Regulation for Conservatives: Behavioral Economics and the Case for “Asymmetric Paternalism” To begin to understand this article we must first define what the authors mean by asymmetric paternalism. According to the Oxford Dictionary, asymmetric is without symmetry or not divided equally. The definition of paternalism states that it is behaving in a paternal way or limiting freedom and responsibility by well-meant regulations. The authors state that the paternal regulations discussed are those developed on an individual basis. The regulations are designed so that those that are uneducated in a particular area are greatly benefited by the regulations, and those whom are already educated, or fully rational, are not affected by the regulation. To explain asymmetric paternalism, the authors divide people into two groups, those who are fully rational, people with goals, preferences and make decision based on those that suit their own best interest, and those who are bounded ly rational.
The bounded ly rational individuals are those who fail to act in their own best interests and fail to use self-control when making choices. The purpose of the article is to help evaluate regulations which are paternalistic and have the regulations designed so that the set limits and boundaries are the bounded ly rational, to help them make choices in their best interest and not make mistakes, at the same time not affecting the rational individuals. The authors focus on four types of policies that demonstrate examples of paternalism, default rules, provision or re framing of information, cooling off period, and the limiting of consumer choices. With defaults, the authors discuss status quo bias. This is the idea that individuals will stick with the status quo, or the existing rather than change even if the cost to change is low. The reasons for this are stated as loss aversion, omission / commission bias, and procrastination.
A Bureaucratic rationale is a system of authority which derives power through a power structure that is hierarchical (Crozier 1969) Authority is vested in positions available in the organizational structure and the people in these positions can practice control over others below them in the hierarchy. Panoptic on the other hand is type of authority with “an all seeing” institution or individual ...
The authors state that the status quo bias effects mostly the bounded ly rational because for the fully rational the choice of defaults requires very little effort. Examples of the choices of defaults are more fully explained in the examples of insurance rights, and retirement savings. The second example of paternalism is framing and information disclosure. This policy requires businesses to provide “seemingly irrelevant additional information.” Since the rational individuals have no need for the additional information, they can simply ignore it. At the same time the bounded ly rational individual can benefit greatly from the information. In order to illustrate this concept, the authors give an example of the lottery.
The rational individuals that play understand the odds of winning, while the bounded ly rational may not. So if the information was provided stating the odds of winning the lottery, the fully rational would not be effected but the bounded ly rational would understand their mistake of believing that they will win. Another example is the “rent to own” concept of purchasing items such as furniture. The errors of the bounded ly rational individuals could be corrected so that they understand that with the high interest rates, they are paying far too much for the item.
The lottery and the Rent-to-Own have lead to consumer and investor protection laws. The Federal Trust in Lending Act, part of the Consumer Credit Protection Act is an example of asymmetric paternalism that already exists. These acts require disclosure of information to consumers. This information greatly benefits the bounded ly rational, who may not be acting in their own best interest.
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At the same time the fully rational individual is not affected by the laws and additional information. The key point stressed by the authors is that the cost to the business is very low. The costs will be at the beginning and when averaged out with the length of the disclosure requirement, will be virtually insignificant. The negative effects of the information disclosure are also noted and include the costs, information overload, and the effect on one’s feelings and behaviors. The third major example of asymmetric paternalism is the cooling off period. This states that in many instances, individuals may be driven to make decisions based on emotions, or as the authors call “hot states.” These self control problems can lead to making decisions that merely benefit in the short term.
The cooling off period would give the bounded ly rational, those making decisions in hot states, and the fully rational, time to reduce the emotion in the decision. Though for the fully rational it may not be necessary, but it affects them with little cost. The article further describes this with the examples of consumer protection, family law, settlement agreements, and suicide. The final example is to place limits on the choices that consumer have to pick from. Though this may effect the fully rational, one must be careful not to so as the authors state, we must look for conservative limits. Many ideas are given, such as to limit procrastination, with the real-world example of the IRA contributions.
Setting deadlines will help consumers to benefit themselves and as long as the deadlines are “not too severe,” the will not affect the fully rational individual. This article exhibits that while many individuals, those who are fully rational, are able to act in their own benefit, there are those who can not. The bounded ly rational individuals do not follow with the economic theory that assumes full rationality. The examples provided in the article illustrate how those who are bounded ly rational many need assistance in making decisions in their best interest. The Rational Choice Model follows that individuals use rationality in making decisions. This paper shows that while the RCM is a good model, we also must take into account that not all individuals are equally informed and educated.
1. To what extent can individual business decisions (as opposed to economic forces) explain deterioration in working conditions for many workers? By reading this case incident it seems to me that individual businesses have the poor economy to blame for the deterioration in their employees conditions. As the economy is not doing well that means that businesses aren’t doing well either. The ...
Asymmetric paternalistic regulations are designed so that those who are fully rational are not affected, or are affected very little. At the same time the bounded ly rational are educated so that they too, may act in a rational manner. Once they act in a rational manner, all individuals will fall under the assumptions of the Rational Choice Model.