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Does Behavioral Economics Matter?

posted by Adam Levitin

The New Republic (yes it still exists) has a piece about whether behavioral economics will have as much influence in a Clinton administration as it did in the Obama administration. The unspoken assumption of the piece is that behavioral economics actually had a big influence in the Obama administration. Here's the thing:  as far as I can tell, behavioral economics has been basically irrelevant in the Obama administration.

Yes, Cass Sunstein was the head of OIRA for part of the Obama administration. But when Sunstein went on a post-administration victory lap giving talks at a bunch of law schools (including at Georgetown), it was notable how few concrete examples he could give of the influence of behavioral economics on policy. There is, to be sure, an executive order suggesting that agencies subject to the order consider behavioral implications in their rulemakings, but the only concrete example Sunstein had was the transformation of the food pyramid into a food plate. (If you missed that change, well, you aren't the only one.) It's not entirely clear to me what great behavioral implication is from going from a pyramid to a plate, much less how much influence it had on how anyone eats.  There are, apparently, a bunch of other behaviorally-influenced moves according to a recent White House report.  But man, they are really small bore improvements on the margins (e.g., calling unemployed workers "job seekers" rather than "claimants"). If this is the highwater mark for behavioral economics, then it has truly fizzled as a policy move.  

What's really notable is the absence of explicit behavioral economics moves in areas like consumer finance. I can't identify anything in the CFPB's rulemaking that is obviously behavioral, even with noted behavioral economist Sendil Mullainathan having been the head of research at the CFPB. The best I can do is point to the Fed's 2010 overdraft rulemaking having an opt-in, rather than an opt-out requirement, but that could have happened without behavioral economics.  

All in all, behavioral economics seems, at least at this point, to have disappointed as a regulatory tool. It has been quite successful as a diagnostic or explanatory tool, but it seems much harder to translate into actual regulations.  Given that, I find myself wondering what its place will be in the legal academy. A decade ago, when my academic career was starting, behavioral was all the rage.  But from today's standpoint it really seems to have crested.  Indeed, we've been seeing the academic pushback or skepticism, not just from the adherents of neoclassical economics, but also from those who are more open to behavioral approaches. (See, e.g., here, here, here, and here.) Thus, I would not at all be surprised if behavioral economics fades into the background in a Clinton administration, not because of any opposition to behavioral economics, but rather because it just doesn't add that much on policy issues in most cases.  Behavioral moves are part of the policy toolkit, but they are unlikely to be transformative tools.  

* As an aside, I'd observe that behavioral economics is not an inherently pro-consumer move, as casual observers might assume. For example, in the class action context, behavioral economics actually argues against class certification in some cases because different consumers might perceive or understand things differently because not all consumers display the same behavioral biases equally. (And this is something the defense bar is aware of--I've been asked about this in deposition.) 


Wasn't the shift from opt-in to opt-out 401k contributions motivated by a Department of Labor initiative?

The shift to 401k opt-ins predates the Obama administration. Congress passed the legislation facilitating it in 2006, and the DOL issued the implementing rules in 2007.

I took a look at the Yale LJ article you linked to, and I think there's a problem that legal literature is missing the fact that the relevant distinction in the economic literature is not between "neoclassical" and "behavioral." The relevant distinction in the economic literature is between "neoclassical" and "game theoretic," with behavioral as something of a side show. (e.g. the CFPB is very clearly born of game theory techniques and the analysis of asymmetric information and strategic behavior, not of behavioral analysis.)

What the Obama administration has done is accelerated the adoption of policy that assumes fundamental failure of neoclassical analysis and takes information asymmetries and strategic behavior seriously. IOW game theory is treated as more relevant than neoclassical analysis. Behavioral economics isn't really what's relevant here.

Focusing on the fact that behavioral economics hasn't affected policy much likely creates confusion, when we finally have policy makers taking the critiques of neoclassical economics seriously and moving beyond disclosure-based approaches.

Bookmarking this. Thanks for sharing.

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