Mich Michie

Behavioral Public Choice: The Behavioral Paradox of

Government Policy

W. Kip Viscusf & Ted Gayer”

I. Overview

W hat are the economic justifications for governm ent inter­ vention in the economy? In a m arket economy, prices coordi­ nate the activities of buyers and sellers and convey inform ation about the strength of consum er dem and for a good and the costs of supplying it. Because trade is voluntary, buyers and sellers only m ake exchanges w hen both parties benefit. Under ideal m arket conditions, this process leads to an efficient alloca­ tion of goods w ithout governm ent intervention.

However, economics has long recognized instances in which markets can fail to lead to an efficient outcome. The long-standing view is that either market power or the nonexistence of markets causes market failures. Market power is present w hen some indi­ viduals or firms are price makers (for example, monopolists) ra­ ther than participants in a perfectly competitive environment. Such situations typically lead to the production of a less than effi­ cient quantity of goods. The problem of market power is the pur­ view of industrial organization economics and antitrust policy. * 1

The nonexistence of markets, or the failure of a robust market to arise, can occur for a num ber of reasons, such as asymmetric in­ formation (when one party in a transaction has information that is not available to another) and public goods (when a good is non­ rival and nonexcludable in consumption and thus likely to be un-

* University Distinguished Professor of Law, Economics, and Management, Vanderbilt Law School, 131 21st Ave. South, Nashville, TN 37203. kip.viscusi@ vanderbilt.edu. We are grateful to the Mercatus Center for their support.

**Vice President and Director, Economic Studies, Brookings Institution, 1775 Massachusetts Ave. NW, Washington, DC 20036. [email protected].

1. H arvey S. Rosen & Ted Gayer, Public Fin a n c e 46-48 (10th ed. 2013).

974 Harvard Journal of Law & Public Policy [Vol. 38

dersupplied by the market). Another cause for the nonexistence of markets is externalities, which occur when transactions impose costs or benefits on a third party that are not considered in the market exchange. A classic example is when a factory produces and sells a good to a consumer to their m utual advantage, but the pollution generated by the production of the good has a negative impact on the health of nearby residents. A market for the clean air in the affected area would not emerge if high transaction costs of organizing the pollution victims prevented the parties from negotiating.2 The market system will fail to internalize the health costs imposed by the factory's operations and lead to inefficiently high production and health consequences.

For about a century, economists have argued that policymakers should rely, when possible, on market-based principles in design­ ing regulations to address these market failures. For example, in the pollution cases above, a tax on production equal to the m ar­ ginal external costs could lead producers to internalize the third- party costs stemming from production, which would result in an efficient outcome.3 Similarly, establishing a property right for the clean air (for example, through a cap-and-trade program) could also cause producers to internalize the third-party costs in their market decisions, again resulting in an efficient outcome.

But in recent years, economics has seen a change from the traditional approach of evaluating m arket failures and in the justifications for governm ent intervention in the economy, w ith im plications for w hen and how the governm ent should inter­ vene. Recent research has focused on identifying cognitive lim ­ itations and psychological biases that lead people to make choices that cause self-harm, thus suggesting another type of m arket failure that justifies governm ent intervention.4 We refer to these phenom ena as behavioral failures in that they often involve departures from the individual rationality assum ptions incorporated in econom ists' m odels of consum er choice.

2. See generally R. H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960). 3. ROSEN & Gayer, supra note 1, at 84-85. 4. As is common in the behavioral economics literature, we classify cognitive

limitations and psychological biases as market failures, even though they reflect problems with individual preferences, not systemic problems with the incentives and institutions that represent the traditional market failures.

No. 3] Behavioral Public Choice 975

William Congdon, Jeffrey Kling, and Sendhil M ullainathan classify deviations from standard economic assum ptions found in psychology and behavioral economics into three categories: im perfect optim ization, bo u n d ed self-control, and nonstandard preferences.5 Im perfect optim ization challenges the traditional economics view that people are good at m aking decisions con­ cerning their ow n well-being. For example, one study suggests that people are less likely to participate in their em ployer's re­ tirem ent plan as the num ber of investm ent alternatives rises, thus suggesting that a governm ent policy of lim iting options could im prove welfare.6 A nother study finds that the salience of a sales tax (which differs depending on w hether the tax is included in the sticker price or com puted at the register) influ­ ences the behavior of consumers, even though the net price the consum er pays is the same in both cases.7

Bounded self-control challenges the traditional economics view that, even w hen people know w hat they want, they are unable to act on these interests. These bounded self-control findings include evidence of procrastination and succumbing to immediate tem p­ tation, both of which can result in self-harm.8 The nonstandard preferences phenomenon challenges some of the standard eco­ nomic assumptions about choice, such as that people value the end state rather than the path taken to achieve an outcome. For example, psychology and behavioral economics find that people value a good differently depending on whether they were ran-

5. William J. Congdon, Jeffrey R. Kling & Sendhil Mullainathan, Policy and Choice: Public Finance Through the Lens of Behavioral Economics 7 (2011).

6. See Sheena Sethi-Iyengar, Gur Huberman & Wei Jiang, How Much Choice is Too Much? Contributions to 401(k) Retirement Plans, in PENSION DESIGN AND STRUC­ TURE: N e w L e s s o n s f r o m Be h a v io r a l F i n a n c e 83, 88-91 (O.S. Mitchell & S. Utkus eds., 2004). Some more recent articles have argued that this apparently flawed decision making when confronting seemingly excessive choices may be a rational response to nonzero search costs not taken into account by Sethi-Iyengar et al. See Dmitri Kuksov & J. Miguel Villas-Boas, When More Alternatives Lead to Less Choice, 29 MARKETING SCIENCE 507, 519 (2010).

7. Raj Chetty, Adam Looney & Kory Kroft, Salience and Taxation: Theory and Evi­ dence, 99 Am. ECON. REV. 1145,1175 (2009).

8. Co n g d o n , Kling & M ulla inath an, supra note 5, at 7.

976 Harvard Journal of Law & Public Policy [Vol. 38

domly endowed with the good,9 and also that people do not value losses and comparable gains symmetrically.10

Reasonable critiques of the behavioral economics fin d i n gs abound. For example, many of the findings of deviation from ra­ tional behavior take place in laboratory or field experiment set­ tings. Nobel laureate economist Gary Becker is critical of the rele­ vance of this practice, noting that "there is a heck of a difference between demonstrating something in a laboratory, in experi­ ments, even highly sophisticated experiments, and showing that they are important in the marketplace."* 11 Becker also points out that "some of the defects in behavior claimed by behaviorists tend . . . to be eliminated in an exchange economy."12 Indeed, one study of the market for sports memorabilia finds that the market experience of card traders leads to the elimination of the endow ­ m ent effect.13 Further, some of the findings suggesting irrationali­ ty are questioned among psychologists. One study concluded that the "conjunction fallacy"14 found in some psychological studies is due to the wording used in the experiments (such as using "prob­ able" instead of "relative frequencies") and contextual interpreta­ tion by the participants rather than a failure of logic.15

In this Article we examine a wide range of behavioral failures, such as those linked to misperception of risks, unw arranted aver­ sion to risk ambiguity, inordinate aversion to losses, and incon­ sistencies in the tradeoffs reflected in individual decisions. Alt-

,9- See Daniel Kahneman, Jack L. Knetsch & Richard H. Thaler, Experimental Tests of the Endowment Effect and the Coase Theorem, 98 J. OF PO L. ECON. 1342,1343 (1990).

10. See generally Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision under Risk, 47 ECONOMETRICA 263 (1979).

11. Douglas Clement, Interview with Gary Becker, THE REGION, June 1, 2002, https:// www.mmneapolisfed.org/publications/the-region/interview-with-gary-becker [http•// perma.cc/23VU-99LJ].

12. Id. 13. John A. List, Does Market Experience Eliminate Market Anomalies?, 118 Q J

ECON. 41, 70-71 (2003). 14. The conjunction fallacy" is a phenomenon whereby experimental subjects

appear to assess the probability of A and B together as being more likely than the probability of A generally —a logical impossibility. For example in the famous "Linda problem" subjects are given a profile of Linda as a young outspoken intel­ lectual involved in social causes and indicate that it is more likely that Linda is a bank teller and a feminist than that she is a bank teller.

15. Ralph Hertwig & Gerd Gigerenzer, The 'Conjunction Fallacy’ Revisited: How Intelligent Inferences Look Like Reasoning Errors, 12 J. BEHAVIORAL DECISION M A K ­ ING 275, 276, 300 (1999).

No. 3] Behavioral Public Choice 977

hough such shortcomings have been documented in the behav­ ioral literature, they are also reflected in government policies, both because policymakers are also hum an and because public pres­ sures incorporate these biases. The result is that government poli­ cies often institutionalize rather than overcome behavioral anomalies. This idea is the principal theme of Viscusi's Rational Risk Policy, which documents a wide range of parallels between the systematic failures in risky private decisions and government risk policies.16 These institutional irrationalities pertain quite gen­ erally to government policies and are not restricted to regulations directly affecting consumer behavior. In this Article, we also find that the government often relies on command-and-control regula­ tion, even when the insights of the behavioral literature counsel a more flexible regulatory approach.

II. Behavioral Public Choice Theory

This Article examines the common policy im plications—not the specific empirical findings—of the behavioral economics lit­ erature, which frequently recom m ends "soft paternalism " poli­ cies that seek to change the structure of the choices available to individuals in order to encourage a more desirable outcome. But, as behavioral agents themselves, policymakers and regula­ tors are subject to the same psychological biases and limitations as all individuals.17 Many, although certainly not all, behavioral economics papers focus on the biases and heuristics of ordinary individuals, while seemingly ignoring that regulators are people too and thus subject to the same psychological forces. One study finds that, of the behavioral economics articles proposing pater­ nalistic policy responses, 95.5% do not contain any analysis of the cognitive abilities of policymakers.18 Congdon, Kling, and

16. W. Kip Viscusi, Rational Risk Policy (1998). See also W. Kip Viscusi & James H am ilton, Are Risk Regulators Rational? Evidence from Hazardous Waste Cleanup Decisions, 89 AM. ECON. REV. 1010 (1999). For a further discussion of how behavioral anom alies am ong the citizenry can im pact public policy, see generally Bryan Caplan, The Myth of the Rational Voter: W hy D emocracies Choose Bad Policies (2008).

17. See generally Slavisa Tasic, Are Regulators Rational?, 17 J. DES ECONOMISTES ET DES ETUDES H umaines 1145 (2011); Slavisa Tasic, The Illusion o f Regulatory Compe­ tence, 21 Critical Rev. 423 (2009).

18. Niclas Berggren, Time fo r behavioral political economy? A n analysis o f articles in behavioral economics, 25 REV. AUSTRIAN ECON. 199, 200 (2012).

978 Harvard Journal o f Law & Public Policy [Vol. 38

M ullainathan acknowledge that "behavioral economics creates something of a paradox in requiring more of policym akers— such as new judgm ents about identifying and distinguishing behavioral tendencies—while suggesting that policymakers' ca­ pacity to make such judgm ents m ay be im paired to the extent that they too are behavioral agents."19 Unfortunately, they sub­ sequently p u t this view aside. Similarly, Professor Cass Sunstein observes, "For every bias identified for individuals, there is an accompanying bias in the public sphere."20

The question then is w hether private decision m akers acting in the m arketplace are m ore or less prone to psychological bi­ ases than are the public decision m akers w ho regulate the economy, w hether through traditional regulations or through "nudges" that seek to change the choice architecture in a way that leads people to choose more optim al actions. This ap ­ proach parallels the traditional public finance calculus of w eighing the inefficiencies caused by m arket failures against the inefficiencies caused by governm ent failures in attem pting to address m arket failures through regulations.21

There are two main reasons w hy regulatory responses motivat­ ed by behavioral economics findings might be suboptimal.22 The first, as already mentioned, is that as behavioral agents them­ selves, regulators are not immune from the psychological biases that affect ordinary people. The second is that policymakers are subject to public choice incentives that could further lead to poli­ cies that reduce welfare, and indeed could lead to the misuse of behavioral findings by regulators in order to enhance regulatory control or favor the influence of powerful special interests over

19. CONGDON, Kling & MULLAINATHAN, supra note 5, at 56. 20. Cass R. Sunstein, W hy N udge? The P olitics of Libertarian Paternal­

ism 102 (2012). 21. See generally Clifford Winston, Government Failure versus Market Fail­

ure: Microeconomic Policy Research and Government Performance (2006). 22. For additional views of the problem s w ith basing regulations on behavioral

economics findings, see generally Robert Sugden, W hy incoherent preferences do not ju stify paternalism, 19 CONST. POL. ECON. 226 (2008) (arguing th at m u tu al ad­ vantage aspect of m arket transactions does not require coherent preferences) and Jayson L. Lusk, Are you smart enough to know what to eat? A critique o f behavioral economics as justification fo r regulation, 41 EUR. REV. OF AGRIC. ECON. 355 (2014) (arguing th a t cognitive biases alone do not justify regulatory intervention).

No. 3] Behavioral Public Choice 979

the interests of public welfare.23 By focusing on these two issues, this Article seeks to answer Sunstein's call for the creation of a field in "behavioral public choice theory."24

There are a num ber of public choice argum ents about w hy private decision m aking m ight be less prone to errors than public decision m aking.25 The m ost obvious argum ent is that psychological failings in citizens w ould suggest bad decision m aking in their voting practices at least as m uch as in their m arket transactions. To the extent that policies are decided through a majority voting system, then u n d e r certain condi­ tions, the m edian voter will determ ine the policy response.26 If the m edian voter is subject to behavioral biases as suggested by the psychology literature, then the resulting policy is likely to be suboptim al. In other w ords, in a dem ocratic system, theory and evidence suggest that governm ent policies will reflect the irrationalities of ordinary people.27

Public choice theory also suggests that private decision m ak­ ers have stronger incentives to acquire inform ation— expending both time and m oney—to overcome behavioral bi­ ases, since the personal costs to a citizen w ho makes a bad de­ cision are higher than the personal costs to the regulator of a rule that leads to a bad outcome for that citizen. There is some experim ental evidence that, at least for some kinds of decisions, people w ith incentives can partially reduce cognitive biases through learning,28 and given that the costs of cognitive biases w eigh more on the citizen than on the regulator, one should expect fewer errors am ong private than am ong public decision makers. Finally, public choice studies have also found that,

23. Go rdon Tullock, Arthur Seldon & Go rdon L. Brady, Government Failure: a Primer in P ublic Choice 87 (2002).

24. SUNSTEIN, supra note 20, at 100. 25. For a summary, see generally Edward L. Glaeser, Paternalism and Psychology,

29 Regulation 32 (2006) 26. Randall H olcombe, P ublic Sector Eco n o m ics: Th e Role of Govern­

m ent in the A merican Econom y 155 (2005). 27. See generally Bryan Caplan, supra note 16, at 10; Jan Schnellenbach & Chris­

tian Schubert, Behavioral Political Economy: A Survey (CESifo, Working Paper No. 4988, 2014).

28. See Colin F. Camerer & Robin M. Hogarth, The Effects o f Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework, 19 J. RISK & UNCER­ TAINTY 7, 34-35 (1999).

980 Harvard Journal o f Law & Public Policy [Vol. 38

w here a policy has high b u t diffuse costs and low b u t concen­ trated benefits (such as a trade-liberalizing policy that im ­ proves net benefits, but does so by providing small benefits to m any consum ers while providing concentrated costs to a few producers), the stronger incentives of the few m ay have greater influence than the preferences of the many, possibly leading to inefficient policies.29 This tendency w ould suggest that gov­ ernm ent policies aim ed at addressing the deliberate m anipula­ tion of the choice architecture that occurs in the m arketplace are also prone to deliberate m anipulation by regulators in a w ay that leads to suboptim al outcomes.

Our focus on behavioral public choice suggests a need for cau­ tion in using the findings of individual biases to justify greater government intervention, even for soft paternalism policies that seek to protect a degree of individual choice. This is not to suggest that all behavioral justifications for government intervention are invalid and inevitably prone to misuse. Daniel Kahneman consid­ ers two modes of thinking: System 1 "operates automatically and quickly, with little or no effort and no sense of voluntary control," while System 2 "allocates attention to the effortful mental activi­ ties that dem and it, including complex computations."30 The bias­ es that lead to suboptimal personal behavior typically result from actions dominated by the "freewheeling impulses" of our System 1 rather than the "conscious, reasoning self" of System 2.31 Behav­ ioral economists who advocate for more soft paternalism policies are essentially motivated by the belief that government techno­ crats are, by nature, training, and employment, disposed toward System 2 thinking and can therefore design policies that overcome the problems caused by System 1 reasoning.32 Some critics, how­ ever, contend that the narrowness of the expertise of government technocrats will subject them to overconfidence caused by the il­ lusion of explanatory depth,33 that such experts will have a lim­ ited and biased understanding compared to the information pro-

29. See Gary S. Becker, A Theory o f Competition A m ong Pressure Groups fo r Political Influence, 98 Q.J. ECON. 371, 392 (1983).

30. D aniel Ka h n em a n , Th in k in g, Fast an d Slow 20-21 (2011). 31. Id. at 21. 32. Id. at 48. 33. See Tasic, Illusion, supra note 17, at 430.

No. 3] Behavioral Public Choice 981

vided by a more decentralized approach,34 and that the use of government nudges to limit individual choice will reduce auton­ omy, dignity, and the motivation of individuals to engage and nurture their System 2 reasoning.35 The behavioral public choice approach seeks to weigh the political incentives and psychological biases of government decision making and critique the optimistic view of a government composed of well-meaning technocrats w ho are better equipped than ordinary citizens to overcome p u r­ ported System 1 biases.

III. Behavioral Rationales For Government Policy

The prom inent role of behavioral rationales for governm ent regulation is exemplified by the recent w ave of governm ent initiatives by the U.S. D epartm ent of Energy (DOE), the U.S. Environm ental Protection Agency (EPA), and the U.S. D epart­ m ent of Transportation (DOT) m andating energy-efficiency levels for m any major consum er durable goods. In an earlier paper, we exam ined these regulations and found that the tradi­ tional m arket failure justifications (for example, externalities and asym m etric information) are incidental to an assessm ent of the m erits of these regulations.36 Rather, the agencies justify these regulations based on the contention that consum ers suf­ fer from psychological biases that lead them to m ake irrational choices in their purchases of durables.

There is a long-standing empirical finding, know n as the en­ ergy-efficiency gap, which shows that consumer choices for en­ ergy-efficiency purchases imply a discount rate much higher than m arket discount rates. This finding suggests that consum­ ers underestim ate the future cost savings stemming from an en­ ergy-efficient product compared to the weight they p u t on fu­ ture savings in other m arket settings.37 This apparent bias could

34. See F. A. Hayek, The Use o f Knowledge in Society, 35 AM. ECON. REV. 519, 524 (1945).

35. Jeremy Waldron, It's A ll for Your O wn Good, N.Y. REV. OF BOOKS, Oct. 9, 2014, http://www.nybooks.eom/artides/archives/2014/oct/09/cass-sunstein-its-all-your- ow n-good/ [http://perma.cc/Y9JP-ATEX]; Steven Poole, N ot so foolish, AEON (2014).

36. Ted G ayer & W. Kip Viscusi, Overriding consumer preferences w ith energy regu­ lations, 43 J. REG. ECON. 248, 249 (2013).

37. See, e.g., Jerry A. H ausm an, Individual Discount Rates and the Purchase and Utilization o f Energy-Using Durables, 10 BELL J. OF ECON. 33, 50-52 (1979). Recent

982 Harvard Journal of Law & Public Policy [Vol. 38

arise from irrational consumer behavior driven by psychological heuristics. Some studies find evidence that people make deci­ sions regarding which appliances to purchase based on current energy prices rather than on expected future prices, leading to a tendency to forgo purchasing energy-efficient products.38 H ow ­ ever, other studies find that consumers reasonably base their forecasts of energy prices on current prices and therefore do not present a behavioral m arket failure.39 Yet other studies find that the psychological "salience" of the more expensive, efficient ap­ pliance leads to underinvestm ent in energy efficiency.40

However, alternative explanations for the energy-efficiency gap exist that are consistent with individual rationality. The observed consumer choice may simply reflect actual consumer prefer­ ences.41 For example, the high implied discount rates could be a rational response to high sunk costs and uncertainty over future conservation savings.42 If you are planning to move or you have a liquidity problem, buying the more energy-efficient but more ex­ pensive appliance may not make sense. Many of the studies pur­ porting to show that consumers forgo profitable energy decisions are based on engineering studies that calculate the net present value of a set of possible energy-efficiency consumption choices, which requires assumptions concerning such things as capital costs, current and future energy prices, duration and frequency of appliance use, and discount rates.43 These studies omit other rele­ vant costs or benefits that can drive the purchase decision.

studies suggest little evidence of consum er m yopia w ith respect to automobile fuel economy. See M eghan R. Busse, Christopher R. Knittel & Florian Zettelmeyer, Are Consumers Myopic? Evidence from N ew and Used Car Purchases, 103 AM. ECON. REV. 220, 221 (2013).

38. Willett K empton & Laura M ontgomery, Folk Quantification o f Energy, 7 EN­ ERGY 817, 822-23, 826 (1982).

39. Soren T. Anderson, Ryan Kellogg & James M. Sallee, What Do Consumers Believe A bout Future Gasoline Prices? 2 (N a ti Bureau of Econ. Research, Working Paper No. 16974, 2011).

40. Charlie Wilson & H adi D owlatabadi, Models o f Decision M aking and Residen­ tial Energy Use, 32 ANN. REV. OF ENV'T & RESOURCES 169,175 (2007).

41. Jerry A. H ausm an & Paul L. Joskow, Evaluating the Costs and Benefits o f A p ­ pliance Efficiency Standards, 72 A m . Ec o n . Rev. 220, 222 (1982).

42. Kevin A. H assett & Gilbert E. Metcalf, Energy conservation investment: Do consumers discount the fu tu re correctly?, 21 ENERGY POL'Y 710, 710 (1993).

43. See, e.g., McKinsey & Co., Electric Power a n d N atural Gas: Unlocking Energy Efficiency in the U.S. Econom y, July 2009, http://w w w.m ckinsey.com /

No. 3] Behavioral Public Choice 983

A nother possible explanation for the energy-efficiency gap findings is that consum ers do not expect to receive as high a retu rn in energy savings as the regulatory analyst assumes. This m ight be the case if, for instance, engineering estim ates of potential savings m isrepresent energy savings because they are based on highly controlled studies that do not directly apply to actual realized savings in a representative house. There is some evidence that engineering estimates of energy savings are in­ deed faulty.44 For example, Gilbert Metcalf and Kevin Hassett find that the realized return on attic insulation falls short of the returns prom ised by engineers and product m anufacturers.45 Accounting for this discrepancy eliminates the paradox of the energy-efficiency gap in this situation.46

A nother approach to m easuring the energy-efficiency gap is to use empirical studies of energy-use data to estimate the av­ erage returns for the set of consum ers that adopt an energy- efficient technology, such as by com paring natural-gas billing data in the first year after w eatherization w ork is done to the same data from the previous year. In addition to the problem associated w ith a short-tim e horizon, these studies also suffer from the com m on pitfalls associated w ith om itted variable bias in w hich other key factors affecting the decision are ignored. As TIunt Allcott and Michael Greenstone explain, such studies can om it m any relevant costs and benefits.47 For example, w eatherizing a hom e can be a tim e-consum ing and unpleasant task for the homeowner. Weatherization can also yield benefits not measured by billing data, such as greater home comfort. Fail­ ing to account for these factors that contribute to the consumption decision can lead to spurious findings of an energy-efficiency gap.

clientservice/electricpowernaturalgas/downloads/US_energy_efficiency_full_ report.pdf [http://perma.cc/3KXK-GY5F].

44. Steve N adel & K enneth Keating, Engineering Estimates vs. Impact Evaluation Results: How Do They Compare and Why? 3, 6 (Research Report U915, American Council for an Energy-Efficient Economy, January 1, 1991), available at http:// w w w.aceee.org/research-report/u915[http://perma.cc/UM 7C-42B7].

45. Gilbert E. Metcalf & Kevin A. Hassett, Measuring the Energy Savings from Home Improvement Investments: Evidence from M onthly Billing Data, 81 REV. OF ECON. & STAT. 516, 516 (1999).

46. Id. at 516, 527. 47. H unt Allcott & Michael Greenstone, Is There an Energy Efficiency Cap? 14 (Mass.

Inst, of Tech., Working Paper No. 12-03, January 1, 2012). See also H unt Allcott, Con­ sumers' Perceptions and Misperceptions of Energy Costs, 101 AM. ECON. REV. 98 (2011).

984 Harvard Journal of Law & Public Policy [Vol. 38

Taken as a whole, the literature on the energy-efficiency gap does not provide strong, credible evidence of persistent con­ sum er irrationality. Nonetheless, governm ent agencies justified the energy-efficiency m andates on the basis of correcting con­ sum er irrationality, even though they offer little or no evidence that consum ers are causing self-harm in their purchasing deci­ sions concerning the regulated consum er durables. Again, in an earlier paper, w e found that the preponderance of the esti­ m ated benefits stem m ing from m ost energy-efficiency regula­ tions derive from this presum ption of addressing consum er irrationality, not from reducing the external costs associated w ith energy use.48 For example, for the recent fuel economy m andates for passenger cars and light trucks, the D epartm ent of Transportation estim ated a total cost of $177 billion and a total benefit of $521 billion.49 Of the $521 billion in benefits (as­ sum ing a discount rate of three percent and constant 2009 dol­ lars), fully $440 billion (or eighty-five percent) stems from the purp o rted benefits of addressing consum er irrationality.50 The evidence that consum ers undervalue fuel economy is very weak, and the u p p e r bo u n d estimates of consum er m ispercep­ tions suggest benefits m uch sm aller than those estim ated by the regulatory agencies.51 For the same rule, the Environm ental Protection Agency estim ated that eighty-seven percent of the total benefits (estimated at $613 billion) were due to addressing consum er irrationality. We found that the p u rp o rted need to address consum er irrationality was also a large driver in other energy-efficiency regulations, including fuel economy stand­ ards for heavy-duty vehicles, clothes dryers, room air condi­ tioners, and incandescent light bulbs.52

This approach by the agencies to justify their regulations based on weak evidence of consumer irrationality illustrates a key negative consequence of m isusing behavioral findings: the welfare loss associated w ith ignoring heterogeneous preferences. The one-size-fits-all approach that ignores potential heterogenei-

48. Gayer & Viscusi, supra note 36, at 249. 49. Id. at 251. 50. Id. 51. H u n t Allcott, The Welfare Effects o f Misperceived Product Costs: Data and Cali­

brations from the Automobile Market, 5 Am . ECON. J.: ECON. Pol'Y 30,32 (2013). 52. G ayer & Viscusi, supra note 36, at 257-63.

No. 3] Behavioral Public Choice 985

ty in consumer preferences is most common in command-and- control regulations (such as energy-efficiency mandates), but even the soft paternalism approach steers all people in the same direction. Differences in preferences and income generate differ­ ent levels of consumer demand for products. Even for products all consumers might find attractive, there will be differences in preference; some consumers are willing to pay more for the product than others, giving rise to the usual downward-sloping demand for the product. There will also be more extreme situa­ tions in which some consumers may not want a product at any price even though others may value it, as in the case of vegetari­ ans who do not wish to consume meat. In recognition of such differences, the market often generates highly differentiated products, ranging for instance from very basic automobiles, which serve as a functional form of transportation, to luxury cars. Homogenizing these choices through command-and- control regulations, or even through more subtle manipulation of the choice architecture, imposes costs on those with prefer­ ences outside of the allowable options.

The fuel economy mandate also provides evidence in support of William Niskanen's public choice view that regulators will attempt to maximize their authority rather than social welfare.53 The behavioral economics approach recommends soft paternal­ ism options over regulations. Indeed, a broad reading of this lit­ erature counsels in favor of many welfare-improving policies that change existing hard regulations to soft, nudge-like regula­ tions. In other words, behavioral economics does not and should not only justify more traditional government interventions; in many cases it should justify a reduction in regulatory power. Public choice theory, however, suggests that regulators would be more prone to use behavioral findings to justify increasing regulatory power than to move toward softening regulations.

The fuel economy regulation is a case in point. The EPA's and DOT's analyses find that the preponderance of the benefits stem from correcting purported consumer irrationality, not from reducing externalities. This raises the question of why a rigid mandate is warranted rather than an informational regu-

53. William A. N iskanen Jr., Bureaucracy an d Representative Govern­ m ent 36 (1971).

986 Harvard Journal of Law & Public Policy [Vol. 38

lation that w ould nudge consum ers to make sounder choices. Indeed, in 2011 the EPA did just that by issuing its M otor Vehi­ cle Fuel Economy Label Final Rule.54 The m andated label for all new cars is quite extensive, including an overall miles per gal­ lon (mpg) rating, a city m pg rating, a highw ay m pg rating, gal­ lons per 100 miles, driving range on a tank of gas, fuel costs in five years versus the average new vehicle, annual fuel costs, fuel economy and greenhouse gas rating, and smog rating.55 These com ponents of the label address the p u rp o rted behav­ ioral failures in th at they (i) indicate the longer-term fuel costs, thus dim inishing the effect of high discount rates, (ii) make the benefits of fuel economy salient and a less "shrouded" attrib­ ute, (iii) provide easy calculations of fuel economy, (iv) enable consum ers to u n d erstan d the actual fuel economy benefits ra­ ther than relying on rough rules of thum b, (v) m ake it clear that fuel economy is a valued vehicle attribute, not a proxy for a less expensive vehicle, (vi) m ake it easier for consum ers to identify which vehicles provide fuel economy, (vii) provide diverse m easures of fuel economy that consum ers can relate to their driving style, and (viii) m ake the fuel costs m ore apparent as an u pfront cost similar to the sticker price of a vehicle. In­ deed, the EPA label rule is directed at rem edying almost all of the types of consum er choice failures that the EPA claims ac­ count for the private benefits of fuel economy standards.

W hat is striking about the EPA's regulatory im pact analysis of the fuel economy m andates is that it does not even m ention the existence of the agency's ow n new label rule.56 This over­ sight goes to the heart of the fuel economy standard analysis, as m ost of the benefits needed to justify the regulation relate to consum er choice failures targeted by the new labeling rule. The EPA analysis of the fuel economy m andate should address the effectiveness of the label rule and the degree to w hich it am e­ liorates the need for an additional m andate. It is not necessarily

54. Revisions and A dditions to M otor Vehicle Fuel Economy Label Final Rule, 76 Fed. Reg. 39,478 (July 6, 2011).

55. Id. at 39, 478-80. 56. U.S. Environmental Protection Agency, EPA-420-R-12-016, Regulato­

ry Impact Analysis: Final Ruling for 2017-2025 Light-Duty Vehicle Green­ house Gas Emissions Standards and Corporate Average Fuel Economy Standards (2012).

No. 3] Behavioral Public Choice 98 7

in co n sisten t to h av e b o th a labeling ru le an d a fuel econom y m an d ate, b u t any assessm en t of the desirab ility of a fuel econ­ om y sh o u ld take into account the im p act of the labeling reg u la­ tion a n d the role of differences in co n su m er preferences. If the label ru le is co m pletely w o rth less an d g en erates n o benefits for co n su m er choice, th e n the EPA w as rem iss in issu in g the re g u ­ lation, an d the Office of M an ag em en t an d B udget, the w a tc h ­ d o g o ver all m ajor n ew federal reg u latio n s, w as rem iss in p e r­ m ittin g the agency to m ove fo rw a rd w ith a ru le th a t o th er EPA assessm en ts im plicitly tre a t as w o rth less.57

A lthough the agencies' analyses of the energy-efficiency stand­ ards invoke b ro ad references to the behavioral economics litera­ ture to justify their p resu m p tio n of consum er irrationality, n o ­ w here in these analyses do they invoke behavioral findings that could suggest a dim inished need for regulation. For example, findings from the psychology and behavioral economics literature suggest th at people care about the outcom es realized by others. These other-regarding preferences m ean that people m ight v o lu n ­ tarily internalize the costs of their actions to others, m itigating the n eed for regulations to address pollution externalities. The exist­ ence of other-regarding preferences w o u ld also suggest ap ­ proaches other than m andates to reduce energy use. Indeed, some studies suggest that economic incentives can discourage p ro ­ social, other-regarding behavior,58 u n d erm in in g the stan d ard eco­ nom ic arg u m en t for pollution taxes to ad d ress externalities. N u ­ m erous findings suggest th at social norm s influence individual behavior, including one stu d y th at fo und evidence of a "conspic­ u o u s conservation effect," in w hich people value the "green halo" signal of ow ning a Prius over other, m ore traditional-looking h y ­ brid vehicles.59 O ther studies suggest that providing feedback to custom ers on energy use w ith a focus on peer com parisons leads

57. Cf. John D. G raham & Cory R. Liu, Regulatory and Quasi-Regulatory A ctivity W ithout OM B and Cost-Benefit Review, 37 HARV. J.L. & PUB. POLY 425,431-39 (2014).

58. See, e.g., Roland Benabou & Jean Tirole, Incentives and Prosocial Behavior, 96 AM. ECON. REV. 1652,1654 (2006).

59. Steven E. Sexton & Alison L. Sexton, Conspicuous Conservation: The Prius Ef­ fect and Willingness to Pay fo r Environmental Bona Fide s 1-2, 22 (UC Berkeley, W ork­ ing Paper, 2010).

988 Harvard Journal of Law & Public Policy [Vol. 38

to a reduction in energy consumption at a low cost.60 Nonetheless, we are not aware of any instances where softer regulations that provide information to influence social norms were considered in the regulatory agencies' analyses of the various energy-efficiency mandates for consumer durables.

IV. Failures Of Risk Perception And Risk Assessment

A major and w ell-docum ented class of failures of rationality in individual choices pertains to the assessm ent and perception of the probability levels of different outcomes. In this Part we focus on behavioral failures linked to w h at is term ed "risk," and in Part V we address closely-related issues concerning am ­ biguity surrounding risk levels. The risk-related concerns p er­ tain to the absolute levels of a probability and possible changes in these levels, w hereas the uncertainty concerns address im­ precision and am biguity involved in the assessed risk levels. We describe how governm ent policies that reflect individual behavioral anomalies w ith respect to risk and uncertainty lead to suboptim al outcomes.

H ow risk and uncertainty enter the decision process depends on the decision context and the norm ative reference point. In the case of governm ent policies, the norm ative assum ption that we adopt in guiding our discussion is that policies should be based on a com parison of the expected costs w ith the expected benefits, w here the probabilities used in these calculations are the m ean values of the probabilities. Thus, we assum e that the precision of the probabilistic judgm ents should not be a con­ sideration. It is the best estimate of the probability levels, not the worst-case or best-case assum ptions regarding the level of the risk, that should guide risk assessments.61

Environmental risks provide an instructive context for consid­ ering how probabilities enter the regulatory impact analysis. The expected benefits for EPA regulations often are expressed in terms

60. Ian Ayres et al., Evidence from Two Large Field Experiments That Peer Compari­ son Feedback Can Reduce Residential Energy Usage 2 (Nat'l Bureau of Econ. Research, Working Paper No. 15386, 2009).

61. We explore possible exceptions to this principle below. In situations in which learning about the probabilities can take place, the precision of the proba­ bilities also enters as a pertinent concern.

No. 3] Behavioral Public Choice 989

such as the expected num ber of cancer cases prevented, calculated using the probability of cancer and the size of the exposed popu­ lation. These expected health effects are then weighted by the agency's monetary valuation of these cancer risks to make the cancer case reduction benefits in the same monetary terms as the regulatory costs, thus facilitating a comparison of the benefits and costs.62 One might, of course, choose to adopt a normative policy criterion other than a benefit-cost framework. The biases that we discuss below are also pertinent to addressing behavioral para­ doxes with respect to many other policy frameworks not tied to a benefit-cost approach, but it is useful to have a reference point for a concrete policy evaluation to frame our discussion.

One of the best-documented biases people exhibit in thinking about risky choices is in their perceptions of the absolute level of risk. An early example in this literature is the study by Sarah Lich­ tenstein et al.,63 which analyzed people's assessment of the level of different mortality risks. They found that the public tends to over­ estimate low probability risks of death and underestimate large risks.64 That is, real threats to health—such as the risks of stroke, cancer, and heart disease—tend to be underestimated, although the less consequential threats—such as the risks of botulism, lightning strikes, and natural disasters—tend to be overestimated. Daniel Kahneman and Amos Tversky incorporated this systemat­ ic bias in risk beliefs with respect to the level of the actual risk into their widely used prospect theory model.65 Note that their model is a predictive framework that indicates how people actually make decisions rather than a normative framework that specifies how they should make decisions. Whether the kinds of departures from economic rationality that are incorporated in the prospect theory model and other behavioral frameworks also affect gov­ ernm ent policy is a key focus of this Article.

62. These costs and benefits are often quite substantial. See, e.g., OFFICE OF Mgm t. & budget, Report to Congress o n the Benefits and Costs of Federal Regulations and U nfunded M andates o n State, Local, an d Tribal Entities 13-18 (2014), http://www.whitehouse.gov/sites/default/files/omb/inforeg/2014_cb/ draft_2014_cost_benefit_report-updated.pdf [http://perma.cc/WV4Y-YGDW].

63. See generally Sarah Lichtenstein et al., Judged Frequency of Lethal Events, 4 J. OF Experimental Psychol. 551 (1978).

64. Id. at 574. 65. See Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Deci­

sion under Risk, 47 ECONOMETRICA 263 (1979).

990 Harvard Journal of Law & Public Policy [Vol. 38

The systematic bias in which small risks are overestimated and large risks are underestimated has two additional implica­ tions. First, because people tend to overestimate small proba­ bilities, when these small risks are eliminated, they will tend to overestimate the risk reduction that takes place. Similarly, this property creates a substantial potential for overreactions to small risks, such as those posed by weak carcinogens and na­ noparticles. If a risk has increased from zero to some small pos­ itive value, people will tend to overestimate the extent of the increase. The alarmist reactions to newly discovered carcino­ gens in food or beverages would fit this profile.

A second ramification of the pattern of overestimating small risks and underestimating large risks is that perceptions in effect flatten out the relationship between perceived risks and actual risks. People may tend to underestimate the change in risk levels for nonzero levels of risk. As a consequence, they will tend to under-assess the benefits derived from risk improvements un­ less the improvements are successful in eliminating the risk.66 Thus, for example, people may tend to underestimate the risk reduction benefits derived from using seat belts, providing a po­ tential impetus for government requirements regarding self­ protection, such as mandating the use of seat belts in cars.67

Biased risk perceptions are not limited to private parties. Whether government policy overcomes these types of irrational­ ity linked to the level of the risk probability—or instead institu­ tionalizes them—depends on the strength of public pressures on the agency and the possible presence of similar failures of ra­ tionality by government officials. Government agencies could be better suited to making more accurate risk assessments if they have additional and unbiased information about the risks that the general public may not have. Government bureaucrats who have a professional involvement in particular risk areas could have more accurate beliefs because they have obtained more in­ formation than the average citizen has about the true risks in­ volved. Government agencies have the expertise and staff to stay

66. VISCUSI, supra note 16, at 25; Viscusi & Hamilton, supra note 16, at 1010. 67. The presence and extent of such a general perceptional bias does in fact af­

fect the particular decision context and should be corroborated in each instance rather than assuming that all private decisions are necessarily flawed and that the extent of the market failure is sufficient to warrant overriding private decisions.

No. 3] Behavioral Public Choice 991

informed about the evolving scientific evidence with respect to risk, thus relying more on K ahnem an's System 2 thinking w hen evaluating these risks. There appear to be some benefits to famil­ iarity with risks in terms of being able to make sound risk judg­ ments. For example, survey evidence dem onstrates that judges have more accurate risk assessments of various kinds of death than does the general public, as judges tend to overestimate small risks and underestim ate large risks to a lesser extent than does the public.68 Such superior knowledge is quite plausible, as judges have handled or have read about num erous cases involv­ ing accidents and various tort-related hazards.

Unfortunately, in m any instances governm ent policies serve to incorporate the same kinds of risk perception biases plagu­ ing individual risk judgm ents. Thus, governm ent officials' ac­ cess to additional inform ation does not m ean that they take ad ­ vantage of greater know ledge about risks to form unbiased assessm ents of risks. There m ay be systematic biases in agen­ cies' risk assessments tow ard devoting inordinate attention to worst-case scenarios. The hazardous w aste cleanup policy know n as the Superfund program is a prom inent example.

The EPA approaches the h azardous waste cleanup decision in a systematic m anner, assessing the level of the risk posed by a particular site. Ffowever, in doing so, the EPA incorporates a series of conservatism biases that tend to lead to an overstate­ m ent of the risk level. The agency's assessm ent of the risk is a product of the level of concentration of a particular chemical, the frequency of exposure to the chemical, the am ount of expo­ sure, and the dose-response relationship linking the chemical exposure to an estim ated risk, such as cancer.69 In particular, the EPA incorporates into the risk assessm ent an u p p er bound value for each com ponent of the assessment, such as the high­ est level of concentration of a chemical identified at the haz­ ardous w aste site. The result is that the calculation com pounds the conservatism bias. Suppose that the agency calculates the cancer risk at the site by m ultiplying a series of four param e­ ters, w here for each param eter the agency uses the ninety-fifth

68. W. Kip Viscusi, Jurors, Judges, and the Mistreatment of Risk by the Courts, 30 J. of Legal Stu d . 107,131 (2001).

69. James T. H amilton & W. Kip Viscusi, Calculating Risks? The Spatial a n d Political Dimensions of H azardous W aste Policy 64 (1999).

992 Harvard Journal of Law & Public Policy [Vol. 38

percentile value of the param eter. If all param eters in the risk calculation are ninety-fifth percentile values, the overall risk calculation that com pounds these biases has a m uch lower chance than 0.05 of reflecting the actual risk. If there are four such param eters in the risk calculation that are at the ninety- fifth percentile, the chance that the calculated risk could be as large as the estim ated risk value is only 6.25 * 1R6, or u nder 1/100,000. An empirical assessm ent of the EPA's risk assess­ m ent calculations for a large sam ple of Superfund cases found that, even excluding upw ard biases in the dose-response relation­ ship that the EPA used, for over two-thirds of the groundw ater and soil risk pathways, the agency estimated the risks beyond the ninety-ninth percentile of the actual risk distribution.70

Regulatory agencies often rely on estim ates of risk th at com­ pound conservatism bias. For example, in its evaluation of the risk of m ethyl m ercury, the EPA relied on a reference dose that started w ith a benchm ark dose that is the low est m aternal blood m ercury concentration expected to lead to a five percent increase in adverse health outcomes in children. Then, it took the ninety percent lower confidence limit of this benchm ark dose and applied an additional safety factor by dividing the dose by ten.71

These numerical biases in calculating a risk represent only one class of the many regulatory systematic risk assessment biases with respect to estimating the risk reduction benefits of hazardous waste cleanups. If the policy concern is with protecting people from hazards in an effective manner, as we believe it should be, then the agency should take into account the num ber of people exposed to the risk, the extent of their exposure, and the extent of their risk reduction. Elowever, the EPA does not incorporate risks to actual populations in the risk assessment practices. Instead, the agency's procedures treat real and hypothetical exposures equal­ ly. Thus, in an extreme case of risk overestimation, the EPA w ould value the risk to a single hypothetically exposed individual in the future as being equivalent to a current risk to a large popu­ lation.72 Treating the hypothetical potential risk as equivalent to

70. Id. at 89. 71. Ted G ayer & Robert W. H ahn, The Political Economy o f M ercury Regulation, 28

Regulation 26,29 (2005). 72. Id. at 91.

No. 3] Behavioral Public Choice 993

an actual risk, coupled with a complete disregard for the num ber of people exposed to the risk, leads to an overestimation of very small risks and comparative inattention to larger risks. As a result, cleaning up Superfund sites that pose real risks to actual popula­ tions looks as desirable as cleanups that might affect hypothetical future populations. This bizarre practice caught the attention of now Supreme Court Justice Stephen Breyer.73 While serving as an appellate court judge, he encountered a Superfund cleanup case, United States v. Ottati & Goss, Inc.,74 in which the rationale for the cleanup was to prevent children from eating the contaminated dirt. Breyer was puzzled, however, as to why the EPA would be undertaking such a cleanup, as he observed that there were no dirt-eating children w ho would actually be affected because the area was currently unoccupied swamp land.75

Setting aside all cost considerations, the p attern of risk per­ ception biases leads people to m uch prefer elim inating a risk to reducing a risk by the same am ount to a low level. A rem aining small risk looms m uch larger than it actually is. The quest for a zero risk level, rather than a risk reduction that bears a reason­ able relation to the costs, becomes the objective. In practice, governm ent policies often institutionalize this targeting of a zero risk level. A w idespread practice throughout the federal governm ent is to design regulatory policies that do not simply reduce the risk, b u t also provide an "adequate m argin of safe­ ty" below the safe exposure level. Agencies are not entirely to blam e for the adequate m argin of safety concept, as these re­ quirem ents m ay also be incorporated in the laws governing regulatory policy. For example, the congressional drafting of the Clean Air Act led to a law that requires the EPA to set am ­ bient air quality standards that provide for an adequate m argin of safety below the safe exposure level.76 This approach of err­ ing on the side of m ore safety than is w arranted by the pres­ ence of a nonzero risk level is also reflected in the Food and D rug A dm inistration's (FDA) desire to ensure that pharm aceu-

73. See Stephen Breyer, Breaking the Vicious Circle: Tow ard Effective Risk Regulation 11-12 (1993). 74. 900 F.2d 429 (1st Cir. 1990). 7 5. BREYER, supra n o t e 7 3 , a t 12. 76. See 42 U.S.C. § 7409(b)(1) (2012).

994 Harvard Journal of Law & Public Policy [Vol. 38

tical regulations provide an adequate m argin of safety.77 Like­ wise, the D epartm ent of Agriculture seeks to provide for a m argin of safety in its food safety efforts.78

The level of the risk is also consequential in terms of how peo­ ple respond to changes in a risk. Increases from the accustomed risk level tend to generate extreme responses. Consumers encoun­ tering increases in their accustomed risk level for products tend to respond in an alarmist manner.79 These responses in turn create pressure for alarmist government regulations. The mechanism driving this result is as follows. Going from a zero risk to a posi­ tive risk level moves the individual from a zero risk baseline to a situation of overestimating small risks. Thus, the perceived change in the risk is greater than it actually is, given the low prob­ ability. Newly discovered risks in food and beverages provoke strong reactions as evidenced by the dramatic impact of the pres­ ence of benzene found in Perrier water in 1990.80 Government pol­ icies likewise frequently exhibit very strong responses to newly discovered risks. A prom inent example is the stringent govern­ m ent responses to the outbreak of bovine spongiform encephalo­ pathy (BSE), known as m ad cow disease. The U.K. government may have overreacted by ordering the indiscriminate slaughter of thousands of cattle rather than testing the cattle to assess potential risks. Another example of excessive reactions to the m ad cow cri­ sis was Japan's ban on the importation of U.S. beef because of the exaggerated threat that U.S. beef posed. Unlike the United King­ dom, which had as many as 37,280 BSE cases in a single year, the

77 . See Preclinical Considerations, FOOD & Dru g ADMINISTRATION, http:// www.fda.gov/ohrms/dockets/ac/03/briefing/3976Bl_02_F-FDA-Tab%205.pdf [http:// perma.cc/QKF8-Z2BX]; N ondinical Safety Evaluation o f Drugs or Biologic Combina­ tions, Fo o d & D ru g A d m in is t r a t io n (March 2006), http://ww w.fda.gov/O FlRM S/ DOCKETS/98fr/05d-0004-gdl0002.pdf [http://perma.cc/C5HU-MUSR].

78. See Appendix B: Compliance Guidelines for Cooling Heat-Treated Meat and Poultry Products (Stabilization), U.S. DEPT. OF AGRICULTURE (updated June 1999), http://www.fsis.usda.gov/OPPDE/rdad/FRPubs/95-033F/95-033F_Appendix%20B.htm [http://perma.cc/GN8Z-6RTB].

79. See VlSCUSI, supra note 16, at 127. 80. George James, Perrier Recalls Its Water in U.S. After Benzene Is Found in Bottles,

N.Y. TIMES, Feb. 10, 1990, http://www.nytimes.eom/1990/02/10/us/perrier-recalls-its- water-in-us-after-benzene-is-found-in-bottles.html [http://perma.ee/UWH3-84BA].

No. 3] Behavioral Public Choice 995

U.S. death toll was very low.81 In a similar overreaction, the 2014 Ebola threat led to the temporary closure of some U.S. schools as a precautionary measure that appeared to be disproportionate to the actual level of the risk.82 In Part V, we discuss m any other novel or emerging risks that also entail aspects of risk ambiguity because of their novelty.

It is challenging to assess the soundness of a policy response to terrorism risk. The policy response to the September 11, 2001, attack has been considerable, including increased screen­ ing of airline passengers, targeting of passengers based on the perceived risks that they pose, and surveillance of phone calls and emails. These m easures surely have had some benefits that are difficult to quantify, but they have also generated some costs to civil liberties and privacy.83

The difficulty posed by small probabilities such as terrorism risks is that, because the threats are fairly new, there is not a sufficiently extensive body of data that can be used to assess the risks. The level of these risks has escalated since before Sep­ tem ber 11, w hen m ost people w ould have assessed the risks as close to zero. The pertinent inform ation gained from the p o st- September 11 period is not enough to form an accurate risk judgm ent, given the low probability of terrorist attacks. The m ost that can be hoped for is that the U.S. D epartm ent of H om eland Security and other involved agencies assess the risks in a reasonable m anner and do not fall prey to the tenden­ cy to display an exaggerated response to increases in risk. Un­ fortunately, it is not feasible to assess the influence of such bi­ ases, as the regulatory im pact analyses for hom eland security policies tend to lack the level of detail needed to determ ine w hether these policies represent judicious responses to a haz­ ard or are a reflection of public pressures that foster excessive

81. There were only three reported U.S. cases from 1989 to 2013. Joseph E. Aldy & W. Kip Viscusi, Risk Regulation Lessons from Mad Cows, in 8 FOUND. & TRENDS IN M icroeconomics 301-02 (2013).

82. See Jennifer Steinhauer, In U.S., Fear of Ebola Closes Schools and Shapes Politics, N.Y. TIMES, Oct. 19, 2014, http://www.nytimes.com/2014/10/20/us/fear-of-ebola- closes-schools-and-shapes-politics.html?_r=0 [http://perma.cc/9J97-JUQN].

83. See Susan Stellin, Airport Screening Concerns Civil Liberties Groups, N.Y. TIMES, Mar. 11, 2013, http://www.nytimes.com/2013/03/12/business/passenger-screening- system-based-on-personal-data-raises-privacy-issues.html?pagewanted=all [http:// perma.cc/EL6K-D2UG].

996 Harvard Journal of Law & Public Policy [Vol. 38

responses. Instead of m aking a risk estimate, the D epartm ent of H om eland Security often relies on a breakeven analysis to as­ sess how great a risk m ust be to w arran t the policy. Given the behavioral biases involved and the general proclivity to over­ react to small risks and new ly em erging risks, there should be increased attention to the desirability of these policies to the extent that national security concerns permit.

V. Risk Ambiguity Aversion And Excessive Regulations O f Dimly Understood Risks

A com m on anom aly in risk-taking behavior is the reaction to am biguous risks, that is, risks whose m agnitudes are not well understood. Daniel Ellsberg analyzed this phenom enon, now know n as the Ellsberg Paradox, by docum enting people's pref­ erence for know ing the probabilities of w inning a prize.84 Sub­ sequent research has docum ented an analogous phenom enon for losses, as people are averse to the uncertain probabilities w hether it is w ith respect to the chance of w inning a prize or the chance of suffering a loss.85 In each case, there is aversion to undertaking a lottery that poses an am biguous risk.

The following example illustrates the phenom enon. Suppose autom obile A poses a well-know n defect risk of 2/1,000 over the lifetime of the vehicle. A utom obile B is new er to the m ar­ ket, and there is a 50-50 chance that the defect risk for autom o­ bile B is either 1/1,000 or 3/1,000, generating an expected defect risk of 2/1,000. Each of these cars consequently poses an aver­ age defect risk of 2/1,000 and should be view ed as posing equivalent risks. However, people generally exhibit a form of am­ biguity aversion that makes the precisely known risk of autom o­ bile A less fearsome than the uncertain risk of automobile B.

Am biguity aversion is a form of irrational behavior and should not be confused w ith risk aversion in which people are averse to the risk of incurring a large loss. People m ight quite rationally choose to purchase a hom eow ners insurance policy for $1,000 even though the expected losses are only $800. A

84. See Daniel Ellsberg, Risk, Am biguity, and the Savage Axioms, 75 Q. J. OF ECON. 643, 669 (1961).

85. See Colin Cam erer & M artin Weber, Recent Developments in Modeling Prefer­ ences: Uncertainty and Am biguity, 5 J. RISK & UNCERTAINTY 325, 3 5 9 -6 0 (1992).

No. 3] Behavioral Public Choice 997

very low probability of a catastrophic loss w ould make such insurance attractive to a risk-averse person and could be quite rational. W hat w ould not be rational is to be sw ayed by the u n ­ certainty regarding the probability. Thus, learning that there is a definite 1/10,000 chance that lightning will hit the house should make insurance just as attractive as having an uncertain risk estim ate for which the average risk is 1/10,000.

G overnm ent policies frequently reflect this am biguity aver­ sion w ith novel risks. For example, court rulings tend to dem onstrate a bias against innovation and the attendant uncer­ tainties of novel drug products. In situations w here there are adverse health effects from new drugs, the courts are m ore likely to levy sanctions against the producer.86 This bias on be­ half of the public is also reflected in product liability case ex­ perim ents using a sample of judges participating in a legal ed ­ ucation program . The judges considered hypothetical cases involving novel drugs and their associated liability risks. W hen given a choice betw een a new d ru g posing an uncertain risk or another d ru g w ith a higher know n risk, m ost of the judges rec­ om m end that the com pany m arket the latter drug.87

Another instance of ambiguity aversion involves genetically modified organisms (GMOs), which "are organisms (i.e. plants, animals or microorganisms) in which the genetic material (DNA) has been altered in a way that does not occur naturally by m ating and/or natural recombination."88 GMOs have come under fire and are increasingly subject to potential regulation throughout the world. Engineered corn is a prom inent example of a GMO product. Although the regulation of GMOs is more extensive in Europe than in the United States, some U.S. compa­ nies have begun labeling foods as GMO-free.89 In addition, there has been increasing pressure for the governm ent to regulate

86. See W. Kip Viscusi, How Do Judges Think about Risk?, 1 AM. L. & ECON. REV. 26, 56 (1999).

87. See id. at 57. 8 8 . Food safety: Frequently asked questions on genetically modified foods, W O R L D H e a l t h

O R G A N IZ A T IO N , http://www.who.int/foodsafety/areas_work/food-technology/faq- genetically-modified-food/en/ [http://perma.cc/24EZ-T935].

89. For example, the Kettle Brand Krinkle Cut Potato Chips have the label "NON GMO Project Verified." T h e NON-GMO PROJECT, http://www.nongmoproject.org/ find-non-gmo/search-participating-products/search/?brandId=75 [http://perma.cc/ PWN2-7JMP],

998 Harvard Journal of Law & Public Policy [Vol. 38

GMOs. Prominent consumer-oriented groups such as Consumer Reports are calling for m andatory product labeling of GMOs.90 In 2014 some states had ballot referenda to require GMO labeling.91 Critics have characterized GMO foods as being very risky p ro d ­ ucts of biotechnology, labeling them "Frankenfoods."92 The poli­ cy trade-off involved is that GMOs may pose uncertain risks that currently are believed to be low in m agnitude, but they reduce the cost of producing agricultural products, which in turn low­ ers food prices and promotes better nutrition.

N anoparticles are very fine particles betw een one and 100 nanom eters in size. These novel com ponents are ingredients in a variety of products, such as sunscreens and polymers. As w ith GMOs, nanoparticles are on the scientific frontier and pose uncertain risks. They generate potentially substantial ben­ efits b u t have caused concern am ong environm ental groups. The EPA recently considered a regulatory proposal to require m anufacturers of products containing nanoscale chemicals to give prior notice to the EPA before any use of these chemicals, b u t the agency has since scaled back this proposal to a less burdensom e data collection requirem ent.93 The EPA also regu­ lates nearly all new nanochemicals.94

The regulatory approach to these and related uncertainties frequently relies on the precautionary principle. Although there are m any variants of the precautionary principle, in general the principle places a weight on the worst-case outcome (better safe than sorry) and places the burden of proof on the m anufacturer to show that the product is safe.95 From a statistical standpoint, the m ost one can ever do is to reject the null hypothesis of zero

90. See Rebecca Kern, Consumer Reports: G M O Labeling Should Be Mandated on Packaged Foods, 42 Pr od. Safety & Liab. Re p . (BNA) 1181 (Oct. 20,2014).

91. Rebecca Kern, Oregon, Colorado Ballot Measures A m ong State Efforts to Require G M O Labeling, Bloomberg BNA Product Safety & Liability Rep. 42 PSLR 1181 (Oct. 20, 2014).

92. See generally HENRY MILLER & GREGORY CONKO, THE FRANKENFOOD MYTH: H o w P ro test a n d P o l u ic s Th r e a t e n t h e Bio t e c h R e v o l u t io n (2004).

93. See Pat Rizzuto, Narrow TSC A Proposal on Nanomaterials Sent to O M B in Place o f Broader EPA Rule, 42 Pr o d . Safety & Lia b. Rep. (BNA) 1149 (Oct. 9,2014).

94. See Pat Rizzuto, Nearly A ll New Nanoengineered Chemicals Are Regulated by EPA Due to Potential Risks, 42 PROD. SAFETY & LIAB. REP. (BNA) 1183 (Oct. 16,2014).

95. See Cass R. Sunstein, Beyond the Precautionary Principle, 151 U. Pa . L. Rev. 1003-04 (2003).

No. 3] Behavioral Public Choice 999

risk rather than proving that something poses zero risk. Moreo­ ver, even extensive testing addresses only the presence of immi­ nent hazards. The fact that there is no evidence of a nonzero risk based on current testing does not preclude the potential for risks that might emerge after a latency period. An example of such deferred risks is the hazards associated with drugs given to pregnant women. One such drug is diethylstilbestrol (DES), which first caused birth defects in the children of mothers who took the drug and then caused second-generation birth defects in the babies of the children of the mothers who took the drug.96

Government policies frequently err on the side of safety by avoiding uncertain risks, thus reflecting the biases found among individuals. We advocate instead that the mean risk should be the guide for single-period policy decisions. In situa­ tions of learning and potential adaptive behavior, the bias should be in favor of the uncertain prospect. If, for example, the uncertain drug proves to be beneficial, the patient can con­ tinue to use it. If the drug has an adverse effect or is ineffective, the patient can switch to an alternative drug. This desirability of ambiguity holds as well in situations where the risk of the adverse outcome is death.97

V I. B e h a v i o r a l R e s p o n s e s T o R e g u l a t i o n s

Government regulations generally do not dictate policy out­ comes. Rather, they establish requirements and incentive struc­ tures that may or may not generate the intended results. De­ spite the government's interest in behavioral economics issues, policymakers often seem to overlook the crucial role of this in­ termediate behavioral response.

People respond to changes in prices, whether they are due to government policies or to markets. Demand curves for prod­ ucts are a downward function of the price. Should consumers, for example, devote their resources to buying organic fruits

96. N a t' l Cancer Inst., Diethylstilbestrol (DES) an d Cancer, http:// www.cancer.gov/cancertopics/factsheet/Risk/DES[http://perma.cc/EA9Z-MEHZ].

97. These issues are explored in greater detail in W. Kip Viscusi & Richard J. Zeckhauser, Regulating Ambiguous Risks: The Less Than Rational Regulation of Pharma­ ceuticals, J. LEGAL Stud, (forthcoming) (SSRN, Working Paper No. 2392070, 2014), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392070 [http://perma.cc/QR8X- LZ3S],

1000 Harvard Journal of Law & Public Policy [Vol. 38

and vegetables in order to reduce the cancer risk from pesti­ cides? A lthough affluent consum ers m ay not be price sensitive, the greater cost of organic food products m ay encourage con­ sum ers to have fewer fresh fruits and vegetables in their diet. For this reason, cancer researchers suggest that it is m ore im ­ p o rtan t from a cancer reduction standpoint to consum e fruits and vegetables than to be concerned w ith the relatively m inor risks from pesticides on nonorganic produce.98

In some instances, the failure of people and firms to take the actions desired by the regulators arises from inadequate incen­ tives to comply w ith costly regulations. The entire set of stan d ­ ards initially enacted by the O ccupational Safety and Health A dm inistration (OSHA) involved safety requirem ents that im­ posed costly expenditures for firms to come into compliance. H owever, the enforcem ent accom panying the som etim es rigid standards involved low probabilities of inspection coupled w ith m odest fines, giving firms very little incentive to comply w ith the regulations. The m any studies docum enting the negli­ gible or m odest effect th at this agency has had on safety often trace its poor policy perform ance to inadequate incentives to lead firms to comply w ith the standards.99

However, even if compliance is ensured, there may be counter­ productive behavioral responses. One type of behavioral response can be traced to the way in which regulations alter the benefit-cost trade-offs that people face. For example, the use of automobile seat belts lowers the expected accident costs to drivers compared to w hat they w ould be in the absence of seat belt use. Once buck­ led, however, the safety provided by the seat belt gives drivers a greater incentive to drive faster to reduce travel time, thereby di­ minishing the beneficial effect of the seat belt requirement and potentially leading to greater numbers of deaths of pedestrians and motorcyclists.100

A related phenom enon linked to individual m isperceptions is the lulling effect of governm ent safety measures. For in-

98. See Bruce N. Ames et al., Ranking Possible Carcinogenic Hazards, 236 SCIENCE 271, 273 (1987).

99. See, e.g., W. Kip Viscusi, Fatal Tradeoffs: Public a n d Private Responsi­ bilities for Risk 198 (1992).

100. See Sam Peltzman, The Effects o f Automobile Safety Regulation, 83 J. POL. ECON. 677, 677 (1975).

No. 3] Behavioral Public Choice 1001

stance, regulators often tout as "childproof" the safety caps for potentially dangerous products such as prescription drugs and automobile antifreeze. Some parents, believing that the caps will protect their children from exposure to these hazards, have become more lax about safety. The result has been an increase in child-related poisonings that in some cases has offset the beneficial effect of the caps. More generally, the reduced pre­ cautions resulting from the behavioral response to the caps has muted the effect of the caps so that there is no evident benefit from the regulation in reducing child poisonings.101

Although government agencies have not acknowledged the existence of a counterproductive impact of safety caps, private companies have been more cautious. Before introducing child- resistant devices on cigarette lighters, Bic commissioned a field study to ensure that the device would be safety enhancing. Surveyed parents indicated that they would be less concerned about safety in the presence of this safety mechanism. Nonethe­ less, the field test indicated that, although parents were more likely to give children access to a lighter with the safety mech­ anism, the safety device was a sufficient deterrent such that on balance the device was safety enhancing.102

VII. Failure To Exploit Behavioral Insights

Exploiting the insights derived from behavioral economics can indeed advance the regulatory response to market failures. For example, the externalities of carbon emissions are highly dependent on individual decisions about energy usage, which are influenced by information on peer comparisons;103 patients' adherence to taking prescribed drugs affects health care costs;104 and people's responsiveness to evacuation warnings affects the losses from natural disasters.105 The menu of policy

101. W. K ip Viscusi, The Lulling Effect: The Impact o f Child-Resistant Packaging on Aspirin and Analgesic Ingestions, 74 AM. ECON. REV. 324, 326-27 (1984).

102. See W. Kip Viscusi & G erald Cavallo, Safety Behavior and Consumer Responses to Cigarette Lighter Safety Mechanisms, 17 Managerial & Decision Ec o n . 441,450 (1996).

103. See A y res e t al., supra n o te 60. 104. See N iteesh K. C h o u d h ry et al., Full Coverage fo r Preventive Medications after

Myocardial Infarction, 365 NEW ENG.]. MED. 2088, 2093 (2011). 105. See M atth ew E. K ahn, The Death Toll from N atural Disasters: The Role o f In­

come, Geography, and Institutions, 87 REV. ECON. & STAT. 271,283 (2005).

1002 Harvard Journal of Law & Public Policy [Vol. 38

options sometimes includes attem pts to exploit the role of indi­ vidual behavior, but opportunities to capitalize on the role of behavioral linkages are often not fully recognized.

The labeling policy for motor vehicles discussed above illus­ trates the potential use of a behavioral approach to foster the regulatory objective of energy conservation coupled with a lack of confidence in its efficacy. In 2011, the EPA instituted a new label­ ing system for automobile fuel efficiency that would convey in­ formation to consumers about the private energy costs of the ve­ hicle as well as the social consequences in terms of traditional pol- pollutants and greenhouse gas emissions.106 Undertaking focus group studies as in EPA's study of energy efficiency labeling is not a substitute for scientific tests of the likely efficacy of labels, as they only provide an informal group that is subject to the influ­ ence of the discussion leader and particularly influential partici­ pants, a phenomenon known as "the loudm outh problem ."107 After m andating a new labeling rule, the EPA subsequently is­ sued m andatory fuel efficiency requirements without considering the effects of the labeling rule, thus resorting to a command-and- control approach. In effect, the agency displayed an implicit lack of confidence in behavioral policy mechanisms.

The FDA's proposed graphic cigarette w arnings also reflect an underlying lack of confidence in policies about w arnings that are in the spirit of "nudge" interventions. Since 1966 ciga­ rette packs have included m andated hazard w arnings.108 The content of the w arnings has evolved over time, b u t available evidence indicates that people are well inform ed of the dangers of sm oking cigarettes. Moreover, evidence in the literature in­ dicates that to be effective, w arnings m ust provide new infor­ mation. Despite this evidence on inform ed behavior, the FDA proposed a series of graphic w arnings for cigarettes in re­ sponse to a legislative requirem ent that the agency develop such warnings. This proposal w as overturned by the U.S. C ourt of A ppeals for the D.C. Circuit, which concluded that there w as not "a shred of evidence" that the graphic w arnings

106. S e e 49 C.F.R. § 575.401 (2012). 107. P hilip Kotler & Kevin Lane Keller, M arketing Mana gem ent 102 (14th

ed. 2012). 108. For a history of cigarette w arnings, see generally W. KIP VlSCUSI, SMOKING:

M aking the Risky Decision (1992).

No. 3] Behavioral Public Choice 1003

w ould lead to any reduction in sm oking prevalence rates, even based on the agency's own regulatory impact analysis.109 Thus, a regulatory intervention intended to alter behavior in effect ig­ nored the behavioral evidence on its likely efficacy. The court concluded that there w ould be no apparent benefit to outweigh the infringement on corporate speech caused by the warnings.

VIII. Asymmetric Attitudes Toward Gains an d Losses

From the standpoint of the benefit-cost analysis fram ew ork that we advocate, losses and gains should be treated sym m etri­ cally. Thus, if a prescription d ru g leads to an increase of five expected deaths b u t also a reduction of ten expected deaths, the net effect is to reduce the num ber of expected deaths by five.

Such balanced arithm etic m ay not, how ever, be consistent w ith patterns of individual preferences. Losses m ay loom m uch greater than gains. A suitable m easure of the difference in atti­ tudes betw een losses and gains is the m onetary value associat­ ed w ith the change in the risk. People are willing to pay m uch less for a reduction in risk than the am ount that they require for a com parable risk increase. Thus, they value the loss associ­ ated w ith risk increases m uch more highly than the gain from risk decreases. Reviews of the gap betw een the willingness to pay for products and environm ental goods and the counterpart willingness to accept values for losing these same products or environm ental goods indicate average ratios of willingness to accept to willingness to pay as high as 7 in one com prehensive review 110 and 6.23 in a similar study.* * 111

This type of phenom enon is em bedded in governm ent poli­ cies for products w ith com peting risk effects, such as prescrip­ tion drugs. The em phasis on adverse consequences is incorpo­ rated in the Hippocratic Oath: Primum non nocere, or, first, do no harm . This em phasis sets the tone for regulation by the FDA. If the starting point is to avoid harm , then there will be a

109. R.J. Reynolds Tobacco Co. v. FDA, 696 F.3d 1205,1219 (D.C. Cir. 2012). 110. John K. H orow itz & Kenneth E. McConnell, A Review ofW TA /W T P Studies,

44 J. ENVTL. ECON. & M G M T. 426, 428 (2002). 111. Tuba Tungel & James K. H am m itt, A new meta-analysis on the WTP/WTA

disparity, 68 J. ENVTL. ECO N . & M GMT. 175,181 (2014).

1004 Harvard Journal ofLaiv & Public Policy [Vol. 38

greater em phasis on losses than on gains. This approach will lead to the failure to approve drugs that on balance m ay en­ hance health b u t have com peting effects.

The reluctance to provide such approval is particularly great w hen the losses and gains arise in a quite different manner. If the FDA approves a drug that leads to harm, that is an error of commission. If comparable expected harm s result from the FDA failing to approve a drug, that is an error of omission, and these losses will tend to receive less weight. Notably, the losses often are m ore visible in the case of errors of commission. The patients who die after taking a dangerous drug are identified lives. By contrast, the patients whose lives are lost because they failed to get the benefits of a promising new drug often cannot be identi­ fied. M ost of us do not know which diseases will affect us, so the small probabilistic stake that each of us has in a drug that might or m ight not help us in the future dam pens our concern w ith its availability. Sometimes, a well-defined patient constituency that can lobby for differential treatm ent can overcome this insuffi­ cient attention to beneficial new drugs w ith competing risk ef­ fects. For example, after vigorous lobbying by AIDS groups, the FDA p u t patient access to these drugs on a faster track.

IX. Inconsistent Trade-Offs

A potential source of individual irrationality is a lack of con­ sistency in decisions across different dom ains of decision. Ob­ taining a payday loan at highly inflated interest rates rather than exploiting one's rem aining line of credit on a credit card might, for example, be a signal of a consum er's financial irrationality if the consumer could obtain the needed funds at a lower cost. Be­ having in an inconsistent m anner makes the consumer worse off by imposing additional finance costs and taking away funds that the consumer could have used to advance personal welfare.

The counterpart inconsistent preference problem is potential­ ly of greater consequence for Congress and governm ent agen­ cies. Unlike the textbook consum er, w ho is assum ed to have a single set of preferences, there is no single set of preferences guiding governm ent policies. M embers of Congress often ad ­ vance their narrow ly defined parochial interests, as evidenced by the "bridge to now here" and other pork barrel projects that bring resources back to the congressperson's hom e district.

No. 3] Behavioral Public Choice 1005

Similarly, different agencies are not guided by a well-defined national interest b u t have specific legislative m andates. The result is that agencies tend to develop tunnel vision w hereby the particular policy concerns of the agency are of dom inant interest. The Clean Air A ct's complete disregard for costs in setting am bient air quality standards is perhaps the m ost ex­ trem e example of institutionalized myopia. U nfortunately, tunnel vision is not unique to air pollution regulations. The U.S. Suprem e C ourt has rejected efforts to require OSHA to undertake policies that balance benefits and costs because the agency's legislative m andate requires that the agency ensure w orker safety if doing so is feasible, irrespective of the cost.112

The ram pant inconsistency in governm ent policies is exempli­ fied in the widely varying costs per expected life saved across governm ent agencies.113 A lthough there have been several tallies of such costs, here we will focus on the Office of M anagement and Budget listing that U.S. Supreme Court Justice Stephen Breyer highlighted in his commentary on regulatory policies. Rather than spending the same cost per life saved in different domains, the costs often vary quite widely. The regulations from the D epartm ent of Transportation tend to be quite cost-effective, w ith costs per life saved on the order of $3 million or less per life saved. However, at the high end are regulations such as the EPA hazardous waste listing for w ood-preserving chemicals, w ith a cost per life saved of $5.7 trillion. Also at the high end is the EPA Superfund program , which has a m edian cost per case of cancer averted of $6.4 billion.114 Of course, in these extreme cases, the agency is not in fact spending billions on the particular policy option. But when the expected lives saved denom inator is very small because of the negligible safety benefits of the policy, the cost per life saved figure escalates.

These w ildly varying levels of efficacy highlight clear-cut opportunities to make governm ent policies m ore rational. We m ake two principal observations. First, these vast differences in cost effectiveness dem onstrate that, for the same level of costs,

112. See Am. Textile Mfrs. Inst. v. D onovan, 452 U.S. 490, 491 (1981). 113. The rationality reference point is for the marginal costs per life saved to be

equated across policy domains. Available data are generally in terms of average costs per life saved, which also are instructive in that they highlight clear-cut inefficiencies.

114. H am ilton & VISCUSI, supra note 69, at 125.

1006 Harvard Journal o f Law & Public Policy [Vol. 38

governm ent policies could save m ore lives by redirecting com­ paratively ineffective regulatory expenditures to agencies that have lower costs per life saved for their regulations. Second, there are real opportunity costs to wasteful expenditures. Funds that are squandered on ineffective policies could be used instead by consum ers to prom ote their well-being. Indeed, be­ cause having additional financial resources enhances one's health, there is a health risk trade-off associated w ith inefficient regulatory policies, so that on balance such policies m ay be harm ing health rather than enhancing it.115

X. Conclusion

In recent years, there has been a shift in the traditional eco­ nomics approach of justifying governm ent interventions based on the existence of m arket failures such as externalities, public goods, asym m etric information, and m arket power. Influenced by psychological studies that find systematic biases in how in­ dividuals m ake decisions, the field of behavioral economics has led to recom m endations for governm ent policies. These rec­ om m endations frequently come in the form of soft regulations or "nudges," to correct behavioral shortfalls that lead in d iv id u ­ als to m ake decisions that cause them selves harm.

The behavioral economics findings that docum ent systematic anomalies that lead to irrational decisions are im portant contri­ butions to the field of economics. While these biases can be justi­ fications for governm ent intervention, our evidence suggests that a fram ework of behavioral public choice should take into account that policymakers and regulators are themselves behav­ ioral agents subject to psychological biases, and further, that they are public agents subject to political pressures and biases endemic in the political process. The behavioral paradox is that governm ent policies are subject to a wide range of behavioral failures that in m any cases become incorporated in the overall policy strategy. We have docum ented m any instances in which governm ent policies institutionalize rather than overcome be­

l l s . For a discussion of the various risk-risk models in economics, see W. Kip Viscusi, The Value of Individual and Societal Risks to Life and Health, in 1 HANDBOOK of the Ec onom ics of Risk a n d Uncertainty 385, 432-35 (W. Kip Viscusi & Mark J. Machina eds., 2014).

No. 3] Behavioral Public Choice 1007

havioral anomalies, and in some cases, attempt to justify ineffi­ cient "hard" regulations, such as mandates, based on the weakly supported need to correct individual irrationality.

Given that government policymaking is not immune to behav­ ioral failures, we suggest a more cautious approach, one that in­ corporates the insights of behavioral economics in a way that is less dismissive of the merits of individual choice. Rather than assuming that any class of behavioral anomalies constitutes a sufficient rationale for overriding consumer preferences, gov­ ernment agencies should assess the empirical prevalence and magnitude of the behavioral failings as they specifically pertain to the policy context. If there are apparent anomalies, there should also be an exploration of whether these deviations from economics norms stem from legitimate differences in prefer­ ences or are in fact errors that, if corrected, would enhance wel­ fare. Thus, in the design of subsequent interventions, there should be increased recognition of the legitimate differences in consumer preferences that may account for purported behavior­ al failings. Policymakers should also recognize the behavioral failings likely to be incorporated in their policy responses due to public pressure or the behavioral failures of policymakers. Fun­ damental behavioral failures are often embedded in the current policy strategies. Any critical review of private behavioral fail­ ures should be accompanied by a comparable assessment of government failures.

Copyright of Harvard Journal of Law & Public Policy is the property of Harvard Law School Journals and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.