Behavioral economics is a branch of sociology
Consumer protection and behavioral economics
Since the financial crisis at the latest, economic research and policy advice have been exposed to increasing criticism. The human image of Homo oeconomicus, the completely rational actor, on which most models are based, is too far from reality. The political recommendations for action are not feasible or even harmful if the actual behavior of people and markets is lost.
Therefore, interdisciplinary analyzes of human behavior are increasingly coming to the fore, to which even an entire branch of research is dedicated: behavioral economics. She tries to enrich the image of the rational actor with findings from psychology and sociology and thus bring economic models closer to reality. In experiments and theoretical analyzes, it shows that people only act rationally to a limited extent. They seldom have the possibilities and skills to collect and evaluate all the information that is relevant for a decision, as there is usually simply too much. Misjudgments and behavior that is more harmful than good in the long term are often the result.
As the complexity of the environment and its speed of change increase, some consumers feel increasingly overwhelmed. This threatens the acceptance of the market economy, whose basic concern is the best possible supply of goods and services to consumers. The profitability of the company is ultimately only the result of the satisfaction of the demand expressed in the market. However, consumer sovereignty is a prerequisite for fulfilling this promise. The less this is guaranteed due to unequal power relations or the exploitation of information asymmetries by the providers, the more doubts about the fairness of the market economy system grow.
As a result, the state intervenes more and more in the market economy processes and tries to prevent incorrect management and wrong decisions. However, the side effects of such measures are sometimes so strong that viewed as a whole they lead to a reduction in welfare.
Behavioral economics therefore tries to strike a balance between more state regulation on the one hand and the idea of completely rational decisions by informed consumers on the other.
It pays to think outside the box of standard microeconomic theory. Some governments are already putting the knowledge they have gained into practice. Behavioral economists have been advising the British and US governments for a number of years. In March 2015, such a team also started its work in the Federal Chancellery and is intended to help orient political measures more closely to real human behavior - with the aim of improving life and welfare in the long term. Critics suspect that the state is trying to manipulate and incapacitate citizens.
Consumer protection is a central area of application of behavioral economics. Because it is precisely in the role of consumers that people are vulnerable due to their information disadvantage, which is reinforced by their limited rationality. Protective measures that focus on the rational consumer - such as better information provision - are insufficient when new research results are taken into account. Practical, modern consumer protection, which increases the well-being of the citizens in the long term, must be more intelligent than the previous state interventions. Above all, these have led to more laws, more bureaucracy and excessive demands on consumers due to many detailed regulations. This protected the well-informed, legally savvy consumers or those advised by lawyers in particular, but not the broad mass of consumers. In some cases this also led to the exploitation of regulations by resourceful or audacious consumers and to a brutalization of morals in business dealings.
In the present IW analysis, the causes and characteristics of restricted rational action are first identified (Chapter 2). Building on this, the existing and new challenges and solution approaches for modern and effective consumer protection are considered (Chapter 3) and illustrated using selected examples (Chapter 4). The different intensity of interventions in consumer sovereignty is always taken into account, ranging from recommendations and default settings to bans. The guiding principle is that free-market processes and the free decision of consumers should be strengthened through behavioral economic measures, as these are the cornerstones of a free order. In this way, the wishes of consumers are better fulfilled than with a “one-size-fits-all” policy. Chapter 5 closes with an outlook.
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