Methodological concerns

The behavioural research project has evoked considerable critique regarding its methodology, mostly from traditional economists. An overview of that debate will follow here.

a. Innovativeness of behavioural insights

A first question point of critique raised against behavioural insight is whether it adds anything new to the debate. This critique claims that both the theory and policy observations that are discussed in behavioural literature can well be covered within the rational choice paradigm. If the rational choice paradigm would also explain the observed behaviour, there would be no need for behavioural theories in order to explain these observations.

105 For a discussion of these issues, see for instance: Arlen (1998: 1768-70), Issacharoff (1998: 1734), Posner (1998a), Rachlinski (2000), Rabin (2002) and Wilkinson (2008: 8-9).

Explaining and predicting behavioural anomalies

When in behavioural literature a certain behavioural anomaly is pointed out, conventional economic scholars typically respond by finding a rational explanation for the observed behaviour (Jolls, Sunstein and Thaler, 1998b: 1595). For example, Posner argues that issues such as hyperbolic discounting can be explained within the rational paradigm by the notion of ‘multiple selves’; the present self having different preferences than the future one. Also, there is a sound rational explanation for the question why people would initially like to eat lobster, but lose their appetite once they have to choose a live one from an aquarium. From a conventional economic viewpoint, one could argue that these are two different goods; having different preferences for two different goods is not surprising. Conventional economic scholars thus argue that the rational choice paradigm is too easily dismissed (Posner, 1998a: 1553-6). Epstein finds several traditional economic explanations that account for anomalous behaviour in a number of cases that are contended by behavioural economics, such as teaser rates, hyperbolic discounting and health clubs (Epstein, 2008: 821-31). Wright, discussing observations regarding credit card debts, shelf space purchases in retail stores and standard terms, argues there are sound standard explanations for the proposed behavioural anomalies and that the behavioural insights are therefore irrelevant (Wright, 2007). Another argument put forward by traditional economists is that the supposedly influential biases and heuristics have in fact only a minimal effect on behaviour. A better understanding of these biases and heuristics will therefore not (greatly) improve predictions of behaviour.

As has been stated in the previous chapter, there are however many behavioural observations that are less easily reconciled with the rational economic framework.¹⁰⁶ Behavioural scholars maintain that decision theory and predicting behaviour can be improved by behavioural insight. Differences in risk perception, inertia that cannot be contributed to transactions costs and the framing of options that should not have any effect on decisions are examples of situations that do not correspond to RCT.

Understanding the influence of present biases informs the understanding of behaviour concerning savings, credit cards, advertising, procrastination, costly self-commitment strategies to fight procrastination and so forth (Rabin, 2002: 671-2). These insights are robust, which refers to the fact that they have resulted from several similar experiments.

Also behavioural insights can be shown to be significant enough to have a distinctive effect on behaviour, and should be used to improve predictions (Fudenberg, 2006: 708).

Behavioural literature is quite critical of these attempts to provide a rational explanation to behavioural observations, as this is deemed to stretch the applicability of rational choice as a paradigm beyond acceptable limits.¹⁰⁷ Furthermore, behavioural

106 See above, chapter 3, section 3.2.3.

107 For critical views, see for instance Rabin (2002: 683) who argues that scholars go out of their way to find an alternative “standard” explanation for behavioural phenomena whenever they can find one, even if this would make the prediction counterintuitive and complicating. Kreps (1998: 170) argues that some of the economic models developed to provide a rational explanation for behavioural observations are “too

4. Cautions and considerations for behaviourally informed consumer policy

90

literature argues that even when thinner versions of rational choice can retrospectively explain certain behavioural effects as rational behaviour, rational choice would have had a harder time predicting those effects. A thin version of rational choice for instance assumes that when a person acts, this act must be in accordance with his preferences and therefore his self-interest, otherwise this person would not engage in the action. Choice is thus necessarily welfare enhancing and rational.¹⁰⁸ Thin versions of RCT can explain most to all phenomena pointed out by behavioural theory, but they lack predictive powers as they are non-falsifiable.

Behavioural notions try to provide insights into why certain acts are engaged in or omitted. These insights can help to explain and predict behaviour, and would not have been developed when the paradigm of rational choice was exclusively used in economic theory (Rachlinski, 2000: 765). Behavioural law and economics asks different questions about law and policy than law and economics scholars or lawyers do. It exposes influences on choice and judgement that would have never come up in either law and economics scholarship or in traditional legal analysis. These insights, such as regret aversion or the endowment effect, can be very relevant to law and policy. Behavioural insights have furthered the discussions and ability of scholars to explain observed behaviour, and the ability to predict behaviour in certain cases.

Alternative theories explaining one observation

In economics, some scholars still claim that rational choice as a theory should be adhered to as long as it is not absolutely falsified. According to this view, the standard explanations in line with rational choice should be favoured as long as the standard explanations hold. Behavioural insight in general has not been proven to be more valid than rational choice at explaining or predicting behaviour, and thus conventional economic theory will be preferred by these scholars as the theory to predict human behaviour.¹⁰⁹ In response, Jolls et al. claim that the existence of two competing explanations for one theory does not automatically imply that RCT should triumph (Jolls et al., 1998b: 1595). Both sets of explanations and predictions should be carefully assessed. The question should not be which paradigm is more valid in general, but which set of insights is more valid in specific situations. After all, neither the predictions based upon rational choice nor the ones based upon behavioural insights are shown to hold under all circumstances.¹¹⁰ Economists who hold on to rationality and who deny that behavioural insights have any value, are claimed by the defenders of behavioural theory

bizarre to take seriously, … too complex to be of any analytical use whatsoever, or do not apply to all cases”.

108 For thinner and thicker versions of RCT, see above, chapter 2, section 2.2.1b and Korobkin and Ulen (2000: 1060-7).

109 See for this claim for example: Klick (2005: 555-9).

110 See above, chapter 3, section 3.2.3.

to suffer from “theory induced blindness”.¹¹¹ These scholars are unwilling to review their theoretical paradigm, even though compelling insights that are contrary to their beliefs have been brought to their attention. Behavioural scholars argue that behavioural insight does not need to be proven correct in all circumstances in order to be a valid alternative to RCT in some situations.

Still, theory induced blindness can also work in the opposite direction: Rabin argues that the growing acceptance of behavioural economics has made some economists overly receptive to alternative assumptions. The rational choice paradigm has always been criticised as being counterintuitive and overly simplifying. Even though behavioural economics offers explanations for behaviour that are more intuitive, they are not necessarily or automatically more accurate. In some situations, rational choice models are shown to provide more accurate predictions. Scholars of either current of literature should be aware of their possible blindness. The existence of a ‘rational’ explanation should not necessarily tip the scales in favour of one literature current, but neither should the existence of a ‘psychological’ explanation (Rabin, 2002: 674).

b. Overarching paradigm: generalisability and contextual dependency

A common concern that is raised against on the influence of behavioural insight on theory or policy recommendations is that behavioural law and economics lacks an overarching paradigm. It offers explanations for observations, but encounters some difficulty in predicting the outcome of the biases under even slightly altered circumstances. The contextual dependency of these insights is high; they cannot easily be generalised. The strength of the bias is hard to estimate. In some instances, biases run in opposite directions, making the outcome uncertain. Behavioural insights are therefore said to fail to generate testable hypotheses. The generality or generalisability of behavioural insights, which refers to the extent to which the insights can be applied to a wide set of phenomena, is called into question (Wilkinson, 2008: 8-9). Experiments that are argued to provide evidence of behavioural anomalies are conducted in laboratory settings, mainly using students. Critics of behavioural theory therefore doubt the external validity, which can be described as the extent to which observations and causal inferences from studies be generalised to other subjects and conditions. Therefore, in the view of this critique, again the standard explanations should be favoured and rational choice models should continue to be adhered to until a behavioural paradigm is developed, upon which more theories and predictions can be built.

111 The term theory induced blindness was mentioned by Prof. Daniel Kahneman during his inaugural lecture when receiving an honorary doctorate from the Erasmus University Rotterdam, November 6^th, 2009; see also in interview with Haaretz, by Guy Rolnik, published online April 19^th, 2009. Available at:

www.haaretz.com/hasen/spages/1077151. Similarly, Korobkin (2005) argues against the “standard theory”

bias that exists among economic scholars. He furthermore claims that because decisive evidence is still lacking and research efforts are necessarily limited by time and money, the more plausible explanations and predictions should be the ones that are investigated; not just any possible theory.

4. Cautions and considerations for behaviourally informed consumer policy

92

Creating a behavioural overarching paradigm

As has been described in the previous chapter, there is some debate about the question whether the aim of behavioural research should be to develop an overarching paradigm. It is doubtful whether a comprehensive paradigm based upon social psychology can ever be constructed in a way that can compete with RCT. This issue is tied to the nature of the science of psychology, as opposed to economics (Brennan, 2008:

32). Economists like to explain the world using a few axioms. Economic theory is general and comprehensive. Traditionally, it uses deduction to come to theoretical premises and predictions. Economists try to find general theorems, and from those theorems deduct predictions. Psychology on the other hand is a more inductive science and (hesitantly) uses observations to come to generalisations. Empirical findings are very specific and context related, and can therefore not easily be generalised into one social theory that explains it all. Psychologists often refrain from generalising their results, fearing over-generalisation. Findings are done within their specific contexts, and results will be accumulated only when this is methodologically possible. As Rabin explains, psychology probes the details of human nature, and is not as devoted to generality as conventional economics (Rabin, 2002: 672). Psychological insights are therefore less suited to provide a theoretical basis for one comprehensive paradigm such as rational choice, or to encompass the same generalisability. Therefore, a generalised theory of decision making which accounts for behavioural insights might never be developed.

Behavioural economics does strive for generality, which could be accomplished through updating economic theory with behaviour insights (Camerer and Loewenstein, 2004: 7).

The generalisability of behavioural notions will however remain a limitation of the behavioural research project.

Contextual dependency

Behavioural notions are often context specific, and apply to the situation in which they were observed; as they are (psychological) observations, they do not stem from one overarching theory (Korobkin, 2006: 11). Contextual dependency complicates the formulation of general predictions.¹¹² A bias found in one context is not automatically relevant to another context. Behavioural insights do not allow for an overly extensive generalisation of observations. Another concern points to the standard methods of behavioural research. Behavioural research is usually based upon laboratory and experimental research, and often uses students at universities as subjects. The findings in these studies might not be so easily generalised to situations involving non-student

112 Methodological concerns about the contextual dependency of behavioural insights are mentioned by many scholars. See for instance: Arlen (1998: 1768-70), Issacharoff (1998: 1734), Rachlinski (2000: 743-4), Scott (2000: 1639) and Kelman (2003: 1363-4).

individuals. Furthermore, the laboratory settings have little in common with real life.¹¹³ Empirical studies that review choices that people have made in their daily life are more able to make valid generalisations than experimental or laboratory studies.¹¹⁴

Scott argues that it is important to realise the limitations of behavioural science, as social data is often too easily generalised. Data should be more cautiously interpreted, especially when it is used for policy. This caution is even more important when social data is interpreted by people who are not accustomed to interpreting statistics, such as most legal researchers and policy makers (Scott, 2000: 1639, 43).¹¹⁵ The difficulty of understanding the significance of statistical studies is a further complication to a cautious interpretation of the social data used in behavioural research. Statistical research is often misinterpreted, even by expert researchers themselves (Hoekstra, 2009). Any statistical study should be interpreted with caution; not all studies are sound; biases found might not apply to all circumstances; a single study showing some behavioural effect cannot be a valid ground for far-reaching policy decisions.

However, behavioural insight can improve the accuracy of predictions within certain contexts. Observations made in behavioural research that are not easily generalisable can still be relevant. Sorting out which biases affect behaviour in which contexts is important when trying to implement behavioural insights in theory and policy. Psychology has a tradition of researching how contexts influence behaviour. Context thus affects behavioural research in two ways: on one hand, it poses a concern as behavioural findings are not easily generalised and depend on context. On the other hand, behaviour and decisions can be shown to be influenced by contexts, not only in the laboratory, but also in real life. Behaviour is shown to be context-dependent, just as behavioural insights.

Context as an aspect of decision making should not be overly generalised, but included as a variable or otherwise accounted for in behaviour research.

c. Tractability and conflicting biases

A related concern points to the tractability of behavioural notions, which refers to the ease with which the theoretical models can be applied to different situations in terms of making testable predictions (Wilkinson, 2008: 8-9). Explaining in retrospect why an individual apparently came to a certain decision is not the same as predicting beforehand how people will decide in certain situations. When biases can go either way, or when the

113 See Korobkin (1998: 661) and Levitt and List (2007) for discussions on generalising problems in laboratory and experimental research. Della Vigna (2009) provides an overview of empirical literature on psychology and economics that explicitly does not rely on laboratory tests.

114 Bernheim and Whinston (2008: 452-3) provide several considerations for the interpretation of social data for policy or theory, such as robustness, whether it is a sound study, whether the findings are based on laboratory or real world observations, and which other explanations for the observation can be explored.

115 Scott (2000: 1639, 43-5) argues that especially legal analysts are prone to making unjustified generalisations from social data. Legal scholarship, he claims, uses a generalising methodology. If A is sufficiently similar to B, than A and B should be regulated in the same way. A is then either sufficiently similar or it is not. The behavioural insights are more nuanced than the legal ‘black or white’ view.

4. Cautions and considerations for behaviourally informed consumer policy

94

impacts and contexts of biases are unknown, it will be difficult for behavioural theory provide valid predictions (Posner, 1998a: 1559). Tractability was especially considered to be an issue when the behavioural research programme came into existence.

Behavioural research however is progressing and creating more and more testable hypotheses. The tractability of the behavioural research programme is considered less of an issue, now that the modelling of behavioural insights has advanced. Numerous scholars have included insights from behavioural sciences into their models.¹¹⁶ Behavioural insights are being used to create testable hypotheses, which are then tested empirically (Della Vigna, 2009). In some situations however, conflicting behavioural biases might be argued to have an effect on behaviour, which is a concern for tractability (Hillman, 2000: 731-3). In these situations, it might be harder to pinpoint the causes of the observed behaviour. As Rachlinski argues, conflicting biases still pose a real issue in behavioural theory; they also however reflect the reality of human judgement. For example, people do both underestimate and overreact to small probabilities of unfortunate events.¹¹⁷ Therefore, more behavioural research is needed; research takes into account the contexts in which decisions are taken. Reconciliation of conflicting biases can require extensive empirical research (Rachlinski, 2000: 746). To improve the predictions of human decision making, an indication should be made of which biases will have a stronger effect than other ones and of how different circumstances may influence the dominance of one bias over the other.

d. Parsimony

Precise and testable hypotheses cannot possibly take all aspects of human nature into account. A lean and simple theory that uses fewer assumptions, thereby allowing for a relatively easy formulation of hypotheses is a valuable tool for predicting behaviour.

Parsimony is thus better than complicated and complex theories. Rational choice can be argued to be more parsimonious than theories based upon behavioural insights;

behavioural insights complicate the story.

In conventional economic theory, how individuals exactly construe their choices is considered to be irrelevant. The decision making process can be seen as a “black box”.

What is inside is not what economics is concerned with; economics is concerned with the outcome of the black box. As long as the predictions by rational choice models hold, the inside of the black box is irrelevant for theory and would only complicate the analysis.¹¹⁸ In order to create precise and testable hypotheses, some elements of human nature are to be ignored. How individuals actually construe their decisions is not of interest, the choice that they arrive at in the end is what matters to economists (Rabin, 2002: 672).

116 See for instance Munier et al. (1999), Rubinstein (1998) and Arlen and Talley (2008) on bounded rationality modelling in general; see for examples of modelling behavioural insights, Bernheim and Rangel (2005), Abdellaoui, Barrios and Wakker (2007) and Wakker, Timmermans and Machielse (2007).

117 See above, chapter 3, section 3.2.2b.

118 See above, chapter 3, section 3.2.1.

Behavioural literature criticises the standard economic model for being overly parsimonious, which actually results in low empirical accuracy (Wilkinson, 2008: 9).

Korobkin argues that the assertion regarding rational choice being leaner, simpler and less complicated, is not always true (Korobkin, 2005: 782, 89-90). Rational choice has already incorporated several assumptions that have complicated the analysis greatly, such as the transaction costs, availability of information (or lack thereof), or whether bargaining is costless or of a high cost.¹¹⁹ In some situations, Korobkin claims, a theoretical approach based upon behavioural insights might therefore be more parsimonious. An example of how assumptions are simplified in order to allow conventional economics to provide predictions based on a simple and lean theory is the doctrine of revealed preferences. The doctrine of revealed preferences enables economists to assume that choices people make will benefit their well-being, instead of

Korobkin argues that the assertion regarding rational choice being leaner, simpler and less complicated, is not always true (Korobkin, 2005: 782, 89-90). Rational choice has already incorporated several assumptions that have complicated the analysis greatly, such as the transaction costs, availability of information (or lack thereof), or whether bargaining is costless or of a high cost.¹¹⁹ In some situations, Korobkin claims, a theoretical approach based upon behavioural insights might therefore be more parsimonious. An example of how assumptions are simplified in order to allow conventional economics to provide predictions based on a simple and lean theory is the doctrine of revealed preferences. The doctrine of revealed preferences enables economists to assume that choices people make will benefit their well-being, instead of