Reference no: EM132204706
"And now, the very people you’d expect to come to the defense of markets are joining the attack: economists. “Competitive markets by their very nature spawn deception and trickery,” Nobel laureates George Akerlof and Robert Shiller write in their new book, “Phishing for Phools.”
Drawing on the insights of behavioral economics, the authors argue that markets give businesses an incentive to exploit behavioral weaknesses, such as a consumer’s desire for instant gratification over long-term welfare. Businesses that won’t sink to that level are pushed aside by the less scrupulous. This is “not some occasional nuisance. It is all over the place,” they write.
Mr. Akerlof, now at Georgetown University, shared the Nobel Prize in 2001 for demonstrating how imperfect information causes markets to break down, such as when sellers know more about the product (think used cars) than buyers. Mr. Shiller shared the prize in 2013 for showing that investors’ psychological biases can cause asset prices to deviate from their fundamental value.
While the insights of behavioral economics are now broadly accepted, applying them in a practical way isn’t straightforward. Around the world, governments have sought ways to use behavioral economics to improve the delivery of services and policies. Inspired by “Nudge,” the best seller by behavioral economists Richard Thaler and Cass Sunstein, Britain established a “behavioral insights team.” Last year, the White House (where Mr. Sunstein served under President Barack Obama ) did the same and last week Mr. Obama ordered federal agencies to incorporate behavioral science into their programs and rules."
Critics of Free Market Shouldn’t Overreach - WSJ - Sep 21, 2015
Questions:
Define "behavioral economics." What are examples of non-optimizing consumer behavior?
Does evidence that consumers do not maximize by systematically undervaluing future savings from more efficient cars, homes, and appliances imply that government regulation of the energy efficiency of these products is needed to promote economic efficiency? If so, what intervention would correct for consumer behavior?
According to a study, about 5 million people in the United Sates were victims of weight-loss fraud in a given year. The fraud ranged from a tea that promised to help people shed some pounds to fraudulent clinical trials and fat-dissolving injections. Do these frauds illustrate adverse selection or moral hazard?