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Home | Library | Behavioral Economics: At Odds with Freedom

Behavioral Economics: At Odds with Freedom

February 12, 2009

Tags Free MarketsMedia and CultureOther Schools of ThoughtPhilosophy and Methodology

[Free Market Madness: Why Human Nature Is At Odds With Economics — And Why It Matters. By Peter A. Ubel. Harvard Business Press, 2009.Xiv + 257 pages.]

Free Market Madness cover 

Peter Ubel has written an informative and useful book, but not entirely for the reasons he thinks. He presents a very well-written and easy-to-understand account of behavioral economics; in doing so, he illustrates, contrary to his intention, the dangers that this movement poses to our freedom.

Ubel, a physician trained in economics and psychology, uses behavioral economics to advocate restrictions on the free market. The market, he thinks, has its place: he quotes Adam Smith on the benefits of the division of labor and enthusiastically agrees. But market fanatics have gone too far. They defend the shocking contention that people should be free to choose as they wish, so long as they do not use or threaten force against others. Accordingly, these misguided people defend an unlimited free market: in it, the choice of consumers determines what will be produced.

Ubel agrees, at least to a large extent, that the market does exactly this. (Like most economists except Austrians, he makes an exception for public goods and externalities, but his attack on the free market in this book lies elsewhere.) But he dissents from the view that this justifies the free market. It would do so only if people chose rationally in their self-interest, and this by no means always holds true.

Science, Ubel tells us, has demonstrated people's irrationality beyond reasonable doubt. Ubel's tale here has three principal heroes: the psychologists Daniel Kahneman and Amos Tversky, who performed pioneering experiments that show how unreasonably people decide, and the economist Richard Thaler, who developed similar ideas and brought the work of these psychologists to the attention of the economics profession. Their research explodes market fundamentalism

How does it do so? For one thing, our heroes say, people often make mistakes in reasoning. If people reason wrongly, how can they hope to get what they really want? The fact that the market gives them what they choose has little significance if this choice results from logical failings. I do not deny the problem: far be it from me to claim that people reason infallibly. But a number of the examples that they cite to make their case strike me as unconvincing.

One of the most famous of these concerns an imaginary young woman.

Linda is thirty-one years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. (p. 35)

People presented with Linda's story assess the probability of various statements, including "Linda is active in the feminist movement," "Linda is a bank teller," and "Linda is a bank teller and is active in the feminist movement." Many people rate the probability of the third statement higher than the second, but of course it cannot be. The probability of a conjunction must be lower than that of any of its conjuncts, so long as the conjuncts are neither all certain nor all of zero probability.

I do not think this result demonstrates that the people in the survey have reasoned wrongly. Suppose, when asked about the probability of Linda's occupation, people think it very unlikely that she has chosen to be a bank teller. They think, by contrast, that she very likely identifies with feminism. When asked about Linda's being both a feminist and bank teller, they may not recall their earlier estimate of her being a teller. Rather, they may simply lower their estimate that she is a feminist, to reflect the new information that she is also a teller. To convict them of fallacy, they should also be asked: "Given that you estimate the joint probability of Linda's being a feminist and a bank teller as x, what is the probability of her being a bank teller?" Only if they do not give an estimate higher than x should they be convicted of fallacy. Along similar lines, they should be asked, "Given that you estimate the chances of Linda's being a bank teller as y, what is your estimate of the probability that she is both a teller and a feminist?" Only if the new estimate is y or higher have they fallen into error.

Although the example does not convince me, for the reason given, one must at least admit one thing. If people in fact do estimate the probability of a conjunction higher than that of any of its conjuncts, they have made a mistake. Other examples that Kahneman and Tversky give do not suffice to show this. They present a number of cases in which people violate Leonard Savage's axioms of rational decision. For example, people tend to prefer getting an amount of money for certain to a chance of getting a larger amount. Given the strength of this preference, one can in some instances derive judgments of preference for probabilities less than one of getting various amounts of money that contradict each other. (I shall omit numerical examples, as I almost always botch them.) But, contrary to what Ubel says, this does not at all show that "If you chose this way [that generates these judgments], my friend, you are contradicting yourself" (p. 41).

Ubel has missed the boat. The person who values certainty does not judge solely by estimates of probabilities: he has added something, the high value he places on certainty, to the equation. The fact that he would make contradictory judgments if he were to decide only on probability judgments has no force. What Ubel offers as a contradiction is nothing more than a version of the familiar Allais paradox, a major challenge to the Savage approach. Amazingly, when Ubel claims contradiction, he cites Allais as a reference (p. 229, note 11): has he read his source? In like fashion, people who view the same probability distributions differently when they face a loss from when they face prospective gain do not commit any mistake in reasoning in so doing.

One might imagine Ubel responding in this way:

Enough of these niggling technical points. Even if my conclusions can be disputed, irrational decisions put human lives at stake. What about, e.g., smokers who ignore the risks of lung cancer? Must not the state step in to protect these people from themselves?

Ubel himself admits, though, that smokers do not underestimate the risks of contracting lung cancer.

By 1985, experts had estimated that lifelong smokers faced a 5–10 percent chance of developing lung cancer… But it paled in comparison with the risk perceptions of the people responding to [economist Kip] Viscusi's survey. On average, Viscusi's respondents, many of whom were adolescents, … thought that lifelong smokers faced almost a 50 percent chance of developing lung cancer. (p. 133)

Whatever the failings of smokers, does not Viscusi's research give us reason to think that smokers have not acted irrationally through turning a blind eye to risk? If you want to show smokers irrational, must you not seek some other way to do it? Ubel does not agree. He spurns Viscusi's argument as "hyperrational." People often decide matters in the grip of emotion rather than through calculation. Thus, even if smokers profess to believe smoking highly risky to health, they have not taken these risks to heart. They do not really picture to themselves in its full intensity what having lung cancer would be like. Further, people's numerical assignments of risk cannot be trusted. Many people lack all facility with how numbers work; they think, e.g., that "fifty percent" is the proper response when they do not know the correct chances.

It is odd that Ubel bemoans the failure of smokers to be sufficiently frightened by the dire peril of cancer, when he elsewhere laments that people often decide matters through emotion and ignore the dictates of reason. Evidently, one either should or should not decide emotionally, depending on whether the conclusion comes out as Ubel wishes.

Further, how does he know that smokers have not adequately imagined the ills that their habit might bring them and that they are innumerate as well? Ubel does no more than describe these problems; he fails to show that smokers fall victim to them. Perhaps the argument is that smokers must exhibit some cognitive or emotional failing, since otherwise they would not decide to smoke; but this blatantly begs the question.

One medical condition worries Ubel even more than lung cancer. In his work as a physician, he often treats morbidly obese patients. Their eating habits shorten their lives. An epidemic of obesity confronts America, and naturally the free market bears the blame.

Because cooking takes less time and labor than it used to, the cost of eating has dropped…This is what I mean when I say that free markets have created the obesity epidemic. Advances in food technology have reduced the monetary and time costs of eating, and these technological advances are a result of free market enterprises responding to consumer demand. Some market defenders might dispute me on this matter, pointing out that the obesity epidemic has only taken off in the last several decades, whereas capitalist enterprise has only been around for at least two hundred years. But by this reasoning, we'd be forced to conclude that free markets aren't responsible for HDTVs, or iPods, or aluminum siding, none of which existed at the dawn of time. (pp. 27–28)

Ubel's argument, then, is that technological advances, made possible by capitalism, bear primary responsibility for the obesity epidemic. He rightly notes that the fact that capitalism long preceded the epidemic leaves his argument intact. But if the technological advances to which he draws attention arrived substantially before the obesity problem, his argument would indeed be open to question.

In fact, he admits at one point, without noticing how it ruins his argument, that exactly this happened: "In 1991, only four states in the United States had obesity rates of 15 percent or higher; by 2001 some thirty-seven states did" (p. 10). Surely the technology behind easy-to-prepare food was well in place in 1991; modern methods of food preparation did not spring up only in the last twenty years. One must beware the fallacy of thinking that the good old days when people slaved over the stove ended only a few years ago. If so, how can technology, and behind it the free market, be blamed for mass obesity?

Regardless of its causes, though, obesity unquestionably poses health risks to many people, and Ubel wants to bring in the state to rectify matters. If you object to him that people ought to be free to decide how much to eat, or whether to smoke, for themselves, he will answer that their choices, marred by cognitive mistakes, cannot be considered the outcome of rationally self-interested deliberation. This contention, I have endeavored to show, he has failed to prove.

But he also says something else. Why, he asks, should one exalt freedom as the supreme political virtue? Must not freedom be balanced against other components of the good life? Ubel invokes Aristotle, who

viewed one of the major functions of society as being to create an environment that develops virtuous actions in its citizens. We could do worse than to follow his advice. (p. 224)

Ubel for once is right. In order to decide on correct social policy, one must posses a sound philosophy of ethics and politics, one that will consider how various goods can be achieved. Despite this bow to philosophy, though, Ubel shows no awareness that state paternalism is a controversial issue. For him, once we know that a choice has bad results, we can at once legitimately ask what the state can do to improve matters. To think otherwise makes a fetish of freedom; and he quite readily describes his proposals as paternalist.

Has he ever so much as glanced at Mill's On Liberty? In a famous passage in that essay, Mill said,

The object of this Essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will is to prevent harm to others. His own good, either physical or moral, is not sufficient warrant.

Ubel is perfectly free to disagree with Mill's claim and to advance arguments on the other side. But he shows no awareness of the essay or the enormous critical literature it has generated. The whole controversy has passed him by: for him, opposition to paternalism reduces to the blathering of free-market fundamentalists. The fact that he elsewhere gives a very good account of Mill's criticism of Bentham makes his omission even stranger.

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Even if one did have a philosophy that justified considerable state action, a further problem would arise — one that Ubel also ignores. Why should we think that existing states would act rationally to carry out the dictates of that philosophy? Would not holders of state power be subject to exactly the errors of rationality that Ubel complains about in participants in the free market?

The matter of course worsens if, like Oppenheimer, Nock, Chodorov, and Rothbard, one views the state as a predatory gang. Then we have no reason at all to think the state would improve on what free individuals can achieve for themselves. Ubel mocks those who speak of a "nanny state"; but the real problem is not that the state officiously looks out for our best interests at the expense of our freedom.[1] It is that the state exploits us.

David Gordon covers new books in economics, politics, philosophy, and law for The Mises Review, the quarterly review of literature in the social sciences, published since 1995 by the Mises Institute. He is author of The Essential Rothbard, available in the Mises Store. Comment on the blog.

This review originally appeared in The Mises Review, Spring 2009.

Notes

[1] In his challenge to those who complain of a nanny state, Ubel says, "One of my favorites is a book titled A Nation of Sheep, in which the government isn't portrayed as treating people like children, but, instead, as if they were mindless animals" (p. 206). This grossly misrepresents Judge Napolitano's book, which argues that people have failed to protest assaults on their civil liberties, principally occasioned by the so-called war on terror. Once again, whether Ubel has read his source is questionable. See my review of Napolitano's book in the Mises Review, Fall 2008.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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