HOW BEHAVIORAL ECONOMICS TRIMS ITS SAILS AND WHY Ryan Bubb & Richard H. Pildes CONTENTS INTRODUCTION .......................................................................................................................... 1595 I. BEHAVIORAL ECONOMICS AND THE LAW .................................................................. 1601 II. RETIREMENT SAVINGS ..................................................................................................... 1607 A. The Neoclassical Account of the Policy Problem ....................................................... 1610 B. The Behavioral Account of the Policy Problem .......................................................... 1611 C. The BLE Approach to Retirement Savings Policy ..................................................... 1614 D. The Limits of the BLE Approach .................................................................................. 1616 1. The Illusion of Choice: Default Rules as Poorly Designed Mandates ............... 1616 2. Defaults vs. Explicit Mandates ............................................................................... 1625 3. The Failure of Tax Subsidies for Retirement Savings .......................................... 1630 E. A More Complete Behavioral Approach....................................................................... 1632 1. The Optimal Retirement Savings Architecture ..................................................... 1632 2. The Big Picture .......................................................................................................... 1633 3. Mandatory Defined Contribution Plans ................................................................. 1635 III. CONSUMER CREDIT .......................................................................................................... 1637 A. The Neoclassical Account of the Policy Problem ....................................................... 1638 B. The Behavioral Account of the Policy Problem .......................................................... 1640 C. The BLE Approach to Regulating Consumer Credit .................................................. 1644 D. The Limits of the BLE Approach .................................................................................. 1647 E. A More Complete Behavioral Approach....................................................................... 1658 1. Product Regulation .................................................................................................... 1658 2. Firm Ownership ........................................................................................................ 1662 IV. FUEL ECONOMY ................................................................................................................ 1665 A. The Neoclassical Account of the Policy Problem ....................................................... 1667 B. The Behavioral Account of the Policy Problem .......................................................... 1668 C. The BLE Approach to Fuel Economy Policy .............................................................. 1672 D. A More Complete Behavioral Approach....................................................................... 1673 CONCLUSION ............................................................................................................................... 1677 1593 HOW BEHAVIORAL ECONOMICS TRIMS ITS SAILS AND WHY Ryan Bubb∗ & Richard H. Pildes∗∗ The preference of behavioral law and economics (BLE) for regulatory approaches that preserve “freedom of choice” has led to incomplete policy analysis and inefficient policies. BLE has been broadly regarded as among the most promising new developments in public policymaking theory and practice. As social science, BLE offers hope that better understanding of human behavior will provide a sounder foundation for policy design. As politics, BLE offers a possible political consensus built around minimalist forms of government action — “nudges” — that preserve freedom of choice. These two seductive dimensions of BLE are, however, in deep tension. Put simply, it would be surprising if the evidence documenting the failure of individual choice implied a turn toward regulatory tools that preserve individual choice. Developing BLE fully along its social-scientific dimension would reveal two categories of recurring limitations in BLE. First, BLE often artificially excludes traditional regulatory tools, such as direct mandates, from its analysis of policy options. However, BLE’s preferred nudges are, in important cases, not likely to be effective — ironically, for reasons BLE itself identifies. BLE has also neglected the ways in which behavioral failures interact with traditional market failures and the implications of this interaction for policy design. A more complete framework generates policy recommendations beyond both nudges and neoclassical economic prescriptions. Second, BLE does not properly evaluate, at times, how its own regulatory tools actually function. Many of these seemingly choice-preserving tools are not nearly as light touch as advertised. The default rules so central to BLE are often better viewed as preserving the formality of choice while, for many individuals, functioning as effective mandates. The view that people can always rationally opt out has led policymakers to set these powerful defaults at the wrong levels, resulting in counterproductive policies. We illustrate the costs of BLE’s commitment to freedom of choice by analyzing three of the most important areas for current policy: retirement savings, consumer credit, and environmental protection. ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– ∗ Associate Professor, New York University Law School. ∗∗ Sudler Family Professor of Constitutional Law, New York University Law School. For help- ful comments and discussions, we are grateful to Jennifer Arlen, Oren Bar-Gill, Michael Barr, John Beshears, Brookes Billman, James Choi, Adam Cox, Sam Estreicher, Rick Hills, Jim Hines, Stefan Hunt, Sam Issacharoff, Howell Jackson, David Kamin, Mitchell Kane, Louis Kaplow, Lewis Kornhauser, David Laibson, Jesse Leary, Michael Levine, Michael Livermore, Brigitte Madrian, Bill Nelson, Peter Orszag, Ricky Revesz, Adam Samaha, Steve Shavell, Daniel Shaviro, David Skeel, Paul Starr, Cass Sunstein, Katrina Wyman, and Noam Yuchtman; participants in workshops at University of Chicago Law School, Drake University Law School, Harvard Law School, Northwestern Law School, University of Virginia Law School, and the NYU School of Law; the U.K. Financial Conduct Authority; and the Behavioral Insight Team at the U.K. Cabi- net Office. Patrick Corrigan, Chris Dodge, and Joshua Goldman provided superb research assis- tance. We appreciate the research support from NYU’s Filomen D’Agostino and Max E. Green- berg Research Fund. 1594 2014] BEHAVIORAL ECONOMICS TRIMS ITS SAILS 1595 INTRODUCTION Behavioral law and economics (BLE) has been broadly regarded in recent years as among the most promising and exciting new develop- ments in public policymaking theory and practice. Emerging enthusi- asm for this potential marriage of psychology and economics — re- ferred to as behavioral economics in economics, as behavioral law and economics in law schools, and as applied behavioral science in other social sciences — stems from both a social-scientific dimension of BLE and a political one. As applied social science, BLE offers hope that proper appreciation of the actual cognitive frameworks, information- processing heuristics, and likely motivations of choice-making individ- uals will provide a sounder foundation than neoclassical economics can for the design of legislation and regulation. As politics, BLE offers the promise of a possible political consensus — built around minimal- ist forms of government action that preserve freedom of choice, such as default rules and “smart disclosure” — that cuts through today’s hyperpolarized, partisan conflicts and offers a tantalizing third way be- tween conventional ideologies of right and left. The thrust of this Article is that these two seductive dimensions of BLE — its appeal as social science and as politics — are, in important contexts, in deep tension. This conflict has not been widely recog- nized. Put simply, it would be surprising if the main policy implication of the mounting evidence documenting the failure of individual choice was a turn toward regulatory instruments that preserve individual choice. Precisely because BLE appears to be making headway as politics, it is all the more important to highlight tensions between BLE’s politi- cal aspirations and its underlying social science. Regulatory policies in the United States are already being informed by BLE.1 President Obama issued an Executive Order requiring federal agencies to con- sider regulatory options that preserve “freedom of choice for the pub- lic,”2 and is now forming a “Behavioral Insights Team” to employ BLE ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 1 See CASS R. SUNSTEIN, SIMPLER 100–26 (2013). 2 Exec. Order No. 13,563, 76 Fed. Reg. 3,821, 3,822 (Jan. 21, 2011), archived at http://perma .cc/KV6D-GB9L. Section 4 of this Order states: Sec. 4. Flexible Approaches. Where relevant, feasible, and consistent with regulatory ob- jectives, and to the extent permitted by law, each agency shall identify and consider reg- ulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. These approaches include warnings, appropriate