This special issue explores foundational questions in behavioral economics and behavioral public policy, drawing on the work of Mario Rizzo, a critical voice in the debate on behavioral paternalism. Behavioral economics has offered significant insights into decision-making, often challenging traditional economic models. However, it has also introduced normative frameworks into policy analysis, such as preference purification, that critics argue oversimplify human decision-making and risk imposing external values. Contributions to this issue examine themes including the tension between standard rationality and inclusive rationality, the epistemological limitations of paternalistic interventions, and the role of tacit knowledge and dynamic learning in policymaking. By engaging perspectives from economics, psychology, philosophy, and law, the issue discusses process-based approaches to policy analysis that respect individual agency and accommodate uncertainty. It also highlights the political economy dimensions of behavioral public policy, emphasizing the need for institutional reforms that enable learning and systematic change rather than narrowly focusing on individual cognitive biases. This issue serves as both a tribute to Mario Rizzo’s intellectual contributions and a call for a deeper reflection on the methodological and normative foundations of behavioral public policy.

During the Cold War, logical rationality – consistency axioms, subjective expected utility maximization, Bayesian probability updating – became the bedrock of economics and other social sciences. In the 1970s, logical rationality underwent attack by the heuristics-and-biases program, which interpreted the theory as a universal norm of how individuals should make decisions, although such an interpretation is absent in von Neumann and Morgenstern’s foundational work and dismissed by Savage. Deviations in people’s judgments from the theory were thought to reveal stable cognitive biases, which were in turn thought to underlie social problems, justifying governmental paternalism. In the 1990s, the ecological rationality program entered the field, based on the work of Simon. It moves beyond the narrow bounds of logical rationality and analyzes how individuals and institutions make decisions under uncertainty and intractability. This broader view has shown that many supposed cognitive biases are marks of intelligence rather than irrationality, and that heuristics are indispensable guides in a world of uncertainty. The passionate debate between the three research programs became known as the rationality wars. I provide a brief account from the ‘frontline’ and show how the parties understood in strikingly different ways what the war entailed.

A core normative assumption of welfare economics is that people ought to maximise utility and, as a corollary of that, they should be consistent in their choices. Behavioural economists have observed that people demonstrate systematic choice inconsistences, but rather than relaxing the normative assumption of utility maximisation they tend to attribute these behaviours to individual error. I argue in this article that this, in itself, is an error – an ‘error error’. In reality, a planner cannot hope to understand the multifarious desires that drive a person’s choices. Consequently, she is not able to discern which choice in an inconsistent set is erroneous. Moreover, those who are inconsistent may view neither of their choices as erroneous if the context reacts meaningfully with their valuation of outcomes. Others are similarly opposed to planners paternalistically intervening in the market mechanism to correct for behavioural inconsistencies, and advocate that the free market is the best means by which people can settle on mutually agreeable exchanges. However, I maintain that policymakers have a legitimate role in also enhancing people’s agentic capabilities. The most important way in which to achieve this is to invest in aspects of human capital and to create institutions that are broadly considered foundational to a person’s agency. However, there is also a role for so-called boosts to help to correct basic characterisation errors. I further contend that government regulations against self-interested acts of behavioural-informed manipulation by one party over another are legitimate, to protect the manipulated party from undesired inconsistency in their choices.

This paper critically assesses Rizzo and Whitman’s theory of inclusive rationality in light of the ongoing cross-disciplinary debate about rationality, welfare analyses and policy evaluation. The paper aims to provide three main contributions to this debate. First, it explicates the relation between the consistency conditions presupposed by standard axiomatic conceptions of rationality and the standards of rationality presupposed by Rizzo and Whitman’s theory of inclusive rationality. Second, it provides a qualified defence of the consistency conditions presupposed by standard axiomatic conceptions of rationality against the main criticisms put forward by Rizzo and Whitman. And third, it identifies and discusses specific strengths and weaknesses of Rizzo and Whitman’s theory of inclusive rationality in the context of welfare analyses and policy evaluation.

For all their differences, the two rival theories of human behavior have many unfortunate similarities. Standard rational choice theory posits that individuals use rational techniques to pick ends that meet their set of private preferences. Modern theories of behavioral economics point to systematic deviations from those principles. Both approaches assume that all preferences are individually based. However, the evolutionary principle of inclusive fitness insists that in family situations, it is the welfare of the unit, not of any of single individual, that explains various forms of natural love and affection that arise because of the interdependence of − and the redistribution of − wealth it requires. Likewise, both standard theories ignore variations in tastes and in competence levels that allow for gains from trade across competence levels. This paper then reinterprets the common treatment of nudges and the various legal doctrines dealing with disabilities, product liability, and firm structure where the standard assumptions of uniform behavior miss the salient features of human behavior and social interactions.

In this paper, I pick up on an important theme in Mario Rizzo’s work: that rationality should be understood more broadly than the rational choice model as learning to adjust behaviour in the light of experience and the mistakes that it yields. In particular, I focus on learning-by-doing (LBD). I argue in the first part of the paper that it should be regarded as one of the central insights in economics, alongside those that are more usually recognised like the gains from trade and the importance of unintended consequences. I use Smith and Hirschman’s discussion of LBD to ground this claim. In the second part of the paper, I turn to the determinants of LBD in teams. I argue that the key rule or constitutional/policy design question is how best to embrace the diversity that is central to LBD within teams without this undermining the social origins of co-operation in teams.

In this paper, we revisit the Knowledge Problem addressed by Hayek eight decades ago and emphasised more recently by Rizzo and Whitman in their critique of the new paternalist approach of mainstream behavioural economics promoted by Sunstein and Thaler. We do this in light of the work of Michael Polanyi. Polanyi developed a theory of knowledge which has some commonalities with Hayek’s but also departs from it by emphasising the tacit, personal and perceptual dimensions of any process of knowing, thus radically renouncing any attempt of a knowledge typology separating different types of tacit knowledge (TK) and even denying that general knowledge could exist independently of TK.

We have previously argued thatbehavioral scientists have been testing and advocating individualistic (i-frame) solutions to policy problems that have systemic (s-frame) causes and require systemic solutions. Here, we consider the implications of adopting an s-frame approach for research. We argue that an s-frame approach will involve addressing different types of questions, which will, in turn, require a different toolbox of research methods.

In 1921, John Maynard Keynes and Frank Knight independently insisted on the importance of making a distinction between uncertainty and risk. Keynes referred to matters about which ‘there is no scientific basis on which to form any calculable probability whatever’. Knight claimed that ‘Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated’. Knightian uncertainty exists when people cannot assign probabilities to imaginable outcomes. People might know that a course of action might produce bad outcomes A, B, C, D and E, without knowing much or anything about the probability of each. Contrary to a standard view in economics, Knightian uncertainty is real, and it poses challenging and unresolved issues for decision theory and regulatory practice. It bears on many problems, potentially including those raised by artificial intelligence. It is tempting to seek to eliminate the worst-case scenario, and thus to adopt the maximin rule, which might seem to be the appropriate approach under Knightian uncertainty. But serious problems arise if eliminating the worst-case scenario would (1) impose high risks and costs, (2) eliminate large benefits or potential ‘miracles’ or (3) create uncertain risks.

This essay is in celebration of the contributions of Mario Rizzo. I argue that among contemporary economists in the Austrian School of Economics tradition it is Rizzo that advanced, more than his contemporaries, the scientific research program of rational choice as if the choosers were human beings; the dynamic subjectivism and the agony of choice and social interaction; the causal processes and the institutional dynamics that make up a complex social order; and the role of law, politics and civil society in shaping commercial life. In making this argument, I attempt to arbitrage the contributions of two essays of Rizzo’s: ‘Law Amid Flux’ and ‘The Genetic-Causal Tradition and Modern Economic Theory’.