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2014.05.19 - OECD-ECLAC Workshop_Session 3_Martin BINDER

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2014.05.19 - OECD-ECLAC Workshop_Session 3_Martin BINDER

  1. 1. Beware of (Behavioural) Economists Bearing Advice! Why Libertarian Paternalism Is A Dangerous Policy Tool Prof. Dr. Martin Binder Professor of Economics, Bard College Berlin OECD-ECLAC Workshop, Paris 19th May 2014
  2. 2. Prof. Dr. Martin Binder 23.05.2014 | Behavioural economics • Standard view of economics: “Homo Economicus” = individuals as highly rational beings • Behavioural economics: (Homer Simpson) – Individuals = “situational idiots” (Camerer et al.) – Framing, biases – Heuristics • Relevance for policy-making – Today: consumer protection – Intervention not only for market failures 2
  3. 3. Prof. Dr. Martin Binder 23.05.2014 | “Libertarian Paternalism” • Paternalism is “inevitable”: help not-fully rational individuals for their own good • Goal: welfare-increasing interventions (“nudges”) while at the same time allowing reversibility = minimal costs for rational individuals • But not: hard paternalism 3 “…influence choices in a way that will make choosers better off, as judged by themselves. Drawing on some well-established findings in social science, we show that in many cases, individuals make pretty bad decisions…” (Thaler/Sunstein, 2008, p. 5, emphasis: MB) “...our emphasis here is not on blocking choices, but on strategies that move people in welfare-promoting directions while also allowing freedom of choice.” (Sunstein/Thaler, 2003, p. 1170, emphasis: MB)
  4. 4. Prof. Dr. Martin Binder 23.05.2014 | Examples • Healthy food in “Carol‘s Cafeteria” (Sunstein/Thaler, 2008) • Pension schemes (Choi et al., 2004, Thaler/Benartzi, 2004) – Individuals under-save (68% admit to saving not enough) – Opt-in: 26-43%  57%-69% (despite “free money“) Opt-out: 85%  98% – 75% do not want to save today; but of these 78% “Save More Tomorrow“ • Defaults for organ donations • Many more… 4
  5. 5. Prof. Dr. Martin Binder 23.05.2014 | Three essential problems (Public choice objections, LP-specific objections, ...) ① Unclear and ad hoc definition of what is in the individual’s best interest ② Focus on preserving nominal freedom of choice instead of substantial freedom or autonomy ③ Systematic neglect of dynamic/evolutionary aspects: a nudge today has consequences today and tomorrow 5
  6. 6. Prof. Dr. Martin Binder 23.05.2014 | (1) What‘s in people‘s interests? • “if they had complete information, unlimited cognitive abilities, and no lack of willpower” (Thaler/Sunstein, 2003, p. 175) = informed preference view – Inconsistent with behavioural economics: Herculean – Normative: requires value judgments (how much information, self- control, will-power, etc.?) – Countless definitions  Ad hoc!!! • Better: clear, operable, systematic and substantially specified notion of welfare necessary: subjective well- being (a.k.a. “happiness”) – Advantage: not ad hoc – Empirical evidence, substantive definition (vs. formal) – Plausible: difficult to contest relevance for one’s interests 6
  7. 7. Prof. Dr. Martin Binder 23.05.2014 | Subjective well-being • X • X • X – X – X – X 7Kahneman/Krueger, 2006, S. 13
  8. 8. Prof. Dr. Martin Binder 23.05.2014 | (2) Preserve autonomy, not freedom of choice • Moral objection to Libertarian Paternalism • Very restrictive idea of freedom as nominal freedom of choice  Nudges are acceptable even if individual is not able to reverse them (limited abilities/awareness) – Reversibility not possible for main addressees of the approach – Manipulation easily permissible: framing allowed so long as the choice set remains intact (“lying policy-makers?”) • Individuals remain unaware of the nudge, cannot learn from their mistakes – If the nudge is omitted in the future, behaviour may revert back to non-rational/sub-optimal pre-nudge behaviour – Or (maybe) worse: individuals learn behaviour through nudges without conscious reflection = heteronomous 8
  9. 9. Prof. Dr. Martin Binder 23.05.2014 | „Autonomy-enhancing paternalism“ (Binder/Lades, 2014) • Freedom: autonomy (positive liberty) = the ability to critically reflect one’s own interests and approve of them may not be diminished (≥0; see Dworkin, 1988) • Autonomy criterion restricts intervention – No manipulation of individuals permissible – E.g.: Autonomy-enhancing “mandated choice” vs. “framing” • Prefer these nudges that allow the individual to become more autonomous through reflected learning of better behaviour for future decisions 9
  10. 10. Prof. Dr. Martin Binder 23.05.2014 | Summary • Behavioural economics necessitates revision of economic world-view • Policy implications: paternalism might be necessary • LP dangerous  Autonomy-enhancing paternalism – Systematic view of individuals’ interests: subjective well-being – Respects autonomy: educate consumers, don‘t manipulate them – Understanding of dynamic aspects needed @Martin_Binder; m.binder@berlin.bard.edu http://de.linkedin.com/in/bindermartin/ 10

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