Regulation for Conservatives: Behavioral Economics and the Case for “asymmetric Paternalism”

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 boundedly rational. The boundedly 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 boundedly 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 reframing 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. The authors state that the status quo bias effects mostly the boundedly 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 boundedly 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 boundedly 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 boundedly 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 boundedly 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 boundedly rational, who may not be acting in their own best interest. 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