The Paternalistic Bias of Behavioral Economics

I find I’ve been waking up each morning with the outline of an essay in my head. Each time it’s a different topic, but the routine is the same: I stare groggily at the alarm clock as one part of my mind proposes objections and the other answers them by drawing out finer distinctions. This is terrible for my sleep, and it hasn’t led to anything productive because there is no way to write a new, worked-out essay each day. I’ll use this blog as a place to file these ideas away.

Today’s subject is what behavioral economists study, what they don’t study, and what this tells us about their underlying prejudices. And, as I realized at 6 am, this all goes back to the exchange between Walter Lippman and John Dewey in the 1920s, although I may not get to that here.



The domain of behavioral economics is the failure of individuals to process information according to the dictates of rational goal achievement, the idealized maximization routines one learns in microeconomics. The list is long and includes such issues as probability bias, accounting bias, availability bias, hyperbolic discounting, loss aversion (status quo bias), etc. All of these cognitive traits have been documented beyond dispute by psychologists, and there is now a vast literature demonstrating that they have nontrivial effects on economic decision-making.

But those familiar with psychological research will know that the behavioral insights gleaned by economists are not exhaustive. In particular, it is interesting that one of the biggest research fields in psychology, cognitive dissonance, has barely made a dent in the BE agenda.

The basic idea of CD is that people experience discomfort from holding two contradictory thoughts at once. The main application has to do with the reception of information that violates an individual’s self-conception: if you have chosen to do something, and this choice plays even a modest role in how you think about yourself, you will have a tendency to ignore or reject information that goes against it. The vernacular version of this is “denial”, which we see every day in real life.

I first became aware of the importance of CD in my studies of occupational safety and health. Of all the psychological impediments to rational thinking about work and health, surely denial is the most significant. There was a flurry of interest among economists in this topic following the publication of “The Economic Consequences of Cognitive Dissonance” by Akerlof and Dickens in 1982; I presented a much simpler but also sharper model in my book Markets and Mortality (1996). Researchers in health behavior took note; they had long had CD on their minds and were predisposed to see it in economic dress.

But read the current literature on BE and you will be hard-pressed to find any mention of CD at all. There is no end to studies of defective information processing, but the initial acceptance of information doesn’t make the cut. We have nuanced policy advice in books like Nudge, but the much larger questions posed by CD are off the table. Am I mistaken in thinking that denial, the refusal to acknowledge information that calls into question our economic behavior, is central to the disconnect between environmental knowledge and anemic or nonexistent policy?

So how to explain this? To put it bluntly, I sense bad faith. The topics researched by BE all have this in common: they point to traits that are likely to disappear with enough exposure to decision theory. We don’t succumb to loss aversion, probability bias or these other flaws. This means we can come up with clever schemes to fix them. But CD is another kettle of fish altogether; there is no reason to suppose that the experts (us) are any less likely to be subject to denial than the lay folk (them). In other words, I think behavioral economists find the paternalistic stance of their discipline congenial; there is less interest in pursuing questions that apply equally to their own judgment.

Ah, but what has this to do with Lippman and Dewey? That will have to wait.