Does Regulation Solve Behavorial Irrationality?
Professor Larry E. Ribstein has an interesting post and reference to a paper at his Ideoblog: The behavioral problems of regulators
Ribstein argues:
"We often hear about how weak-minded and emotional consumers and investors need regulation to protect them from themselves and from businesses that prey on them. This is particularly significant for financial regulation -- indeed, an important basis of such regulation is that people tend to be irrational when it comes to handling money and investments. And of course we’re hearing this a lot in the wake of the problems with subprime.I’ve been a skeptic of behavioral economics justifications for regulation in general and financial regulation in particular. See my Fraud on a Noisy Market. One basis of my skepticism is that the same theories that call for consumer protection also apply to the regulators themselves."
I haven't read Ribstein's article, nor David Hirshleifer's paper, so I won't be commenting on them.
But I do agree with Ribstein's conclusion: irrational and emotional consumers are not protected by regulation. Largely because that regulation avoids or ignores the behavioral root causes of irrationality - in franchising, we are told that proper due diligence will avoid bad purchases.
We aren't told how regulators solve the confirmation bias or Wason effect. (They haven't solved either problem.)
