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Posts Tagged ‘Cass Sunstein’

There’s Nothing Profreedom about “Nudging” People with Government Policy | Mises Wire

Posted by M. C. on September 3, 2021

John Staddon

The July/August 2021 Cato Policy Report hosted a friendly debate between Cass Sunstein and Mario Rizzo. Sunstein is a Harvard Law professor, a onetime member of the Obama administration, and coauthor of Nudge and other books advocating public policy applications of behavioral economics. Rizzo is an economist at New York University. Sunstein argues that modifying the “choice architecture” available to consumers so as to “nudge” them toward the correct choice is a libertarian position perfectly compatible with Friedrich Hayek’s The Constitution of Liberty. Rizzo disagreed, arguing that behavioral economics does not solve Hayek’s knowledge problem, quoting psychologist Jerome Kagan’s 2012 book: “Few psychological concepts intended to represent a person’s tendency to react in a certain way apply across diverse settings.” In other words, we do not know enough psychology to know how people will react in every choice situation. Kagan did not write about behavioral economics, but, as we will see, his reservation applies there with special force.

The “knowledge problem” manifests itself in many places in this short debate; I will mention just one: Sunstein’s frequent use of the undefined term “epistemically favorable conditions,” which seems to mean conditions under which people will act “rationally”—which of course presupposes the kind of knowledge that Kagan and Hayek dispute. We cannot in general know what epistemically favorable conditions are. Much more could be said along these lines, but here I simply want to point out a couple of serious flaws in behavioral economics.

The seminal paper in behavior economics is the 1979 paper by Daniel Kahneman and Amos Tversky called “Prospect Theory: An Analysis of Decision under Risk.” This work eventually led to many thousands of citations and an economics Nobel Prize in 2002. Kahneman and Tversky consulted their own intuitions and came up with simple problems which they then asked individual subjects to solve. The results generally confirmed their intuitions.

Here is a typical problem. Subjects were asked to pick one of two choices. In one case, the choices were A, 4,000 (Israeli currency) with probability 0.2, or, B, 3,000 with probability 0.25. Sixty-five percent of the subjects picked A, with an expected gain1 of 800 over B, chosen by 35 percent, with an expected gain of 750. This represents rational choice on the part of 65 percent of choosers. 

The authors contrast this result with an apparently similar problem, A, 4,000, p = 0.8, versus B, 3,000, p = 1.0. In this case, 80 percent of subjects chose B, the certain option with the lower expected value (3,000 versus 3,200), an irrational choice. Kahneman and Tversky then used this contrast, and the results of many similar problems, to come up with an alternative to standard utility theory. Prospect theory, as they called it, is not like most scientific theories, namely a modest set of assumptions from which many predictions can be deduced. It is rather list of effects—such as the certainty effect (this case), loss aversion, confirmation bias, and the like (Wikipedia lists more than a hundred “biases” like this). Prospect theory attempted, with only partial success, to account for these discrepancies by proposing a modified utility function (a more complex version appears in a later paper), but basically it is a set of labels, rather than a theory.

There two problems with this superficially attractive approach: teleology and the object of inquiry. First, as to teleology, the use of utility functions: Ludwig von Mises argued that “teleology presupposes causality,” and teleological accounts often fail, because they are either silent on the causal processes which, under some conditions, allow people to maximize utility or, more commonly, because they assume that the mathematical method for obtaining the maximum, equating marginals, is in fact the one that people use. Kahneman and Tversky did not (and we still do not) know the processes by which people arrive at their decisions. Hence the failure of their teleological models and the reduction of “prospect theory” to a set of labels.

The more serious problem, hinted at by Rizzo’s Kagan quote, is prospect theory—any theory that attempts to account for the majority choice—cannot apply to the minority choice. Neither the 35 percent who chose rationally in the first case nor the 20 percent who chose irrationally in the second. If the object of inquiry is the psychology of individual human beings, the work is incomplete. To finish the job, the experimenters need to find out what it takes to produce the same result for all subjects.

Kahneman and Tversky’s results, and the theory that describes them, are a property of groups of people under very restricted conditions. They are not, as is sometimes assumed, general properties of human nature. The method is just opinion polling, albeit with a clever set of questions. Yet each effect is presented as an invariant property of human choice behaviorBecause the group effect is reliable, individual exceptions are ignored. There is little doubt, for example, that subjects given a lesson or two in probability, or faced with a question phrased slightly differently (e.g., not “What is your choice?” but “What would a statistician choose?”), would choose differently. As Rizzo hints at one point, under some conditions, a group might even choose differently than an individual. For example suppose the subjects were allowed to consult among themselves before choosing. If the choice were between, say, 1,000 for sure versus a 0.6 chance of 2,000, would it not be wise for the group of, say, twenty subjects to agree among themselves to always choose the 0.6 and 2,000 option and then split the proceeds evenly—thus ensuring that everyone would probably get more than $1000?

People’s choice in a problem like this almost certainly depends on the absolute quantities involved. Who can doubt that if subjects were offered a credible choice between, say $10 million for sure versus a 0.6 chance of $20 million, close to 100 percent would choose the sure thing? Until the theory is developed to account for the minority choice and the effect of absolute amount, until it is in a form that allows no individual exceptions, it cannot pretend to be an adequate model of human choice behavior. Hence, quite apart from all the other objections to “nudge” policy is the fact that to the extent that it relies on behavioral economics, it relies upon a fallacy.

  • 1. Expected gain = p(outcome) x amount; in this case 0.2 x 4000 = 800.


John Staddon

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A Problem with Paternalism | Mises Wire

Posted by M. C. on November 23, 2019

Suppose, for the moment, that we accept Sunstein’s claim that these cognitive mistakes impede people from getting what they want. Does this give one reason to reject the Epistemic Argument? I do not think so. According to the Epistemic Argument, each person is in a better position than government officials to choose the appropriate means to satisfy his ends. This is entirely consistent with people’s making cognitive mistakes. The point of the Epistemic Argument is that people can better judge their situation than officials can, not that their judgment is without error.

Sometimes the government passes laws that restrict people for what it claims to be their own good, such as laws that ban drugs that are supposed to be bad for your health. Laws like this are called “paternalistic.”

Libertarians oppose paternalism, but it is not only libertarians who reject it. It is at odds with the whole tradition of classical liberalism. John Stuart Mill famously opposed paternalism in On Liberty. He defended the Harm Principle: “[T]he only purpose for which power may be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or mental, is not a sufficient warrant.”

Paternalism has in recent years made a comeback, as we see in such absurdities as restrictions on the size of cans of soda. I’d like to look at one argument against Mill’s Harm Principle advanced by the influential lawyer and government administrator Cass Sunstein, in his book Nudge and elsewhere. (In fairness to Sunstein, he says he is a libertarian paternalist, not a paternalist tout court. “Libertarian paternalist” seems contradictory to me, but I will put this aside.)

The argument I want to consider is Sunstein’s response to what he calls the Epistemic Argument: “Because individuals know their tastes and situations better than officials do, they are in the best position to identify their own ends and the best means of obtaining them.” He thinks the Epistemic Argument is the strongest argument in favor of the Harm Principle.

To challenge the Epistemic Argument, Sunstein points to cognitive mistakes that people make. Sunstein is a leading figure in behavioral economics, and he writes about these mistakes with great authority. Following the psychologist (and Nobel Prize-winner) Daniel Kahneman, he distinguishes between two “cognitive systems” in the mind. “System 1 works fast. It is often on automatic pilot. Driven by habit, it can be emotional and intuitive.” By contrast, System 2 is “deliberative and reflective.” When we operate, as we often do, with System 1, we are subject to various sets of mistakes, which count as “behavioral market failures.” With the details of these mistakes, we are not here concerned, but the errors include “present bias and time inconsistencies,” “ignoring shrouded (but important) attributes,” “unrealistic optimism,” and “problems with probability.” What for our purposes is important is the conclusion Sunstein draws: “With respect to paternalism, the unified theme is that insofar as people are making the relevant errors, their choices will fail to promote their own ends. It follows that a successful effort to correct these errors would generally substitute an official judgment for that of choosers only with respect to means, not ends.”

Suppose, for the moment, that we accept Sunstein’s claim that these cognitive mistakes impede people from getting what they want. Does this give one reason to reject the Epistemic Argument? I do not think so. According to the Epistemic Argument, each person is in a better position than government officials to choose the appropriate means to satisfy his ends. This is entirely consistent with people’s making cognitive mistakes. The point of the Epistemic Argument is that people can better judge their situation than officials can, not that their judgment is without error.

Ludwig von Mises fully realized this point, and Sunstein would have benefited from a reading of Mises’s comment in his essay “Laissez-Faire or Dictatorship” on J.E. Cairnes’s objection to laissez-faire: “Let us for the sake of argument accept the way in which Cairnes presents the problem and in which he argues. Human beings are fallible and therefore sometimes fail to learn what their true interests would require them to do. … It is very unfortunate that reality is such. But, we must ask, is there any means available to prevent mankind from being hurt by people’s bad judgment and malice? Is it not a non sequitur to assume that one could avoid the disastrous consequences of these human weaknesses by substituting the government’s discretion for that of the individual citizens?”

There is a further problem with Sunstein’s use of cognitive mistakes to justify paternalistic interventions. He offers no evidence that people who act in ways he wants to modify have fallen victim to cognitive mistakes. Do people who smoke, or consume sodas in large quantities, or fail to buy fuel-efficient cars, suffer from cognitive mistakes? Maybe they do, but the fact that people are susceptible to these mistakes does not show, for any particular example, that they have made these mistakes.

The challenge to the Epistemic Argument thus fails.

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The Cambridge Book Club features Paternalism ...



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