Over at Free Exchange, Will Wilkinson is taking some shots at behavioral economics and its occasional implications for tighter regulation of markets. "These alleged irrationalities," writes Will, "are general tendencies of the species. So they must afflict every voter, every politician, every bureaucrat, every power hungry general. How exactly is 'a larger role' for the government supposed to improve on the coordinating function of the price mechanism?" I'm not sure what exactly it is that Will finds so inexplicable here. Behavioral research often finds that consumers act irrationally in certain situations. So given a specific set of constraints, they may underestimate future risk, prove oversensitive to loss, exhibit significant status quo bias, and so on and so forth. All problems. Now, the government may be made up of people, but it is not made up of people carrying out transactions under these conditions. An easy example is the research on opt-out 401(k)s. We know, from the economists, that investing in 401(k)s is generally a wise idea. We know, from the statisticians, that far fewer people do it than should. We know, from the behavioralists, that far more people would do it if the default setting put you in the 401(k), rather than forced you to wander down to HR and specifically ask for it. And so folks in the government, acting with more information and in a different context than folks in an office, think up a policy to "recognize the power of inertia in human behavior and enlist it to promote, rather than hinder, saving." At exactly which point in this process does Will fear that the same irrationality that keeps someone from creating a retirement account will foul up a regulator's efforts to ease their way into a retirement account? Similarly, at which point does an individual's tendency to discount the need for future savings screw up a regulator's ability to create Social Security? Indeed, you may not like Social Security, or opt-out 401(k)s, but whatever their flaws, they simply aren't the same flaws affecting the targeted groups. Regulators, working with the benefits of information, expertise, and detachment, can certainly create incentives that militate towards empirically desirable behaviors. The failings of individuals are, in general, different than the failings of institutions, just as the failings of the market tend to be different than the failings of the government. In any given situation, you have to decide which is worse. But they're not the same.
