Saturday, April 30, 2016

Behavioral Public Choice - A Literature Review

Bryan Caplan recently posted about a fantastic West Virginia Law Review article that provides a lengthy discussion of the intersection of public choice (the application of economics to politics) and behavioral economics (the application of psychology to economics). 

Here's a segment of the introduction sans footnotes:
Behavioral public choice is both an extension of and a reaction to behavioral economics and its counterpart in legal scholarship, behavioral law and economics. Psychologists and behavioral economists have documented imperfections in human reasoning, including mental limitations and cognitive and emotional biases. Their research challenges the rational actor model of conventional economics, especially the idea that individuals acting in a free market can make optimal decisions without the government's assistance. Behavioral economists and legal scholars in the behavioral law and economics movement have used this research to justify paternalistic government interventions, including cigarette taxes and consumer protection laws, that are intended to save people from their own irrational choices. 
Because of their focus on market participants and paternalism, most behavioral economists and behavioral law and economics scholars ignore the possibility that irrationality also increases the risk of government failure. Behavioral public choice addresses that oversight by extending the findings of behavioral economics to
the political realm.  
A key insight of behavioral public choice is that people have less incentive to behave rationally in their capacity as political actors than in their capacity as market actors. 
Another law and economics article entitled "Nudging in an Evolving Marketplace: How Markets Improve Their Own Choice Architecture" tackles a similar topic. Here's the abstract:
Behavioral economics claims to have identified certain systematic biases in human decision-making with the implied assumption — sometimes leading to an explicit policy proposal — that these biases can only be corrected through centralized planning. While the appropriateness of policy corrections to perceived biases remains an open debate, far less attention has focused on the role markets already play in “nudging” consumers toward more mutually beneficial outcomes. We describe a process by which markets evolve over time to satisfy consumer preferences — or risk failure and removal from the marketplace. By organizing our understanding of markets in this dynamic, evolutionary sense, we expose a basic logic that dominates market transactions as they occur in practice; that is, the mechanisms that ultimately survive market competition tend to compensate for, limit, or otherwise reduce the incidence of bias. We explore empirical evidence for this argument in the market for consumer financial products.
This brings to mind a few previous posts of mine on market dynamics and monopoly. You can read them here, here, and here.

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