Summary of arguments

In the first contribution to this issue, Gerd Gigerenzer provides a reflection on what he terms the ‘rationality wars’ among three distinct approaches within the behavioral sciences in the 20th century. He notes that during the Cold War, logical rationality – grounded in consistency axioms, subjective expected utility maximization, and Bayesian probability updating – became the cornerstone of economics and other social sciences. However, in the 1970s, this framework faced significant criticism from the heuristics-and-biases program spearheaded by Daniel Kahneman and Amos Tverksy. This program interpreted logical rationality as a standard for how individuals ought to make decisions. Gigerenzer notes that such an interpretation is absent in much of the canonical and foundational work in decision theory by John von Neumann and Oskar Morgenstern or L. J. Savage. According to the heuristics-and-biases program, deviations from logical rationality in people’s judgments were thought to reveal stable cognitive biases, which were subsequently viewed as underlying social problems and justifying governmental paternalism. In the 1990s, the ecological rationality program emerged, inspired by the work of Herbert Simon. This approach moves beyond the restrictive boundaries of logical rationality and examines how individuals and institutions make decisions under conditions of uncertainty and complexity. Gigerenzer argues that this broader perspective reveals that many of the supposed cognitive biases are markers of intelligence rather than indicators of irrationality, and that heuristics serve as essential guides in navigating a world filled with uncertainty.

The second article in this issue, authored by Adam Oliver, explores a specific aspect of neoclassical rationality: choice consistency. Oliver aligns with a significant claim in Rizzo’s work, asserting that choice inconsistencies are legitimate facets of individual decision-making. Oliver highlights that a core normative assumption of welfare economics is that individuals should maximize expected utility and, consequently, maintain consistency in their choices. While behavioral economists have documented systematic choice inconsistencies, they often respond by attributing these behaviors to individual errors rather than relaxing the normative assumption of expected utility maximization. Oliver argues that this attribution is itself an error – what he calls an ‘error error.’ In reality, planners cannot fully understand the diverse desires that influence an individual’s choices, making it very difficult to determine which choice in an inconsistent set is erroneous. Furthermore, Oliver points out that individuals who exhibit inconsistencies may not view either of their choices as erroneous if the context meaningfully interacts with their valuations of outcomes. According to Sugden (Reference Sugden2018), planners should refrain from intervening in market mechanisms to correct behavioral inconsistencies, advocating instead for the free market as the best means for individuals to arrive at mutually agreeable exchanges. Notwithstanding the compatibility of these points with Rizzo’s general perspective, Oliver nevertheless posits that policymakers have a legitimate role in enhancing individuals’ agentic capabilities. The most effective way to achieve this is by investing in human capital and creating institutions that are widely regarded as foundational to personal agency. Additionally, he acknowledges the need for ‘boosts’ to help people avoid make costly decision errors. Oliver argues that ‘budges’ are justified, i.e., government regulations against market actors who use behavioral insights in a self-interested manner to manipulate others.

The third article, by Roberto Fumagalli, can be read as a response to some of Gigerenzer’s and Oliver’s arguments, as it critically assesses Rizzo’s concept of inclusive rationality and defends standard rationality as a foundation for BPP. The paper aims to contribute to the ongoing debate about the connection between rationality and welfare. At the core of Fumagalli’s argument is a qualified defense of the consistency conditions of standard rationality against Rizzo and Whitman’s main criticisms. Fumagalli posits that reported violations of consistency conditions decrease significantly when experienced decision-makers are involved, particularly when individuals have the time and incentives to learn about the choice problems they face. Additionally, Fumagalli provides a qualified normative defense of consistency conditions. He argues, for instance, that completeness requires individuals only to specify preferences over relevant alternatives in a given decision problem and that transitivity can be defended by highlighting the losses incurred from violations and the tendency for individuals to revise intransitive choices once they recognize their inconsistencies. Furthermore, Fumagalli suggests that many reported descriptive violations of consistency can be reconciled by adjusting the descriptions of choice options in counterexamples to the axioms of standard rationality. While Fumagalli acknowledges the valuable critical insights Rizzo’s work provides regarding the descriptive and normative validity of standard rationality in evaluating public policies, he notes that Rizzo’s account of inclusive rationality remains vulnerable to objections.

The contribution by Richard Epstein critiques the choice theories of both neoclassical and behavioral economics, arguing that despite their differences, these two rival theories share several unfortunate similarities. Standard rational choice theory posits that individuals employ rational methods to choose goals that satisfy their self-interested preferences. In contrast, modern behavioral economics highlights systematic deviations from these principles. However, both approaches assume that all preferences are based solely on individual choice. Epstein invokes the evolutionary principle of inclusive fitness, which suggests that in familial contexts, the welfare of the family unit, rather than that of any single individual, accounts for the natural love and affection that emerge from interdependence and the redistribution of wealth. Furthermore, both standard theories overlook or underemphasize variations in tastes and competence levels, which can generate gains from trade. Epstein reinterprets the treatment of nudges and various legal doctrines related to disabilities, product liability, and organizational structure, arguing that the standard assumptions of uniform behavior fail to capture the salient features of human behavior and social interactions. He acknowledges Rizzo’s achievement in exposing the challenges inherent in behavioral models that portray deviations from standard rational choice as fatal flaws in economic theory. However, Epstein contends that merely undermining the case for paternalism is insufficient. His broader narrative recognizes that while some individuals may require the guidance of parents or guardians, significant variations in preferences and competencies do not warrant state paternalism.

In the next article, Shaun Hargreaves Heap explores a significant theme in Mario Rizzo’s work, viz., the argument that rationality should be conceived more broadly than the conventional rational choice model. Following Rizzo, Hargreaves Heap argues that rationality encompasses the ability to adjust behavior based on experience and the mistakes that arise from it, emphasizing the concept of learning-by-doing. Hargreaves Heap posits that learning-by-doing should be recognized as a central insight in economics, on par with widely acknowledged concepts like the gains from trade and the significance of unintended consequences. To substantiate this claim, he references discussions by Adam Smith and Albert Hirschman on learning-by-doing. Hargreaves Heap then examines the determinants of learning-by-doing processes within teams, noting that Rizzo’s work often emphasizes that social learning occurs in teams within organizations. For instance, the success of entrepreneurship in society heavily relies on the effectiveness of team learning. Hargreaves Heap identifies a key challenge for teams: how to harness the diversity essential for learning-by-doing while preserving the cooperation necessary for effective collaboration. Drawing inspiration from political theory, he addresses the broader societal issue of designing rules that encourage individuals with fundamentally different perspectives to engage in positive-sum activities rather than zero-sum ones. Hargreaves Heap advocates for checks and balances to prevent any individual or faction from pursuing zero-sum behaviors, framing this as a critical concern for public policy. His proposals suggest that teams adopt an egalitarian structure reminiscent of de Tocqueville’s principles of democracy to foster cooperation and maximize learning.

In their contribution, Agnès Festré and Stein Østbye highlight an important point in Rizzo’s work, viz., the epistemological divide between contemporary mainstream behavioral economics – particularly its libertarian paternalistic variant as represented by Richard Thaler and Cass Sunstein – and Hayek’s complexity and evolutionary perspectives on rationality and learning. Central to their argument is Hayek’s knowledge problem, which refers to the inherent limitations in policy-making due to the dispersed nature of knowledge in society. Knowledge is decentralized, fragmented, and often includes the knowledge of ‘the particular circumstances of time and place.’ This individual knowledge encompasses tacit knowledge, a concept elaborated by Hayek’s contemporary Michael Polanyi. Festré and Østbye point out that while Hayek’s theory of tacit knowledge shares similarities with Polanyi’s, the latter’s theory diverges by emphasizing the tacit, personal, and perceptual aspects of knowing. Polanyi’s ultimately rejects any attempt to categorize different types of tacit knowledge. He even questions the existence of general knowledge independent of tacit understanding. Festré and Østbye contend that tacit knowledge warrants greater attention to the limitations of the nudging approach in BPP. They argue that determinism is intrinsic to the nudging strategy, yet this stance conflicts with both Hayek’s and Polanyi’s emphasis on indeterminacy. In this context, Festré and Østbye posit that tacit knowledge should be foregrounded in the debate, advocating for indeterminacy as a compelling argument against nudging and in favor of prioritizing education and learning.

Daniel Connolly, George Loewenstein, and Nick Chater expand on earlier insights by Chater and Loewenstein (Reference Chater and Loewenstein2023), who argue that behavioral scientists often focus on individualistic (i-frame) solutions to policy issues that stem from systemic (s-frame) causes. Typically, i-frame policies begin with the assumption that adverse outcomes like obesity and retirement insecurity arise from inherent human frailties, such as present bias. This perspective aligns with the idea that public policy can modify the choice architecture by means of nudging to encourage better decision-making. For example, to address insecure retirement, policymakers may change the default settings in retirement savings accounts, while combating obesity may involve providing calorie information to help consumers make healthier food choices. However, Connolly et al. argue that by concentrating on mitigating individual cognitive biases and behavioral errors, the i-frame approach neglects and distracts from the systemic issues (s-frame) which significantly contribute to the problems these interventions seek to address. While i-frame policies aim to assist individuals in making ‘better’ choices within existing frameworks, s-frame public policies focus on transforming the societal rules and institutions that shape the choices available to individuals. This emphasis on institutional change aligns with Rizzo’s work (e.g., Rizzo, Reference Rizzo1980, Reference Rizzo2021), which suggests that the s-frame is where meaningful societal progress can be made. The authors contend that shifting BPP’s focus toward the s-frame and creating beneficial systemic change will require the behavioral research community to confront a new set of questions, necessitating a different mix of research methodologies. They advocate for a transition from field experiments, which are well-suited for testing i-frame interventions, to quasi-experimental and qualitative observational approaches that examine policy changes across countries and over time.

In his contribution, Cass Sunstein engages with Mario Rizzo’s recent work on radical uncertainty (Dold and Rizzo Reference Dold and Rizzo2021; Rizzo and Dold, Reference Rizzo and Dold2021) and its implications for institutional analysis at both the organizational and public policy level. Sunstein’s argument draws on the distinction made by John Maynard Keynes and Frank Knight between uncertainty and risk. He explains that Knightian uncertainty arises when individuals cannot assign probabilities to conceivable outcomes. For instance, people may be aware that a particular course of action could lead to adverse outcomes, but lack information about the likelihood of each occurring. Challenging the standard view in economics, Sunstein asserts that Knightian uncertainty is a widespread phenomenon that presents complex and unresolved issues for decision theory and regulatory practice. He points out that it affects various public policy problems, including those related to the uncertainty around the consequences of (un)regulated artificial intelligence. Sunstein argues that while it may be tempting to eliminate worst-case scenarios by adopting the maximin rule, this approach can lead to significant drawbacks. According to Sunstein, such drawbacks include (1) imposing high risks and costs, (2) sacrificing substantial benefits or potential breakthroughs, and (3) generating uncertain risks. Consequently, there are good arguments for why individuals or societies would not necessarily opt for maximin in situations of uncertainty. Much depends on the trade-offs involved in eliminating the worst-case scenario, including the potential for increased resilience. In many cases, available information allows for informed judgments about these trade-offs, at least in general terms. However, Sunstein recognizes that in the most challenging and intriguing cases, no simple rule can be defended. Instead, some form of judgment must be made, which may be inherently political and thus susceptible to the public choice considerations emphasized in Rizzo’s work.

In the final article, Peter Boettke expands the discussion of the previous articles by exploring how BPP could benefit from a deeper engagement with the history of economic thought, particularly Austrian Economics. Boettke highlights Austrian Economics as a school of thought with deep and important insights into market processes, learning, and subjectivism. Boettke argues that insights from Austrian Economics have significant implications for the potential and limits of reforms within political and legal systems. According to Boettke, a core tenet of Austrian economics is that it is not only individual decision rules that help people cope with ignorance but also the institutional safeguards provided by private property and the freedom of contract rooted in the rule of law. Boettke says that Rizzo’s contributions highlight both the stability and dynamic nature of law. A relatively ‘static’ legal framework enhances predictability, allowing individuals to pursue their own goals and shape their own lives. The central question then becomes: which legal framework creates a more stable environment for individuals to pursue their ends in harmony with one another? Building on Rizzo’s insights (Rizzo, Reference Rizzo1980), Boettke claims the answer may lie in the ‘antiquated’ and static system of strict liability, particularly in a dynamic world where the information required for ‘fine-tuning’ is often unavailable. Nevertheless, the law must also adapt to new technological and societal developments. Like the market, the law is in a continuous state of evolution – not erratic or arbitrary change, but gradual adaptation and adjustment. Hence, the governing dynamics for addressing the complexities of a world in flux – both in law and the market – share strong affinities: the ‘fine-tuning’ paradigm is illusory; the only valid basis for comparing the ‘efficiency’ of systems lies at a fundamental institutional level.