1. Beware of (Behavioural) Economists
Bearing Advice!
Why Libertarian Paternalism Is A Dangerous Policy Tool
Prof. Dr. Martin Binder
Professor of Economics, Bard College Berlin
OECD-ECLAC Workshop, Paris 19th May 2014

2. Prof. Dr. Martin Binder 23.05.2014 |
Behavioural economics
• Standard view of economics:
“Homo Economicus”
= individuals as highly rational beings
• Behavioural economics:
(Homer Simpson)
– Individuals = “situational idiots” (Camerer et al.)
– Framing, biases
– Heuristics
• Relevance for policy-making
– Today: consumer protection
– Intervention not only for market failures
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3. Prof. Dr. Martin Binder 23.05.2014 |
“Libertarian Paternalism”
• Paternalism is “inevitable”: help not-fully rational individuals
for their own good
• Goal: welfare-increasing interventions (“nudges”) while at
the same time allowing reversibility
= minimal costs for rational individuals
• But not: hard paternalism
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“…influence choices in a way that will make choosers better off, as judged
by themselves. Drawing on some well-established findings in social science,
we show that in many cases, individuals make pretty bad decisions…”
(Thaler/Sunstein, 2008, p. 5, emphasis: MB)
“...our emphasis here is not on blocking choices, but on strategies that move
people in welfare-promoting directions while also allowing freedom of
choice.” (Sunstein/Thaler, 2003, p. 1170, emphasis: MB)

4. Prof. Dr. Martin Binder 23.05.2014 |
Examples
• Healthy food in “Carol‘s
Cafeteria” (Sunstein/Thaler, 2008)
• Pension schemes (Choi et al., 2004,
Thaler/Benartzi, 2004)
– Individuals under-save (68% admit to saving not enough)
– Opt-in: 26-43%  57%-69% (despite “free money“)
Opt-out: 85%  98%
– 75% do not want to save today;
but of these 78% “Save More Tomorrow“
• Defaults for organ donations
• Many more…
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5. Prof. Dr. Martin Binder 23.05.2014 |
Three essential problems
(Public choice objections, LP-specific objections, ...)
① Unclear and ad hoc definition of what is in the individual’s
best interest
② Focus on preserving nominal freedom of
choice instead of substantial freedom or
autonomy
③ Systematic neglect of dynamic/evolutionary aspects: a
nudge today has consequences
today and tomorrow
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6. Prof. Dr. Martin Binder 23.05.2014 |
(1) What‘s in people‘s interests?
• “if they had complete information, unlimited cognitive
abilities, and no lack of willpower” (Thaler/Sunstein, 2003,
p. 175) = informed preference view
– Inconsistent with behavioural economics: Herculean
– Normative: requires value judgments (how much information, self-
control, will-power, etc.?)
– Countless definitions  Ad hoc!!!
• Better: clear, operable, systematic and substantially
specified notion of welfare necessary: subjective well-
being (a.k.a. “happiness”)
– Advantage: not ad hoc
– Empirical evidence, substantive definition (vs. formal)
– Plausible: difficult to contest relevance for one’s interests
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7. Prof. Dr. Martin Binder 23.05.2014 |
Subjective well-being
• X
• X
• X
– X
– X
– X
7Kahneman/Krueger, 2006, S. 13

8. Prof. Dr. Martin Binder 23.05.2014 |
(2) Preserve autonomy, not
freedom of choice
• Moral objection to Libertarian Paternalism
• Very restrictive idea of freedom as nominal freedom of
choice  Nudges are acceptable even if individual is not
able to reverse them (limited abilities/awareness)
– Reversibility not possible for main addressees of the approach
– Manipulation easily permissible: framing allowed so long as the
choice set remains intact (“lying policy-makers?”)
• Individuals remain unaware of the nudge, cannot learn from
their mistakes
– If the nudge is omitted in the future, behaviour may revert back to
non-rational/sub-optimal pre-nudge behaviour
– Or (maybe) worse: individuals learn behaviour through nudges
without conscious reflection = heteronomous
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9. Prof. Dr. Martin Binder 23.05.2014 |
„Autonomy-enhancing
paternalism“
(Binder/Lades, 2014)
• Freedom: autonomy (positive liberty)
= the ability to critically reflect one’s own interests and
approve of them may not be diminished (≥0; see
Dworkin, 1988)
• Autonomy criterion restricts intervention
– No manipulation of individuals permissible
– E.g.: Autonomy-enhancing “mandated choice” vs. “framing”
• Prefer these nudges that allow the individual to become
more autonomous through reflected learning of better
behaviour for future decisions
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10. Prof. Dr. Martin Binder 23.05.2014 |
Summary
• Behavioural economics necessitates revision of economic
world-view
• Policy implications: paternalism might be necessary
• LP dangerous  Autonomy-enhancing paternalism
– Systematic view of individuals’ interests: subjective well-being
– Respects autonomy: educate consumers, don‘t manipulate them
– Understanding of dynamic aspects needed
@Martin_Binder; m.binder@berlin.bard.edu
http://de.linkedin.com/in/bindermartin/
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