Hayekian behavioral economics

Abstract

One of Friedrich Hayek's most important arguments pointed to the epistemic advantages of the price system, regarded as an institution. As Hayek showed, the price system incorporates the information held by numerous, dispersed people. Like John Stuart Mill, Hayek also offered an epistemic argument on behalf of freedom of choice. A contemporary challenge to that epistemic argument comes from behavioral economics, which has uncovered an assortment of reasons why choosers err, and also pointed to possible distortions in the price system. But, even if those findings are accepted, what should public institutions do? How should they proceed? A neo-Hayekian approach would seek to reduce the knowledge problem by asking what individual choosers actually do under epistemically favorable conditions. In practice, that question can be disciplined by asking five subsidiary questions: (1) What do consistent choosers, unaffected by self-evidently irrelevant factors, end up choosing? (2) What do informed choosers choose? (3) What do active choosers choose? (4) When people are free of behavioral biases, including (say) present bias or unrealistic optimism, what do they choose? (5) What do people choose when their viewscreen is broad, and they do not suffer from limited attention? These questions are illustrated with reference to the intense controversy over fuel economy standards.

‘Come on, man!’ On errors, choice, and Hayekian behavioral economics

“…The behavioral response is based an empirical hunch: Consumers might be making errors, perhaps because of present bias, perhaps because of limited attention. A great deal of empirical work investigates that hunch (Sunstein, 2021). The jury is still out, but in my view, the hunch has significant support, in the sense that under epistemically favorable conditions, consumers would be making more fuel-efficient choices (Sunstein, 2021).…”

“…My main goal in Hayekian Behavioral Economics (Sunstein, 2021) was interpretive in Dworkin's sense. I sought to sketch an approach that (1) recognizes the importance and pervasiveness of individual errors, (2) emphasizes the epistemic limits of planners, (3) builds on individual choices rather than planner preferences, and (4) gives authority to choices made under epistemically favorable conditions, in which informational deficits and behavioral biases are least likely to be at work.…”

“…Might consequentialism import deontological considerations? The best answers to these questions will, I think, lead us to question Hayekian behavioral economics, as I have elaborated it, and to undertake the specification, or at least to notice the need for it (Sunstein, 2020b).…”

“…In 2003, Thaler and I argued for 'libertarian paternalism', that is, an approach that preserves freedom of choice while steering people in certain directions, but we did not elaborate (4) in any way. By emphasizing certain choice-attuned ways of deciding on the right defaults (Sunstein, 2020b), I suppose that we made some gestures in broadly Hayekian directions. But we did not engage Hayek's work in any terms, and we did not have a time-travel machine.…”

“…Speaking of that spirit: Regulators all over the world are giving careful consideration to fuel economy and energy efficiency standards (Sunstein, 2021). Such standards promise to reduce externalities, including greenhouse gas emissions.…”