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From homo oeconomicus to homo emotivus: The elusive quest for paternalism in the age of diminishing rationality
Behavioral economics argues that if left free to identify and pursue their wellbeing, people will often fail to achieve it because the neoclassical axiom of perfect rationality is never met in practice. On the contrary, people’s thinking is infected by a variety of biases and cognitive distortions and they are unable to escape from the unconscious universe of their own emotions and prejudices. Consequently, this is supposed to present an opportunity for a positive state intervention. The main message of the present paper is that there is a danger to throw out the free market baby with the neoclassical bath water. While it is true that people do not behave according to the prescriptions of perfect rationality models, the case for paternalism is no better now than before the import of psychology in economics. Judgment biases and emotional impulses notwithstanding, social planners do not enjoy a comparative advantage in allocating resources.
1 Introduction
In the intellectual panoply of free market’s critics, the idea that imperfect individuals need paternalist guidance is as old as it can be. Curiously, although classical economists were knowledgeable about the failing nature of human ...