The favourite Economic Idea Of Nanny-Staters May Just Be Plain Wrong

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behavioural Economics is all the rage these days, especially with people who favour energetic government regulation of economic activity.  It’s the theory that informs Robert Shiller and George Akerlof’s Animal Spirits, for instance.

The basic idea is that because of various biases people don’t really behave as rational utility maximizers, so there’s a role for the government to step in to nudge things in the right direction.

We’ve critiqued this idea before (here and here), on the grounds that it depends on a double standard: claiming that market actors are irrational but government is rational.  But now a new paper by Fed economist Laurie Pounder takes on the Behavioralists from the other side: showing that people aren’t as irrational as the Behaviorialist crowd claim. What’s more, when people are irrational, they’re not irrationally risky–they’re too prudent.

Pounder’s first finding is that the actual spending patterns of people pretty much line up with what would be predicted by a standard model of optimising consumer behaviour. She compared the actual spending of 2000 Americans aged between 53 and 73, and found that the average propensity to spend out of current income is similar to predictions of optimal consumption under uncertainty in a dynamic stochastic model.

A key claim of the Behaviorial Economics crowd is that people tend to save too little. But Pounder’s survey directly challenges this. She found that people consume out of expected future income and net wealth much less than the optimising model would predict. “Far from being irrationally spendthrift, therefore, people are irrationally prudent,” Charles Dillow writes at Stumbling and Mumbling.

This seems to undercut the case that many Behaviorial Economics folks make for governmental paternalism, the idea that people need to be protected against themselves and their own bad behaviour.

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