Academic

Thaler On Posner

By Kim Krawiec

Last week, I blogged about Richard Posner?s Wall Street Journal critique of the Consumer Financial Protection Agency Act of 2009, Treating Financial Consumers as Consenting Adults, in which he also took on behavioral economics and leading behavioral economist, Richard Thaler:

The plan of the new agency reveals the influence of ?behavioral economics,? which teaches that people, even when fully informed, often screw up because of various cognitive limitations. A leading behavioral economist, Richard Thaler of the University of Chicago Booth School of Business, wrote ?Nudge: Improving Decisions About Health, Wealth, and Happiness? last year with Cass Sunstein, who is President Barack Obama?s nominee for ?regulatory czar.?

Mr. Thaler, whose views are taken seriously by the Obama administration, calls himself a ?libertarian paternalist.? But that is an oxymoron. He is a paternalist with a velvet glove?as the agency will be. Through the use of carrot and stick, the agency will steer consumers to those financial products that it thinks best for them, whatever they naïvely think.

. . .

Behavioral economists are right to point to the limitations of human cognition. But if they have the same cognitive limitations as consumers, should they be designing systems of consumer protection?

This week, Thaler responded to Posner in a long post that is worth reading in its entirety, here:

Posner does not stop at mischaracterizing the proposal. He launches a second line of attack based on the following logic. 1) Behavioral economists such as Thaler have endorsed this plan. 2) Thaler has been known to make mistakes. 3) Therefore, he should not be in the business of helping consumers avoid mistakes. Of all the evidence readily available that I am not perfect, he concentrates on the fact that I have written about the well-known puzzle in economics that the difference in returns between equities and bonds (the "equity premium") has, in the past, seemed to be too large. With the market now down, presumably he thinks this writing makes me look foolish. I plead guilty to joining the hundreds of other economists (most of whom are not behavioral economists) who have written about this historical puzzle. . . .

But, given that I do not claim to be infallible, what does this have to do with whether we should try to help people make better choices? The premise of behavioral economics is that humans are not perfect decision-making machines. We are busy and distracted. We have fields that we know well, but are amateurs in most other domains. If our car breaks down, we go to a trained mechanic. Even the best mechanics will make some mistakes (they are human), but for most of us they still have a better chance of getting our cars to work than doing it ourselves. Even Judge Posner is human, and given the number of books he has written, he must have made a few mistakes in print. But our legal system needs judges, and one of the reasons we have a layered judicial system is so that mistakes by one judge can be corrected by others. Should we abolish our legal system because judges are known to make mistakes? 

(HT: Mark Thoma)

Full post as published by The Faculty Lounge on August 01, 2009 (boomark / email).