Professors Henderson and Ribstein touch on two theoretical failures of the behavioralist movement which both reveal the prematurity of ‘behaviorally-informed’ regulatory proposals: the behavioralist assumptions that (1) behavioral biases theoretically necessitate, or at least enable, public intervention, and (2) governmental entities can net improve individual outcomes over the status quo of unfettered, if limited, human capabilities. I think both of these observations highlight the shocking dearth of theoretical exploration amongst behavioralists thus far. I want to focus on connecting these assumptions to the connection between behavioral economics and administrative regulation.
The first assumption calls for a comparative institutional analysis; the second at least invites one. Both are necessary – and neither sufficient – to justify behaviorally-informed regulations. Neither proposition, however, is self-evident. Professors Bar-Gill and Warren broadly claim that borrower irrationality gives rise to predatory lending practices, which yield sub-optimal outcomes where consumers borrow more than they otherwise might. Even assuming these biases into existence, however, it is unclear why, absent market power amongst lenders, these supra-competitive profits would not be competed away as price (and non-price) credit terms themselves. Bank of America, among others, offers a “keep the change”-style policy – a relatively painless way for a consumer to voluntary alter the default rule of their own expenditures to increase savings. Chase now peppers the airwaves with “Slate with Blueprint,” purporting to help a consumer navigate a myriad of bills, obligations, and interest rates to neatly tailor one’s own spending patterns. Unless behavioralists can demonstrate – or even articulate! – some reason to believe that firms (1) remain sufficiently rational to predate upon consumer biases, yet (2) despite this rationality will not compete the monopoly profits of those biases away – I echo several other contributors’ insights that the leap from behavioral quirk to public intervention is something of a non sequitur.
Yet I think that Professor Ribstein’s point addressing the second of these two assumptions is even more unsettling. Governmental interventions run a gamut of intrusiveness, both along actors and actions. Potential behavioral regulations may compel disclosures, reverse common-law default rules, or prohibit disfavored choices. Potential behavioral regulators could conceivably include, amongst others,the court system (through the common-law evolution of behaviorally-informed doctrines or the interpretation of behaviorally-informed statutes), state legislatures, state administrative bodies, Congress, or myriad administrative agencies. Behavioralists seem to prefer the latter – witness the CFPB and its towering regulatory superstructure. To the extent that we cannot trust markets for law when we cannot trust markets whatsoever, as Professor Ribstein points out, this is intuitively consistent. Yet I neither believe the Administrative Procedure Act – or administrative law, or the administrative process more broadly – is well-adapted to the assumption of pervasive irrationality among consumers (much less regulators), nor do I think behavioralism is prepared to implement the conceptual checks on the regulatory process that would flow from a consistent application of checks against behavioral irrationality.
By way of example, reference the Supreme Court’s position on equitable estoppel against administrative agencies. Hundreds of government agencies administrate various regulatory and benefits programs for myriad classes of individuals. By necessity these regulations are indecipherable to even many specialists; the agencies generally provide free advice upon inquiry. The Court finds this general advice a social good which, albeit subject to a meaningful chance of error, provides rational consumers of governmental services with a low-cost means of resolving low-value inquiries. We assume that individuals who have especially significant benefits or risks at stake on the interpretation of one rule or another will participate in the regulatory or adjudicative process more closely, or will otherwise rationally expend resources (say, on a tax lawyer) to ensure their conduct conforms to the law. Accordingly, an individual must demonstrate something approaching unequivocal statements by an authoritative government source and extreme, unjustifiable harm to a private entity as a result of ill-taken government advice in order to equitably estop a government agency or actor.
All of this, of course, assumes rational decision-making by individuals as a sine qua non. Even if we put aside the necessity of assuming rational actors within the government – no small task for a behavioralist! – it stands to reason that surely public actors, insulated from competitive pressures, must be called to account for the potential hyperbolic discounting effects the agencies have upon consumers of their services as well. In other words, the chances the Social Security Office’s free advice is in fact erroneous and will result in a deprivation of benefits, followed strictly, may actually be 1 in 5; however, a behavioralist’s optimism bias may suggest, for example, that individuals relying on that advice may assume it as 1 in 10. Or 1 in 100. Or 1 in 1,000. And so forth. To demand private firms hold consumers harmless for their irrationality is to ignore that behaviorally-informed administrative law would, or should (in a world of undivided light and perfect intellectual consistency) do so as well. Are behavioralists prepared to call for robust equitable estoppel against government agencies with superior information that provide information to consumers? This, of course, is merely a narrow, trivial example; the entire construction of the Administrative Procedure Act presumed rational – or super-rational – technocrats capable of “solving big problems;” to broach the possibility of individual irrationality at the regulatory level is both a new heresy and a very, very old one.
These inconsistencies are troubling. To the extent regulators and regulations flow despite – and not in response – to them, it leaves liberty-minded observers with an impression that behavioral economics wields a cudgel of irrationality to justify subordinating, rather than revealing, individuals’ true preferences. It is not historically atypical, however, to see a movement that stands to deeply undermine liberty shroud itself in the language of individualism and personal protections. That behavioralists yet feel compelled to do so – as unmodified “paternalism” remains a dirty word in a contemporary culture suffused with examples of it – should provide advocates of freedom with some small solace.