Behavioural biases in regulation

Something has puzzled me for a long time. Why are regulators so willing to apply achievements in behavioural economics to public policy in such a one-sided way? In the UK, there is a Behavioural Insights Team, whose mission statement is “to apply insights from academic research in behavioural economics and psychology to public policy and services”. Yet, to my best efforts (although I may not have looked thoroughly enough) I could not find anything else than how consumers are behavioural agents, which has to be taken into account when designing policies. Nowhere was there any discussion that regulators may also be characterised by the same behavioural biases.

Similarly, one of the OFT’s flagship new areas is the application of behavioural economics to improve the enforcement of competition policy. Yet again, nothing on the fact that case investigators, decision-makers, and regulators all display the same behavioural patterns as any other human being.

An article by James Cooper and Bill Kovacic does look at this and demonstrate how flawed heuristics and myopia may lead regulators to adopt policies closer to the preferences of political overseers than they would otherwise. Moreover, they show that regulatory bias is likely to endure longer than biases by market actors for whom the market provides a stronger corrective feedback mechanism than exists in regulatory policy-making.

But there are other obvious issues. Take confirmation bias. In many cases the same regulator (and often the same group of people) decide on whether to start an investigation into market behaviour and whether to intervene in the marketplace. Doesn’t it become more likely that these people will vouch for intervention, if they were the ones deciding to run a costly investigation at the first place? Also, when analysing the impact of this intervention, when done by the same people, it is hardly likely that they will report if anything goes pear shaped. Or think of anchoring (the phenomenon of relying to stubbornly on one piece of information in decision making): how likely it is that intervention happens based on information that is readily available rather than information that is needed to an impartial decision? Small competition authorities are very likely to show signs of some bandwagon effect when they decide to follow the decisions of larger agencies. The list could be followed on and on and this should be a warning sign to anyone who believes that more regulation and more public interventions into the market is for the unconditional benefit of the public.

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