Are you smart enough to know what to eat? A critique of behavioural economics as justification for regulation

With the rise of behavioural economics has come the belief that decision-making biases justify paternalistic policies. Such views challenge the notion of consumer sovereignty and the validity of traditional approaches of economic welfare analysis. While behavioural economics might improve the effectiveness of policies that are already justified on some other market-failure grounds, this article argues that the existence of cognitive failures, alone, do not justify government regulation. If one abandons the idea that consumers know what is in their best interest, judging the merits of policies becomes arbitrary and reflects only what a paternalist wants for others. The typical behavioural economic experiment occurs with college students devoid of real-world context. The biases found in such setting may not extrapolate well to conditions where people have more experience and knowledge, and where they can learn from past mistakes. Even when behavioural biases persist in the ‘real world’, consumers face incentives to engage in activities that protect them from the adverse consequences of the biases, and public policies that shield people from such consequences reduce incentives to self-regulate. The article concludes with some ideas for future research and a discussion of the merits of freedom of choice.