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“It is not a case of choosing those [faces] which, to the best of one's judgment, are ... S C I E N C E. N O . 1. Taxi Drivers and Beauty Contests by Colin F. Camerer.
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Our thanks to participants at the University of Pennsylvania Law School Sympo- sium on ..... substantial body of literature examines how people with self-control problems ..... bias, a substantial fraction of 401(k) participants hired under auto- .... 65 James M. Lacko et al., Federal Trade Commission Bureau of Economics Staff.
Professor Camerer is the Rea and Lela Axline Professor of Business Economics, California Institute of Technology; Professor Issacharoff is the Harold R. Medina Professor of Procedural Jurisprudence, Columbia Law School; Professor Loewenstein is a Professor of Economics and Psychology, Carnegie Mellon University; Ted O’Donoghue is an Assistant Professor of Economics, Cornell University; and Professor Rabin is a Professor of Economics, University of California at Berkeley. Our thanks to participants at the University of Pennsylvania Law School Symposium on Preferences and Rational Choice, the University of Southern California Olin Workshop, the Columbia Law School faculty workshop, the Columbia Center for Decisional Sciences Workshop, and the Russell Sage Foundation roundtable for their comments. Ted O’Donoghue and Matthew Rabin thank the National Science Foundation for its financial support through grants SES-0078796 and SES-0079266. The authors received helpful comments from Ehud Kamar, Ed McCaffrey, Kristin Madison, and Ed Rock. Michael Fischer, Dina Hamerman, and Todd Lundell provided excellent research assistance.
See, e.g., Christine Jolls et al., A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1545 (1998) (concluding that individuals realistically display only bounded rationality, bounded willpower, and bounded self-interest; and calling for a more complex, and accurate, economic analysis of law); Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 CAL. L. REV. 1051, 1059 (2000) (finding that individuals frequently “fail to maximize their expected utility,” and identifying behavioral factors that may complicate the cost-benefit analysis by individuals on which much of rational choice theory depends). 2 Many regulations are ambiguous in terms of whether they are better classified as paternalistic or aimed at counteracting externalities. “Helmet laws” for motorcyclists, for example, probably reflect a mixture of paternalistic motivations—concerns that motorcyclists who don’t wear helmets fail to truly appreciate the risks they are taking— and externality motivations—chiefly, that society will have to pick up the tab for medical expenses created by accidents involving motorcyclists who don’t wear helmets. 3 This idea has been presented under the rubric of “cautious paternalism.” See Ted O’Donoghue & Matthew Rabin, Procrastination in Preparing for Retirement, in BEHAVIORAL DIMENSIONS OF RETIREMENT ECONOMICS 125, 150 (Henry J. Aaron ed., 1999) (describing how policies based on “cautious paternalism” can be “valuable if people are making errors, but . . . have relatively small costs if people are fully rational”) [hereinafter O’Donoghue & Rabin, Procrastination]; cf. Ted O’Donoghue & Matthew Rabin, Risky Behavior Among Youths: Some Issues from Behavioral Economics, in RISKY BEHAVIOR AMONG YOUTHS: AN ECONOMIC ANALYSIS 29, 31 (Jonathan Gruber ed., 2001) (advocating a principled method to study when and how youths make errors, which interventions mitigate errors, and when interventions help more than they harm).
Cf. infra Part III.B (considering proposals embodying varying degrees of asymmetric paternalism that will assist irrational individuals to make better decisions). 5 Rogers v. Higgins, 48 Ill. 211, 217 (1868), available at 1868 WL 5084, at *4. 6 See Eyal Zamir, The Efficiency of Paternalism, 84 VA. L. REV. 229, 230 (1998) (providing examples of paternalistic regulations focusing on those considered to be of limited capacity). 7 See Anthony T. Kronman, Paternalism and the Law of Contracts, 92 YALE L.J. 763, 778-84 (1983) (arguing that the possibilities of regret and disappointment justify laws against “self-enslavement”); Eric A. Posner, Contract Law in the Welfare State: A Defense of the Unconscionability Doctrine, Usury Laws, and Related Limitations on the Freedom to Contract, 24 J. LEGAL STUD. 283, 312-14 (1995) (detailing historical justifications for usury laws). 8 See, e.g., Holden v. Hardy, 169 U.S. 366, 393-98 (1898) (upholding maximum hours legislation regulating the underground mining industry). 9 Cf., e.g., 75 PA. CONS. STAT. § 1503(a) (1996) (prohibiting the issuance of drivers licenses to categories of individuals who are “user[s] of alcohol or any controlled substance” and persons who have been adjudged “to be afflicted with or suffer from any mental disability or disease”).
ity,” rather than the universal rationality envisioned by rational choice economics). 13 For a general discussion of applications of Bayes’s law, see DOUGLAS G. BAIRD ET AL., GAME THEORY AND THE LAW 79-121 (1994). 14 See, e.g., CHOICES, VALUES, AND FRAMES, at x-xvii (Daniel Kahneman & Amos Tversky eds., 2000) (explaining the editors’ desire to compile literature that would expand and “get right” the prospect theory of decision making); Colin Camerer & George Loewenstein, Behavioral Economics: Past, Present and Future, in ADVANCES IN BEHAVIORAL ECONOMICS (Colin Camerer et al. eds., forthcoming 2003). 15 See, e.g., Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, in JUDGMENT UNDER UNCERTAINTY: HEURISTICS AND BIASES 3, 4 (Daniel Kahneman et al. eds., 1982) (arguing that “representativeness heuristic[s], in which probabilities are evaluated by the degree to which A is representative of B,” lead to “serious errors, because similarity, or representativeness, is not influenced by several factors that should affect judgments of probability”). 16 See, e.g., Herbert A. Simon, A Behavioral Model of Rational Choice, 69 Q.J. ECON. 99, 103-10 (1955) (using traditional economic analysis to develop “approximate” definitions of rationality that more closely reflect human behavior).
have shown that people exhibit systematic mispredictions about the costs and benefits of choices—for example, the degree of loss aversion exhibited in people’s choices seems inconsistent with their actual ex24 periences of gains and losses. It is such errors—apparent violations of rationality—that can justify the need for paternalistic policies to help people make better decisions and come closer to behaving in their own best interest. Behavioral economics extends economic theory in a manner similar to other successful extensions. The simplest models in economics assume perfect competition, perfect information, and perfect rationality. These boundary cases are obviously unrealistic much of the time, but can yield plain insight and useful approximations. Furthermore, gradually relaxing each of these strict assumptions has proved productive. Starting in the 1930s, economists began to relax the assumption of perfect competition by firms and agents, which helped to spawn a 25 wave of innovative research in industrial organization. Beginning in the 1970s, the assumption of perfect information was relaxed (in models of costly search, screening, signaling, and so forth) with enormous 26 success. Relaxing the assumptions of perfect rationality represents a logical next step in this productive progression. The scientific consolidation of psychological findings into a new brand of behavioral economic theory breathes new life into the rationales for paternalistic regulation discussed above. In a sense, behavioral economics extends the paternalistically protected category of “idiots” to include most people, at predictable times. The challenge is figuring out what sorts of “idiotic” behaviors are likely to arise routinely and how to prevent them, while imposing minimal restrictions on those who behave rationally.
ferent hypothesis). 24 See Tversky & Kahneman, supra note 19, at 1047-48 (finding that the introduction of a disadvantage tends to decrease the valuation a person places on something more than the introduction of an advantage tends to increase its value); see also Michael Strahilevitz & George Loewenstein, The Effect of Ownership History on the Valuation of Objects, 25 J. CONSUMER RES. 276, 285 (1998) (finding a duration-of-currentownership effect, “according to which selling prices increase as a function of how long an object has been owned”). 25 See generally George Loewenstein, The Fall and Rise of Psychological Explanations in the Economics of Intertemporal Choice, in CHOICE OVER TIME 3 (George Loewenstein & Jon Falster eds., 1992) (chronicling the evolution of economic thought). 26 See, e.g., THOMAS C. SCHELLING, CHOICE AND CONSEQUENCE 195-242 (1984) (applying strategic analysis and game theory to interactive problems in situations of incomplete information).
If bureaucrats design or implement the policy badly, due to their own rationality bounds or regulatory capture, then I will be large.
And occasionally, paternalistic policies could have “negative implementation costs.” For example, a policy might advocate that courts refuse to help enforce or entertain law suits regarding contracts that are deemed unwise; or a policy that provides for laws against hasty marriages could diminish the number of full-fledged divorce and child custody legal cases the states will eventually face. 29 Of course, asymmetrically paternalistic policies are not likely to yield Pareto improvements, wherein everyone benefits. In particular, to the extent that the owners of firms are not a random sample of consumers, asymmetrically paternalistic policies will tend to transfer surplus from the owners of firms to consumers.
Herrnstein, Loewenstein, Prelec, and Vaughan refer to externalities imposed on the self as “internalities.” R. Herrnstein et al., Utility Maximization and Melioration: Internalitites in Individual Choice, 6 J. BEHAV. DECISION MAKING 149, 150 (1993) (defining an “internality” as a within-person externality, “which occurs when a person underweighs or ignores a consequence of his or her own behavior for him or herself”). 31 See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 15-17 (3d ed. 1986) (defending the assumption of rationality in economic models of law). 32 See Gary S. Becker, A Theory of Competition Among Pressure Groups for Political Influence, 98 Q.J. ECON. 371, 372 (1983) (setting out the role of capture in directing public policy by analyzing how competition among pressure groups seeking political influence affects taxes, subsidies, and other political favors and reduces aggregate efficiency).
the phrase “economic judgment” for the phrase “health and diet” in the preceding analogy leads to a similar mix of information, persuasion, and regulation. The second purpose of introducing the concept of asymmetric paternalism is “positive” or “descriptive” rather than “normative” or “prescriptive.” Many economic analyses of law are explicitly positive or descriptive: these analyses try to explain how laws evolved to meet efficiency needs. The evolutionary quality of legal rules allows for legal regulation to gravitate toward socially useful forms even when their logic remains poorly articulated. If asymmetrical paternalism is socially useful, therefore, we might expect that instances of it would, in fact, have already evolved. Indeed, below we show that many existing regulations can, in fact, be interpreted as asymmetrically paternalis37 tic. It is hard to understand how such laws could promote efficiency in a world in which all agents are rational. An appealing way to explain how these laws came about is that the law reflects what we are calling asymmetric paternalism and uses it as a cost-benefit standard. In this sense, asymmetric paternalism complements the basic law and economics belief that the law tends to move toward efficient solutions. An attentiveness to minimizing costs to rational actors while maximizing benefits to boundedly rational actors fits well within a richer conception of efficiency. The third and final purpose for asymmetric paternalism is that it helps frame research conducted by social scientists interested in the law. Asymmetric paternalism, specifically as expressed in equation (1) above, provides a general framework for evaluating the efficiency and robustness of paternalistic policies. Consider, for example, a policy that requires patients to get a second opinion before undergoing a particular form of surgery. If a second opinion is always desirable, there will be some benefit to limitedly rational consumers, who get a second opinion when they otherwise would not, but little cost to rational consumers, who spontaneously seek out a second opinion (although there may be implementation costs as well as costs and benefits for insurance companies, surgeons, and hospitals). If a second opinion is not always desirable, there is a reduction in the benefits for the limitedly rational types and an increase in the costs for rational types. The example shows how the concept of asymmetric paternalism could be used to help specify the variables of key interest in evaluating paternalistic policies.
See infra Part III.B (setting forth examples).
biguity, in BEHAVIORAL LAW & ECONOMICS 168, 168-72 (Cass Sunstein ed., 2000) (analyzing possible reasons and theories for omission and commission biases). 41 See Thomas Gilovich & Victoria Husted Medevec, The Experience of Regret: What, When, and Why, 102 PSYCHOL. REV. 379, 391-92 (1995) (analyzing temporal patterns of regret and concluding that action produces greater regret in the short term while inaction produces more regret in the long term); Thomas Gilovich et al., Commission, Omission, and Dissonance Reduction: Coping with Regret in the “Monty Hall” Problem, 21 PERSONALITY & SOC. PSYCHOL. BULL. 182, 188 (1995) (finding that subjects are more regretful of actions taken than of actions forgone and thus are more likely to initiate remedial actions to compensate for the increased hurt in the short term); see also Kenneth Savitsky et al., Remembering and Regretting: The Zeigarnik Effect and the Cognitive Availability of Regrettable Actions and Inactions, 23 PERSONALITY & SOC. PSYCHOL. BULL. 248, 254 (1997) (proving that the Zeigarnik effect, defined as the tendency for people to remember incomplete tasks better than completed tasks because of a feeling of unresolved tension, may contribute to the temporal pattern of regret—that people tend to regret actions more in the short term but inaction more in the long term). 42 O’Donoghue & Rabin, supra note 22, at 103-24; see also Ted O’Donoghue & Matthew Rabin, Choice and Procrastination, 116 Q.J. ECON. 121, 122 (2001) (discussing how procrastination may be more severe when pursuing important, rather than unimportant, goals).
See, e.g., Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 91-95 (1989) (providing theories of how courts and legislatures should set default rules); Richard A. Epstein, Beyond Forseeability: Consequential Damages in the Law of Contracts, 18 J. LEGAL STUD. 105, 138 (1989) (arguing that current judicial attitudes, emphasizing expectation damages, should be set aside in favor of views based on tacit risk assumption and greater acceptance of freedom of contract due to greater precision and to advance the long-term welfare of contracting parties); Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967, 970 (1983) (stating that common law contract rules for mitigation are deficient due to their imprecision and the uncertain judicial treatment of contract provisions); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L.J. 615, 648 (1990) (explaining that in crafting contract default rules, the preference for expansive default rules may be more efficient, and that established theories fail to adequately account for strategic incentives in bargaining).
Eric J. Johnson et al., Framing, Probability Distortions, and Insurance Decisions, 7 J. RISK & UNCERTAINTY 35, 48 (1993). 45 Id. An alternative explanation for this phenomenon is that consumers regarded the regulators’ choice of default as expressing information about what was best. This explanation requires an ancillary assumption that either people believe their own state’s regulators more than the other state’s regulators or that it is costly to obtain information about the other state’s regulations. 46 See JAMES J. CHOI ET AL., FOR BETTER OR FOR WORSE: DEFAULT EFFECTS AND 401(K) SAVINGS BEHAVIOR 2 (Pension Research Council, Working Paper No. 2002-2, 2002) (finding that “automatic enrollment has a dramatic effect on retirement savings behavior”); Brigitte C. Madrian & Dennis F. Shea, The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, 116 Q.J. ECON. 1149, 1184 (2001) (discussing the impact of automatic enrollment in 401(k) savings plans and concluding that participation is higher among plans with automatic enrollment).
See STEVE FARKAS & JEAN JOHNSON, MILES TO GO: A STATUS REPORT ON AMERICANS’ PLANS FOR RETIREMENT 9 (1997) (finding three-quarters of those surveyed believed they should be saving more for retirement); B. Douglas Bernheim, Do Households Appreciate Their Financial Vulnerabilities? An Analysis of Actions, Perceptions, and Public Policy, in AM. COUNCIL FOR CAPITAL FORMATION, TAX POLICY FOR ECONOMIC GROWTH IN THE 1990S, 1, 1-30 (1994). 48 CHOI ET AL., supra note 46, at 13; Madrian & Shea, supra note 46, at 1153. 49 Madrian & Shea, supra note 46, at 1171. 50 See Thomas E. MaCurdy & John B. Shoven, Stocks, Bonds, and Pension Wealth, in TOPICS IN THE ECONOMICS OF AGING 61, 66 (David A. Wise ed., 1992) (considering whether, given historical returns, a hypothetical faculty member with a twenty-five-year investment horizon would be better off with an all-stock or an all-bond portfolio, and concluding that an all-stock portfolio was almost always better); see also Shlomo Benartzi & Richard H. Thaler, Myopic Loss Aversion and the Equity Premium Puzzle, 110 Q.J. ECON. 73, 73 (1995) (reporting “[t]he empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin”). 51 CHOI ET AL., supra note 46, at 13. 52 See id. at 22 (“[A]utomatic enrollment failed to dramatically raise wealth accumulation because of the conservative nature of the automatic enrollment defaults.”).
Shlomo Benartzi & Richard H. Thaler, Naive Diversification Strategies in Defined Contribution Saving Plans, 91 AM. ECON. REV. 79, 79 (2001). 54 Richard H. Thaler & Shlomo Benartzi, Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving 4 (Aug. 2001) (unpublished manuscript, on file with authors). 55 Id. 56 James J. Choi et al., Benign Paternalism and Active Design: A Natural Experiment in Savings 2 (Aug. 29, 2002) (unpublished manuscript, on file with authors). 57 Id. at 11 (finding that “the vast majority of the participants (80%) have remained in the plan through three pay raises,” dramatically increasing contribution rates). 58 See the Conclusion below for further discussion of whether we should expect the market to provide asymmetrically paternalistic policies.
See I.R.C. § 401(k)(3)(A)(ii) (2002) (“A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement unless . . . the actual deferral percentage for eligible highly compensated employees . . . bears a relationship to the actual deferral percentage for all other eligible employees.” (emphasis added)). 60 See Amos Tversky & Daniel Kahneman, Rational Choice and the Framing of Decisions, in RATIONAL CHOICE: THE CONTRAST BETWEEN ECONOMICS AND PSYCHOLOGY 67, 68 (Robin M. Hogarth & Melvin W. Reder eds., 1986) (arguing that “the logic of choice does not provide an adequate foundation for a descriptive theory of decision making”). 61 See Tversky & Kahneman, supra note 15, at 7-8 (detailing misconceptions of chance).
See, e.g., Timur Kuran & Cass R. Sunstein, Controlling Availability Cascades, in BEHAVIORAL LAW AND ECONOMICS, supra note 40, at 374, 374-76 (discussing ways in which the vividness of imagery distorts assessments of probability). 63 While some people might object on the ground that reminding people of how long the odds are only “ruins their fun,” this is true only if their “fun” is based on a misperception. Hence, irrespective of whether this objection is valid, it is not consistent with traditional rational choice objections to paternalism. 64 See generally Joseph P. Fried, Rent-a-Center Charged with Price Gouging, N.Y. TIMES, Aug. 23, 2001, at B8 (reporting that electronic equipment rented to the poor had base charges of approximately three times the suggested retail price); David Leonhardt, Economic View: TV’s, DVD’s: All Yours, but First Do the Math, N.Y. TIMES, Dec. 16, 2001, § 3, at 4 (claiming that rent–to-own companies selling to customers with little or no credit often mask the true cost of their products). 65 James M. Lacko et al., Federal Trade Commission Bureau of Economics Staff Report: Survey of Rent-to-Own Customers, at ES-1 (2000), available at http://www. ftc.gov/reports/index.htm. 66 Id. at ES-3 to ES-5.
See DAVID LAIBSON ET AL., A DEBT PUZZLE 2 (Nat’l Bureau of Econ. Research, Working Paper No. 7879, 2000) (“[A]verage [credit card] debt per household rises to over $6,000. . . . [A]t least 63% of all households with credit cards are borrowing (i.e., paying interest) on those cards.” (citation omitted)). 68 15 U.S.C. §§ 1601-1667f (2000). 69 Id. §§ 1601-1693. 70 Id. § 1601(a).
See, e.g., id. § 1639(a)(2) (requiring disclosure of the annual percentage rate, amount, and variance of monthly payments); WASH. REV. CODE ANN. § 19.146.030 (West 1999) (listing the required disclosure elements, including percentage rates, costof-credit reports, and conditions of lock-in agreements). 76 See, e.g., WASH. REV. CODE ANN. § 19.146.030(b) (West 1999) (containing an extensive list of items a mortgage broker must disclose). 77 See, e.g., COLO. REV. STAT. § 11-38-109 (2001) (providing an example of disclosure necessary in a reverse mortgage). 78 See, e.g., CAL. INS. CODE § 778.4 (West 1993) (detailing what information must be provided by an insurance broker). 79 See, e.g., MONT. CODE ANN. § 31-1-818 (2001) (explaining the required disclosures for title loan agreements). 80 See, e.g., 9 V.I. CODE ANN. § 142 (1998) (detailing consumer protection disclosures for home equity loans). 81 See, e.g., FLA. STAT. ANN. § 520.73 (West 1997) (listing information that must be disclosed for home improvement loans). 82 See, e.g., HAW. REV. STAT. § 476-4 (1993) (specifying the requirements for credit sale contracts). 83 See 12 C.F.R. § 213.1 (2001) (addressing the “[a]uthority, scope, purpose, and enforcement” of Regulation M).
See, e.g., HAW. REV. STAT. § 481L-2 (Supp. 2001) (listing the warnings a retail lessor is required to disclose to the lessee in the lease agreement); N.H. REV. STAT. ANN. § 361-D:4 (1995) (declaring certain warnings that must be included in motor vehicle leasing agreements). 85 Some have disparagingly referred to this as the “Snackwell Effect,” named for the fat-free cookie that appears to induce unrestricted consumption. See Catherine Censor Shemo, Fake Fats, Real Threat, VEGETARIAN TIMES, Feb. 1997, at 20 (describing effect of dieters being lulled by misunderstood food labeling information). Nor is there a clear health effect from greater nutritional information. Cf. Daniel Goleman, Eating Disorder Rates Surprise the Experts, N.Y. TIMES, Oct. 4, 1995, at C11 (“New studies suggest that both anorexia and bulimia are twice as frequent as shown in earlier studies and that the incidence is increasing steadily.”).
claring a particular paternalistic regulation to be asymmetrically paternalistic. 2. Investor Protection Another area in which policies that could be construed as asymmetrically paternalistic have already been implemented, or are under discussion, involves disclosure of financial information. The recent meltdown of Enron has led to vigorous cries for strengthening market safeguards to protect investors. The plight of the loyal Enron worker who saw her once robust retirement savings vanish virtually overnight has spawned a wave of proposed legislation aimed at revamping the structure and management of company 401(k) plans pursuant to 86 ERISA. The goal, as expressed by Representative Ken Bentsen, is “to prohibit knowing misrepresentations by fiduciaries of 401(k) plans which may induce participants and beneficiaries to act contrary to their own best interest in controlling the assets in their own ac87 counts.” Why did the Enron 401(k) plan wreak so much havoc? Part of the problem was lack of diversification: Enron’s 401(k) plan was 88 too heavily invested in the company’s own stock. As a result, when Enron failed, employees lost their retirement benefits along with their jobs. Recognizing this economic reality, the House of Representatives is currently considering the 401(k) Pension Right to Know Act of 2002, a bill designed to induce 401(k) portfolio diversification by employees by requiring plan sponsors to “advis[e] participants and beneficiaries of the importance of diversifying the investment of the assets in their accounts and of the risk of holding in their portfolios securi89 ties of any one entity, including employer securities.” The failure to so advise would be held a breach of fiduciary duty and would be penal90 ized accordingly.
This requirement to provide advice is a nice example of asymmetric paternalism. The educated and informed investor already understands the economists’ advice and hence is not affected. The less-savvy investor, on the other hand, will hopefully not fall prey to another Enron. By heeding the call for diversification, market flaws will be corrected at a greatly reduced cost to society at large. 3. Similar Regulatory Strategies Many existing policies can be interpreted as asymmetrically paternalistic, though not conceived as such. For example, consider the case of licensing requirements, both for certain categories of professionals, such as physicians, and for certain activities, such as driving a car. Some critics of such requirements, such as Milton Friedman, have argued that these requirements are unnecessary because, in the former case, people can be relied upon to gather information about physician quality and, in the latter case, dangerous drivers can be relied 91 upon to stay off the roads. The more common view, Milton Friedman notwithstanding, is that people who pose a menace to themselves or others can neither be relied upon to gather adequate information about the competence of a physician nor keep themselves off the roads. The beauty of licensing requirements is that if they are truly diagnostic and inexpensive to administer, they impose minimal costs on those who are actually competent, but present a serious obstacle to those who are not. Similarly, there are conservatively paternalistic policies that withhold information and are justifiable on similar grounds. Information withholding makes sense when it would not or should not prove useful to fully rational people—those who process information in the fashion assumed by economics—and is subject to misuse by others. As an example, consider various forms of “blind” review intended to avoid bias, such as grading students’ papers without visible names. If people are not biased, blind review introduces hardly any costs, but if reviewers are biased, the benefits can be significant.
administrator’s fiduciary duties . . . .”). 91 See MILTON FRIEDMAN, CAPITALISM AND FREEDOM 137-60 (1962) (arguing that occupational licensing is an undesirable interruption of market forces).
“stronger relative weight [is given] to the earlier moment as it gets closer”); David Isaac Laibson, Hyperbolic Discounting and Consumption 9 (1994) (unpublished Ph.D. dissertation, Massachusetts Institute of Technology) (on file with the M.I.T. Libraries) (arguing that human preferences, as modeled by the hyperbolic discount function, “set up a conflict between today’s preferences and the preferences which will be held in the future”), available at http://theses.mit.edu/Dienst/UI/2.0/Describe/ 0018.mit.theses%2f1994-72?abstract=. 97 The status quo effect discussed above might limit the benefits of cooling-off periods. To the degree that people exhibit a bias in favor of the status quo, they will refrain from reversing a harmful decision on some occasions even though the cooling of their ardor would otherwise have led them to do so.
purchases by senior citizens, adult and vocational education pro104 105 grams, solicited charitable contributions, health studio service 106 107 contracts, and campsite time-shares. Congress has also stepped in to require cooling-off periods in certain instances. For example, it enacted a cooling-off period for home equity loans by granting buyers a limited right to rescind certain credit transactions involving the buyer’s principal dwelling as a security in108 terest. More recently, Congress imposed a waiting period on any employee waiver of rights under the Age Discrimination in Employ109 ment Act (ADEA). That legislation was prompted by the need to ensure that any action on the part of the employee was “knowing and 110 voluntary” and not hasty or coerced. Under normal conditions, this type of protectionist legislation might seem overly paternalistic. However, all of the above regulations target specific transactions where experience has shown that consumers are likely to act under influences other than rational decision making. These regulations likely impose costs on sellers, but the greatest costs focus on those sellers who benefit from consumers making hasty, ill-conceived decisions in the heat of the moment.
signed). 103 See, e.g., N.D. CENT. CODE § 51-18-02(1) (1999) (providing that a buyer sixty-five years of age or older has fifteen business days to cancel a home solicitation contract). 104 See, e.g., 105 ILL. COMP. STAT. ANN. 425/15.1a(1)(a) (West Supp. 2002) (establishing that a student has before midnight of the fifth business day after enrollment to cancel and receive a full tuition refund). 105 See, e.g., COLO. REV. STAT. § 6-16-106(1)(b) (2001) (granting an individual the right to cancel her monetary contribution until midnight of the third business day, or midnight of the first business day if the contribution was non-monetary). 106 See, e.g., CAL. CIV. CODE § 1812.85(b)(1) (West 1998) (mandating that a contract for health studio services must be cancelable at any time prior to midnight on the third business day). 107 See, e.g., ARK. CODE ANN. § 18-14-703(a) (Michie Supp. 2001) (providing that the buyer of a camping site time-share has until midnight of the fifth business day to cancel the purchase). 108 See 15 U.S.C. § 1635(a) (2000) (giving a borrower the right to cancel any consumer credit transaction involving her principal dwelling as a security interest before midnight of the third business day after the agreement was completed). 109 See 29 U.S.C. § 626(f)(1)(G) (2000) (requiring that an agreement to waive one’s rights may be revoked up to seven days after its inception). 110 See id. § 626(f)(1) (“[A]n individual may not waive any right or claim under this chapter unless the waiver is knowing and voluntary . . . .”).
better nor imagine that you will feel better”). 122 Erica Goode, Terminal Cancer Patients’ Will to Live Is Found to Fluctuate, N.Y. TIMES, Sept. 4, 1999, at A8 (discussing a study in which cancer patients showed substantial fluctuations in their will to live). 123 G. Alan Marlatt, Craving Notes, 82 BRIT. J. ADDICTION 42, 42 (1987).
P. Joseph Frawley, Neurobehavioral Model of Addiction: Addiction as a Primary Disease, in VISIONS OF ADDICTION: MAJOR CONTEMPORARY PERSPECTIVES ON ADDICTION AND ALCOHOLISM 25, 32 (Stanton Peele ed., 1988). 125 Frank H. Gawin, Cocaine Addiction: Psychology and Neurophysiology, 251 SCIENCE 1580, 1581 (1991). 126 L.A. GIORDANO ET AL., OPIOID DEPRIVATION AFFECTS HOW OPIOID-DEPENDENT OUTPATIENTS DISCOUNT THE VALUE OF DELAYED HEROIN AND MONEY (Carnegie Mellon University, Dep’t of Soc. & Decision Scis., Working Paper, n.d.) (on file with authors). 127 Many states regulate liquor sales in a similar way, by restricting hours and days of sale. See, e.g., 47 PA. CONS. STAT. ANN. § 4-492(4) (West 2002) (making it illegal to “sell malt or brewed beverages between the hours of twelve o’clock midnight of any Saturday and two o’clock in the forenoon of the following day”). This effectively requires an alcoholic to plan ahead, which protects alcoholics who only drink on unplanned binges. 128 THE FEDERALIST NO. 10, at 48 (James Madison) (Clinton Rossiter ed., 1999) (“Where a majority is included in a faction, the form of popular government . . . enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens.”).
See, e.g., FIN. CONST. § 73 (requiring suspension of consideration of non-urgent constitutional proposals until after following parliamentary election); LA CONST. art. 89 (Fr.) (requiring, in most cases, passage of amendments by two assemblies followed by submission to a referendum). 130 U.S. CONST. art. V (requiring that proposed amendments be approved by twothirds of both the House and Senate as well as three-fourths of the states). 131 See, e.g., Daniel Read et al., Choice Bracketing, 19 J. RISK & UNCERTAINTY 171, 191 (1999) (arguing that an integrated approach to decision making generally leads to better outcomes than a case-by-case approach does). 132 For economic models of procrastination, see George A. Akerlof, Procrastination and Obedience, 81 AM. ECON. REV. 1, 6-7 (1991). See also O’Donoghue & Rabin, supra note 42, at 148 (discussing the effects of “naïve procrastination” both in the abstract and in “important economic contexts”); O’Donoghue & Rabin, supra note 22, at 119 (“When costs are immediate, you tend to procrastinate; if you are aware that you will procrastinate in the future, that makes you perceive it as more costly to procrastinate now.”); Ted O’Donoghue & Matthew Rabin, Incentives for Procrastinators, 114 Q.J. ECON.
Imagine you have two days to write a paper. You believe it will take about six hours. To avoid being rushed, you decide to get to work. . . . Now suppose you had to decide what to do for the next five minutes—either work on the paper or play one game of pinball . . . . In the short run, five minutes of pinball is far more pleasurable than five minutes of paper writing, and after all, how much of a paper can you do in five minutes? Pinball is the obvious choice. The game is over so you must decide about the next five minutes. The situation is only trivially changed, so you will reach the same result. Once . . . you’ve fragmented your night into five minute intervals, you may be doomed to play until you run out of money, the machine breaks, or someone meaner than you wants to play. . . . One of the ways of being irrational and procrastinating is to act on ra133 tional calculations for intervals that are irrationally short.
769, 770 (1999) (considering the role of procrastination in the context of economic incentive schemes). 133 JOHN SABINI & MAURY SILVER, MORALITIES OF EVERYDAY LIFE 133 (1982).
For more numerical examples of this type, see O’Donoghue & Rabin, Procrastination, supra note 3, at 133. 135 Letter from Chris Caswill, Economic and Social Research Council, to George Loewenstein (Aug. 15, 2001) (on file with authors). 136 See 26 U.S.C.A. § 219(b)(5)(A) (West 2002) (setting maximum contribution amounts); id. § 6072(a) (requiring returns to be filed “on or before the 15th day of April”).
Lawrence H. Summers, Summers Replies to Galper and Byce on IRAs, 31 TAX NOTES 1014, 1016 (1986). 138 Dan Ariely & Klaus Wertenbroch, Procrastination, Deadlines, and Performance: SelfControl by Precommitment, 13 PSYCHOL. SCI. 219 (2002). 139 Id. at 220. 140 Id. at 221.
See generally Zamir, supra note 6, at 256-61 (proposing a formal model for identifying efficient paternalistic regulation).
Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY 609, 614-16 (Nat’l Bureau of Econ. Research ed., 1964) (commenting on the role of information as a commodity and the issues that arise in its allocation).
Drunk drivers are involved in nearly 30% of all fatal accidents on the road even though they only account for a much smaller percentage of drivers at any point in time. See Steven D. Levitt & Jack Porter, How Dangerous Are Drinking Drivers?, 109 J. POL. ECON. 1198, 1199 (2001) (reporting that during “time periods in which alcohol usage is greatest, [this] proportion rises to almost 60 percent”).
profitable to retailers implies they are costly to buyers. Should extended warranties be prohibited? Should we treat those who would be prone to purchase them as though they are modern equivalents of 144 minors or idiots? It depends on whether overpaying for a warranty is a mistake or a preference (a “bug” or a “feature” in the human mind). Perhaps people who buy warranties do not realize how slight the chance is the product will break within the warranty period, or the fact that the small loss they have to pay for repairs out-of-pocket can be easily absorbed into the hedonic ups and downs of everyday life. On the other hand, it is also possible that consumers who purchase warranties are perfectly cognizant of the relevant probabilities and derive real benefits (e.g., “peace of mind”) that warrant the expenditure. In the face of such uncertainty, the right policy is one that encourages disclosure rather than, say, bans warranties. If disclosure reduces warranty purchases by reminding consumers of the low chance of product breakage, then purchasing the warranty would have been a mistake rather than a preference. If informed consumers continue to purchase the warranties, then it is quite possible that they have good reason to do so, however unfathomable that decision may seem to an economist. To sum up: asymmetric paternalism helps those whose rationality is bounded from making a costly mistake and harms more rational folks very little. Such policies should appeal to everyone across the political spectrum and can potentially shift the debate from one about whether or not paternalism is justified, to one about whether the benefits of mistake prevention are larger than the harms imposed on rational people. The idea is designed to focus debates about paternalism on these empirical terms. Creating a sharp empirical debate may, in turn, encourage social scientists and lawyers to generate new answers.
In a classic episode of The Simpsons, Homer was having a crayon hammered into his nose to lower his I.Q. (Don’t ask.) The writers indicated the lowering of his I.Q. by having Homer make ever stupider statements. The surgeon knew the operation was complete when Homer finally exclaimed: “Extended warranty! How can I lose?” The Simpsons: HOMR (Fox television broadcast, Dec. 24, 2000).
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