I just finished a new paper with economist Adam Smith (no, not that one) Behavior, Paternalism, and Policy: Evaluating Consumer Financial Protection. We argue that even if the findings of behavioral economics are sound and robust, and the recommendations of behavioral law and economics are coherent (two heroic assumptions, especially the latter), there still remain vexing problems of actually implementing behavioral economics in a real-world political context. In particular, the realities of the political and regulatory process suggests that the trip from the laboratory to the real-world crafting of regulations that will improve consumers’ lives is a long and rocky one.
This paper examines the relationship between behavioral law and economics (BLE) as a policy prescription platform and its influence on the regulations emerging from the Consumer Financial Protection Bureau (CFPB). We show how these regulations are inconsistent with the intent and purpose of improving consumer choices. We further demonstrate that the selective modeling of behavioral bias in the BLE framework causes an overestimation of the ability of regulators, who in actuality use inefficient, heavy-handed rules based on little if any real empirical findings of consumer irrationality. Accordingly, the broader lesson on the misapplication of behavioral economics goes beyond the ill-considered policies emerging from the CFPB.