigerenzer 2010; Gigerenzer and Gaissmaier 2011) as three examples of a wider take on how beliefs and decisions are formed. However, it is beyond the scope of this paper to delve deeper into these phenomena.
A positive analysis of how economic decision-making functions does not in itself imply a normative position on whether the government should try to influence economic actors in particular ways. However, it certainly can be used in an argument for paternalism.
Bowles and Gintis (2000: 1425): “First, market failures and state failures are now analyzed in a common framework rather than from competing viewpoints, due to development in information economics, and especially the modeling of relations between principals and agents. Moreover, public choice theory has given us a unified approach covering the actions of government officials and market actors alike. As a result, the state is no longer the exogenous instrument wisely implementing some concept of social well-being, and attention has shifted from picking the right policy, to setting up the right rules so that the imperfect interplay of incentives of all the relevant actors will support socially desirable, if not optimal, outcomes.” Cf. Kliemt (2005).
This is not to say that the exact same assumptions need to be applied: rationality and cognitive ability could be imperfect for both types of actors but the imperfections could be of different kinds.
“Policy” or paternalism need not refer to government interventions but could also refer to market or civil-society actors, who may try to induce others to make better decisions. In this paper, the main focus is on the government, but recommended interventions of the latter type are also covered in the systematic analysis.
Cf. Coase (1994: 116).
While the conditions are expressed in dichotomous (and categorical-sounding) form in the figure, this is a simplification. They may be met to a smaller or larger degree, and paternalism is called for to the extent that they are met.
However, as pointed out by Sugden (2009), if business owners are to be urged to try to bring about more rationality, one must first analyze if they have an incentive to do this and if they themselves are not characterized by irrationality, cognitive limitations and poor self-control. If so, the case for this type of paternalism is also weakened considerably.
One could also, under this rubric, envisage other methods for solutions than paternalism, e.g., market mechanisms under general institutions that induce economic actors to act almost as if they were rational—see Smith (2000), Levitt and List (2008), List and Millimet (2008) and List (2011). Put shortly, institutions affect how a given level of rationality translates into actions and outcomes.
In the ensuing analysis, we do not consider “the public choice insight”, not because it is unimportant but because we wish to focus on “the behavioral political economy insight”, which applies irrespective of whether policymakers are self-interested or not (von Mises 1966; Krusell et al. 2002). In future research, in accordance with the robust political economy approach, it could be interesting to analyze interaction effects, e.g., to see whether self-interested policymakers exploit cognitive limitations to pursue policies that favor them rather than the population in general.
The full dataset, with a listing of all included articles and with quotes of policy recommendations, is available upon request from the author.
There is considerable overlap between different rankings of economics journals. For example, the one by Kalaitzidakis et al. (2003) has seven of the ten journals included here on its top-ten list (excluding the three finance journals).
By “different” is meant an assumption that specifies policymakers as being rational or, at least, less irrational than those which paternalism is supposed to help make better decisions. One basis for such an argument could be that policymakers are often experts or have access to experts who are able to clearly see what needs to be done. We do not claim that this is an unreasonable assumption—although several scholars cited in Section 3 could be interpreted as seeing it as such—but we do think that it should be made explicitly and that it should be motivated, preferably on empirical grounds.
Of the 323 articles in behavioral economics identified, 131 (40.6%) are purely theoretical. Of the 67 ones that also contain a policy recommendation, 27 (40.3%) are purely theoretical. Hence, a majority of the articles with a policy recommendation contains empirical analysis.
This is not to say that the cognitive limitations are of the exact same kind, only that some type of cognitive limitation is assumed or allowed for also in the case of policymakers.
Some caution when interpreting the findings is advisable: they are only based on publications in ten journals during a ten-year period, and results may differ for other journals and periods. Likewise, classification is to some extent subjective. For transparency and verification, the full classification, of the articles in the top journals and of the articles in Review of Austrian Economics, is available as Excel files.
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Acknowledgments
We wish to thank Christian Bjørnskov, Geoffrey Brennan, Werner Güth, Daniel Hedblom, Arye Hillman, Manfred Holler, Dan Johansson, Henrik Jordahl, Daniel Klein, Mark Pennington, Per Skedinger and two anonymous referees, as well as participants in the conference “Philosophy, Politics and Economics of Public Choice: Reflections on Geoffrey Brennan’s Contributions” at the University of Turku, and participants in the Public Choice Meetings in San Antonio, for insightful comments; Lina Eriksson, Mounir Karadja, Camilla Sandberg and Hans Westerberg for excellent research assistance; and the Swedish Research Council for financial support.
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Appendix
Appendix
1.1 How the study was undertaken practically
Each issue of each journal for all 10 years was checked manually in order to find articles that fit the definition of behavioral economics in Section 3. Titles and abstracts were read in order to determine if articles featured behavioral economics content. If an abstract was not available or gave inconclusive information, the introductory and concluding sections were read. Moreover, a full text search query was performed, using a set of keywords (presented below), in order to determine whether or not the article fits our definition of behavioral economics. The searches included all relevant conjugations and modifications of the keywords, e.g., rational, irrational, rationality, irrationality etc. When a keyword was found, the adjacent text was read in order to form an opinion about whether the article could be classified as being in behavioral economics or not.
The introductory and concluding segments of all articles identified as being in behavioral economics articles were then read, and the full articles were furthermore searched with keywords (presented below), in order to see whether they contained a policy recommendation (as defined in Section 3) or not. When a keyword was found, the adjacent text was read in order to form an opinion about whether the article could be classified as containing a policy recommendation or not. Those that were found to contain such a recommendation were further categorized, firstly into categories depending on for whom the recommendation was meant (government or private actors) and secondly into categories depending on whether they employed the same (behavioral economics) assumptions for economic actors and paternalist actors, whether they used different assumptions for these two groups, or if they did not specify anything about the rationality, cognitive limitations or self-control of paternalist actors at all. “The same assumptions” need not mean the exact same assumptions, since there are many different forms of cognitive biases. An article is categorized as making the same assumptions if some kind of cognitive bias is considered in the analysis of both paternalist and economic decision-makers. An article is categorized as making different assumptions if the analysis of paternalist decision-makers proceeds on the assumption that they do not suffer from any cognitive bias or that they suffer from such bias to a lesser degree than economic decision-makers. In the case of our journal of comparison, Review of Austrian Economics, the categorization of articles as being in behavioral economics was conducted in the same manner. However, since none of these articles contained policy recommendations, the further categorization scheme used for the ten other journals was not applied. Instead, an assessment of all articles regarding whether they contained behavioral political economy, i.e., in the sense of explicitly making precise what assumptions are being made of the rationality and cognitive ability of political actors, was made.
Keywords (including names) used for to search all articles in order to be able to classify them as being in behavioral economics or not: Anomaly, Ariely, Behavioral, Bernheim, Bias, Bounded, Bowles, Boyd, Camerer, Cognitive, D03 (the JEL code for behavioral economics), Fehr, Frame, Gintis, Heuristic, Kahneman, Loewenstein, Nudge, Paternalism, Psychology, Rational, Self-control, Thaler, Tversky. Keywords used to search all articles found to be in behavioral economics in order to be able to classify them as containing a policy recommendation or not: Consequence, Implication, Policy, Political, Reform.
Articles incorporating hyperbolic discounting have been included as instances of behavioral economics (although it is disputed whether it signifies irrationality—see, e.g., Dasgupta and Maskin 2005). Articles where policy recommendations are proffered but where it is unclear whether they are directed towards government or civil society have been marked as being directed towards both. Articles where it is unclear or hard to judge whether a policy recommendation is strong or weak, have been categorized as belonging to the latter group.
1.2 Three examples of classification
To illustrate how the classification was made, we briefly describe how three articles that are included in the study were assessed.
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1.
Eliaz and Spiegler (2006) – article in behavioral economics, no policy recommendation
This paper presents a principal-agent model where agents differ in types. The different types do not depend on heterogeneous preferences, but on the degree of cognitive ability. Cognitive ability is taken to describe the likelihood of agents understanding their future preferences, which in this model are different from current ones. Thus, a higher degree of cognitive ability leads to a greater likelihood of realizing that one has time-inconsistent preferences. Unawareness of time-inconsistent preferences is a typical subject of study in behavioral economics, since current choices often must be based on the estimation of future preferences. If these estimations are faulty, agents are partially or fully naive and therefore subject to cognitive limitations, in this setting leading to a greater risk of being exploited by the principal. This paper does not go further in terms of giving recommendations of how this behavioral feature could be dealt with. Hence it is categorized as being in behavioral economics without a policy recommendation.
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Ameriks et al. (2003) – article in behavioral economics, policy recommendation, no behavioral analysis of policymakers
This paper analyses the relationship between the propensity to plan and budgeting behavior. Similar households tend to behave differently in terms of how much wealth they accumulate. The authors argue that the reason for this lies in agents’ “attitudes and skills related to financial planning” and that certain attitudes and/or low skills relate to self-control problems for less sophisticated agents. When agents have a hard time committing to (or even making) saving plans that reflect their preferences for consumption today and in the future, they are thought to have some form of cognitive limitation, the reason for which this paper is categorized as being in behavioral economics. The authors also suggest that future research “develop a suitably rich dynamic model of planning and wealth accumulation consistent with our findings. In doing this, it will be crucial to incorporate policy issues.” They also continue with a statement concerning how saving should be encouraged with respect to their findings. The article is categorized as containing a policy recommendation because the authors clearly state that policymakers should try to change agents’ behavior. No further analysis of the policymakers is made, which is why the article is categorized as not containing any behavioral analysis for the envisioned interventionist.
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Bernheim and Rangel (2004) – article in behavioral economics, policy recommendation, a different behavioral analysis of policymakers (compared to that undertaken for economic actors)
The article is based on the premise that substance addiction is the result of mistakes, an assumption the authors state is motivated by results from previous research in various disciplines. This indicates that agents are assumed to have self-control problems, which is why we characterize the article as being in behavioral economics. The authors also argue that government intervention can help agents with these kinds of self-control problems, and that the type of intervention differs depending on the usage pattern. They then give numerous examples of how policies may be designed under different circumstances. Therefore, the article is categorized as containing a policy recommendation. The authors also conduct a behavioral analysis of the policymakers, when they state that “[t]hough individuals may have some ability to avoid problematic cues and create their own counter-cues, the government is arguably better positioned to do this.” This comment shows that the authors believe that there is a behavioral-ability difference between addicts and policymakers. Thus we characterize this as containing a behavioral analysis of policymakers, but a different one compared to that applied to consumers.
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Berggren, N. Time for behavioral political economy? An analysis of articles in behavioral economics. Rev Austrian Econ 25, 199–221 (2012). https://doi.org/10.1007/s11138-011-0159-z
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DOI: https://doi.org/10.1007/s11138-011-0159-z