The Manipulation of Choice

Most economists understand choice to be a matter of picking the best option available to a person, such as filling your shopping cart with great bargains or selecting an automobile based on getting the best options for a good price. Sounds reasonable, right? Sure, but once we tease out the meanings of “best” and “available”—as well as other terms that economists use when they discuss choice, such as “preferences” and “well-being”—we see that the standard economic model of choice is anything but reasonable. When you get down to it, it doesn’t involve any actual choosing or deciding: you see, and you want, so you get. This might be fine to describe your dog’s “choices,” but not yours or mine—we deserve a better model, and economists need one.

Behavioral economists recognize how simplistic the standard economic model of choice is and have proposed more elaborate models as alternatives. Using the work of experimental psychologists who studied decision-making in various contexts and situations, behavioral economists pointed out specific quirks or anomalies in our decision-making processes, systematic and predictable errors that prevent us from reaching our true goals. These various cognitive biases and heuristics include framing effects, referring to the effect that the presentation of options has on the choices people make, and endowment effects, which tend to make you demand more to give up something that you own than what you would offer to get it if you didn’t. In many cases, these cognitive effects represent significant deviations from the textbook models of rationality used by mainstream economists, and have helped to generate more accurate explanations and predictions of choice in studies of consumer behavior, financial markets—and legal studies, as we’ll see in the next chapter.

It didn’t take long for the insights of behavioral economics to reach the field of law and economics, in which economic principles and analysis are applied to legal issues, and which is now considered a dominant approach to legal studies in law schools across the country and throughout the world. Law and economics uses economic models of choice to study how laws affect human behavior and societal outcomes (such as accident and crime rates), as well as to recommend changes in laws and legal procedures to influence behavior and improve outcomes. Behavioral law and economics was born when behavioral economists and legal scholars began to criticize the use of the shortsighted standard economic models of choice to study the law. When law and economics is enhanced with behavioral research, the resulting models of choice will predict different behavior when cognitive biases and dysfunctions are accounted for, which will change the models’ recommendations for legal policymaking and regulation. For instance, mistaken perceptions of risk will affect people’s decision-making in situations such as accident precaution, which affects their reactions to legal standards regarding negligence and liability, and in turn this may suggest changes in the standards themselves.

Countless times every day, people around the world make choices in their own interests, including their wants and needs, goals and dreams, and principles and ideals, all of which are incredibly complex and multifaceted. But behavioral economists question many choices made by ordinary people because they seem to contradict the simplistic interests they assume people have, such as wealth or health. For instance, people buy lottery tickets, even though the chance of winning is astronomically small. But no one buys lottery tickets because he or she thinks it is a prudent financial decision—they buy them because it’s exciting to watch the balls drop and imagine the joy of winning. Likewise, people don’t eat unhealthy foods just because they don’t know better or have self-control issues, but they may have other reasons to eat them—reasons that may be suspect according to a health economist but not to the people making that choice. To them, it may have been a great choice, fully in their interests, regardless of what anyone else thinks of it.

Some of you reading this book may be wondering why I focus almost exclusively on the use of behavioral economics on the part of government and not private business. Certainly, private companies use the same behavioral research on cognitive biases and heuristics to get consumers to buy their products. Why don’t I criticize private companies for this as well, especially since businesses are using these tools to increase their own profit, while the government, even if it’s not effective and ethically problematic, is at least trying to help? And what about nudges used by the government for nonpaternalistic reasons, such as recycling? Are these also problematic?

When you dig beneath the surface of the previous chapters in this book, everything comes down to autonomy: determining your own interests and making choices in pursuit of them. Not only do libertarian paternalism and nudges manipulate our choices, but more importantly, they claim to do so in our interests while furthering others. We’ve also seen that this disregard for people’s true interests is a natural legacy of the way that both mainstream and behavioral economists think about decision-making: a deliberative process, however complex, guided by an overly simplistic goal. These simplistic goals allow economists to build complicated models of decision-making, but economists neglect to question whether the goals and interests assumed in their models correspond to what real people value. They focus on the process more than the goal, and they end up missing the forest for the trees. In the end, they presume to know what people’s interests are and to act to promote those interests—which is the most distressing problem with libertarian paternalism and nudges.