The role of consumers’ sovereignty

Can Behavioral Economics Justify the Unbound Regulator?

“You must be the best judge of your own happiness.” Jane Austen said that, in Emma, but the statement is also a keystone principle of modern microeconomic theory, and it provides the epistemic foundation that makes benefit-cost analysis possible. The only way to know people’s preferences is observe the choices that they themselves freely make; all inferences about the “public” interest must begin there. Behavioral economists have poked holes in this principle by demonstrating in laboratory studies, as well as in the field, that people will often make irrational or inconsistent choices, so that simple models of rational individual preferences are not always good at predicting the actual behavior of real people. What influence, if any, should these findings have on public policy? Very little, I will argue. ….[READ]