Regulators are people too

The behavioral economics of government behavior remains a drastically underexplored field.  I recently received this email (excerpted) from the Brookings Institution:

In Behavioral Public Choice: The Behavioral Paradox of Government Policy, Gayer and Viscusi analyze several recent regulations, finding that many government actions are in fact also subject to bias.  Regulatory agencies have recently relied upon behavioral economics, a relatively new economics field, which identifies cognitive limitations and psychological biases that lead people to make choices that cause self-harm, thus suggesting a justification for government intervention.  However, Gayer and Viscusi develop an framework of “behavioral public choice” that recognizes that government officials are also subject to behavioral anomalies and to public choice incentives that can further lead to welfare-reducing or harmful policies. They document several government policies that institutionalize rather than overcome behavioral biases, as well as regulations that justify inefficient mandates “based on weak or nonexistent evidence of consumer irrationality.”

For example, the Environmental Protection Agency, the Department of Energy, and the Department of Transportation have recently justified mandating energy-efficiency standards for durable goods (cars, appliances, etc.) based on the assumption that consumers (irrationally) do not take into account future cost savings from buying an energy-efficient product. Yet the agencies offer little or credible evidence that consumers are persistently irrational in their purchasing decisions for energy-consuming products. The authors note that this approach to justify regulations based on weak evidence of consumer irrationality “illustrates a key negative consequence of misusing behavioral findings: the welfare loss associated with ignoring heterogeneous preferences.”


Coase would have loved this. What's not clear, though, is whether "overenforcement" is worse than "underenforcement"? Here's my approach to this question:

While I'm generally on this particular bandwagon, also I think it is very likely that consumers do not price in the future cost of electricity in their durable goods purchases. Though of course I have no evidence for this, except that anecdotally I have never attempted to calculate those costs myself, or to look them up.

But I agree regulators should have some better evidence before they move.

Forward-looking car buying are looking for comfort and longevity, not the environment, and they're working with limited budgets. And we know consumers don't account for future income well (the losses less so than the gains).

I actually greatly appreciate that the EPA takes care of these standards so I don't have to ponder yet another dimension during my car-buying experience. It is stressful enough as is!

Tackle the externality at its source (carbon emissions), not in every corner of the economy (the amount of gasoline your car uses).

Actually, I was thinking of washing machines and fridges, not cars. In my experience fuel efficiency is indeed one of the top things people looks for in a car. Of course they weigh it up against other goods things.

So in the case of cars, no I would not like regulators stepping in and saying "No, whatever trade off you make on other things, there must XYZ level of fuel efficiency".

I think most consumers have very little knowledge of how much power most appliances use, and thus are unlikely to calculate the present value of future electricity purchases when buying them.

And many consumers are just not mathematically literate. For example, I've known people who refuse to use an electric food chopper because they're concerned about how much energy it uses, apparently not recognizing that even if it used a great deal of power (it doesn't) such a thing won't use much energy because it's only used now and then for a few minutes at a time.

Perhaps those government stickers actually help consumers make rational choices, but I have my doubts. A basic problem here is, consumers are aware of spending money to fuel their vehicles, but their electric bills just lump everything into a single bill and thus there's no "OMG, that old refrigerator is costing me $50. per month!" as might happen with an old, fuel-hungry motor vehicle.

And then there's the economic disconnect in rental properties, where the party who buys the large appliance is usually not the one who will pay for electricity to run it...

There are giant yellow stickers on most major appliances stating typical costs for annual energy consumption.

When the only tool you have is a regulation, every problem looks like a nail salon.

"consumers (irrationally) do not take into account future cost savings"

My current favorite linguistic trick there. The (irrefutable) literal claim is that two or more consumers fail to take that into account. But the sentence's rhetorical role is to claim that "the bulk of consumers fail to a significant degree to take into account future cost savings."

The NY Times does this habitually. "Germans want to force Greece out of the Eurozone." Yup, at least 2 Germans surely do.

They recognize the irrationality of decision making.

Okay, they're half way there. Now they can agree to third-party cost benefit analysis of their decisions. And agree not to hide behind private email accounts.

The examples you cite are really the most benign forms of regulatory bias. The Obama administration has used the regulatory agencies to advance goals that would never have been agreed to by the voters. They have just issued regulations to impose federal requirements on zoning, to add to regulations to totally revamp overtime pay. Prior grabs are by the EPA to regulate CO2 and attempts to bring all waters under Federal control. The regulators are overwhelmingly in favor of increased government control over the citizens, and this new tyranny doesn't register with the low information crowd.

I really love the "people don't care about my petty concerns, they must be ill-informed" posturing. Never fails to get a chuckle from me. They are even regulating CO2! It is a classic!

Well the EPA was forced to regulate CO2 and that occurred under bush. You can go ahead and blame Obama but the Supreme Court interpreted the Clean Air Act as requiring CO2 regulations.

Regulators are almost always professionally and intellectually inferior to the regulated. The smart guys always get better paid jobs in banks, investment funds and hedge funds.

Not sure about moral inferiority/superiority, but according to my personal experience of a regulated subject, I firmly believe there is a lot of envy and schadenfreude among regulators. After all, they are people, too.

Anyone who doesn't want to work at a hedge fund is immoral and stupid. They go into public service to get revenge.

It is hilarious, or maybe just sad, that people actually believe this. I firmly believe you should write for the Onion.

They go into public "service" because they are lazy and/or stupid.

You're making yourself sound very intelligent here. Keep it up.


People work for the government mainly because they are attracted to the short work hours/holidays and the lack of consequences for failure. Hence, lazy.

If you dispute the stupid, you must have never had any interaction ever with a bureaucrat.

No, they go into public service because they value their leisure time, and are smart enough to have found a way to earn a decent salary while maintaining a high work-life balance. It's nice, you should try it.

Not quite.

They go into the public sector for something the private sector, above the shitty retail/service job-level, no longer offers: job security.

The trade-off is 1) lower pay than the private sector and 2) having to deal with the mind-bogglingly plodding and absurd bureaucracy. If you think the paperwork and hassle is bad dealing with the government from the outside, it is an order of magnitude worse on the inside.

Job security is the last refuge of the lazy and incompetent.

"they value their leisure time"

Of course, the lazy usually do.

Job security is the last refuge of the lazy and incompetent.

Mood affiliation. Ever had a chronically ill family member? Job security is pretty important in a lot of different contexts. And as the parent commented, they are willing to take less money for that security.

Not being a regulator myself but knowing at least one, I'd say "no" to the envy and "yes" to the schadenfreude. When some clown comes in swinging his dick, I'm not sure how else you're supposed to feel when pointing out the ways his arrogance and obliviousness is hurting the public interest.

'For example, the Environmental Protection Agency, the Department of Energy, and the Department of Transportation have recently justified mandating energy-efficiency standards for durable goods (cars, appliances, etc.) based on the assumption that consumers (irrationally) do not take into account future cost savings from buying an energy-efficient product.'

Look at American car sales over decades by class, MPG, and influence of CAFE standards and fuel cost at time of purchase - the data exists, after all. And it is easy to demonstrate that American auto purchasers 'do not take into account future cost savings from buying an energy-efficient product.' Nor do American automobile manufacturers have any apparent interest in offering such models - this model policy reflecting the decline of the American automobile manufacturers in world markets, as American auto producers continue to service an irrational market while also opposing CAFE standards.

'Yet the agencies offer little or credible evidence that consumers are persistently irrational in their purchasing decisions for energy-consuming products.' The above mentioned data is not exactly hidden - or or as just the top three hits at google for 'cafe american mpg data transportation.'

Irrational purchasing decisions are at the heart of the consumer economy. If consumers were serious about future energy consumption sales of clothes line rope and clothes pins would be high and that of electric dryers would be low. Line drying clothes is the easiest and cheapest use of solar energy but it's now almost extinct, maybe because it involves getting off one's duff and moving around in a non-airconditioned environment.

In Australia people I find that people dry clothes on a washing line. In Europe I find they mostly do it in a drying machine, or by hanging the things of their indoor furniture. Especially the heaters.

It all seems pretty rational to me.

How dare people decide their time is more valuable than that!!!

The fact that U.S. auto purchasers don't buy the most fuel-efficient vehicles available doesn't mean that they don't take fuel costs into account, only that they don't put the same weight on those factors as the EPA or you. That doesn't make their preferences irrational (any more than not buying food based on maximal caloric content or winter coats based on maximum thermal efficiency). And their preferences don't even really differ much from consumers in Europe, where there has also been an SUV boom. It's true that in Europe those preferences have been (somewhat) constrained by $8/gallon gas and the need to drive and park on narrow streets. But even so when driving on the auto-route, it's certainly not an unusual experience to have a BMW X6 go blowing by at some absurd (and inefficient) speed, and the Ford Escape that's so popular in the U.S. was developed in Europe (where it is sold as the Kuga).

This. %99 of the time when someone says 'consumers are irrational' they mean 'consumers are making choices that i dont like'

Why don't we hear about time shares anymore? Sometimes they show up in the "free" section of craigslist but nobody's tried to sell me one lately.

Look here prior_approval.

For comparison, she defined FES and RFS regulations that would achieve a 20% cumulative reduction in gasoline consumption between 2010 and 2050. She also designed a gasoline tax policy that would elicit the same cumulative reduction. (The tax was implemented as a constant percentage of the gasoline price, starting at $1.00 per gallon in 2010.) Consistent with other studies, her analysis of those three measures indicates that taxing gasoline is 6 to 14 times less costly than the alternative policies in achieving a 20% reduction in the use of that fuel between 2010 and 2050.

"Yet the agencies offer little or credible evidence that consumers are persistently irrational in their purchasing decisions for energy-consuming products."
When gas prices fall, sales of gas-guzzling behemoths go up, and when gas prices rise, sales of gas-guzzling behemoths go down. Could it be that consumers assume, irrationally, that gas prices tomorrow will be the same as gas prices today? Companies depend on the irrationality of consumers; otherwise, why would they advertise. Look no further than today's style in men's suits: why would grown men want to wear ill-fitting suits that make them look like Pee-wee Herman?

When gas prices fall, sales of gas-guzzling behemoths go up, and when gas prices rise, sales of gas-guzzling behemoths go down.

Isn't this rational behavior?

Companies depend on the irrationality of consumers; otherwise, why would they advertise. Look no further than today’s style in men’s suits: why would grown men want to wear ill-fitting suits that make them look like Pee-wee Herman?

If only they'd put me in charge! Men's suits would once again be well-fitting and proper!

"Isn't this rational behavior? "
No, cheap gas today doesn't cheap gas tomorrow. Someone can buy a car when gas is cheap and end um spending more money than someone who bought a car when gasoline was more expensive.

I like big cars (actually, I don't), so I buy a big car when gas is cheap. When gas goes up, I trade it in and get a small car. What am I missing here? Home Depot stock today may not look so good tomorrow, so never buy stocks? All of existence is a gamble.

People vote with their dollars for their individual preferences. The fact that you disagree with them doesn't make them irrational.

By this logic, the gas-guzzler's price would plummet when gas prices went up, forcing you to take a big loss on your sale.

The real question is how well immediate changes in gas prices are correlated with gas prices over the lifetime of the vehicle in question.

If everyone is doing the same thing, then you've just bought high and sold low. Is the loss you take smaller, equal to or less than the saving you made by enjoying the car when petrol was cheap?

If current gas prices are at least somewhat indicative of future gas prices, and the cost of getting more accurate information is high (or if it just isn't available, which it probably isn't), then it may very well be rational behavior.

There is no reason to think consumers know which way gas prices will go just by knowing current prices. Maybe those brilliant consumers should all go play in the commodities market.

Sure, irrationality is one explanation. Saving up for a big car and buying it when it seems most affordable doesn't sound all that irrational to me, however.

The reasons people buy gas-guzzlers are categorically different from the reasons people buy little sedans. If you're the type of guy who likes to pinch every penny and maximize your miles-per-gallon, then you're already in the little sedan category. What does that have to do with the big pickup that just towed an even bigger trailer up to my neighborhood, loaded with landscaping equipment? You really think that guy's going to be better off buying a sedan?

Never mind that last question; I have another: Do you really think that guy is irrational for buying his truck when gas prices are down?!?

It's about smart regulation. There is probably a lot of environmental protections and food safety oversight, for example, that needs to be put in place but hasn't. On the other hand, things like overly restrictive zoning, trade licensure and medical scope of practice laws tend to hurt growth and enrich a few at the expense of others.

I suspect we would get a greater return by better policing the current regulations than by adding more.

The F-150 has been the best selling car for 30+ years. Could it be that consumers are a little irrational?

What's irrational about buying an F150?

I speak for the fraction of my family that lives in Illinois. Their truck has never touched a dirt road or carried anything dirtier than big boxes from Costco. Deep snow may be a concern but it's not a 4x4 so it is as useful as any other sissy car. People that carry lots of stuff for work or tow weekend toys need a pick up or a van. Urban and suburbans with white collar jobs.........I'm not sure.

White collar folks have lots of uses for a truck. They're good for hauling your son's baseball team's equipment around, appliance purchases, mulch for the yard, moving, etc. The fact that they may do this only occasionally is kind of irrelevant. The F150 is still functional transport even when it's not hauling cargo.

Labelling somebody's actions as "irrational" because their preferences differ from yours shows a lack of objectivity. Having anal intercourse with lots of different men isn't my idea of a good time, and the disease rates of male homosexuals suggest I avoid the activity, but that doesn't mean deviants who find it highly pleasurable are "irrational."

Do you consider it irrational to consider anything other than pure utility when buying any product - furniture, houses, shoes, clothing? Is it irrational that we're not all walking around wearing sneakers and gray sweats at all times? Is it irrational for sorority girls to walk around in miniskirts and heels...and to drive around in Jeeps that they never take off-road? When will the sensible regulators put and end to this kind of madness?

I understand freedom but there are things called externalities. I like to smoke and no one can tell me stop, but I understand it's not good to smoke in a bus with children. I'd really like to smoke in a 12 hour flight, but you know.......regulations.

Same with cars, freedom is sacred but if a moronic regulation can make cars have better MPG yield that has a good impact on air quality and many things more, why not? Because it is a regulation?

You do not actually "understand" freedom.

Freedom is about unloading your externalities onto everyone but yourself. This guy doesn't even know about the tyranny of fuel efficiency.

But that's a completely different argument than irrationality, which is what is being discussed here. The irrationality argument for regulation is that consumers are impulsive/ill-informed/don't know their own minds (e.g. are overgrown children) and so wise regulators need to step in to protect them from themselves.

"The irrationality argument for regulation is that consumers are impulsive/ill-informed/don’t know their own minds (e.g. are overgrown children)" YES "

" wise regulators need to step in to protect them from themselves. NO"

Bad argument. Because purchasing decisions could be irrational it doesn't necessarily follow that regulations are necessary.

The F-150 has never been the best selling car.

Its a truck.

I drive a truck and I always want one truck in the family because about once a month having it is very useful. I often lend it out to friends. I just saved $60 on the delivery of a washing machine.

Consumers believe what they want to believe, or what they are conditioned to believe, whether the product is a car, a suit, or an economic theory; indeed, when it comes to economic theory, students are often conditioned to believe what history tells them is unbelievable.

Welcome to the Idiocracy, boys and girls. Santa Claus is a liberal,. God is a conservative.

"God is a conservative."
That explains why the Universe is so mismanaged.

And, it's your duty to make it right.

It is a shame "God's people" keep trying to make it even worse. Well, a Conservative is someone who would try to convince God that Earth should remain "without form, and void" or, better yet, scrap the Earth idea, the Universe always was fine the way it was.

The effects (intended or actual) of regulations are largely irrelevant. The purpose of regulation from the point of view of those writing them is to enlarge the budget and staff of the regulator. The regulator uses whatever tools are available to justify this, but the purported justification for a regulation, whether behavioral economics today or price stability in the New Deal, is only there to placate the masses. As Sir Humphrey Appleby put it, by definition a big department is more successful than a small one. That is the actual justification.

This issue is not limited to government. In the private sector, responding to bias or to immediate self interest vs employers/consumers interest is also the norm. The only difference is you can't fire the government.

The evidence supporting mandatory standards for certain types of energy-using consumer durables is overwhelming and the authors of the study conveniently misrepresent it by framing it in terms of consumer irrationality. It is not about consumer irrationality. It is about rational ignorance, asymmetric information, split incentives, and similar factors.

Here are links to articles I posted in 2006 on the need for mandatory power supply efficiency standards. "Power supplies," in this context are the devices that convert AC line voltage to DC voltage for electronic devices.

Regulation may be necessary, but citizens should at least be aware of the risks inherent in its use.

One such risk is tunnel vision. For example, a regulator who seeks to reduce accidents at railroad crossings may demand that train horns be blown when approaching all crossings. And when doing so reduces accidents, the regulator feels justified.

Yet the horns also lower quality of life for those living near the crossings, and by depriving residents of sleep may lead to increased loss of life due to drowsy driving, and that regulator, who's focused on the regulatory task at hand (reducing accidents at railroad crossings) is unlikely to take these costs into account if they're not part of the metric used to justify the regulation.

Another risk is politicization. For regulation is done by government, and therefore it is inherently political. Yet calculations of political benefit are far different from calculations of overall public benefit, and attempts to limit political influence on regulators will always be insufficient as they can't eliminate the influence of the political interests of the regulators themselves. We like to think that government governs with the consent of the governed, yet the very need to insulate regulators from political pressures also limits the rights of The People to dismiss them when they act unwisely, unjustly or even dishonestly.

And then there's the risk of excessive caution. Regulation is mostly done to prevent harm and therefore no regulator is likely to be dismissed even when the the cost of avoiding that harm (opportunity cost, for example) is excessive. Especially in cases where the harm is just a possibility yet the opportunity cost is certain.

Just to mention a few.

Yes! Federally mandated automobile fuel efficiency standards played no role in the bankruptcy of the US automobile industry. It was the unions! No, Lehman Brothers! No AIG! No the housing bubble! No Bush!

At play is The Law of Diminishing Returns on Centrally Planned, Command and Control Economies. A couple thousand credentialed ideologues in unison with coercive, deceitful politicians deploy tends of thousands of regulations and regulators to force theories on millions of rational market actors. It may take more than a hundred years (1913 beginning of the end of the strength of America) but they are doomed to spectacularly fail.

What part of 'America's strength' is less now than it was in 1913?

Related question, when in time can you locate a functioning society that did not have top down regulations?

Related comment: historically you don't like to asnwer questions, only spout opinions. Please be aware that no answer = a pretty weak opinion

"America can only be strong if I can poison everyone else's lungs. "

The purchaser doesn't isn't always the consumer. For example apartment owners are purchase appliances for rental units and the renters pay the utilities. The owner isn't concerned about energy costs and the utility costs are a minimal concern to the renter compared to the overall cost of the apartment.

Consumers are FAST,

Regulators are SLOW.

Can't let the thread die without this classic from Virginia Postrel:

"Technocrats and Glowing Panties"

Forgot to include:

"In the behind-the-scenes meetings that establish the rules, no one speaks for pleasure. You can't measure aesthetic enjoyment with a light meter, so enjoyment doesn't count. We wind up with a law that makes it illegal to reproduce a Victoria's Secret. Legislators don't even know what they've passed."

The error, if it is an error, in mandating "energy efficient" assets is probably mis-estimates of the energy savings rather than mis-estimates of consumer decision making. In other words, its misuse of engineering findings, not of behavioral economics findings. The questing should be, do the regulations increase income when correct energy use data and correct pricing of CO2 externalities are used?

Bureaucrats have become ideologues trying to ingratiate themselves with Washington political types. You have no idea how political government agencies have become. It's like the Soviet Union.

This whole line of research seems like misdirection to me. The point isn't whether consumers rationally consider their own costs in making a purchase, it's whether they consider externalities like climate change or what have you. Isn't the idea that one doesn't care about externalities pretty much baked into the definition of the concept? The point of regulation is not that regulators believe consumers are acting irrationally, but rather that public goods are not being adequately considered.

It seems this research is trying too hard to dress up things that everyone already knows as novel. Oh, there's a welfare loss from ignoring heterogeneous preferences? Do tell!

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