Consumer Protection and Behavioral Economics: To BE or Not to BE?

Howard Beales, Apr 24, 2008

The foundation of consumer protection policy is respect for consumer choice. Modern consumer protection recognizes the need to preserve information markets and to carefully structure interventions to ensure compatibility with how consumers actually process information. Behavioral economists have identified a number of behaviors inconsistent with the assumption that consumers rationally maximize their utility, leading some to argue for policy changes that would restrict choice in some instances. Four interrelated concerns limit the applicability of behavioral economics to consumer protection policies. The experimental evidence that provides the most compelling evidence supporting various behavioral biases may not predict real-world behavior in markets. There is no consistent and coherent body of behavioral theory yielding clear predictions about which biases might be relevant in a given situation. There has been relatively little exploration of the implications of particular biases for the nature of the economic equilibrium. Finally, we have little reliable empirical evidence addressing the benefits and costs of possible interventions based on behavioral principles. Behavioral economics offers useful insights into consumer behavior, many of which are already a part of consumer protection policy. Like other interventions, however, policies based on behavioral principles must be tested against actual market behavior. At present, we do not have an empirical foundation that would justify significant changes in policy.