The community of advantage

The aim of this thesis is to address from a methodological, philosophical and theoretical perspective the problem of how to reconcile normative and behavioural economics — the “reconciliation problem”. The first part develops a methodological assessment of behavioural welfare economics (and more specifically of libertarian paternalism), which currently constitutes the most accepted approach to deal with the reconciliation problem. We argue that behavioural welfare economics is in the direct continuation of neoclassical welfare economics, and that its conception of individual behaviour is tightly connected to Pareto’s reductionist model of the Homo economicus. It is assumed that an individual can be defined by “true” preferences — distinct from her revealed preferences — and that those preferences are consistent and context-independent. The satisfaction of those true preferences is taken as the normative criterion. The existence of true preferences requires accepting that people have access to a latent mode of reasoning able to generate consistent and context-independent preferences, and to treat individual decision-making as if it was the result of an optimisation problem faced by an inner rational agent trapped in an outer psychological shell. We argue on the contrary that we cannot define unambiguously such true preferences. We then argue that the normative challenge raised by behavioural economics is that individuals may lack of autonomy: rather than focusing on the satisfaction of one’s preferences, we argue that what matters is the ability to choose one’s own preferences. Since we suggest that the difficulties of behavioural welfare economics are related to its commitment to an implausible model of individual preferences, we provide in the second part of the thesis a model of preferences compatible with our methodological analysis: we take Bacharach’s variable frame theory as the primitive of our analysis, and build a model of endogenous preferences, in which individuals can choose to some extent their own preferences. The main contributions of this model are that (i) it does not require the existence of latent true preferences, and (ii) the individuals are allowed to team reason. We assume that collective preferences are strategically chosen, and show that team reasoners tend to be aggressive (cooperative) with other teams in submodular (supermodular) games. We finally show that team reasoning can be empirically justified as an ecologically rational heuristic.

International audience

Chapter 4 reviews ‘behavioural welfare economics’—the approach to normative analysis that is favoured by most behavioural economists. This approach assumes that people have context-independent ‘true’ or ‘latent’ preferences which, because of psychologically-induced errors, are not always revealed in actual choices. Behavioural welfare economics aims to reconstruct latent preferences by identifying and removing the effects of error on decisions, and to design policies to satisfy those preferences. Its implicit model of human agency is of an ‘inner rational agent’ that interacts with the world through an imperfect psychological ‘shell’. I argue that there is no satisfactory evidence to support this model, and no credible psychological foundation for it. Since the concept of true preference has no empirical content, the idea that such preferences can be reconstructed is a mirage. Normative economics needs to be more radical in giving up rationality assumptions.

What should be the ‘informational base’ of welfare economics if one takes the insights from behavioral economics seriously? Sugden proposes individuals’ sets of opportunities. This paper discusses his opportunity criterion and argues that it largely neglects intricate problems of context-dependence and personal agency. We contrast Sugden’s approach with Buchanan’s understanding of choice, which highlights the importance of agentic capabilities to navigate choice sets, particularly in situations where individuals face subtle interdependences between preference formation processes and their situational or social environment. This paper advocates that the informational base of welfare economics may need to go beyond opportunities if it is to command general assent among individuals who have an interest in being sovereign ‘authors of their own lives’. We argue that economists who take individuals interests seriously should not only consider the size of opportunity sets but also individuals’ sense of personal agency when comparing alternative social states.

Behavioural economics builds on psychology rather than on sociology, and on cognitive science rather than the science of culture. The same is true for new behavioural scholarship in the legal discipline, whether this is referred to as 'behavioural law and economics' or 'law and the behavioural sciences'. The result of a one-sided definition of a more realist research agenda in legal scholarship is an impoverished understanding of the 'social'. In Thaler and Sunstein's famous concept of nudging, social conformity appears as a property of the individual, which can be instrumentalized by social nudges. More generally, the cognitive strand of behavioural economics lends itself to strategies of regulatory 'debiasing', which suggests that it is possible to get down to pure preferences that are free from any distortions. While this approach neglects the endogeneity, or social contingency, of individual preferences, the social strand of behavioural economics is explicitly concerned with the dynamics of social interaction, or the effects of social interdependence. However, both strands of behavioural economics are still higher on methodological individualism, naturalism or positivism and lower on institutionalism, culturalism or constructivism than a genuinely sociological approach. More specifically, their understanding of the 'social' does not sufficiently account for the social embeddedness of both rational and irrational economic action. What is more, behavioural economics also lacks the means to reflect on the link between science and politics, which includes the question of why different models of economic man are attractive at different points in time. The conceptual move from rational to behavioural economic man bears distinctive policy implications, which are in line with the transformation of welfare capitalism towards 'less state' and 'more market'. While the overall direction of this project gets blurred in Thaler and Sunstein's branding of 'libertarian paternalism', it is evident in the adaptation of consumer policies, which proceeds under the imperative of market-conformity. Accordingly, a strategy of nudging does not put into question the wider institutional context but offers a technical solution to what is defined as a problem of individual behavioural rigidities and cognitive biases in the market environment.

Armed with a set of economic theories and a desire to influence policy and improve lives, behavioral economists have developed a doctrine variously referred to as libertarian, light/soft, or asymmetric paternalism, and a series of policy proposals collectively referred to as the nudge agenda. To its advocates, the nudge agenda allows us to improve people’s choices and thereby their well-being on their own terms at minimal cost and without interfering with their liberty or autonomy. To its critics, the nudge agenda represents an ineffective and dangerous intrusion into the sphere of personal decision-making by bureaucrats who may be no better at making decisions than the people whose choices they are trying to improve. This paper reviews what libertarian paternalism and the nudge agenda are, how their foundations differ (or not) from those of neoclassical economics, and what their promises and limitations might be.

In The Community of Advantage, Robert Sugden reconstructs and defends an account of the liberal tradition (LT) in normative economics in the light of the findings of Behavioural Economics (BE). In this paper, the LT in neo-classical welfare economics which has roots in J.S. Mill’s thought is contrasted with Sugden’s account. Cass Sunstein and Richard Thaler’s Libertarian Paternalism (LP) arguably attempts to reconcile the LT in neo-classical welfare economics with the findings of BE and to provide it with a Millian pedigree. To the extent that it attempts this, LP is unsuccessful. While Sugden abandons core elements of traditional normative economics – notably the ‘view from nowhere’, welfarism and the preference satisfaction view of welfare – which have a Millian pedigree and advances a contractarian alternative, he successfully reconciles his reconstruction of the LT with the findings of BE and also provides it with a sound Millian pedigree.

Behavioural welfare economics has lately been challenged on account of its use of the satisfaction of true preferences as a normative criterion. The critique contests what is taken to be an implicit assumption in the literature, namely that true preferences are context-independent. This assumption is considered not only unjustified in the behavioural welfare economics literature but unjustifiable – true preferences are argued to be, at least sometimes, context-dependent. This article explores the implications of this ‘critique of the inner rational agent’. I argue that the critique does not support a wholesale shift away from the use of true preferences as an evaluative standard in normative economics; instead, the critique implies that behavioural welfare economists need to inquire into and establish the ‘source’ of particular context-dependent choices in individuals’ decision-making. The source determines the permissibility of correcting individuals’ context-dependent choices and can, in some situations, support decisive welfare judgements.

This paper compares two alternative answers to the question ‘Who is the addressee of welfare economics?’ These answers correspond with different understandings of the status of the normative conclusions of welfare economics and have different implications for how welfare economics should be adapted in the light of the findings of behavioural economics. The conventional welfarist answer is that welfare economics is addressed to a ‘social planner’, whose objective is to maximize the overall well-being of society; the planner is imagined as a benevolent despot, receptive to the economist's advice. The alternative contractarian answer is that welfare economics is addressed to individuals who are seeking mutually beneficial agreements; a contractarian recommendation has the form ‘It is in the interests of each of you separately that all of you together agree to do x’. Each of these answers should be understood as a literary convention that uses a highly simplified model of politics. I defend the contractarian approach and show that it is less supportive of ‘soft paternalism’ than is the welfarist approach.

Chapter 9 considers a critique of the market and of the liberal tradition of economics that has been made both by virtue ethicists and by behavioural economists. According to this critique, market relations are based on self-interested and instrumental motivations, and so are morally impoverished; socially valuable practices (particularly those of trust and reciprocity) can depend on pro-social and intrinsic motivations which the market tends to ‘crowd out’. An important strand of behavioural economics is concerned with modelling intrinsic motivation, ‘social preferences’ and preferences for conforming to social norms. I identify a paradoxical implication of many of these models: there cannot be an equilibrium in which everyone is completely trustworthy, because if everyone were trustworthy, trust would not reveal pro-social intentions and so could not prompt trustworthiness. This is the ‘Paradox of Trust’.

Behavioural experiments as an impactful tool in sustainable development

Behavioural economics has taught us that human agents don't always display consistent, context-independent and stable preferences in their choice behaviour. Can we nevertheless do welfare economics in a way that lives up to the anti-paternalist ideal most economists subscribe to? I here discuss Sugden's powerful critique of most previous attempts at doing so, which he dubs the ‘New Consensus’, as appealing to problematic notions of latent preference and inner rational agency. I elaborate on a fundamental rethinking of the normative foundations of anti-paternalist welfare measurement that often remains implicit in the behavioural welfare economics literature Sugden discusses, but which is required to make these accounts minimally plausible. I argue that, if we go along with this rethinking, Bernheim and Rangel's [(2007). Toward choice-theoretic foundations for behavioural welfare economics. American Economic Review, Papers and Proceedings, 97, 464–470. https://doi.org/10.1257/aer.97.2.464; (2009). Beyond revealed preference: Choice-theoretic foundations for behavioural welfare economics. Quarterly Journal of Economics, 124(1), 51–104. https://doi.org/10.1162/qjec.2009.124.1.51] choice-theoretic framework withstands Sugden's criticism. Sugden's own, more radical proposal is thus under-motivated by his critique of the ‘New Consensus’.

Behavioral economics has shaken the view that individuals have welldefined, consistent, and stable preferences. This raises a challenge for welfare economics, which takes as a key postulate that individual preferences should be respected. We argue, in agreement with Bernheim (2009) and Bernheim and Rangel (2009), that behavioral economics is compatible with consistency of partial preferences, and explore how the Bernheim-Rangel approach can be extended to deal with distributive issues. We revisit some key results of the theory in a framework with partial preferences, and show how one can derive partial orderings of individual and social situations. (JEL D03, D63, D71, H23)

[A]n important class of intertemporal markets shows systematic deviations from individual rational behavior and … these deviations are consonant with evidence from very different sources collected by psychologists (Arrow 1982, 8) From Homo economicus to Homo sapiens Behavioral economics has become an active and well-established research program in economics that makes a wide-ranging critique of standard rationality thinking. Yet why has the “new” behavioral economics become successful so quickly when bounded rationality thinking as developed in the now “old” behavioral economics had relatively little impact on economics? One possible reason is that economists are now convinced that the introduction of more realistic psychological assumptions into economics is likely to improve prediction, and they take prediction more seriously. Behavioral economists have consistently argued that their models have solid empirical foundations that produce better results, and instrumentalist economic methodology emphasizing prediction has been influential in economics since the case made for it by Milton Friedman (Friedman 1953). A second and related possible reason is the unexpected impact of laboratory experiments on economics. Having long denied laboratory experiments are possible in economics, economists have been arguably caught off balance in judging their value, and as a result they have been perhaps overinclined to accept the evidence from the lab and thereby the arguments of behavioral economists. However, I will emphasize a third possible reason, namely, that the adjustment involved in introducing psychological assumptions into economics appears to many economists, at least thus far, to be compatible with much of standard theory. Individual economic agents are still the focus, they interact in markets, and whereas they are boundedly rational, they still aim to optimize, if only somewhat less successfully. Simon’s program, in contrast, proposed a quite different view of the economic process as well as an individual conception that abandoned optimization for satisficing. In effect it demanded revolution rather than reform, and too much would have had to go from standard theory for Simon’s program to have attracted many adherents. However, the view that the behavioral economics program is compatible with much of standard economics may not be accurate if the ways in which behavioral economics revises the standard Homo economicus conception undermines the idea that economics is essentially about individuals’ interaction in markets. We saw in the last chapter that prospect theory produces a multiple selves account of the individual, an important manifestation of which is a present-bias type of choice anchoring in intertemporal decision making. As we will see in this chapter, one response to this is to recommend that benevolent rational experts design decision contexts and choice architectures for irrational decision makers – the “libertarian paternalism” of Richard Thaler and Cass Sunstein. Such a strategy emphasizes interaction between individuals outside of markets, and thus makes it unclear whether economics is still primarily about individuals’ interaction in markets, and whether behavioral economics’ introduction of psychological assumptions into economics is as compatible with standard economics as some may believe. What, then, does behavioral economics’ revised utility function conception of the individual actually involve? As good an answer as any to this question comes from Richard Thaler, whose Journal of Economic Perspectives “anomalies” series has done much to popularize behavioral economics, and who gives a concise and clearly motivated view of how the individual conception of behavioral economics is different from the traditional conception. For him, behavioral economics should be seen as replacing the traditional Homo economicus conception with a Homo sapiens conception of the individual, in which the latter exercises ordinary human rationality in real world settings (Thaler 2000). His argument is that the thrust of postwar economics was to increasingly populate economic models with hyperrational economic agents, whose capacities were only limited by “the IQ of the smartest economic theorist;” but with greater emphasis on realism he believes we can expect that “this trend will be reversed in favor of an approach in which the degree of rationality bestowed to the agents depends on the context being studied” (ibid., 134). Thus, if Kahneman and Tversky’s prospect theory is seen as “contextualizing subjectivity,” Thaler might be said to see behavioral economics’ bounded rationality Homo sapiens conception as “contextualizing individuality.”

Hume's experimental psychology and the idea of erroneous preferences