Cato Unbound has an excellent symposium on “libertarian paternalism,” the theory that argues that government should intervene to protect people against cognitive biases that lead them to make decisions that ultimately reduce their ability to achieve their own objectives. Advocates of libertarian paternalism argue that their approach is different from and superior to traditional paternalism, which imposes the paternalists’ own values on those subject to regulation. Overall, I largely agree with the criticisms of libertarian paternalism in the Cato symposium by Glen Whitman (here and here) and Jonathan Klick. However, I wish to focus on a different weakness of libertarian paternalism: the implicit assumption that voters and government regulators are not subject to serious cognitive biases of their own.
It may well be that private citizens acting in markets and civil society often make decisions that they later regret because of cognitive errors. However, regulators and voters are people too. They also might make bad decisions because of cognitive errors. Libertarian paternalist scholars generally ignore this possibility by implicitly comparing perfectly rational regulators with often irrational consumers. But there is no a priori reason to believe that the former are more rational than the latter.
I. The Cognitive Biases of Regulators.
Indeed, there are good reasons to believe that regulators are likely to be more susceptible to cognitive biases than private sector consumers. This is so for at least three important reasons. First, regulators are making decisions for others, not for themselves. As a result, they have less incentive to get them right. If regulators in the proposed Consumer Financial Protection Agency ban financial products that are of great value to consumers, the regulators themselves won’t suffer (unless they happen to want to purchase those products themselves). The less people have at stake in the decisions they [...]