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Behavioral Biases: How Markets Can Outperform Paternalism

by David Stadelmann

WP 2020-07.

Decisions in laboratory experiments often reveal departures from the rational decision maker framework. These findings have been employed to legitimize a paternalistic approach for the government calling for policies that protect citizens from their own behavioral biases. This paper argues against such an approach. First, we review experimental evidence showing that, if they are given the chance, subjects delegate some complicated decisions to other agents. Second, we develop a framework in which individuals who suffer from a behavioral bias may delegate some decisions to other individuals who have the ability/technology to help them solving this bias. We show that introducing a market for solutions to behavioral biases reduces the likelihood of biased behavior. Finally, we explore more standard government remedies (i.e., taxes) and show that market solutions can dominate such government interventions. To download the paper, please click on the icon below. stadelmanntorrens_delegation_final_11_11_2020.pdf

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