Economia del comportamiento transformando a la economía

Cambridge Journal of Economics 2011, 35, 705–728
doi:10.1093/cje/beq049
Advance Access publication 5 January 2011
Behavioural and experimental economics:
are they really transforming economics?
Ana C. Santos*
Behavioural and experimental economics are part of an increasingly pluralistic
mainstream economics, sharing with other recently established research pro-grammes
the revision of fundamental assumptions of the previously dominant
neoclassical economics research programme. The recent proliferation and consol-idation
of these new approaches creates the possibility for the emergence of a new
orthodoxy of economics, i.e. a new general research programme capable of replacing
neoclassicism. The goal of this paper is to investigate the potential contribution of
behavioural and experimental economics to help build a general research pro-gramme
capable of supplanting neoclassical economics and thereby transforming
economics. To this end, it focuses on two influential applied fields of behavioural and
experimental economics—choice architecture and design economics.
Key words: Anomalies, Choice architecture, Design economics, Market design,
Recent economics
JEL classifications: A12, B52, C90
1. Introduction
Behavioural and experimental economics are part of recent mainstream economics,
sharing with other emergent research programmes the rejection of fundamental assump-tions
and commitments of the previously dominant neoclassical economics research
programme. The recent proliferation and consolidation of the new approaches, with
overlapping areas of research and concerns, is now raising the possibility for the emergence
of a new orthodoxy of economics, i.e. a new general research programme capable of
replacing neoclassicism (Davis, 2006, 2008). The goal of this paper is to investigate the
potential contribution of behavioural and experimental economics to transform econom-ics.
I focus, in particular, on their capacity to carry out two major transformations that are
deemed as characterising the ongoing process of change in the discipline: (i) the revision of
the neoclassical economics model of human action, homo economicus; and (ii) the new
economic approach to market building. In order to do this, I look at two recent applications
Manuscript received 11 October 2009; final version received 17 November 2010.
Address for correspondence: CES, Center for Social Studies, University of Coimbra, Cole´gio de S. Jerońimo,
Apartado 3087, 3001-401 Coimbra, Portugal; email: anacsantos@ces.uc.pt
* University of Coimbra, Portugal. I acknowledge financial support from Fundacxaõ Calouste Gulbenkian
(n 21-107001-S). I would also like to thank the comments of Joaõ Rodrigues and Jose´ Castro Caldas and
those of three anonymous referees. Usual disclaimers naturally apply.
The Author 2011. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.
All rights reserved.
Downloaded from cje.oxfordjournals.org by Robert Looney on July 2, 2011

706 A. C. Santos
of these research programmes—choice architecture and design economics—which, as we
shall see, focus on each one of these features in turn.
The new research programmes, also comprising, among others, game theory, evolu-tionary
economics and neuroeconomics, have a common denominator. They all are
relatively recent developments whose emergence relied on conceptual contents imported
from other disciplines, such as psychology, biology and neuroscience (Davis, 2006, 2008).
Their trajectories thus stand in stark contrast to that of neoclassical economics, which is
consolidated around a fairly well-delimited analytical toolkit that has been widely applied
to other fields of research. The model of human action, homo economicus, and the model of
the competitive market have been particularly instrumental to the expansion of the
neoclassical approach outside the conventional realm of economics. They have been
pivotal in the so-called ‘economics imperialism’ movement, contributing to universalising
and naturalising a particular version of the market and the egotistic and rational attributes
of human beings (Carvalho and Rodrigues, 2008).
That the new fields of research have relied on content imported from disciplines with
radically different principles, presuppositions and conceptual frameworks, making up
a rather heterogeneous and pluralistic mainstream economics, naturally fuels the
expectation of change in economics. John Davis (2008), for example, considers that the
recent approaches carry a great transformative potential, superior to that of the traditional
heterodox approaches. Notwithstanding the fact that both recent and traditional heterodox
approaches depart from key assumptions of neoclassical economics and have close ties with
sciences outside economics, only the new research programmes are moving inwards
toward the core of economics in a deliberate attempt to redirect it. This is taken to be the
case of current behavioural economics. Having its origins in psychology and its primary
focus on the critique of homo economicus, behavioural economics is now attempting to
incorporate new behavioural assumptions into new models of human action (cf. Camerer
and Loewenstein, 2004). Traditional heterodox approaches, in contrast, remain oriented
toward the periphery of economics, rejecting core neoclassical principles rather than
attempting to reform them, and insisting on an alternative foundation for economics, one
more based on closer ties to other social sciences. The greater transformative potential of
the new approaches is further supported by the higher professional status that the
practitioners of the new approaches seem to be enjoying, as testified by the award, in 2002,
of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel to Daniel
Kahneman, ‘for having integrated insights from psychological research into economic
science, especially concerning human judgment and decision-making under uncertainty’
and to Vernon Smith ‘for having established laboratory experiments as a tool in empirical
economic analysis, especially in the study of alternative market mechanisms’.1
Choice architecture and design economics are policy applications that provide
a privileged vantage point from which to assess the potential of the new approaches to
transform economics. This is so because, as we shall see, policy proposals render
particularly salient economists’ conceptions of economics and of the social world.
Choice architecture and design economics unequivocally depart from the research
strategies of neoclassical economics. Rather than assuming at the outset that human beings
are homo economicus, i.e. that they are always capable of maximising their individual utility,
choice architecture takes as a starting point how people actually deal with particular forms
of decision-problems. The purpose of choice architecture is to prepare contexts of choice
1 http://nobelprize.org/nobel_prizes/economics/laureates/2002/

Behavioural and experimental economics 707
to help individuals make better choices, as judged by individuals themselves, or by society
as a whole (Thaler and Sunstein, 2003, 2008). Design economics is in turn devoted to the
conception of specific allocation mechanisms that aim at coordinating individual actions
for the accomplishment of the goals set by the designer (Roth, 2002). Rather than
assuming that markets emerge spontaneously and automatically generate efficient
allocations of resources, design economics puts at the forefront the complex social
engineering processes involved in the building of markets and market-like allocation
mechanisms that determine individual outcomes and the aggregate results that are
obtained by having people interacting under those mechanisms.
Yet it is not clear that the reform of the core principles of economics is under way. Both
choice architecture and design economics seem to retain two fundamental principles of
neoclassical economics—rationality and efficiency. Having observed that economic agents
are not always rational and that their actions in market and non-market contexts do not
always produce desirable outcomes, economists seem now to be dedicated to the
fabrication of the conditions of rationality and efficiency. And there is a clear division of
labour. While architect-economists are devoted to the creation of contexts of choice that
make rational choices viable, designer-economists are devoted to the construction of
market mechanisms that ensure socially efficient outcomes. Thus, while importing new
models of individual decision-making and new experimental technologies, choice
architecture and design economics still seem to retain the neoclassical view of rational
choice, defined in terms of the choice that confers the individual the highest net benefit
given constraints, and of the market understood as a mere allocation mechanism. This
might in fact explain the success of choice architects and design economists as policy
advisors. Notwithstanding the ongoing process of change in economics, economic
discourse and general perceptions about economics may lag far behind. Policy proposals
that appeal to the standard normative notions of rationality and efficiency might thus still
be well-received by policy-makers and the general public. However that may be, the fact of
the matter is that Richard Thaler, Cass Sunstein and Alvin Roth are all accomplished and
much sought after scholars to give advice and help reconfigure a variety of socioeconomic
institutions.2
If on the one hand, the rejection of key assumptions of neoclassical economics may entail
a transformative potential, the preservation of the neoclassical criteria of rationality and
efficiency, on the other hand, may suggest that neoclassical economics principles are still
very much present in the new approaches. The goal of this paper is to investigate this
tension so as to evaluate the prospects of change in economics and the emergence of a new
general research programme capable of replacing neoclassicism. Section 2 starts off by
briefly reviewing the recent transformations taking place in economics. Section 3 presents
and analyses choice architecture while Section 4 is given over to the presentation and
examination of design economics. Section 5 then discusses the tensions that arise from the
revision of the key assumptions of the neoclassical research programme that preserves its
normative criteria of rationality and efficiency. Based on the analysis of choice architecture
2 Thaler and Sunstein are from Chicago University and were famously advertised as campaign advisors to
the then Presidential candidate, Barack Obama. Sunstein is the current Administrator of the White House
Office of Information and Regulatory Affairs. Thaler was advisor to the leader of the British Conservative
party, David Cameron, and continues to advise the institutional investment firm Fuller Thaler Asset
Management, Inc., which he founded (see Chakrabortty, 2008; Lewis, 2008; Wilby, 2008). Roth is from
Harvard University and he too has been a consultant for various American public entities, such as The
National Resident Matching Program and The New York City Department of Education.

708 A. C. Santos
and design economics, Section 6 draws the main conclusions of the paper regarding the
potential of behavioural and experimental economics to transform economics.
2. Neoclassical dominance and the new mainstream pluralism
This paper appraises the departures of choice architecture and design economics from
neoclassical economics so as to assess the potential of behavioural and experimental
economics to transform economics. At this juncture, two caveats are in order. First,
controversy abounds regarding the implications of behavioural and experimental econom-ics,
within and between the practitioners of the two research programmes. The
experimental economist Vernon Smith (2008, pp. 155–6), for instance, seems to consider
behavioural economics to be outside the scope of economics, dealing with ‘the
performance consistency (choice rationality) of individual decision making’, which ‘is
not where the action is in understanding economic performance and human achievement’.
Economics is instead about how ‘wealth is created by task specialization across individuals,
groups, populations, regions and climates’, where ‘specialization is determined by the
depth and breadth of the market’. Smith thus seems to exclude from experimental
economics individual decision-making experiments. Experimental economics concerns
instead ‘market performance (market rationality), incentives in public good provision and
small group interactions, and other environments with dispersed individual valuations’.
Camerer and Lowenstein (2004, p. 3) consider instead that experimental economics is
defined by the laboratory method, as applied to both individual choice and market
behaviour. Behavioural economics is particularly devoted to improving ‘the realism of the
psychological underpinnings of economic analysis’, which is deemed to advance the field of
economics by ‘generating theoretical insights, making better predictions of field phenom-ena,
and suggesting better policy’. For the purpose of the analysis to be carried out, I will
focus on behavioural economics’ revisions to homo economicus, and on the contribution of
experimental market economics to the reconsideration of the neoclassical conception of
the market. Examination of the transformative potential of behavioural economics will be
based on the analysis of choice architecture and that of experimental market economics on
the analysis of design economics. This means, and this is the second caveat, that the
analysis to be carried out will be necessarily partial. Nonetheless, choice architecture and
design economics are taken to be particularly informative of the ongoing process of change
in the discipline, namely concerning: (i) the revision of the neoclassical economics model
of human action, homo economicus (e.g. Frey and Benz, 2004); and (ii) the recent economic
approach to market building (e.g. Mirowski, 2007).
Homo economicus is the neoclassical economics model of human action. Homo economicus
is rational and typically selfish. He chooses so as to maximise his utility and succeeds in
doing so. No cognitive limitation of any kind gets in his way when calculating the costs and
benefits of the alternatives at hand. Nor does he have self-control problems that impede the
selection and the pursuit of the alternative that benefits him the most. Because he is
generally guided by his narrow self-interest, choice depends on his individual subjective
preferences and the constraints he faces, in particular his income and the relative prices
(explicit or implicit) of the different choice alternatives. The natural habitat of homo
economicus is the market. The market, through its price mechanism, is deemed to provide
the relevant information and the required incentives for multiplying the range of choice
and thereby for maximising individual utility and social welfare, which is no more than the
sum of individual utilities.

According to the neoclassical approach, governments should abstain from ‘intervening’
in the market; otherwise they will distort prices and thereby undermine rational decision-making
and social well-being. Government action should be restricted to so-called market
failures, for in these cases prices no longer reflect the costs and benefits of alternative
options. But even in these cases governments should avoid as much as possible restricting
individual choice through laws and regulation. They should instead try to mould individual
behaviour via the use of pecuniary incentives, attempting to align individual and group
interests by changing the costs and benefits of the various courses of actions. Pecuniary
incentives are deemed to be effective in a rational world where individuals react to changes
in their possibility space in a systematic and predictable way, refraining from pursuing
costly and undesirable actions, which do not need to be outlawed, and engaging in more
beneficial activities.
Even though the ‘market’ is the central institution of neoclassical economics, it has not
been constituted as an object of study on its own right. There has been little interest in
studying how specific markets operate and how prices are actually obtained. Instead, it has
been taken as a relatively homogenous and undifferentiated entity, to which are associated
vague notions of supply and demand that jointly determine the equilibrium price of
commodities (Hodgson, 2008).
The abstract model of human action and the vague conception of the market are two key
elements in economics imperialism, which has consisted of the extension of the economic
approach to a variety of non-economic fields of research in politics, law, history, the arts
and the family (Frey and Benz, 2004).3 This process has also been extended to public
discourse and to the conducting of public policy, resulting in an increased commodifica-tion
of social life. Neoclassical economics has in this way been part of a process of
universalisation of market-based social relations (Carvalho and Rodrigues, 2008).
Recent research challenges the homo economicus model and places a greater emphasis on
the role of institutions, specifically of market institutions, in guiding and shaping human
behaviour, as well as in determining aggregate outcomes. As Philip Mirowski (2007,
p. 211) summarises, we are moving ‘from a period when ‘‘the market’’ has been left implicit
and undefined to an era in which markets are becoming the center of attention’. Economics
has hence ‘become less fixated upon agency and more concerned to theorize the meaning
and significance of a diversity of (small-m) markets’. Recent change in economics has thus
consisted of the inversion of interest in the status and nature of agents in favour of the
specifications of markets.
These transformations are by and large the result of both behavioural and experimental
economics. The gradual establishment of these fields of research, most notably since the
1990s, has contributed to draw the profession’s attention to the study of the behavioural
deviations from the predictions of the rational model of human action, and to the role of
socioeconomic institutions in determining individual behaviour and aggregate outcomes.
Choice architecture and design economics derive the policy implications of the recently
acquired understanding of human behaviour and of the role of the overall institutional
setting. They rely on distinct resources, however. Choice architecture builds upon the
‘behavioural’ experiments of economics, as well as from evidence obtained from other
methods and from other disciplines (especially from cognitive psychology), which have
produced knowledge of individuals’ attributes (e.g. preferences, attitudes toward risk, and
so on) and of the processes by which people select and apply heuristics or abide by social
3 See Ma¨ki (2009) for a discussion on the notion of economics imperialism.

710 A. C. Santos
norms when facing particular individual and collective decision-making problems. Design
economics builds instead upon the ‘technological’ experiments of economics that are
particularly tailored to study market institutions, namely their incentive compatibility
attributes, i.e. their capacity to induce self-interested individuals to take the actions that
achieve desirable results at the aggregate level (cf. Santos 2007; 2010, cap. 10).
Behavioural experiments have produced a substantial amount of evidence that shows
that human beings are prone to systematic error even in areas of economic relevance where
stakes are high (e.g. Thaler, 1992; Camerer, 1995). Rather than grounding individual
choice on the calculus of the costs and benefits of alternative options so as to choose the
alternative that provides the highest net benefit, individuals have recourse to a variety of
decisional rules and are influenced by various contextual factors that jeopardise the pursuit
of individuals’ best interests. The increased understanding of how people actually select
and apply rules for dealing with particular forms of decision problems and of the influence
of contexts on individual choices is the starting point of choice architecture devoted to the
study of choice setups that can curb human idiosyncrasies to good result, as judged by
individuals themselves, or by society as a whole (Thaler and Sunstein, 2003, 2008).
Technological experiments have produced a substantial amount of evidence of the
relative performance of various market mechanisms (e.g. Kagel, 1995). More recently,
they have been used as engineering tools for building new markets from scratch. That is,
they have been used for building ‘economic machines’, which ‘are supposed to work for
several years, in different contexts and without constant supervision of their manufacturer’
(Guala, 2001, p. 464) or as ‘testbeds’ of ‘a working prototype of a process that is going to be
employed in a complex environment’ (Plott, 1997, p. 605). These experiments have forced
economists to explicitly recognise that markets are the outcome of complex social
engineering processes that determine the rules under which individuals are to act and
the aggregate results that obtain by having economic agents interacting under these rules
(Roth, 2002). In the next two sections, I look in more detail into the policy proposals of
choice architecture and design economics so as to investigate the extent to which they
depart from neoclassical economics and thereby assess the potential of the recent
approaches to transforming economics.
3. The assumptions of neoclassical economic theory, behavioural anomalies
and choice architecture
The neoclassical economics model of human action, homo economicus, relies on two basic
assumptions—unbounded rationality and self-interest— which underlie the utility max-imising
analysis of human behaviour. Experimental work first carried out by cognitive
psychologists, and subsequently by economists, identified so-called ‘anomalies’,
i.e. patterns of judgment and choice that are inconsistent with utility maximisation,
challenging both assumptions.4 Behavioural economists have, then, attempted to replace
the standard assumptions of economics with more realistic descriptions of human
behaviour that could account for people’s bounded rationality and other-regarding
considerations. However, the revised conception of human action was not accompanied
by an equivalent change in economic theorising. While accommodating ‘anomalous’
4 Richard Thaler had an important role in introducing these results to economists in the column
‘anomalies’ of the prestigious Journal of Economic Perspectives, between 1987 and 1990. His The Winner’s
Curse: Paradoxes and Anomalies of Economic Life, published in 1992, brings together some of these
experimental results. See also Camerer (1995).

behaviours, an important part of theoretical work has maintained formal rigour and kept
the traditional fields of application and the disciplinary boundaries intact (cf. Camerer and
Lowenstein, 2004). This strategy allowed economists to retain the utility maximising
principle, considering, for example, that individuals simply have a richer set of preferences
than was traditionally considered, such as the so-called social preferences (cf. Camerer and
Fehr, 2004).5
But empirical research unequivocally challenges the standard rationality assumption.
People do make systematic mistakes, failing to choose what is best for them. Rather than
basing their decisions on the calculus of the net benefits of various choice alternatives, people
have recourse to simple rules of thumb, or heuristics, which help them cope with various
problems in a quick and satisfactory way, thus allowing saving precious time with time-consuming
deliberation (Tversky and Kahneman, 1974). However, sometimes these
heuristics lead to inferior choices, i.e. choices that would be corrected if people had
complete information, unlimited cognitive abilities and unbreakable willpower, and took
time to make their calculations. This body of evidence leads Thaler and Sunstein (2008, pp.
6–7) to conclude that rather than homo economicus, people are homo sapiens, that is, humans.
The psychologists Amos Tversky and Daniel Kahneman (1974) long ago identified three
pervasive heuristics—anchoring and adjustment, availability and representativeness—and
the biases they generate. The ‘anchoring and adjustment’ heuristic, to give one example,
leads to excessive influence of a particular feature of the problem (which works as an
‘anchor’) because individuals often fail adequately to take into account other relevant
elements of the decision problem. The psychologists have also noted that the framing of the
decision-problem, i.e. the way the problem is described and presented, has a strong impact
on the choices individuals make (Tversky and Kahneman, 1981; Kahneman and Tversky,
2000). This goes against the assumption that individual preferences and the inherent costs
and benefits of the alternatives at hand are the sole determinants of human behaviour. Not
only do people ignore features that economic theory takes as relevant, they are also
influenced by factors that economists do not consider.
The status quo bias is a particularly frequent behavioural pattern (Samuelson and
Zeckhauser, 1988) and of particular interest to choice architecture, as we shall see below. It
consists of the tendency to stick to one’s current situation, even when the risk of altering the
situation is low compared to maintaining the situation. This behaviour may be explained
by people’s aversion to losses, i.e. the tendency to place a greater negative value on losses
(e.g. letting go of the present situation) than on gains (e.g. the benefits of change). Status
quo bias may also be caused by what is known as the ‘omission/commission bias’—people’s
tendency to care more about errors of their own actions (commission) than about errors
that occur as a result of their inaction (omission) (Ritov and Baron, 1992). Another
possible cause of the status quo bias is procrastination, i.e. the tendency to delay beneficial
actions that involve immediate costs, such as dieting (O’Donoghue and Rabin, 1999).
Individuals’ excessive optimism and overconfidence in their own abilities may further
exacerbate this tendency.
The opposite behavioural pattern is also frequent and important. People are as well
prone to hasty decisions due to self-control problems, which may lead them to fall into
temptation, doing things that they later regret. This often occurs when the benefits of the
goods or actions are immediate and costs are delayed. This effect is even stronger if
5 See also Starmer (2000) for a review of theoretical developments prompted by experimental research on
individual decision-making under risk.

712 A. C. Santos
individuals are in emotionally or biologically ‘hot’ states, which may provoke an
overestimation of the short-term benefits of falling prey to the temptation (Loewenstein
et al., 2003).
Notwithstanding the accumulated evidence, many (non-behavioural) economists re-main
sceptical. They argue that people do a better job of choosing in the ‘real world’,
especially in markets where they face problems that really matter to them and the stakes are
high (e.g. Binmore, 1999). But the anomalous phenomena have been replicated with
higher stakes, both in the lab (Camerer and Hogarth, 1999) and in the ‘real’ world, as in
financial markets (Shiller, 2000).
The consideration that individuals are boundedly rational and weakly willpowered is
now inspiring various versions of so-called ‘soft paternalistic’ approaches to individual
decision-making—asymmetric paternalism, cautious paternalism, libertarian paternalism
(cf. Camerer et al., 2003)—devoted to helping people make choices more in line with
maximising behaviour, while avoiding as much as possible placing limits on individual
choice and thus causing harm to those who behave rationally. Choice architecture,
proposed by Richard Thaler and Cass Sunstein, is a case in point.6
The starting point of choice architecture is the human propensity to err. Choice
architecture departs from the assumption that ‘almost all people, almost all of the time,
make choices that are in their best interest or at the very least are better than the choices
that would be made by someone else’ (Thaler and Sunstein, 2008, p. 9). As the empirical
studies mentioned above show, not so infrequently people make choices they would not
have made if they had relevant information, unlimited cognitive abilities to process it and
complete self-control. They are particularly vulnerable when they face complex and
infrequent decisions that offer poor feedback. Not only will they have difficulty in
translating aspects of the situation into terms they can easily understand, but they may also
be exploited by those who can profit from their vulnerability to make predictable mistakes.
Based on an informed view of actual human behaviour, the choice architect has, then,
‘the responsibility for organizing the context in which people make decisions’ (Thaler and
Sunstein, 2008, p. 3). The goal is ‘to steer people’s choices in directions that will improve
their lives’, that is, ‘‘that will make choosers better off, as judged by themselves’ (p. 5) A
critical aspect of choice architecture is that it emphatically avoids constraining the options
of the individual. Its aim is instead to alter ‘people’s behaviour in a predictable way without
forbidding any options or significantly changing their economic incentives’ (p. 6).7 As
Thaler and Sunstein put it, ‘[f]reedom to choose is the best safeguard against bad choice
architecture’ (p. 11).
Choice architecture is devoted to the design of what the authors call ‘nudges’ that
attempt to induce the choices that best serve individual (or collective) interests by taking
into account how people make decisions in particular contexts. Two key instruments of
choice architecture are default options and disclosure devices. Default options deal with
individuals’ status quo biases by carefully designing a solution that is automatically selected
if the individual fails to choose for him/herself. Thaler and Sunstein point out that default
options should only be proposed if it is unambiguous that they serve individuals’ best
interests. Automatic enrolment in the American 401(k) employee saving plans, to give an
example, is thought to benefit employees, since the costs of saving too little for retirement
are admittedly much greater and severe than the costs of saving too much. In any case,
6 Except when stated otherwise, this section refers to Thaler and Sunstein (2008).
7 The authors are here referring to pecuniary incentives.

those who do not wish to be part of the plan may always opt out. The authors consider that
the low rates of opt outs observed in the past suggest that most employees do benefit from
this measure, enrolling earlier than they would otherwise do, if they did so at all. These
measures would not be necessary in a fully rational world in which individuals always
choose the best option regardless of the default. But individuals’ inertia and tendency to
procrastinate more likely lead to no action. Default options have been shown to be
particularly effective, especially so if they also entail an explicit endorsement from the
default setter that it is the recommended course of action (Thaler and Sunstein, 2008,
p. 83).
The choice architect may also select the relevant information for decision-making and
design information disseminating devices that facilitate comparison of the alternative
options. This solution is proposed for decisions involving complex pricing schemes, such as
mortgages, cell phone calling plans and insurance policies. According to Thaler and
Sunstein, in these cases the government should regulate disclosure practices, requiring that
customers be informed of fees, in a legible format, and be given regular reports of the fees
that have been charged. These reports would provide consumers with feedback so that they
could shift their demand to the services that most adequately fit their consumption
patterns. Besides the design of defaults or information disclosure devices, choice architects
may have recourse to other tools to attenuate people’s propensity to err, say the framing of
the context of choice, which may be tamed to better capture the analytical structure of the
decision-problem; moreover, they may take advantage of people’s attributes, for instance,
people’s susceptibility to social influence, by making salient the prudent and beneficial
actions of others.
Consumption, saving and investment decisions constitute obvious areas for the
application of choice architecture. The high rates of household indebtedness in developed
economies (but not only) are to some extent explained by individuals’ failure to make wise
consumption/investment decisions, due to non-transparent and difficult-to-process in-formation
and to self-control problems, given that the temptation of immediate
gratification is too salient as compared with the costs of hasty/risky decisions that are
only suffered at a later time.
Matters are at present even more complicated by the highly sophisticated and complex
financial markets that have rendered credit and investment decisions increasingly more
difficult. Less educated individuals are in a particularly disadvantaged position because
they are more vulnerable to aggressive campaigns and marketing strategies deployed by
those who profit from consumers’ hasty decisions. This is explicitly recognised by Thaler
and Sunstein, when referring to mortgage markets:
When markets get more complicated, unsophisticated and uneducated shoppers will be
especially disadvantaged by the complexity. The unsophisticated shoppers are also more likely
to be given bad or self-interested advice by people serving in roles that appear to be helpful and
purely advisory. In this market, mortgage brokers who cater to rich clients probably have
a greater incentive to establish a reputation for fair dealing. By contrast, mortgage brokers who
cater to the poor are often more interested in making a quick buck. (Thaler and Sunstein, 2008,
p. 134)
In this particular situation, Thaler and Sunstein’s proposal is to demand that mortgage
lenders provide the relevant information in a readable format so that all the fees and interest
rate provisions can be more easily compared. They argue that this will not only make it easier
to shop, but it will also allow independent third parties to offer much better advice, thus
making the mortgage market more competitive (Thaler and Sunstein, 2008, p. 138).

714 A. C. Santos
Choice architecture thus mobilises the recently acquired understanding of how
individuals process information and make decisions, to design contexts of choice that
help people make better choices. The choice architect may focus on the design of default
options that protect individuals from inertia or conceive information devices to help
improve people’s ability to select options that make them better off. At the same time the
designer should avoid, as much as possible, changing the incentive structure of the
problem-situation. The authors stress ‘[t]he central goal would be to inform costumers of
fees rather than set prices’ (Thaler and Sunstein, 2008, p. 83).
It is by now clear that the neoclassical models of rational choice and of the competitive
market loom in the background of choice architecture. The problem, as Thaler and Sunstein
see it, is that individuals fail to conform to the rational choice model due to incomplete
information, cognitive limitations and weak willpower. Prevalent incentives in opaquemarkets
may even exacerbate this problem because it can be highly profitable to exploit people’s
bounded rationality. The choice architect should then help people with decision-making so
that they more closely align their demand with the actual benefits derived from consumption.
In this way, choice architecture also contributes to bettering the functioning of competitive
markets by reducing the detrimental effects of asymmetric information between buyers and
sellers. The more consumersmake the right choices, the more markets become competitive.
Thaler and Sunstein thus work within the larger framework of the neoclassical research
programme trying to deal with the problems of asymmetric information and decision-makers’
bounded rationality. Even though they acknowledge that in many circumstances
choice architectures are unavoidably designed by someone else for others to make their
choices, they do not address this key issue to choice architecture. They merely identify
complex and difficult decision-making as obvious areas for the intervention of the
benevolent choice architect. Thus, they do not consider the possibility that some of
people’s ‘errors’ might in fact be the result, intended or unintended, of current choice
architectures. This means that choice architecture only addresses those problems caused
by incomplete information, bounded rationality and weak willpower, leaving out those that
stem from faulty choice architectures. This is patent when Thaler and Sunstein discuss
mortgage markets, disregarding the participation of the wider financial system in growing
household rates of overindebtedness, limiting their focus on the complexity of these kinds
of decision, the main problem to be fixed by choice architecture.
The work of Robert J. Shiller (2000, 2008) on financial markets illustrates the interplay
between choice architectures and human behaviour showing that understanding individual
decision-making requires understanding the institutional structure inside of which people
act. Shiller interprets the so-called subprime crisis not so much in terms of the complexity
of the decision-making process, but instead in terms of an ‘epidemic of irrational
enthusiasm for housing investments’ caused by the perverse incentives of the financial
sector. On Shiller’s view, the unsustainable levels of mortgage borrowing in the USA were
ultimately caused by dramatic institutional changes in financial markets over the last three
decades, through deregulation and, more recently, financial innovation, culminating in
what is known as the New Financial Architecture. The new institutional setting, together
with rising housing prices and low interest rates, rendered mortgage lending a highly
lucrative investment fed by a new securitisation industry.8 When house prices collapsed
8 The feedback mechanisms are well-known: mortgage brokers sold loans, investment bankers packaged
the loans into securities, banks and specialist institutions serviced the securities, rating agencies gave their seal
of approval, and insurance companies protected holders of such securities against loss through the use of
credit default swaps.

and interest rates rose, and borrowers started to default on their payments, the mortgage
market collapsed, impacting on other parts of the globe, since mortgage-based financial
products had been dispersed around the world. The end result was the greatest financial
crisis since 1929. According to Shiller, the ‘subprime solution’ must result in a profound
restructuring of the housing and financial economy of the magnitude of the New Deal.
This therefore suggests, at least as regards individual decision-making in financial markets,
that a more significant amount of institutional engineering than solving people’s status quo
biases or hasty decision making is required. Otherwise, governments will have to be called
upon to rescue financial actors with ever more massive bailouts to guarantee the sector’s
sustainability (Crotty, 2009).
The minimalist solutions of choice architecture contain an implicit acceptance of the
prevalent institutional arrangements. This is clear in Thaler and Sunstein’s rhetoric, where
choice architecture is to be subjected to the preservation of ‘freedom of choice’ and of the
free functioning of the market, which is deemed as characterising the present situation.
The solutions proposed, however mild, may nonetheless have effects on the status quo ante.
If the new choice architecture is to be effective, in the sense that it succeeds in steering
individual behaviour in desirable directions, it necessarily interferes with the interests in
place, reallocating economic opportunities among differently situated individuals. Those
most adversely affected by the new institutional setup will probably resist, depicting the
new policy as an unnatural ‘intervention’ into some natural state.
However, policy is not some alien ‘intervention’ into a naturally evolved reality. The
status quo ante is itself the result of past political processes—a point that has been made by
various generations of institutional economists, especially in the tradition of John
Commons (1931). It is only our ‘institutionalised mind’ that sees current practices,
choices and actions as normal, right and correct, and changes to that situation as artificial
‘interventions’ (Bromley, 2006). And people, as behavioural economists would now add,
have a tendency to resist change. To conclude with the wording of Warren J. Samuels
(1989, p. 432) ‘[w]hat is normally considered ‘‘intervention’’ is not the intrusion of
government in an area in which government hitherto has been absent but the change of the
interests to which government gives its support or which government is used to support’.
The objection that institutional change is coercive and inhibitive of individual ‘freedom’ is
therefore incoherent, as is the complaint that public policy creates ‘distortions’ in an
otherwise frictionless economy (Bromley, 2006). What institutional change does is alter
the previous allocation of economic opportunities among differently situated individuals,
advancing the economic and social agendas of some and impeding those of others. From this
it follows that the concept of efficiency cannot refer to some natural state of world. Efficiency
is always measured by reference to some institutional setup that indicates which instances of
costs and benefits are to be considered and recorded (Samuels, 1992). If the context
changes, what will count as rational and efficient will change too. This is illustrated in the
next section, where institutional change is more explicitly addressed in design economics.
4. Design economics and the expansion of markets
Design economics affords the economist a more active role in the (re)design of contexts of
choice. Design economics is in fact presented as the engineering field of economics. In
Roth’s (2002, p. 1341) account, it is ‘the part of economics intended to further the design
and maintenance of markets and other economic institutions’. And like any other
engineering field, design economics is taken to deal with the ‘natural’ complications that

716 A. C. Santos
arise when applying theory to practicalmatters, for which end it mobilises the resources from
three emergent research programmes of economics: game theory, computational and
experimental economics. Game theory provides the general framework for addressing
design, in particular, for the definition of the ‘rules of the game’. The tools of computational
and experimental economics are instead used to ‘bridge the gap’ between theory and the
institutional details of particular markets. Computational methods, in particular, ‘will help us
analyze games that may be too complex to solve analytically’, while laboratory experiments
‘will help inform us about how people will behave when confronted with these environments,
both when they are inexperienced and as they gain experience’ (Roth, 2002, pp. 1373–4).
Design economics emerged in the 1990s when game theorists began to be hired as
consultants for the design of various allocation mechanisms that were soon to be
implemented in real world environments. The design and implementation of these new
mechanisms raised technical complications for which no theory or past experience could
suggest any solution, and new devices had to be designed from scratch. Two famous
exemplars of these allocations mechanisms are the design of labour clearinghouses for the
US National Resident Matching Program (NRMP) that would assign hospital positions to
young doctors, and the design of an auction mechanism for the US Federal Communi-cations
Commission (FCC) that would allocate licenses to use the electromagnetic
spectrum for various telecommunications services.
The NRMP clearinghouse called for the design of a matching algorithm that would
allocate applicants to residence programs based on preferences lists of both doctors and
hospitals, avoiding favouring one side of the market over the other, while producing
a stable matching (i.e. a matching on which both parties could agree). To this end, the
performances of alternative algorithms were assessed and compared in terms of the impact
on each side of the market, speed, stability and so forth. The FCC auction was intended to
allocate airwave spectrum rights in a transparent and efficient way. But while economists
were hired to design new allocation mechanisms the responsibility for selecting or deciding
whether to adopt the proposed design was retained by the public authority that hired them,
in consultation with its various constituencies.
The FCC auction provides a very useful illustration of design economics, which is worth
looking at more closely.9 The FCC auctions have been greeted as the biggest engineering
success of economics. In 1994, the FCC implemented what was to be known as the
simultaneous–multiple-round–independent auction, which would soon be praised as ‘the
greatest auction in history’ (McAfee and McMillan, 1996, p. 159). This auction launched
a market for thousands of spectrum licenses, and its success in raising billions of dollars for
the public treasury has been taken as evidence of the successful accomplishment of the
goals set by the regulator.
According to the official version, as recounted by the game theorists involved in their
design, the auctions aimed at creating a transparent and efficient market that would
allocate the airwave spectrum rights to highest value users—those who most valued and
made best use of them.10 Until 1982, spectrum licenses were assigned by an administrative
9 See Guala (2001) for a more detailed account of the engineering work involved in the construction of the
FCC auctions.
10 This account is based on game theorists’ reports of events, after efficiency had been set as the main goal
of the auction to the detriment of welfare goals defined by Congress, such as the expansion of public access to
new technologies, products and services, and the decentralisation of the licenses awarded to include small
businesses, rural telephone companies and minority groups. For a more complete account of the political
process involving the FCC auctions see Nik-Khah (2008).

hearing process (recognisably slow and non-transparent), which allocated licenses for free.
After 1982, licenses were sold and allocated via a lottery system, which significantly
improved the speed and transparency of the allocation mechanism, but it did not prevent
opportunistic behaviour. Licenses could be bought and resold by individuals who did not
want to use them and thus undeservedly appropriated revenue raised by the commercial
use of the public spectrum.
The auction mechanism seemed to offer a tremendous advantage over the alternatives. It
offered the possibility of identifying the firms with the highest use-values for the spectrum,
which would be in a position to pay the highest prices for using it and, as a result, maximise
the FCC’s revenue. This in turn required the design of an auction mechanism that
encouraged bidders to reveal their true valuations, while preventing opportunistic
behaviour on their part.
The building of the FCC auctions was a complex endeavor, best depicted as a patchwork
of various and partial solutions to the particular issues that arise when building new
markets. Auction design resembled ‘a kind of engineering activity’ that had recourse to all
sorts of resources ranging from ‘practical judgments, guided by theory and all available
evidence’ to ‘ad hoc methods to resolve issues about which theory is silent’ (Milgrom, 2000,
p. 271). Game theory merely assisted in ‘developing intuition’, in particular in ‘show[ing]
how people behave in various circumstances and [. . .] identify[ing] the tradeoffs involved in
altering those circumstances’ (McAfee and McMillan, 1996, p. 171).
The auction had to tackle three major technical issues. First, to ensure that the highest-value
users bought and paid for the licenses at their value; second, to allow the composition
of favoured combinations of licenses, which had to take into account licenses’ comple-mentarities
and substitutability; and, third, to prevent opportunistic behaviour on the part
of bidders, which would jeopardise the competitive gains obtained from instituting the
market. Theory would help look at the strategic structure of the decision-making problem
and anticipate ‘how bidders choose their bids, not knowing the value of the item for sale
and not knowing what their rivals know; and what the seller can do to stimulate the bidding
competition, not knowing how much any of the bidders is willing to pay’ (McMillan, 1994,
p. 146).
Based on advice from the game theorists, the FCC opted for the simultaneous–multiple-round–
independent auction, which gave bidders the possibility of operating in several
markets at the same time and thus of composing desirable aggregations of items or
adjusting their aggregation to a last-resort composition if their first-choice aggregations
became unattainable. The licenses would then be allocated to the highest bidder that paid
his/her bid price. Many detailed rules were then defined to organise the running of the
auction, namely how bidders were to engage in the transactions while attempting to
prevent the opportunistic exploiting of any gap.11
The next step consisted of gluing together these partial solutions and evaluating whether
they could be implemented in an operational environment. Laboratory experiments were
crucial in order to put the various pieces together into a workable mechanism and solve the
11 For example, an activity rule required the payment of deposits on the total number of desired licenses at
the beginning of the auction to ensure that market participants had actually intended to own and use the
licenses. Given the high stakes at play, the government was also concerned with simplifying procedures in
order to reduce the incidence of mistakes. To avoid the ‘winner’s curse’, i.e. selling of licenses to traders who
overestimated their value, or to avoid the extra-cautionary behaviour of risk-averse bidders, the bids were
announced at every round so that traders could make better estimates of the licenses’ values. The incidence of
unpredictable mistakes was further taken into account by allowing bid withdrawal, though with a penalty.
The auction rules in the end amounted to a 130 page document.

718 A. C. Santos
complications that emerged while trying to do so (Guala, 2001; Nik-Khah, 2008). The
building of the FCC auctions thus followed a division of labour in which game theorists
proposed the auction form and the rules that would organise the functioning of the market;
and experimental economists implemented these rules in an electronic market. After
stabilising the auction rules, the experimenters subsequently tested the auction under
conditions that closely resembled the market to be implemented and thereby assessed the
combined effect of the auction’s rules, which could not possibly be predicted by non-experimental
means.
Even though the accounts of the game theorists make us believe otherwise, the success
story of the FCC auctions is not uncontroversial. In an evaluation of the results, Peter
Cramton (1998, p. 735), a successful design economist, states that ‘any auction would look
good relative to the FCC’s past experience with comparative hearings and lotteries’. At the
same time, he concedes that ‘[s]ince I do not observe the bidders’ actual valuations, it is
impossible to say exactly how efficient the auctions were’ and retreats to the more vague
claim that the auctions were successful for the government, as judged by the revenues
raised, and for bidders, as judged by the stability of license compositions (pp. 728–9).
Edward Nik-Khah, based on the archives of the FCC, tells a different story, concluding:
‘[o]verall, the allocation of licenses produced by the auctions proved to be unstable, as the
industry has gone through a spate of mergers, acquisitions, and bankruptcies, ultimately
leading to a high degree of license concentration’ (Nik-Khah, 2008, p. 90). Based on the
analysis of 10 years of FCC auctions, comprising the data of 58 auctions, Gregory F. Rose
and Mark Lloyd (2006) conclude that the auctions failed to maximise receipts and
promote efficiency in the sector because bidders managed to carry out manipulative
strategies (e.g. tacit collusion and pre-emptive bidding), which resulted in the auctioning of
licenses at significantly lower prices.
Yet game theorists were eager to wrap their contribution in the allure of science,
emphasising that ‘the auction design process was driven not by politics, but by economics’
(McMillan, 1994, p. 147). But the process of building the auction was marked by the
interests of the constituencies in place, namely those of the large telecommunications
corporations. Large corporations hired game theorists to help them to position themselves
in the policy-making process, first by lobbying for the most favourable architectures for the
auctions and then by assisting in defining their clients’ bidding strategies (Nik-Khah,
2008).12 As Charles Plott (1997, p. 606), one prominent consultant, candidly acknowl-edged:
‘Business understood that the rules and form of the auction could influence who
acquired what and how much was paid’. Thus, the building of the FCC auction was not
a mere engineering exercise. It was a complex political process, where big companies
actively exercised their influence before and during its operation. Because the FCC failed
to prevent collusion and other anti-trust strategies, taking place both inside and outside the
market, the market became more concentrated in the hands of a few large corporations.
The FCC auctions thus make it plain that markets, and non-market allocation
mechanisms for that matter, are complex institutional arrangements that require the
engineering efforts of various social scientists and social actors, and that market outcomes
depend on the particular configurations of these arrangements. Rather than assuming at
the outset that markets ensure efficiency, via the symbiotic conjunction of agents’
12 To give just a few prominent names, Paul Milgrom, Robert Wilson and Charles Plott were hired by
Pacific Bell, Preston McAfee by Airtouch Communications, Peter Cramton by CI, John Ledyard and David
Porter by the National Telecommunications and Information Administration and, finally, JohnMcMillan by
the FCC.

rationality and the information disseminated through prices, design economists are
devoted to the study of ‘the rules of the game’. In Roth’s wording:
The largest lesson in all this is that design is important because markets don’t always grow like
weeds—some of them are hothouse orchids. Time and place have to be established, related goods
need to be assembled, or related markets linked so that complementarities can be handled,
incentive problems have to be overcome, etc. (Roth, 2002, pp. 1373–4)
It is also clear that design economics is to be devoted to the ‘technical issues’ that arise in
market building. That allocation mechanisms are the outcome of difficult and complex
political processes is not adequately taken into account, especially the impact of these processes
on the ‘technical’ goals set beforehand. Design economists, qua specialised technicians, deal
with the technical complications that arise in social engineering, specifically with those that
stem from the strategic environment and the opportunistic behaviour of economic agents,
who will try to outwit the regulator, and from the cognitive limitations of real economic
agents that may compromise the goals set by the regulator. This means that design
economists also take into account the actual characteristics of economic agents. The
effectiveness of market mechanisms requires that the design setter be able to predict how
economic agents will behave under the new institutional setup. But in contrast to choice
architecture, design economists focus on the structure of incentives. The new arrange-ments
must be incentive compatible devices. They should align individual and collective
interests in such a way that individuals’ incentives correspond to what is needed to achieve
group optima, while making sure that economic agents understand the incentive structure
so that they behave predictably, like homo economicus. In the FCC auctions this meant that
the auction mechanism had to succeed in eliciting the subjective values of spectrum
licenses to ensure telecom companies acquired the desired licenses, while contributing to
an efficient allocation of the licenses, thus defined, and the maximisation of FCC revenue.
In sum, design economics is devoted to the (re)design of complex markets and other
economic institutions to be implemented in context-specific environments, to which end the
opportunistic behaviour of economic agents and their propensity to err must be taken into
account. The ultimate goal is to conceive a structure of incentives such that individual actions
can generate desirable social states. Insofar as it overlooks the political process involved in the
(re)building of new economic institutions, design economics risks failing on their own terms,
that is, it fails to pursue its narrowly defined goals of efficiency. The higher the stakes, the
more the (re)creation of a new market gives rise to an intense struggle for influence over the
collective definition of ‘the new rules of the game’. The outcome will contain a high degree of
uncertainty and it will depend on the correlation of power of those involved and their
capability to bring forward their favoured solutions. This means that market building frames
and shapes the interactions of individuals for the attainment of rather elusive goals, say the
allocation of resources in an operational way, while attempting to curb opportunistic
behaviour on their part. To put it in another way, the efficacy of design economics ultimately
hinges on determining the extent to which economists are able to implement their models in
the real world and make reality conform to their theoretical constructs, that is, on
determining the performativity of economics (to be further discussed in Section 5).13
13 This view is also shared by Vernon Smith (2008, ch. 6). While generally favourable to market design, he
thinks that the ‘ecological fitness’ of ‘rational constructivist designs’ is only achieved, if at all, after a long
process of trial-and-error that corrects behavioural incentives and strategic problems not considered in
design. Smith clearly does not think that the FCC auctions have already stabilised and achieved their
ecological fitness.

720 A. C. Santos
This exclusive concentration on ‘technical’ issues is even more salient when design
economists propose the extension of market relations to non-market domains of social life.
The introduction of market-like arrangements that set up contractual forms of exchange
involving the transfer of money and property rights has encountered severe resistance,
since this new form of exchange becomes ‘repugnant’, as Roth puts it, when money is
added to the transaction. This ‘distaste for certain kinds of transactions can be a real
constraint on markets and how they are designed, every bit as real as the constraints
imposed by technology or by the requirements of incentives and efficiency’ (Roth, 2007, p.
38). The challenge, from the point of view of the design economist, is to learn how to deal
with these constraints, which are perceived as part of a technical problem that needs to be
tackled. Roth then urges economists to understand better and engage more with the
phenomena of repugnant transactions. This is so because ‘attitudes about the repugnance
(or other kinds of inappropriateness) of transactions shape whole markets, and therefore
shape what choices people face’ (Roth, 2007, p. 38). When referring to the debate over the
creation of a market for the sale of kidneys, Roth (2007, pp. 53–4) makes this clearer by
contrasting the irrational reactions of its opponents to the frustration of economists ‘at the
failure to adopt what they see as a feasible solution that could be implemented quickly’. In
Roth’s view, design economists, qua rational technicians, should take on ‘the important
educational role of pointing to inefficiencies and tradeoffs, and costs and benefits’ (Roth,
2007, p. 53). They should nonetheless be aware that the sources of repugnance (such as
other-regarding motivations) mayaffect the efficacy of incentive schemes due to the crowding
out of altruistic motivations (cf. Frey, 1997; Frey and Jegen, 2001).14 In order to be effective,
new markets have to deal with all sorts of complications that arise in market building.
To sum up, design economics is devoted to the (re)design of complex market institutions
that deal with varied technical complications in context-specific environments. The
ultimate goal is to (re)align the structure of incentives so that individual actions can bring
about desirable social states. Design economics is not circumscribed to the market domain.
The expansion of markets or market-like forms of exchange to other domains of social life,
however, requires that the economist qua social engineer take on the pedagogic role of
pointing to inefficiencies and tradeoffs, as well as costs and benefits, in discussions
informed by taboo or visceral reactions.15 This brings into the analysis the impact of other-regarding
considerations on the efficacy of public policy. The underlying political processes
of market design and the struggle for political influence are left out, however.
5. Choice architectures and market designs are political constructs
Choice architecture and design economics convey two major transformations deemed as
characterising the ongoing process of change in the discipline: (i) the revision of the
neoclassical model of human action, homo economicus; and (ii) the recent economics
approach to market building. But while fully acknowledging that individuals are not always
rational and that markets are complex socially engineered institutions, these recent
developments retain the view of economics as the science of choice, which ought to
conform to the rational choice model, and select the market as the most adequate
institution to coordinate individual actions in various realms of social life. With minor or
14 To be further explained below.
15 Roth’s account provides an unflattering caricature of critical reactions to the expansion of market forms
of social interaction. See the Journal of Economic Perspectives, vol. 21, no. 3, for the debate around the creation
of a market for the sale of human kidneys, where both positions are more reasonably presented and discussed.

major tinkering with the institutional setup, economists are committed to helping people
make rational choices and to coordinate their actions efficiently for the attainment of
socially desirable ends. Institutional change targets incentive structures, information
disclosure devices and other calculation tools to assist individuals when determining the
costs and benefits of alternative options. They will then make choices more aligned with
the maximisation of individual utility and with what is required to achieve socially desirable
outcomes.
Not only do these proposals retain the fundamental principles of neoclassical
economics—rationality and efficiency—they also continue to promote their expansion to
various domains of social life. Through the architecture of contexts of choice and the
design of market mechanisms, economists are putting their expertise at the service of
individual rationality and economic efficiency, within and beyond the traditional domain of
economics.
Choice architecture and design economics promote a particular version of economics
imperialism that goes beyond the mere export of its concepts to territories traditionally
occupied by disciplines other than economics. They actually aim at inculcating economic
calculus in human deliberation and introducing market-like forms of social interaction
where they have been absent. In other words, what is at stake here is the deliberate attempt
to make society more like its description in neoclassical economic theories, i.e. the
performativity of economics (Mackenzie, 2006; Callon, 2007; Mackenzie et al., 2007).
Whether or not they have succeeded in this endeavour is an empirical question that cannot
be addressed here.16 For now, it is suffice to note that while taking into account predictable
behavioural irrationalities and the opportunistic behaviour of economic agents in their
policy proposals, both choice architecture and design economics retain and promote the
expansion of the neoclassical concepts of rationality and efficiency in their market-based
solutions. This is problematic, however.
The recognition that context influences the choices people make and that the particular
institutional configurations determine individual and aggregate outcomes jeopardises the
ideal of freedom of choice, deemed as characterising the status quo, and the neoclassical
goals of rationality and efficiency. The acknowledgment that the contexts of choice and
social interaction require institutional change, moreover, opens the political Pandora’s box
that neoclassical economics kept closed. Institutional change is fundamentally political. It
requires the action of public authorities to carry it out and it impacts on the balance of
economic and political power among different social groups. As Daniel Bromley (2008,
p. 220) puts it, ‘public policy has but one purpose—to bring about changes in individual
behaviour’ and it does so ‘by altering the institutional arrangements that define the choice
sets—the fields of action—for individuals seeking their best advantage from inside of
a specific institutional structure’.
The dichotomy between the market, the locus of freedom of choice, and non-market
domains is now harder to sustain. Choice architecture and design economics make it plain
that both individual choices and their aggregate outcomes depend on extant institutional
arrangements, stemming from prior political processes that defined the range of admissible
action for different groups of people. As institutional economists have reminded us, it is
only our familiarity with extant institutions that creates the illusion that current
institutional set-ups are natural and fixed, and whence the perception that their change
is the outcome of an artificial ‘intervention’. This is the more so, the more institutional
16 This issue has, however, been addressed in (Santos and Rodrigues, 2009).

722 A. C. Santos
change alters the distribution of resources, power and opportunities. Those most affected
by the new institutional setup tend to depict the new policy as an unnatural ‘intervention’
and will struggle hard to prevent it. But, as the FCC auctions illustrate, markets are the
outcome of complex political processes requiring the involvement of an organised power
capable of imposing a new set of rules defining who can participate and how. As Ha-Joon
Chang put it:
Emphasizing the institutional nature of the market [. . .] requires that we have to bring politics
explicitly into the analysis of the market (and not just into the analysis of the state) and stop
pretending that markets need to be, and can be, ‘de-politicised’. Markets are in the end political
constructs in the sense that they are defined by a range of formal and informal institutions that
embody certain rights and obligations, whose legitimacy (and therefore whose contestability) is
ultimately determined in the realm of politics (Chang, 2002, p. 553)
It is now clearer that choice architecture and design economics are not mere technical
solutions. Their proposals may affect the distribution of economic and political power and,
insofar as they do, they may see their legitimacy questioned on grounds that they violate
freedom of choice or introduce distortions in the market. That is, they may be faced with
the liberal rejection that they are unwarranted ‘interventions’ to solve problems that are
best corrected by the ‘free’ functioning of the market.17
The expectation of this kind of reaction may indeed explain the overly defensive tone of
Thaler and Sunstein and their insistence on the principle of ‘freedom of choice’, defined
negatively as the protection from interference by others. As we have seen, they have
repeatedly stressed that choice architectures are to leave the menu of choices unaltered and
grant individuals the exclusive power to use and dispose of things and services as they wish.
They thereby accept the status quo ante as legitimate and avoid, as much as possible,
altering it. By so doing they focus on people’s choices, leaving the analysis of the context
and the circumstances of the individual in the background, as is typical of neoclassical
economic theory (cf. Peter, 2004). This means that choice architecture is circumscribed to
problems of choice that stem from people’s bounded rationality. It cannot deal with those
problems that stem from the wider institutional setup where individuals act and interact.
Design economics, in contrast, proposes major institutional change, which may
substantially alter the relative position of different social groups. The proposal of the
expansion of markets to new spheres of social life has, moreover, forced design economists
to acknowledge that market relations can be coercive. The discussion around the creation
of a market for the sale of kidneys made the coercive power of pecuniary incentives more
salient for economists, acknowledging that the introduction of a monetary payment may
force the most deprived groups of the population to engage in unwanted transactions due
to extreme economic necessity (Roth, 2007). Design economists have therefore, if only
implicitly, recognised that the government does not have the prerogative of the use of
power to control people’s behaviour. Power can be exerted by various means and by
various actors.18 Nonetheless, design economists still advocate market-based solutions to
various kinds of social problem. Even when the legitimacy of these solutions is questioned,
bringing about ‘reactions of repugnance’, Roth, as we have seen, pushes economists not to
give up their traditional role of pointing to trade-offs and the costs and benefits of the
alternatives at hand, proposing that the coercive power of pecuniary incentives be tackled
17 See Sugden (2008) for a critique of choice architecture along these lines.
18 See Grant (2006) for a comparative exercise on the various forms of power, including coercion,
bargaining and persuasion.

by tuning in to their optimum level and by replacing part of monetary compensations with
in-kind rewards (Roth, 2007, p. 50).
An ample literature, however, exists in the area of political philosophy, which discusses
the need to block the expansion of markets so as to prevent so-called desperate transactions
(Walzer, 1983, 1984; Anderson, 1990, 1993). In this view, and unlike neoclassical
economics, restricting market expansion may, in fact, enhance individual freedom.
Keeping the various spheres of social life separated may be the most effective way to
ensure a range of options large enough actually to allow people to act in conformity with
their preferences and values. For, as Elizabeth Anderson (1990, p. 201) puts it, ‘the
realization of some values demands that certain goods be produced, exchanged, and
enjoyed outside market relations, in accordance with nonmarket norms’.19
On this view, not only may the introduction of market relations in realms of social life
traditionally protected from monetised exchanges create an unacceptable strain on
individuals and impede the realisation and expression of values important to human life,
but it may also have a detrimental impact on the values fostered. This is so because
preferences are endogenous (Bowles, 1998). They are affected by the institutional
arrangements that delineate the patterns of social interaction amongst the people who
make up society. The social norms and relations of the market, by conveying particular
ideals and nurturing specific values, may crowd out other fundamental values (Frey, 1997;
Frey and Jegen, 2001). Anderson’s (1993), for example, depicts market social relations as
impersonal and selfish, where individuals perceive their relations with others as a means to
satisfy their own ends, feeling free to pursue their personal advantage without consider-ation
for that of others.
In markets people are less compelled to follow non-market norms and values. By
aligning self-interest with the interests of others, market mechanisms moreover obviates
the need for ethical reasoning; as a result, individuals no longer have the opportunity, as
Steve Turnbull puts it, to ‘flex their ethical muscles’ (Frohlich and Oppenheimer, 2003,
p. 290). Individuals’ ability to behave in accordance with non-market norms and values,
then, will be seriously compromised. On the contrary, living with the tension between the
best strategy from a rational, self-interested point of view and the ethically best strategy
keeps the ethic imperative active.20
From this it follows that choice architecture and design economics are to be subjected to
ethical evaluation. Insofar as choice architecture and design economics alter the balance of
economic opportunities among people in order to control or influence their actions toward
the goals set by choice architects, by economic designers or by those who hire them, the
legitimacy of their proposals must be subject to ethical evaluation, like any other political
instrument or proposal. The market rhetoric of freedom of choice and economic efficiency
does not obviate the need for such ethical assessment. Indeed, if one takes Ruth Grant’s
(2006) criteria—legitimacy of purpose, voluntary response and the effect on the character
of the parties involved—one clearly comprehends that expanding the range of choice does
not ensure that the available options are equally legitimate, that individuals are capable of
pursuing their most preferred actions, or that the outcomes of individual actions are
19 See Rodrigues (2008) for a review on this literature.
20 Frohlich and Oppenheimer (2003) describe a prisoner’s dilemma experiment where there is a conflict
between the best individual strategy and the best social strategy. The removal of this conflict through the
introduction of an incentive compatible device is effective in promoting the desirable behaviour. But when the
device is removed, the level of cooperative behaviour reaches its minimum level, lower than the level observed
in groups accustomed to the moral dilemma.

724 A. C. Santos
morally innocuous to the parties in the transaction. This ethical assessment gains particular
relevance when considering, as the studies of behavioural economics have shown, that
people are not always aware of the role of the context and of the institutional arrangements
in determining their perceptions of it, and thus of their actions. This relevance is further
magnified by the scientistic discourse that often accompanies the proposal of economists’
solutions, which are purged of political content so as to appear innocuous to the parties
involved. As Grant (2006, p. 30) argues, in these instances it seems that ‘there is no need to
convince people that collective goals are good or to motivate them to pursue those goals by
appeals to rational argument, personal conviction or intrinsic motivations’. As a result,
‘[e]xperts and powerful elites [may] direct institutions and shape people’s choices without
the sort of public discussion and consent that characterizes democratic processes in
general’. But the ethical superiority of market and market-like solutions cannot be taken for
granted. It must be assessed and compared with other instruments of public policy.
To conclude, as long as choice architecture and design economics aim at altering
economic institutions and thereby the balance of power between individuals, they must be
part of a wider process of public discussion and consent; otherwise they risk being
instruments of manipulation. For they may deceive people into believing that they are
acting autonomously when they are actually being used for somebody else’s purposes. The
slogans ‘freedom to choose’ and ‘market efficiency’ are not substitutes of public discussion.
The economic and ethical benefits of public policies must be demonstrated rather than
assumed with the creation of new markets and market-like institutional arrangements.
6. Concluding remarks
Behavioural and experimental economics are part of the new mainstream of economics.
This is testified by the publication of behavioural and experimental research in top
economics journals and by the professional status their practitioners have acquired, inside
and outside academia. Policy makers are asking choice architects and design economists
for advice in the construction of various institutional setups that aim at steering human
behaviour in the directions set by policy-makers.
Both choice architecture and design economics depart from the neoclassical model of
human action, the homo economicus. The effectiveness of their policy proposals depend on
an accurate depiction of human beings, namely on their ability correctly to predict how
people will behave in the proposed institutional settings. And they both recognise the
relevance of the wider social and institutional context in people’s behaviour. This is in fact
their starting point. Choice architecture and design economics aim to improve the
institutional setting so as to help people make better choices for themselves and be more
aligned with what is required for the attainment of desirable socio-economic goals. These
proposals rely specifically on providing individuals with the required information and on
suggesting various devices that can help them to make the right calculations, thereby
preventing the detrimental effects of the bounded rationality of homo sapiens.
There is a crucial distinction between the two proposals, however. Whereas choice
architecture explicitly seeks to preserve the status quo ante, leaving the range of individual
choices and the structure of economic incentives intact, design economics may be
mobilised to produce major institutional change, altering the allocation of the set of
economic and political opportunities among differently situated groups of individuals. But
they are equally political constructs. They either protect or alter the balance of economic
and political power between different groups of people.

Yet both proposals are presented as technical solutions to various kinds of socioeco-nomic
problems. While choice architecture deals with individual cognitive biases, helping
people the better to satisfy their wants, design economics deals with incentive problems,
trade-offs and other technical problems, to ensure the efficient allocation of goods, e.g. the
distribution of goods to those who value and are willing and able to pay the most for them.
They do not consider, much less address, how the new institutional arrangements will
impact on the distribution of economic and political opportunities and how interested
parties will react in turn. This omission may jeopardise the efficacy of proposed solutions
on their own terms. Institutional change may bring about an intense struggle for influence
over the collective definition of the new ‘rules of the game’ or may instill strong resistance
due to its impact on important values unprotected by the narrow neoclassical normative
principles of rationality and efficiency. Insofar as they have these impacts, the proposals of
choice architecture and design economics ought to be subjected to public discussion.
The implication of the foregoing analysis for the direction of economics is not
unambiguous. On the one hand, it may seem that the new research programmes are
adopting a rather conservative strategy, one that does not substantially change the nature of
economics. Economics is still largely about rational choice in efficient markets, where
human behaviour is still analysed in terms of the selection of the best alternative under
given constraints and goods are allocated to those who subjectively value, and are willing
and able to pay the most for them. On the other hand, the policy proposals make clear the
relevance of the institutional setup to individual and collective wellbeing, which cannot be
adequately dealt with within the neoclassical economics framework. Paraphrasing Chang
(2002), by emphasising the institutional dimension of human action, choice architecture
and design economics bring politics explicitly into economic analysis. And this may just be
the contribution of the recent research programmes to the building of a new orthodoxy
capable of replacing the old neoclassicism.
The analysis carried out thus suggests that the potential of the behavioural and
experimental approaches to transform economics lies in the consideration of the political
dimension of institutional change, a lacuna in the neoclassical economics approach. This
requires the explicit recognition that policy-making is not a mere technical exercise. The
economic and moral desirability of alternative socioeconomic institutions has to be
discussed and argued for. It also suggests that this research agenda can benefit from
collaborative work with heterodox economists, namely the tradition of old institutionalism,
who have addressed institutional change as part of a larger political process, and with
political philosophers who have studied the morality of markets, which must be subjected
to ethical scrutiny and democratic validation. Such a research programme would place the
analysis of institutions in a wider framework, one that explicitly recognises institutional
change as a political process, one that alters the distribution of economic and political
opportunities among individuals and that impacts on the motivations and values nurtured
in political communities. The possibility of reconciling these approaches would require of
traditional heterodox economists a greater interest in core topics, and of behavioural and
experimental economists a more receptive attitude toward the ethical appraisal of
alternative socioeconomic institutions.
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