Archives For Hyperbolic discounting

Douglas Ginsburg is Circuit Judge, U.S. Court of Appeals for the District of Columbia.

Joshua Wright is Associate Professor, George Mason University School of Law.

The behavioral economics research agenda is an ambitious one for several reasons.  The first reason is that behavioral economics requires a theory “true” preferences aside from – and in opposition to — the “revealed” preferences of the decision maker.  A second reason is that while collecting and documenting individual biases in an ad hoc fashion can generate interesting results, policy relevance requires an integrative theory of errors that can predict the sufficient and necessary conditions under which cognitive biases will hamper the decision-making of economic agents.  A third is not unique to behavioral economics but is nonetheless significant: demonstrating that behavioral economics improves predictive power.  The core methodological commitment of the behavioral economics enterprise — as with economics generally at least since Friedman (1953) —  is an empirical one: predictive power.  Indeed, no less than  Christine Jolls, Cass Sunstein and Richard Thaler have described the behavioralist research program as the economic analysis of law “with a higher R-squared,” that is, “a greater power to explain the observed data.”

As I’ve observed previously, there are some good reasons to believe that behavioral law and economics (BLE) scholars do not share these methodological commitments.   I’ve discussed previously the example of failure of BLE scholars to even cite, much less grapple with, the work of Zeiler & Plott (or here) regarding the endowment effect.  Zeiler & Plott present and support the provocative claim that current evidence supporting the endowment effect is better explained by experimental procedures than cognitive biases.  Proponents of regulation based on the endowment effect, in my view, need not agree with this interpretation of these findings but they ought to respond to them if they want to be taken seriously.  Unfortunately, out of the 342 articles in JLR discussing the “endowment effect” from 2006 to present, only 35 cite either Zeiler and Plott article.  I find that ratio discouraging for the discipline of behavioral law and economics generally and the prevailing level of discourse.

Indeed, while David Levine is not referring to the BLE literature, he might as well have been when he writes:

Behavioral economics: love it or hate it – there seems to be no middle ground. Lovers take the obvious fact people are not frictionless maximizing machines together with the false premise that economists assume that they are to conclude that all of economics must be wrong. The haters take the equally obvious fact that laboratories are not the real world to dismiss all laboratory evidence that conflicts with their pet theories as irrelevant. In the end they seem primarily to talk past each other.

How can we improve the discourse and get discussion focused on predictive power and consequences of actual behavioral policies proposed or implemented?  The burden here lies with the skeptics.  As Richard Epstein points out, the behavioralists’ message has been clear and effective; indeed, Bar-Gill and Warren’s article generated the Consumer Financial Protection Bureau.  Behavioral skepticism has proven less effective.

Skeptics, including myself, have been decidedly less effective in convincing their respective audiences that specific behavioral proposals should be rejected and conventional economic approaches should (at least for now) prevail in the market for ideas in the academy and in the policy world.  It is true that the skeptics have a number of forces working against them.  One is that BLE is new and exciting.  Arguing that the “conventional” approach outperforms the newest tool in the toolkit is always an uphill battle.  I’ve alluded to a second reason, failure of at least some of the BLE literature to engage with opposing ideas.  But perhaps most important is the failure of the skeptics to present a comprehensive and convincing case that the conventional economic approach systematically can be expected to outperform BLE when the full social benefits and costs of the various approaches and institutions are accounted for.  I’ve long been of the opinion that two primary reasons for this failure are that different strands of the skeptical literature have talked past one another, and that this has led to a failure to present the “full” case against BLE on the record to be evaluated.

Consistent with this view, the goal of this post is not to present any new ideas about behavioral economics or behavioral law and economics, but catalog the various objections that have been raised in the literature, discussing their interactions, and linking to some of the leading scholarship in the area calling into question the assumed superiority of the BLE approach on a variety of grounds.

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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.

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Judd E. Stone is law clerk to the Honorable Daniel E. Winfree of the Supreme Court of Alaska and formerly Research Fellow of the International Center for Law & Economics.

Behavioral law and economics has arisen to international prominence; between Cass Sunstein’s appointment to head the Office of Information and Regulatory Affairs the United Kingdom’s appointment of a “nudge” bureau, behavioralism has enjoyed a meteoric impact on policymakers.  Thus far, behavioral economists have almost exclusively focused on the myriad foibles or purported cognitive errors which hamper consumer decision-making.  These traits include “optimism bias,” the tendency for an individual to underestimate the likelihood of negative results from their behavior, and hyperbolic discounting, where individuals reveal time-inconsistent preferences (often by over-valuing immediate consumption, at least as measured against some third party’s valuation).

Several recent proposals seek to import these observations wholesale into the antitrust context.  Advocates of “behaviorally-informed” antitrust consistently note the potential presence of one or more individual errors to conclude the necessity of greater interventionism in antitrust, including a Leegin repealer, aggressive Section 2 enforcement, or utilizing Section 5 to “gap-fill” (or intrude upon) Supreme Court precedent hostile to usage of the antitrust laws as a general code of business regulation.  Even conceding the most charitable set of assumptions to the behavioralist enterprise – that behavioral errors are consistent and can be documented within individuals; that these errors persist in markets and are not learned away over time; that these errors aggregate to the firm level; and, necessarily, that these errors are somehow not simultaneously visited upon putative regulators – this attempt is misguided.  In a recent article with Professor Wright, we argue that there is not yet a behaviorally-informed theory of economic behavior relevant to antitrust.  Behavioralist antitrust proposals suffer from a fatal theoretical failure.

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Geoffrey A. Manne is Executive Director of the International Center for Law & Economics and Lecturer in Law at Lewis & Clark Law School

The problem with behavioral law and economics (and its behavioral economics cousin) is not that it has nothing interesting to say, but rather that the interesting things it has to say do not mean what its proponents think they mean.  It is one thing to claim that people are less rational than we thought.  It even one thing to claim that people are systematically less rational than we thought, in predictable and important ways.  But it is entirely another to presume that the implication of this is a larger scope for government regulation to protect the market and market actors from the depredations of this irrationality.

Why?  Well, the market, of course.  Just because individuals may be less-rational than we thought does not mean that the complex and nuanced activities of markets can’t account for these deviations (particularly if they are predictable).  Add to this well-canvassed problems like government actors subject to the same biases, the problem of competing and conflicting biases, and the problem of unacknowledged, contrary implications, and the case for doing anything about behavioral quirks is extremely weak.

Thus, for example, let’s grant that, as many behavioralists aver, hyperbolic discounting exists.  Um, so, if that’s right, what should we do about it?  Force everyone to save more of their paychecks for retirement?  Insist on opt-out rather than opt-in retirement investing?  Ban cigarettes? Raise tax rates? (I don’t know if anyone has argued this one yet, but it seems like a plausible implication, and it’s only a matter of time)

Here’s the problem, as I see it:  Let’s say the behavioralists are right that, in the abstract, people save less money for future consumption than they would like.  Richard Thaler’s solution to this problem is the “Save More Tomorrow plan (pdf),” which takes advantage of people’s alleged current hyperbolic discounting to commit them to future savings that they actually want but can’t otherwise adhere to when the future actually arrives.  This is a “libertarian paternalist” (pdf) solution to the problem.

But there is a problem, even with a libertarian brand of paternalism here. Continue Reading…

David D. Friedman is Professor of Law at Santa Clara University

I have long argued that the economic assumption of rationality is useful not because it is a complete and correct description of real world behavior but because it describes that part of behavior that is predictable. If half the time an individual takes the actions that best achieve his goals and half the time he acts at random, then modeling his behavior as rational with some random error probably does as good a job of predicting it as we can do. When dealing not with a single individual but with the aggregated affects of many individual actions, random actions will tend to cancel out, making the predictions of a rational actor model more accurate than they would be for a single actor. Further, in some but not all cases, the actors that most matter are precisely those selected for successful decisions in the past—successful speculators, for example, have more money to speculate with and so a larger effect on markets, than unsuccessful ones.

Behavioral economics offers an interesting and persuasive challenge to that argument. Its central claim is that at least some of the irrational actions are predictable, follow known patterns that can be determined by observation and experiment. I have, however, two reservations about the field. One has to do with it as an approach to creating economic theory, the other to its use in generating and defending policies.

The theoretical problem is that behavioral economics, at least as I have seen it done, lacks any unifying theory; it tells us that individuals are irrational in certain ways, but not why. It is hard to imagine an experiment that could refute the general approach, since the supporter can always come up with a new form of irrationality to explain the new data. Thus it risks degenerating into pure curve fitting, the sort of theory that does little more than summarize existing data and so tells us little that we do not already know. At most, one might refute a particular pattern of irrationality, which would then have to be revised into some new form that explained the anomaly. Continue Reading…

Josh’s ongoing series on “Nudging Antitrust” and FTC Commissioner Rosch’s recent thoughts on behavioral economics has been excellent and I look forward to the next installment.  Rosch’s speech, not surprisingly, also elicited a strong response from me.  What follows are my thoughts on Rosch’s speech, focusing on some of the same issues Josh addressed in his first post.

Rosch puts forward four reasons, purportedly identified by behavioral economics, that explain why “human beings sometimes act irrationally in making commercial decisions.”  Each of his four reasons and/or his understanding of its implication is problematic.  Finally, Rosch proposes a policy response to his assessment of the behavioral literature—one that, unfortunately, bears almost no relationship to the behavioral findings form which he purports to draw it.

In the interest of space (and assuming readers have seen Josh’s posts on the speech) I will jump right in with my assessment of Rosch’s claims without trying to restate them.  The speech is readily-available here for those interested in checking my characterizations of Rosch’s comments.

Rosch’s four claims about behavioral economics:

1.  Information asymmetry.  It is deeply problematic that Rosch seems to think that this isn’t something that classical economics has discussed for generations.  More importantly, the idea that it presents a special problem is valid (at least as Rosch seems to see it) only if you act like information is or should be free and that there are no (or small) adverse effects to forcing disclosure of information.  In reality, the creation, assessment and disclosure of information are costly, and it makes no sense to act like there should be no return to these activities or to view as illegitimate the protection by commercial actors of the value they create.

2.  Instant gratification may be more important than long-run maximization.  As Josh points out, we have to assume this refers to hyperbolic discounting.  But even so, the implications of this, if true, are unclear, especially if we take into account (as Rosch seems not to) that regulators are also subject to the effect.  Implicit in much of the behavioral literature (derived, as it is, from constrained and manufactured experimental settings) is that institutions little affect the found effects.  It may even be the case that regulators operating within bureaucratic constraints indeed could be less affected by hyperbolic discounting.  But certainly actors in markets are less constrained than the naked assumption implies, and, either way, the policy implications would seem to be significantly affected by the institutional setting, consideration of which is essential to any legitimate assessment of the value of behavioral economics to the antitrust enterprise.  Unfortunately this consideration seems to be completely lacking here.

3.  Status quo bias.  Again, a large conventional literature on this sort of effect (arising from different sources, perhaps) exists, and the extent to which Rosch is talking about something new is unclear to me.  Even to the extent that it is a new idea, its assessment here falls prey to the same problems I mention above.  Moreover Rosch’s comments fail to reflect the difficulty in differentiating a “normal” or “rational” preference for the status quo arising from, for example, risk aversion, avoidance of transaction costs and the obtaining of costly information from their “irrational,” status-quo biased counterparts.

4.  Sellers may not always behave rationally.  As Josh suggests, this is, at least as Rosch seems to think relevant, an absurd claim on his part.  First off, claiming the theory of the firm for the behavioralists, or ignoring the essential ways in which “conventional” economics accounts for the very things Rosch thinks it fails to account for, seriously calls into question the quality and clarity of Rosch’s thinking on this topic.  Second, everyone knows that perfection is an assumption and not a description of reality.  The constant refrain, sometimes implicit and sometimes explicit, that classical economics “presumes that people will always behave rationally to achieve the best outcome” is, I think, willfully misleading.  Especially along the lines Rosch suggests here (agency costs?  Really? This is something behavioralists invented?), economics has never assumed this kind of perfection, and entire fields revolve around its rejection.

Moreover, there is also a sly and perhaps willful disconnect in emphasis.  The critique ends up sounding like a disparagement of classical economics’ (presumed) description of actual, individual psychology and behavior rather than a critique of a methodological assumption used to achieve better analysis (Josh’s reference to Friedman here is apt, of course).  Saying the behavioralists have a good handle on certain aspects of human psychology is not at all the same thing as saying they have a good approach to making those bits of knowledge systematic and useful.

Rosch’s policy recommendation:

Finally, Rosch pulls all of this together to make a recommendation: Merger review should rely more heavily on documentary evidence of merging parties’ “actual intent.”  In Rosch’s words, neoclassical economics has a problem dealing with behavioral economics because it

suggests [that neoclassical] models are imperfect and that better evidence (i.e., the parties’ documents and testimony) may be just as accurate at predicting competitive effects.

Um, no.  Actually there is nothing in behavioral economics, and certainly nothing in Rosch’s speech, that supports the claim that the parties’ documents may be just as accurate as neoclassical models (nor do I think that most neoclassical economists, other than a few misguided post-Chicagoans, think they should base their analysis of cases solely on abstract theories) at predicting competitive effects.

Of course regular readers know that this is a hot button for me.  My paper with Marc Williamson on the serious problems with relying on documents to infer intent, and on relying on expressions of intent as meaningful to relevant antitrust analysis, must have made little impression on Rosch (in case you haven’t looked at it in a while, the paper, Hot Docs vs. Cold Economics, is here).

Not only does Rosch’s assertion overstate the claims that even behavioralists would make for their ability to understand, interpret and systematize human and group psychology and sociology, it completely glosses over the incredibly thorny problem of the disconnect between that which is intended and that which actually is.  Nothing in the behavioral literature says anything at all about this problem, and it is a serious lapse for a Commissioner of the FTC to suggest that better knowledge (assuming it is better knowledge) about intent permits stronger conclusions about competitive effects.  This is just a non sequitur.

Overall I find the Commissioner’s speech to be seriously lacking.  I understand and applaud the effort to find knowledge useful to the antitrust enterprise wherever it may lie.  But one can’t help feeling that Rosch is a bit too enthusiastic, combative, naïve and, thus, careless in his support for the usefulness of this particular bit of knowledge.

I’ve been, for some time, a behavioral law and economics skeptic.  Sometimes this position is confused with skepticism about behavioral economics, as in — believing that behavioral economics itself offers nothing useful to economic science or is illegitimate in some way.   That’s not true.  Now, I have some qualms about the explanatory power of some of the behavioral models as well — but the primary critique (in my view) has always been the threat that behavioral economics will be used as the intellectual cover for regulation judged by the preferences of the regulators rather than rigorous economic analysis of any sort.

Recall, that much of behavioral economics amounts to a demonstration that individuals exhibit inconsistent preferences.  But as Glen Whitman points out, the absence of knowledge about true preferences requires that the policy maker make some decisions about actual preferences.   That’s hard to do.  It requires a lot of information.  In the case of hyperbolic discounting, for example, the conventional approach is to arbitrarily assume that true preferences are reflected by the utility function of today’s “self” rather than future “selves.”   The point is that the behavioral law and economic exercise necessarily requires that planners impose some decisions about true preferences — or in the case of firm, optimal decision-making.  What will be the basis for those decisions?  One can naively dream that they will always be founded on the best economic theory and evidence available.  But in the real world, it is apparent that one can and should be concerned that these decisions will reflect the regulators’ priors and own preferences and perhaps also those of special interests.  While there are other important methodological debates about behavioral economics, this argument is at the heart of the Rizzo and Whitman “slippery slope” objections to behavioral law and economics — and suggests that behavioral economics will be used in ways that extend beyond its limitations.

One possible response to the high likelihood of this kind of abuse is to play the “I can’t help it if…” card.  Here’s Richard Thaler in the Cato Unbound exchange, that one “cannot control how my ideas are used, either by those who advocate similar but more intrusive policies.”   But that is hardly satisfying when one is selling the ideas to the general public (now just one-click away at Amazon and sure to “improve decisions about health, wealth and happiness ” all for under $20!).  In the exchange, Thaler seems to at least implicitly agree that the ideas have been or will be used to make bad policy.  Perhaps the ideas should come with an instruction manual for how to implement policies.  But alas, the behaviorists tell us that nobody reads those sorts of disclosures anyway.  Maybe a nudge is in order?  Of course, I think Sunstein and Thaler ought to be able to sell the book without a nudge.  In fact, I bought a copy.  But note than many of the policy proposals in the behavioral law and economic literature — restrictions on credit cards and sin taxes for tobacco and soda come immediately to mind — involve products that some folks will use to make themselves better off and some, because of cognitive biases, will not.  If cognitively biased regulators’ decision-making processes are skewed toward policies that are consistent with their policy preferences and ideological views rather than what maximizes social welfare — one would think the creator of the “choice architecture” concept could come up with something a bit more creative to “debias” the decision-maker than “I cannot control how my ideas are used.”

Its a bit of an odd moment to decide to that influencing the choices of others no longer makes sense isn’t it?  In the CFPA, the so-called “plain vanilla” provision would have required those selling consumer credit products to offer consumers a “plain vanilla” version of the product and disclose the risks of the alternative product before selling any “flavored” variations.  Perhaps what is called for is a similar “plain vanilla” provision for behavioral interventions where the regulator or policy maker must show that they carefully thought through the alternative, “standard” economic interventions before choosing the riskier behavioral intervention.

Its also a critical moment.  Evidence in support of the suggestion that behavioral economics is being used in ways that extend well beyond its limits, and are quite plausibly welfare-decreasing, are not hard to find.  For example, my recent critiques of behavioral antitrust (Nudging Antitrust Part I, Part II) suggest an abuse of behavioral economics to solve policy problems without regard to its limits.  I’ve also pointed out (with co-author David Evans) that the intellectual arguments for some of the regulatory interventions in credit markets found in the CFPA/CFPB, explicitly based on behavioral economics, extend well beyond its logic and limits.   Claims of legal scholars about the policy implications of behavioral economics for consumer contracting also extend well beyond any intellectual and empirical support the behavioral economic literature can provide.  And as readers of TOTM will know, the legal literature in particular has played fast and loose with the endowment effect for quite some time.

Of course, the abuse of behavioral economics by regulators and legal scholars is a danger with any sort of methodological commitment and so, one can equally point out that the same regulators and judges might abuse Chicago School microeconomics, or game theory, or a non-economic methodological commitment, e.g. originalism.  In these situations it is especially important for academics to identify those sorts of abuses.  But it is especially beneficial for leading figures in the “abused” field to stand up and identify policy proposals do not really fit the model.  This is one of the questions that I’ve had about the behavioral economics movement.  Why doesn’t one see a prominent leader of that movement saying: “Wait a minute, that’s not what we had in mind” or “no, that is really not what behavioral economics says.”

Asked and answered.  Much to their credit, in Wednesday’s New York Times, behavioral economists George Loewenstein and Peter Ubel do exactly that.  Loewenstein and Ubel write:

But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.

While they don’t talk about some of my favorite examples in antitrust and the credit markets, they offer some of their own:

Take, for example, our nation’s obesity epidemic. The fashionable response, based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling — for instance, there’s a mandate in the health care reform act requiring restaurant chains to post the number of calories in their dishes.  Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City’s attempt at calorie posting have found that it has had little impact on dieters’ choices.

Obesity isn’t a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods.  To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food — for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods. But because we lack the political will to change the price of junk food, we focus on consumer behavior.

Loewenstein and Ubel also discuss other interventions where standard economics might provide better results:

Our over-reliance on behavioral economics is not limited to health care. A “gallons-per-mile” bill recently passed by the New York State Senate is intended to help drivers think more clearly about the fuel consumption of the vehicles they purchase; research has shown that gallons-per-mile is a more effective means of getting drivers to appreciate the realities of fuel consumption than the traditional miles-per-gallon.

But more and better information fails to get at the core of the problem: people drive large, energy-inefficient cars because gas is still relatively cheap. An increase in the gas tax that made the price of gas reflect its true costs would be a far more effective — though much more politically painful — way to reduce fuel consumption.

The one thing that is missing are examples where the problem is not just that the behavioral intervention improves things marginally while the standard intervention (or the combination of the two) would be optimal, but that the behavioral intervention reduces welfare.  And from some of the examples they use, I suspect I might disagree with the authors on what policy prescriptions “standard” economics would recommend.  I believe that the credit examples in the CFPA/CFPB provide exactly that case; I also strongly believe that behavioral antitrust policy of the sort proposed by Commissioner Rosch (Part 3 of Nudging Antitrust will discuss this next week) would make consumers worse off.

Nonetheless, Loewenstein and Ubel should be applauded as “insiders” starting a high-profile discussion on the limits of behavioral economics.  From the examples the authors give, and the ones I mention above, it appears inevitable that regulators and will abuse the new tools provided them by behavioral economics.  Perhaps its time to talk about what to do about it.  Behavioral economists ought to have something valuable to say about this rather than merely punting.  The question is how to frame the policy discussion in a manner that “debiases” regulators and provide incentives for decisions that are based grounded in theory and evidence and away from their own preferences.  If the plain vanilla proposal or rules like it to encourage serious deliberation about choices are good enough for credit cards, certainly such rules should also sensible for regulatory decisions about credit cards.

Increasingly, the notion that updating antitrust policy with the insights of behavioral economics would significantly improve matters for consumers.   Others have called for more major surgery, favoring an outright rejection of the current economic foundation of antitrust policy — and especially the portions of the foundation “Made in Chicago” — in favor of a new regime based on behavioral economics.  There are plenty of antitrust scholars who’ve begun to make this case, with perhaps Professor Stucke having been the most prolific on this score.  And behavioral economics has provided the intellectual support, or perhaps cover depending on who you ask, for the recent regulatory expansion involving consumer credit.  The issue is also getting more and more attention.  Competition Policy International recently published a symposium issue dedicated to the topic.

One might argue that the intellectual banter about the back and forth of “what school” reigns in antitrust is a waste of time.  But that strikes me as inconsistent with the history of the development of antitrust doctrine, which has largely lagged the dominant economic paradigm a few decades.  To the extent that the dominant economic paradigm changes, it is certainly quite plausible that we start to see changes in the doctrine.   Though, for example, the Supreme Court has largely but not entirely resisted adopting Post-Chicago economics despite the fact that it has certainly established itself as the dominant economic paradigm in economics departments.   Nonetheless, I think questions of competing economic models in antitrust and elsewhere can have real consequences — as can questions about how those battles should be resolved (e.g., I make the case here that that the Chicago School has defended its territory largely because the empirical evidence warrants that result).

All of that said, when the chatter about the appropriate intellectual foundation for antitrust shifts from the ivory tower to the regulatory agencies who can do something about it, the issue deserves more attention.  Indeed, Commissioner Rosch has been making policy speeches about the value of incorporating behavioral economics into antitrust.  The latest, this June 9th speech, gives the most detailed account of “the case” for antitrust law displacing conventional economic theory with the insights of the behavioral economic literature.   It is not the first time Commissioner Rosch has sung the virtues of behavioral economics and antitrust.   Nor, I suspect, will it be the last.  But it is the most detailed intellectual case in support of “nudging” antitrust the Commissioner has offered thus far, and given both the source and level of detail, I think the claims are worthy of serious consideration.

In a series of posts beginning today, I am going to use Commissioner Rosch’s speech to analyze some of the issues involved, while reserving others for an article I am currently working on detailing the uses and abuses (especially the latter) of behavioral economics in antitrust.  I’ve written quite skeptically about the incorporation of behavioral economics into antitrust previously.    Some of this skepticism derives from documenting abuses of the behavioral economics literature in order to provide intellectual support for policy preferences; some from theoretical or empirical features of the behavioral theories that deserve more serious economic attention than can be supplied in a blog post.  With respect to the former, please note that this criticism is one that I do not necessarily level at behavioral economists themselves, but instead those who would incorporate that literature into the law in a haphazard fashion.

In this blog series, I intend to highlight just some of the fundamental theoretical and empirical faultlines in the intellectual foundation of the behavioral antitrust enterprise, at least as it has been articulated thus far by Commissioner Rosch and others.  I’ll save many of new arguments for that paper, which I hope will have some influence over the emerging debate over behavioral economics in antitrust and other consumer protection settings

[Note to law review editors: look for the paper in the fall submission season!  Feel free to contact me if you are interested]

But with the case being made strongly by influential antitrust policy makers at the Commission — there is no time like the present to point out some — but not all — of the existing logical and economic flaws in the hopes of starting a serious dialogue about what behavioral economics adds, if anything, to antitrust.  And new arguments are not required to expose many of the flaws in Commissioner Rosch’s case for behavioral antitrust.  Indeed, his claims fail largely on their own terms.  Commissioner Rosch’s speech organizes the case in a reasonable three-part manner: starting with discussing insights from behavioral economics and their antitrust relevance as well as the so-called failure of conventional economics, then turning to and rejecting criticisms of behavioral antitrust, and finally concluding with some views on where all of the aforementioned takes antitrust.

I believe this issue deserves more serious attention than it appears to be getting.  I will address Commissioner Rosch’s argument in a three-part series of posts responding to Commissioner’s Rosch’s case for “behavioral antitrust.”  By this I mean an antitrust and competition policy regime that incorporates the insights of behavioral economics rather than mainstream economic theory, including neoclassical price theory and to some extent Post-Chicago models as well.

In Part I, below the fold, I’m going to focus on the Commissioner’s description of behavioral economics and what is has to offer antitrust.

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Economist, co-author, and sometimes TOTM guest David Evans (UCL, University of Chicago School of Law) has an excellent note on “Why Now is Not the Right Time To Revamp Consumer Protection,” based on remarks made at the New York Federal Reserve Board-New York University Conference on Regulating Consumer Financial Products yesterday in New York.  Evans makes some of the points we discuss in our joint work criticizing the intellectual basis for the Consumer Financial Protection Agency, but also offers a concise and powerful case against “revamping” consumer protection too hastily, or without attention to the institutional details or the economic evidence.  Geoff’s post the other day on credit card regulation, for example, points out precisely the types of harmful errors that can be made on “behalf” of consumers when invoking the behavioral economics literature without analyzing it (or the related empirical evidence) closely. Evans makes six essential points — and I’m excerpting here — but I suggest readers check out the whole thing:

First, the Treasury Department proposed a sweeping overhaul of consumer protection for financial services for the wrong reasons. It is widely reported that the Administration pushed consumer financial protection legislation because they thought it would be the “locomotive that would drive financial reform.” The idea is that the folks back home couldn’t get why their representatives would be working on obscure things like clearing houses for credit default swaps. But they could connect with plain old consumer protection. Hey, who wouldn’t want to be protected? Since we’re not in DC perhaps I won’t be laughed out of the room for saying this is pretty cynical.

Second, Treasury wrapped consumer protection in the flag of the financial crisis. Yet there is no credible evidence that failures in the current system were a significant factor in causing the financial crisis. Many of the consumer protection problems that people point to are mainly the result of our collective delusion—the madness of the crowds—that housing prices would go up forever. There are numerous accounts of the causes of the financial crisis from varying ideological perspectives. Not one of them that I know of blames the financial crisis on failed consumer protection.

Third, instead of being the locomotive for financial reform, consumer protection has deflected attention from problems that really were at the heart of the financial crisis. Remarkably, the Administration proposed no significant reforms of Fannie and Freddie. The Administration came forward with nothing on dealing with the credit rating agencies. There’s widespread support among economists for introducing competition into that business… .

Fourth, the Treasury Department and Congress have proposed this sweeping overhaul of the lending industry at just about the worst possible time. A massive credit crunch is holding back the economy. New businesses that drive most of the job growth in the economy can’t get loans. Small businesses have had their credit lines slashed. Consumers who need to borrow money can’t. Now is the time to focus on policies to encourage lending. It is not the time to impose a new layer of regulations and costs that will make it more expensive and legally risky for financial institutions to lend money to people and businesses who want to borrow it….

Fifth, instead of dealing with financial reform and getting ourselves out of the economic crisis it looks like a lot of energy is going to be spent on the CFPA bill. So let’s talk about the merits of the proposals. The CFPA is the brainchild of several law professors including Professor Warren who spoke at lunchtime. If you look at the articles that they have written you will see that the proposed CFPA is based on three propositions …. .

Here’s my sixth and final point. If we are going to have a single consumer financial protection agency I would give it to the Federal Trade Commission. They are a well run government agency, have significant expertise in consumer protection, and have first-rate economists….

On the reliance on behavioral law and economics providing the intellectual foundation for the CFPA, Evans notes:

I’m a fan of behavioral economics. However, much of the work that proponents of the CFPA rely on is based on studies that find that consumers are shortsighted in a particular technical sense known as hyperbolic discounting. Recent work has found that those studies confused shortsightedness with risk aversion. People act in ways that seem impulsive and shortsighted mainly, it seems, because bird in hand is better than two in bush. As a result I don’t believe we have a sound basis at least at this time for moving from regulations that are based on market failures in the provision of information (the intellectual basis for the current system) to market failures based on people making systematically stupid or shortsighted decisions (the intellectual basis for the new regime). The behavioral economics field has produced a rich and interesting theoretical and empirical literature. One should exercise caution, however, in unleashing these “new products” on the American consumer before they are more fully tested and vetted.

And consider the following fun anecdotal account of precisely the problems with authorizing (or requiring) a federal agency to design credit card products on the assumption that regulators are better situated than consumers to make these decisions:

Professor Warren’s lunchtime discussion of her venture into developing a new credit card deserves some mention here. As I understood it she and her colleagues had developed a “clean card”—one that did not have any fees besides an annual fee an APR—and at least got some banks excited about considering it. They soon learned that banks couldn’t introduce the card profitably. She also mentioned that Citi had introduced a more “consumer friendly” card and gotten a lot of great PR out of it. They eventually pulled it from the market because few consumers wanted it. So Professor Warren sees a problem. Banks can’t make money from a “good card” (I think that her explanation is that one bank can’t unless others also offer it) and consumers won’t take a “good card” (I think the story her goes back to our mental deficiencies). So regulation is needed. I find this very worrisome. I don’t believe that even extremely smart and well-intentioned people such as Professor Warren should be put in the position of telling—or prodding—businesses to offer products they don’t want to offer to consumers who don’t want to take them. The CFPA Act put forward by the Administration was set up to do just that.

If you are looking for a short and concise statement of the case against the consumer protection revolution, this is it.