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Hayekian behavioral economics

Published online by Cambridge University Press:  19 March 2021

Cass R. Sunstein
Cass R. Sunstein*
Affiliation:
Harvard Law School, Cambridge, MA, USA
*
*Correspondence to: E-mail: csunstei@law.harvard.edu
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Abstract

One of Friedrich Hayek's most important arguments pointed to the epistemic advantages of the price system, regarded as an institution. As Hayek showed, the price system incorporates the information held by numerous, dispersed people. Like John Stuart Mill, Hayek also offered an epistemic argument on behalf of freedom of choice. A contemporary challenge to that epistemic argument comes from behavioral economics, which has uncovered an assortment of reasons why choosers err, and also pointed to possible distortions in the price system. But, even if those findings are accepted, what should public institutions do? How should they proceed? A neo-Hayekian approach would seek to reduce the knowledge problem by asking what individual choosers actually do under epistemically favorable conditions. In practice, that question can be disciplined by asking five subsidiary questions: (1) What do consistent choosers, unaffected by self-evidently irrelevant factors, end up choosing? (2) What do informed choosers choose? (3) What do active choosers choose? (4) When people are free of behavioral biases, including (say) present bias or unrealistic optimism, what do they choose? (5) What do people choose when their viewscreen is broad, and they do not suffer from limited attention? These questions are illustrated with reference to the intense controversy over fuel economy standards.

Keywords

internalitiespresent biasloss aversionHayek
Type
Perspective
Information
Behavioural Public Policy , Volume 7 , Issue 1 , January 2023 , pp. 170 - 188
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press

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