There’s Nothing Profreedom about “Nudging” People with Government Policy
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 o
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