Do We, AT Lawyers, need a Shrink?
This is the question which arises from the growing influence of behavioral economics in competition law.
Ahead of a conference in Vienna which will take place next week (“Industry v. Competition“, see programme below), and where I have to speak of this issue, I would like to share a thought with my readers :
There’s an irrational me that understands that economic agents do not necessarily seek to profit maximize;
There’s a rational me that thinks that this is probably the exception more than the rule. Irrationality is not, and cannot, be a good basis for devising general rules and making public policy choices. In so far as firms’ behavior is concerned, the rationality hypothesis remains indeed a reasonable assumption because most CEOs, and more generally sales agents go to business school and learn how to make informed decisions. In so far as consumers are concerned, the undisputable success of low costs business model, and customers’ increased sensitivity to price in times of crisis are blows to the irrationality hypothesis. At best, behavioral economics shall play at the margins, and inform individual decisions on particular cases where markets depart from rationality (retail banking and telcos, where consumers do not switch despite price competition).
So no, we do not need a shrink.
Chillin'Competition 
During the week end I read this intriguing post by Robert Sudgen. You may find some good idea for your speech.
Emilio
Cameron and Clegg Advocate Behavioural Economics – But Have They Got It Right?
(by Robert Sugden) Yesterday, the UK’s new coalition government published its agreed ‘Programme for Government’. As one of the pioneers of what has come to be called ‘behavioural economics’, I was intrigued to find that the second sentence of the section on ‘Consumer Protection’ reads: ‘We need to promote more responsible corporate and consumer behaviour through greater transparency and by harnessing the insights from behavioural economics and social psychology.’ What does this mean?
Perhaps all that is meant is that consumer protection regulation should be informed by scientific knowledge about the biases and errors to which consumers are liable, and the ways in which these can be exploited by firms. But there may be a sub-text. Two years ago, David Cameron put Richard Thaler and Cass Sunstein’s Nudge – the manifesto of ‘libertarian paternalism’ – on a recommended summer reading list for his MPs. The Foreword to the coalition’s programme, supposedly written personally by Cameron and Nick Clegg, includes passages which seem to echo Thaler and Sunstein. Among the ‘old thinking’ our new leaders reject is ‘the assumption that central government can only change people’s behaviour through rules and regulations’. Instead: ‘Our government will be a much smarter one, shunning the bureaucratic levers of the past and finding intelligent ways to encourage, support and enable people to make better choices for themselves.’
The starting point for Thaler and Sunstein’s argument is that behavioural economics shows that people often lack stable and coherent preferences and that their decisions are sensitive to apparently arbitrary matters of ‘framing’, such as which of a given set of options is presented as the default choice. According to Thaler and Sunstein, these findings have two important implications. First, if individuals do not have preferences that can be respected, the traditional anti-paternalist stance of economics is incoherent. Second, planners (Thaler and Sunstein prefer the term ‘choice architects’) can ‘nudge’ individuals towards better choices by manipulating the framing of decision problems, without actually constraining freedom of choice – hence the slogan ‘libertarian paternalism’. Cameron and Clegg’s ‘smarter’ government sounds worryingly similar to this.
I say ‘worryingly’ because Nudge is in many ways anti-market. Its premise is that pre-behavioural economics has justified the market as a mechanism that is efficient at satisfying the preferences of rational individuals. If real people are irrational and do not have consistent preferences (we are told), that justification is invalidated. But (as I have argued in recent papers), the market can be understood as an institution which gives individuals opportunities to get what they want, whether their preferences are rational or irrational. To see this feature of markets as valuable, you do not need to have consistent preferences, but only to want to make your own decisions for yourself and take responsibility for the consequences. It seems to me that libertarian paternalism is inconsistent with two of the three values of the coalition’s motto: Freedom, Fairness, Responsibility. I can only hope that Cameron and Clegg are not equating ‘the insights of behavioural economics’ with libertarian paternalism.
Emilio De Giorgi
1 June 2010 at 2:10 pm