Paternalistic Regulation and the Knowledge Problem

Lynne Kiesling

A recent essay from legal scholars Todd Zywicki and Josh Wright analyzes the proposed Consumer Financial Protection Agency, and over at Volokh, Ilya Somin adds to their analysis based on his own research. Both pieces are founded on an important core idea — paternalistic regulation that is grounded in the desire to mitigate the effects of individual cognitive errors and biases ignores the effects of the same cognitive errors and biases when incorporated in the political process. Put another way, political processes amplify and distort the effects of our inherent cognitive traits, by inserting them into processes that are also characterized by voter ignorance and that are prone to regulatory capture.

Much of the “nudge” literature on paternalistic regulation commits a Nirvana fallacy by overlooking the effects of our cognitive characteristics on the decision-making and outcomes from political processes. If we are going to evaluate the effects of our cognitive characteristics on outcomes from decentralized market processes, then the only apt comparison for making policy recommendations is to evaluate the outcomes of centralized political processes with those same cognitive assumptions.

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