Andrew Burton / Reuters From my cold, dead hands: protesting the proposed “soda ban” in New York City, July 2012.

A Nudge Too Far

Paternalism and the Pitfalls of Behavioral Economics

In This Review

Misbehaving: The Making of Behavioral Economics
by Richard H. Thaler
Norton, 2015
432 pp.
Purchase

Lawyers may reign in Washington, D.C., but it is economists who drive the policymaking process. In July 2009, for example, Douglas Elmendorf, the economist who headed the Congressional Budget Office, nearly derailed the Affordable Care Act (also known as Obamacare) when he announced that, as drafted, the legislation would not “reduce the trajectory of federal health spending by a significant amount”—contradicting assurances made by the law’s supporters, who had to scramble to make changes to the bill. Economists also dominate in academia, so much so that scholars in the other social sciences call economics “the imperial discipline,” decrying its tendency to intrude beyond its proper boundaries.

The accusation is on the mark: many economists do believe that they can explain political and sociological phenomena better than political scientists or sociologists. Their confidence reflects a conviction that economics is more mathematically rigorous and better grounded in theory than the other social sciences. According to its practitioners, economics offers not only descriptive analyses of how society operates (determining who is affected by a particular tax, for example) but also normative policy recommendations (such as determining the optimal tax rate).

At the core of mainstream economics is the assumption that people optimize—that they make purchases rationally and otherwise act rationally in making economic decisions, taking into account their preferences and the information available to them. And yet it is safe to say that every economics professor has paused at some point after setting out a theoretical model and said something like, “In reality, people don’t act exactly this way.” As Richard Thaler, a professor at the University of Chicago Booth School of Business, explains in Misbehaving, the standard economic approach suffers from the fact that humans are not what he terms “Econs”: they don’t, or can’t, optimize all the time. Sometimes the decision at hand is simply too complex to be dealt with rationally; other times, people allow what Thaler calls “supposedly irrelevant factors” to affect their behavior.

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