Behavioral Economics is the study of psychology as it relates to economic decision making processes. That’s quite a mouthful, right? The two most important questions in the field are: Are economists’ assumptions of utility or profit maximization good approximations of real people’s behavior? And, do individuals maximize subjective expected utility?
In an ideal world, all people always make optimal decisions. You know, ones that provide them with the greatest benefit and satisfaction. In economics there is something called rational choice theory. It says that when humans are presented with options under the conditions of scarcity, they choose the option maximizing their individual satisfaction. This assumes people are capable of making rational decisions. The theory acknowledges people make decisions based on their preferences and constraints. It also assumes they will effectively weigh the costs and benefits of each option available to them. The final decision will be the best choice for the individual.
Fortunately or unfortunately we live in the real world. We all know what is rational to us at any given point in time may be viewed differently by others. We know the rational person has self-control, and may exercise it. Not only that, people are moved by emotions and external factors. Hence, we know what is best for ourselves. Behavioral economics explains that humans are not rational and therefore are incapable of making good decisions. Interestingly, being capable of good decision making is not the same as actually always utilizing good decision making. The distinction is often significant.
Now, are you aware that in 2015 former president Obama implemented a behavioral science insights policy across our federal government agencies by executive order? In so doing the American government formally adopted a pro “nudge” policy position. That means the work of academics looking for ways to derive practical societal benefits from the insights of behavioral economics is now policy for our federal bureaucracy.
State and local governments too are beginning to use nudging with some enthusiasm. It was used federally with the PPACA. There is nudging being used in “Housing First” initiatives which provide apartments for the homeless. West Virginia used it in promotion of wellness among public employees by imposing higher healthcare premiums for those refusing to participate in fitness testing or who did not perform to standard. It has been used in an attempt to affect commuter driving patterns in Durham, NC. It was used when former NYC mayor Bloomberg banned the sale of sweetened soft drinks in big gulp containers.
This tool, nudging, through application of behavioral economics can be a powerful tool. But should governments wield it at all? Behavioral economics rests on the foundation that people left to themselves will often behave irrationally. But is that justification for allowing the government to remove our right to choose? By extension policy implementation asserts government is always rational and does not make mistakes.
Since the Obama administration we have accepted that the government, by policy, knows what is best for us and should guide and instruct our choices. Perhaps more importantly, the government has taken it upon itself to limit our options to those it considers optimal. This leaves open only determination of whose optimal will be enforced. When did we hold that constitutional convention to create the fourth branch of government, the bureaucracy?