Irrational, Exuberant Regulators

The econ blogosphere is passing around this graph, a statistical analysis of the frequency of laughter at Federal Open Market Committee meetings (based, simply, upon the frequency with which “[laughter]” appears in the text of the minutes):

This is, of course, not a scientific proof of anything. But it can serve as a funny illustration of a point I want to harp on as I continue to write about brain science and economics for the next year and a half. We very frequently read in popular magazines and newspapers that modern behavioral economics, by shedding light on individuals’ irrationality, demonstrates that we need more regulation. I don’t doubt that this is true in certain cases; and I do support many of the innovative regulatory “nudges” that behavioral economists like Cass Sunstein have proposed (i.e., making the default options on various things, like state forms related to organ donation or employment forms related to savings plans, the more broadly socially beneficial ones).

But what this graph hints at is that regulators and technocrats are also biased and irrational — in this case, the members of the FOMC appear to be as caught up in the “irrational exuberance” of the bull market and ever-rising real estate prices as AIG ever was. Indeed, since regulators are humans, our default assumption should be that any broad cognitive bias, such as infectious irrational exuberance, should affect them as much as speculators. So it is never enough to say, “Individuals are irrational, therefore we need more regulation, QED.” To make a strong case for more regulation, you need to have a good reason to be able to predict that, “In this case, taking account of the biases, blind spots, conflicts of interest, and irrationalities of both the marketplace and our proposed regulators, we can show that our proposed regulation on the whole will lead to a better outcome.” I fear that journalists, who don’t have time to make that case in full and who, instead, just dash off that familiar line, leave their readers with an inappropriately vague and optimistic view of how greater regulation can help.



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