Peter raises the threat that behavioral economics poses to free market policy. I’m less concerned about this movement, in large part because its teachings can be turned against central regulators.
Here’s law professors Stephen Choi and Adam Pritchard, from the conclusion to their excellent 2003 article Behavioral Economics and the SEC (from the Stanford Law Review; working paper version available here):
Read the rest of this post →Regulators are vulnerable to a wide range of behavioral contagion. Regulators may suffer from overconfidence and process information with only bounded rationality. Heuristics play a large role in how regulators make decisions. Even with expertise, regulators may misapply heuristics across the spectrum of different regulatory problems. Regulators may also suffer from confirmation bias, supporting prior regulatory decisions whatever the wisdom of the decisions.