Friday, August 26, 2016

Sugden (2008) on Incoherent Preferences and Paternalism; or, Let Me See Cake

Robert Sugden, “Why Incoherent Preferences Do Not Justify Paternalism.” Constitutional Political Economy 19(3): 226–248, September 2008.

• Standard economics takes individual preferences as sacred; hence, revealed preferences are respected and interference in individual choices, absent externalities, is disparaged.

• Behavioral economics questions whether choices reflect preferences, and whether preferences are stable, context-independent, and rational; as a result, behavioral economics seems to undermine the pre-disposition against paternalistic interventions.

• From the point of view of behavioral economics, nudges are forms of paternalism that are respectful of the deeper concerns about influencing individual choices that traditional economics reflects. Behavioral researchers sometimes argue that because choices are not context-independent, influencing choice is inevitable, so we might as well be paternalistic about it.

• The incoherent preferences that behavioral economists highlight look like a sort of “corrupted data [p. 229]” from the point of view of a welfare-maximizing planner. But if we take Hayek’s approach, we can dispense with the planner, and note that incoherent preferences provide little bits of information about preferences, and that markets can still use these bits of information in socially productive ways, and perhaps help to form more regular preferences.

• Voluntary exchange and mutual advantage are hallmarks of market exchange. Further, Sugden argues, these features are not compromised by incoherent preferences: for the version of a person who makes the trade, at least, these exchanges are welfare improving. Competitive markets will still exhaust all such mutually advantageous exchanges, even with incoherent preferences.

• Can a planner do better than mutual, voluntary exchange? How can a soft paternalist know that he or she is serving the interests of the nudged individual if preferences are incoherent?

• In the “arranging food in a cafeteria” example, why not task the choice architect with the pursuit of profit maximization? Profit maximization leads to a “customer is always right” bias, which doesn’t seem bad for customers.

• The profit-maximizing cafeteria owner doesn’t care about the coherence of customer preferences, only about the willingness-to-pay of the acting version of actual customers. A person with incoherent preferences nevertheless understands his interests.

• The cafeteria example, as well as others, suffers from the initial set-up, that there is some choice architect (planner) who will give the people what they really want: control is vested in the planner from the start. This hardly captures the crux of the argument against paternalism.

• Which approach, a choice architect aiming to maximize customer well-being, or entrepreneurs wanting to maximize profits, will best serve social welfare? Shouldn’t we, like the profit-maximizing cafeteria owner, privilege the acting self, too?

• Perhaps cafeteria managers don’t so much serve preferences as create them. But how is that a problem? Do people have preferences for fashion designs before they are produced? Doesn’t profit maximization do a good job in this incoherent setting to get desirable designs produced and exchanged, even without knowledge of consumer preferences?

• “…I would rather have my willpower challenged by tempting cakes than license cafeteria managers to compromise on the attractiveness of their products so as to steer me towards the ones that they think best for me [p. 247].”

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