COGNITIVE-BASED REGULATION: NEW CHALLENGES FOR REGULATORS?*
by
Fabiana Di Porto
(University of Salento)
and
Nicoletta Rangone
(Politecnico of Milan)
25 October 2013
Summary: 1. Introduction. 2. The need for a cognitive-based approach to the regulatory
process. 3. Cognitive sciences in practice: enriching traditional regulatory strategies. 4. The
emergence of new regulatory strategies: operational empowerment and nudging. 4.1
Operational empowerment options. 4.2 Nudge strategies. 5. Lesson drawing for regulators:
how to choose among different regulatory options?
1. Introduction
The economic paradigm of rational choice (if adequately informed) tends to frame reality in
an interpretative scheme which does not necessarily correspond to reality itself. The cognitive
sciences
1
have discredited this paradigm by stressing that people are driven by cognitive
short-cuts, social norms and pressures.
*
This paper has been subject to blind peer-review. It will be included as a chapter in L. Arnaudo (eds), Cognitive
law: A collection of Italian studies, Rome, Luiss University Press, forthcoming, 2014. The paper has been
conceived and structured in common. However, paragraphs 1, 3, 4 and 4.1, were written by F. Di Porto.
Paragraphs 2, 4.2 and 5 were written by N. Rangone. Comments are welcome. Suggested quotation: F. Di Porto
and N. Rangone, Cognitive-based regulation: new challenges for regulators?, federalismi.it, 20/2013.
1
We should acknowledge that no generally accepted theory exists defining, classifying and establishing a clearcut distinction between cognitive sciences and behavioural studies. We use here “cognitive sciences” as a
general label encompassing different disciplines which investigate human learning and decisions and their
federalismi.it n. 20/2013
Indeed, the cognitive sciences have shown that the real people are all but perfectly informed
and rational utility-maximisers; rather, they use mental shortcuts and heuristics, and are
subject to recurring biases in decision-making
2
(such as, for instance, status quo bias, time
inconsistency, loss aversion, or short term costs overvaluation against long term benefits).
Such errors are due to intuitive rules which enable people to simplify choices (heuristics) used
in the collection and processing of information for decision-making, such as availability,
representativeness and anchoring 3. Morals too, as well as emotional contexts, can condition
human decision-making 4.
Dealing with these and similar cognitive errors is something regulators cannot ignore,
provided that even the most sophisticatedly designed regulation may become ineffective or
fail to reach its goals where all or part of the regulated group respond in an unpredicted way.
In this perspective, the novelty and great contribution of these studies is an unprecedented
attention to real people. By analysing real people’s decision-making mechanisms and
reactions, the cognitive sciences have shown that people, firms and decision-makers, while
not necessarily always being rational, are not always irrational either. As an obvious
consequence, any simplification of reality by substituting one a priori for another must be
avoided. In fact, even errors – due to heuristics – must be measured with reference to a given
relevant market. In other words, the specific psychological reaction to a duty to do something,
to an offer (of consumption), an option (of saving, investment etc.) must be analysed in the
here and now. Therefore, the following may be an indication for rule-makers: for any specific
relationship with the social context, such as neurosciences, social psychology and sociology. We will especially
refer to contributions from both behavioural economists and neuroeconomists that apply knowledge on human
behaviour and brain to economics. The main goal of this paper is to bridge such studies with a particular branch
of public law, namely regulation.
2
We will use biases and cognitive errors in the conventional way, i.e. as predictable deviations from rationality
(bounded rationality) only for the sake of simplicity. We are conscious that the cognitive sciences, as defined
above, encompass a more multifaceted vision of human decision-making and behaviour. Here biases are not to
be regarded as deviations or anomalies, as exceptions to rationality but rather they are just part of normal
behaviour, as neuronally driven and conditioned by personal attitudes, culture, institutional environment, and the
interactions among them.
3
This systematization is due to A. TVERSKY and D. KAHANEMAN (Judgement under Uncertainty:
Heuristics and Biases, Science, Vol. 185, n. 4157, 1974, pp. 1124-1131; D. KAHANEMAN and A. TVERSKY,
Prospect Theory: an Analysis of Decisions under Risk, Econometrica, Vol. 47(2), 1979, pp. 263 ss.). These
studies, published in the Nineteen-Seventies, are considered the starting point of the behavioural economics
which, thanks to H. SIMON’s teachings (A Behavioral Model of Rational Choice, Quarterly Journal of
Economics, 1955, Vol. 69, n. 1, p. 99 ss.), uses surveys and laboratory data in order to match neoclassical
economic theory with real people’s behaviour and to find reasons for eventual inconsistency. These studies have
been developed by R. THALER (Mental Accounting and Consumer Choice, Marketing Science, Vol. 4:3, 1985,
pp. 199-214) and then addressed to rule-makers by this Author and C.R. SUNSTAIN (Libertarian Paternalism,
The American Economic Review, 2003, Vol. 93, n. 2, p. 175 ss.).
4
P. KOSLOSKI, Principles of Ethical Economy, Kluwer Academic Publishers, 2001; A.K. SEN, On Ethics and
Economics, Blackwell Publishing Ltd. 1987; G. AKERLOF and R. SCHILLER, Animal Spirits. How Human
Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton University Press,
Princeton-Oxford, 2009, p. 21.
www.federalismi.it
2
targeted group in the relevant market, it is important to intervene on the basis of empirical
evidence of end-users’ heuristics and cognitive errors.
This puts a great challenge on regulators, and calls for a change in the regulatory process.
Indeed, where cognitive errors have been detected, rule-makers need to decide if, compared to
other strategies, intervening through regulation is the most suitable response to help
individuals adopt deliberately conscious decisions. If this is the case, then regulators need to
decide what type of regulation should be preferred.
Our claim is that choosing among different regulatory tools depends on whether the detected
cognitive errors may be overcome or not. In the first case, we argue that operational
empowerment tools (aimed at educating people and increasing their cognitive abilities) might
be best strategy; whereas in the second nudging (which in our narrow definition takes
advantage, often in an undisclosed manner, of heuristics and errors while preserving
regulatees’ choice) should be preferred. Again, there could not be a general or theoretical
answer to the question of the avoidability of cognitive errors, which must be detected in the
regulatory process.
Establishing how the regulatory process should change in order to bring out and use evidence
from cognitive sciences is the first question this paper is intended to answer (Para 2). It then
looks at how well established regulatory strategies might be enriched by a cognitive-based
approach (Para. 3). It further provides a closer look into two newly established regulatory
strategies that put in practice and respond to the challenges of cognitive science: operational
empowerment and nudge (Para. 4), showing their characteristics, weaknesses and strengths,
having special regard to their attitude toward cognitive errors. It then concludes by
formulating some proposals about how to choose among different regulatory options (Para.
5).
2. The need for a cognitive-based approach to the regulatory process
Biases in judgment and individual perception of external stimuli 5offer crucial information to
rule-makers about the reactions of end-users, and in so doing they enable the better
formulation of rules and the provision of more adequate responses to the public interest they
are intended to satisfy.
5
“Knowledge and personal knowledge are therefore the cornerstones of decision-making: this implies the
individual ability to perceive external stimuli and to modify them through interpretation, representation and
imagination. Learning can be considered as the engine that allows us to build up a representation of the situation
and to carry out the steps that precede actions” (M. EGIDI and S. RIZZELLO, Cognitive Economics:
Foundations and Historical Evolution, Working paper n. 4/2003, Università di Torino, p. 3).
www.federalismi.it
3
Therefore, it could be useful to use this knowledge in order to draft regulatory options and to
verify ex post their efficacy in the regulation life-cycle. However, this approach does not
justify any automatic connection between evidence of cognitive errors and a given regulatory
tool (as highlighted above). On the contrary, once the presence of cognitive errors has been
established, it should be measured with reference to existing (one or several) groups of
regulatees in the relevant markets. Indeed, end-users’ reactions to a regulatory strategy are
strongly influenced by the existing social norms and by the (quality of) regulation; therefore –
as an obvious consequence – the socio-cultural context and the characteristics of the
regulatory framework become crucial elements in this analysis.
Using evidence from the cognitive sciences in rule-making requires an evidence-based
approach and a great change in the regulatory process.
First of all, surveys and consultations should be designed to pinpoint information about
cognitive errors – ideally carried out with the help of cognitive science experts. Indeed, it is
important to consult in a way which could bring about potential cognitive errors. For instance,
in order to evaluate the role of biases (such as inertia and procrastination) in the low switching
rate in energy retail markets 6, those consulted could be consumers (and not only firms) who
should be asked about their knowledge of consumption and of costs related to their
consumption; if they have ever switched providers in the same or other markets; whether, if
they did, they have saved money, and then checked the continuing benefits of this choice; if
they are aware of alternative offers and how they heard of them 7. Moreover, consultations
should be carried out carefully so as to tease out the extent to which low switching, in the
example, has been influenced by other factors, such as the perception of the quality of
regulation, or the perception of adequate protection of consumer interests from the behaviour
of firms. Academic studies and professional documents on emotional reactions to a given
issue and on social norms which might shape individual decision-making, might also provide
valuable insight whose relevance might need to be verified in the area targeted by the
regulatory intervention.
Secondly, the regulatory impact assessment-RIA should also allow the use in the rule-making
of knowledge about cognitive errors and decisional processes. Indeed, RIA (while used
6
Office of Gas and Electricity Markets-OFGEM, What can behavioural economics say about GB energy
consumers?, 21 March, 2011.
7
See e.g. C. WADDAMS, Consumer Choice and Rationality, Presentation at the international conference on
Consumer Protection in Europe, organised by Acquirente Unico and EUI, Fiesole, 16 February 2012.
www.federalismi.it
4
according to the proportionality principle)
8
is meant to help regulators to choose among
regulatory options (including those drafted using information about cognitive errors) and to
assess ex post their real impact. However, in order to fulfil this role, RIA should evolve both
in terms of information gathering and in terms of evaluating the impact of rules. Indeed, when
based on the cost-benefit analysis, the RIA tends to assume end-users as rational self-interest
maximisers. Otherwise, an RIA enriched by a risk assessment might evaluate impacts of
different regulatory options by taking into account the end-users’ potential biases as well as
considering heuristics as a risk to be assessed in terms of outcomes and probabilities. The
result of this analysis could help rule-makers to decide whether or not to deal with cognitive
errors through regulation 9, and to identify a minimum threshold justifying regulation, which
of course does not correspond to the simple presence of cognitive error risks, but to those
risks that regulators have considered unacceptable
10
. Therefore, RIA helps rule-makers to
detect if a cognitive-based regulation is really needed, bringing out factors which influence
individuals’ behaviour, whether the errors are cognitive in nature or due to some other factor
11
. Moreover, in RIA the potential effectiveness of regulatory options are compared to the
8
Only major rules with a potential significant impact might be concerned: otherwise, if all the flow and stock of
regulation is assessed, the analysis risks being superficial and its costs unjustified. However, the various criteria
identified are far from solving the problem, being either too or to general, or requiring asking for a specific
assessment in order to decide whether an impact assessment is needed. In the USA, the use of RIA at federal
level is only for rules that may have “an annual effect on the economy of $100 million or more or adversely
affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment,
public health or safety, or State, local, or tribal governments or communities” (Executive Order 12866,
Regulatory Planning and Review, 1993). The UK suggests the use competition impact assessment for proposals
which have a potential significant impact on competition (Completing Competition Assessment in Impact
Assessment, 2007). At the same time, the depth of the assessment (as well as the consultation process) must be
proportional to the issues at stake and the resources available. At European level, although general exceptions
have not been made, the concept of a “proportionate level of analysis” for any RIA has been employed. It relates
to the appropriate level of detail of analysis which is necessary for the different steps of RIA, and is connected to
potential impact, political significance and the steps in the process of policy development (European
Commission, Impact Assessment Guidelines, SEC(2009) 92, p. 12).
9
H. PILADES and C. R. SUNSTEIN, Reinventing the Regulatory State, in University of Chicago Law Review,
Vol. 62, n. 1, 1995, p. 43.
10
Although it could prove difficult to identify the relevant probabilities and specify the contribution of a given
regulation to reducing the risk of cognitive errors (C.R. SUNSTEIN, The real world of cost-benefit: thirty-six
questions (and almost as many answers), 2013, forthcoming. Moreover, as scholars have underlined, the risk
analysis is not a neutral technique and many steps may involve regulatory or political discretionality (R.
BALDWIN, M. CAVE and M. LODGE, Understanding Regulation. Theory, Strategy, and Practice, Oxford,
Oxford University Press, 2012, p. 283).
11
Indeed, the challenge is to “distinguish truly irrational behaviour from rationally made and therefore efficient
mistakes” (J.D. WRIGHT and D.H. GINSBURG, Behavioral Law and Economics: its Origins, Fatal Flaws,
and implications for Liberty, Northwestern University Law Review, 2012, Vol. 106, n. 3, p. 1048). For instance,
information about a low switching rate in energy retail markets which characterises two countries (such as, e.g.,
the United Kingdom and Italy) could be a clue of a cognitive error (such as inertia and procrastination), or of a
very rational behaviour if, according to a specific regulatory framework, it is more convenient (or at least less
risky) to remain with the incumbent rather than switching. Therefore, a cognitive based regulation which is
intended to deal with inertia and procrastination might be useful in the first example and a policy error in the
second.
www.federalismi.it
5
doing nothing option. Therefore, this step might be very useful in order to avoid any overestimation of social costs of cognitive errors (which, according to the critics of libertarian
paternalism, could end up justifying over-regulation), as well as any under-estimation of
social costs of regulations aimed at reducing such errors (a cognitive-based regulation) in
terms, for instance, of individual liberty limitation 12. Such an incorrect estimation might be
difficult in RIA which, by assessing the potential impacts of feasible options and comparing
them with the doing nothing option, is intended to identify the option whose advantages
outweigh its disadvantages (the so-called preferred regulatory option)
13
. Moreover RIA,
increases end-users’ participation and rule-making transparency, being based on consultations
and generally being characterized by the publication of the technical analysis performed (at
least in a summary). As such, it might help in increasing the end-users’ awareness of
cognitive-based mechanisms (which, being designed to encourage people, are less transparent
than those which impose or forbid behaviours).
Thirdly, evidence from cognitive science leads to an enrichment of the traditional regulatory
options (such as those based on the command and control approach, or incentive based
regulation) and to include new regulatory options (operational empowerment and nudging).
3. Cognitive sciences in practice: enriching traditional regulatory strategies
The lack of knowledge about real people, their recurrent errors and biases may defeat even the
most sophisticated and traditional regulatory tool, such as Command and Control (C&C),
disclosure or incentive regulation. In this domain, evidence of cognitive errors may add to the
understanding of one’s behaviour and strengthen the regulator’s cognitive apparatus and
increase regulatory effectiveness
14
. In addition, cognitive sciences may also help re-
12
These critics of behavioural law and economics literature are mentioned by J.D. WRIGHT and D.H.
GINSBURG, Behavioural Law and Economics: its Origins, Fatal Flaws, and implications for Liberty, cited
above, note 11, p. 1041.
13
A comparison between a new cognitive-based intervention with what would have happened if nothing were
changed might always be engaged in rule-making even when, according to the proportionality principle, RIA is
not used. In both regulatory processes with and without RIA, the comparison might be more robust by using a
randomly assigned control group (L. HYNES, O. SERVICE, B. GOLDACRE and D. TORGERSON, Test,
Learn, Adapt: Developing Public Policies with Randomised Control Trials, Cabinet Office Behavioural Insights
Team, 2012).
14
On the increasing interest toward a deeper knowledge about decision-making processes and individuals’
errors: see e.g. the Commission’s report edited by N. CHATER, R. INDERST, S. HUCK, Consumer DecisionMaking
in
Retail
Investment
Services:
A
Behavioural
Economics
Perspective,
2010
(http://ec.europa.eu/consumers/strategy/docs/final_report_en.pdf). More recently the Commission has adopted a
number of initiatives to include behavioural insights into its policy-making: see e.g. the “European Consumer
Agenda
Boosting
confidence
and
growth”
COM(2012)
225
fin.,
of
22.5.2012
(ec.europa.eu/consumers/strategy/index_en.htm#agenda), and the Staff Working Document on “Knowledgeenhancing aspects of consumer empowerment, 2012 – 2014”, SWD(2012) 235 fin., of 19.7.2012
(ec.europa.eu/consumers/strategy/docs/swd_document_2012_en.pdf). In 2013 the Commission has
www.federalismi.it
6
interpreting traditional paternalism, thus somehow enriching its rationale, something that
many often confuse with a cognitive approach to rule-making.
(a) Rethinking command and control. On the first ground, a C&C strategy with paternalistic
objectives, prohibiting or imposing limits to end-users, if designed in a cognitive-based
manner, can be used to avoid cognitive errors. For instance, in the case of corporate
governance rules and information obligations can be imposed on listed companies to
counterbalance the overconfidence of company managers. Here the rule-maker takes note of
regulatees’ cognitive errors, but does not accept the risk that they occur, and adopts regulation
intended to avoid or limit such errors. This approach is potentially effective and relatively
inexpensive for rule-makers, as general standards are usually cheap to design and easy to
implement. However, beside paternalism 15, it could lead to over-regulation anytime it bans or
puts limitations onto those not affected by cognitive errors.
These highly intrusive limitations would hardly be regarded as cognitive-based in the sense
clarified above (para. 2): firstly, many of them were introduced several decades ago, i.e. far
before the first studies on cognitive sciences and behavioural economics were known to the
wider public, and eventually irrespective of the proof of any cognitive errors; secondly, their
implementation was most probably not preceded by systematic gathering of data or empirical
evidence of any recurrent cognitive errors; nor were they introduced following
experimentation
16
. Following a cognitive-based approach could help reducing the over-
regulation shortcoming of C&C: if evidence is gathered of biases affecting only a slight
minority of the population in a given relevant market, then a complete ban or a set of duties
and standards would be excessively restrictive of the population’s autonomy.
On the second ground, if a C&C strategy is used irrespective of the proof of any cognitive
errors, it can still be interpreted in a cognitive perspective. So, for instance, speed limits or the
commissioned four studies (on cross-border healthcare, online gambling, hidden fees for card payments and
making greener choices for online purchases) to gather behavioural evidence to be included in its future policies.
Results of these studies were presented and discussed at the Conference on “Applying behavioural insights to
policy-making: results, promises and limitations”, Brussels, 30.9.2013.
15
J. KLEINIG, Paternalism, Totowa (NJ), Rowman&Allanheld, 1983, esp. at pp. 18 ff.; G. DWORKIN,
Paternalism, The Monist, 56, 1972, pp. 64–84 (see also Paternalims, in the Stanford Encyclopaedia of
Philosophy: http://plato.stanford.edu/entries/paternalism/). According to A. OGUS, Regulation, Oxford, OUP,
1994, pp. 51-2, many paternalistic regulations could be better justified in terms of externalities.
16
Similar arguments can be made with regards to statements by Director General Testori Goggi (Behavioural
insights in the Commission, appeared on European Voice, of 14 June 2012) claiming that the European
Commission has been using a behavioural approach since 2008. Examples cited include the 2008 EC limitation
to the use of pre-checked boxes in consumer contracts and the 2010 “user-friendly” on-screen ballot box
remedy in the Microsoft I antitrust case. As remarked, this is not a truly cognitive-based approach to regulation,
provided that the Commission did not engage in “serious, systematic, yet experimental, use of behavioural
insights into EU policymaking”: A. Alemanno in his blog (www.albertoalemanno.eu/articles/4381082).
www.federalismi.it
7
obligation to wear seat belts can be understood ex post as tools intended to counterbalance
motorists’ overconfidence. Similarly, smoking bans benefit (also) those who are being
coerced: indeed, they might help people who are willing to quit smoking, but are unable to do
so, to take the sensible course of action 17. Ex post cognitive explanations can also be useful,
for instance to judges, to justifying and interpreting a legal measure in adjudication.
(b) (follows) Disclosure regulation. A second traditional regulatory strategy is disclosure18:
information-related obligations and the (ex post) control of false or misleading information
are copious in most legal systems
19
and are aimed at attenuating market failures, such as
information asymmetries or externalities
as democratic participation
21
20
, as well as fostering other social objectives, such
and avoiding government failure 22.
Information disclosure obligations are fundamentally neutral with regard to individual
preferences and freedom of choice, as are the norms on unfair commercial practices; indeed
they are choice preserving. The main limitation is that all these disclosure tools have in mind
a notional, typical consumer 23; they assume that individuals may take advantage of disclosure
to make rational decisions.
17
R.H. THALER and S. BENARTZI, Save More Tomorrow: Using Behavioral Economics to Increase Employee
Saving, Journal of Political Economy, Vol. 112, S1, February 2004, pp. S164-S187; see also S. BENARTZI and
R. LEWIN, Save More Tomorrow: Practical Behavioural Finance Solutions to Improve 401(k) Plans, New
York, Penguin, 2012.
18
On disclosure regulation see: R. BALDWIN, M. CAVE, M. LODGE, Understanding regulation, 2nd ed.,
Oxford, OUP, 2012, espec. p. 117; A. OGUS, Regulation, cited above, note 15, pp. 121 ff.; S. BREYER,
Regulation and its reform, Cambridge (MA), Harvard University Press, 1982, p. 161 ff.; F. DI PORTO,
L’informazione come ‘oggetto’ e come ‘strumento’ di regolazione (il caso dei mercati energetici al dettaglio), in
Riv. trim. dir. pubbl., 4/2011, pp. 975-2010.
19
See EC Commission’s Report on “Consumer Policy (July 2010 - December 2011)” accompanying the
“European Consumer Agenda - Boosting confidence and growth”, SWD(2012) 132 final, of 22.5.2012,
providing details on EU information regulation in various domains (food, tobacco, educational programmes,
etc.), p. 10 ff. See also the Consumer Law Compendium 2007, edited for the European Commission by H.
SCHULTE-NÖLKE in co-operation with C. Twigg-Flesner and M. Ebers, 2007 (www.eu-consumerlaw.org/index.html) at pp. 412-415 for implementation of EC directives encompassing some information-related
obligations in the 27 member states.
20
A. SCHWARTZ and L. WILDE, Intervening in markets on the basis of imperfect information: a legal and
economic analysis, 127 Univ. Penn. L. R., 1979, p. 630.
21
For consideration of public systems of information provision, see: K. YEUNG, Government by Publicity
Management: Sunlight or Spin?, Public Law, 2005, pp. 360-383; ID., Regulating Government Communications,
65 Cambridge L. J, 2006, pp. 53-91; C. HOOD and H. MARGETTS, The tools of government in the digital age,
London, Palgrave Macmillan, 2007.
22
E. BALLEISEN and D. MOSS, Introduction, in Balleisen and Moss (eds.) Government and Markets: Toward
a New Theory of Regulation, New York: Cambridge University Press, 2009, p. 1 ff.
23
See cons. 18 of Directive 2005/29/CE.
www.federalismi.it
8
However, they do not consider that information giving per se does not imply real
comprehension
24
. Incalculable empirical studies exist showing that consumers do not make
full use of the information provided; that information given in a dense format may discourage
people from acting or may confuse them; that too much information may distract people from
relevant aspects to making sensible and reflected decisions; that information overload
increases transaction costs, and so on 25.
For disclosure regulation to be cognitive-based scrutiny on motivational determinants of
individuals’ choices and errors in the targeted group should be conducted prior to its
introduction and considered in ex post assessment. Recent developments at EC level testify of
an evolution of disclosure regulation to take into consideration cognitive shortcomings and
build a more comprehensive strategy named empowerment, which will be analysed in more
detail below (para. 4.1).
(c) (follows) Legal empowerment. A third strategy is legal empowerment: legal standards are
enforced not only by individuals but also by public institutions acting ex officio. Old tools
(e.g. the power to challenge unfair clauses in standardised contracts
26
) are put at disposal
(also) of public bodies, transforming them into public procurators for individuals’ well being
and individual rights’ enforcement. Unlike in traditional contexts where the notion of “legal
empowerment” was first introduced 27, here it is to be understood mostly as “public tutoring”,
where the public powers are in charge of supporting the exercise of private rights, to attain
stronger compliance, no matter whether consumers are effectively in need of protection or
weather they are actually affected by some cognitive error. Legal empowerment assumes
consumers’ weakness, and avoids the risk of low enforcement of their rights. In that, it
24
Such an acquisition is commonly dated back to the pioneering works of H.A SIMON, A Behavioral Model of
Rational Choice, 69 Q. J. Econ., 99, 1955, pp. 99‒ 100, and ID., Rational Decision Making in Business
Organizations, 69 Am. Econ. Rev., 1979, pp. 493 ff.
25
Commission’s Staff Working Document on “Knowledge-enhancing aspects of consumer empowerment, 2012
– 2014”, 2012, cited above, note 14, at p. 8: “The traditional economic approach assumes that more consumer
information leads to better consumer empowerment. Each new piece of information improves consumer welfare
as it enables consumers to make better informed choices. But today’s society is characterised by a densemessage environment, and our cognitive capacities are limited … In practice, behavioural researchers have
found that … there is a limit to how much information a consumer can or wants to absorb at the various steps of
the purchasing process, and more information is not always better for consumers. There is a clear trade-off
between information completeness and simplicity, and also a potential crowding-out effect”.
26
See Council Directive 93/13/EEC of 5 April 1993 on Unfair terms in consumer contracts (OJ L 95 of 21 April
1993, 29-34), as amended by Directive 2011/83/EU of the European Parliament and of the Council of 25
October 2011 on consumer rights.
27
“The purpose of legal empowerment is to enable the people - in particular, the disadvantaged - to assert their
rights vis-à-vis the State. Here the State and the administration play a double role: they recognize rights and also
provide the means to enforce them” (S. CASSESE, The rise of the administrative state in Europe, Rivista
Trimestrale Diritto Pubblico, 2010, pp. 981-1008).
www.federalismi.it
9
strengthens the deterrent effect of private enforcement. However, like C&C, it is still stuck to
the notional, unrealistic concept of “average consumer”. It supports the idea that the best way
to protect individuals is by more public intervention and more ex officio powers to public
bodies, such as independent regulatory authorities
28
. No doubt the latter have a deeper
knowledge of the commercial strategies adopted in their realms, however expertise does not
necessarily cover knowledge about the real people and their cognitive errors. For instance,
following a cognitive-based approach, the regulator might consider the “rational apathy”
affecting consumers as the main cause for limited use of class actions
29
. In such
circumstances, a possible solution might be to substitute the existing opt-in default rule (only
people registered in the class will be affected by the final decision) with an “opt-out” one (the
final decision or decree is binding to the all in the class unless opted out) 30, instead of (or in
addition to) “public tutoring” (i.e. complementing private action with a public one or of
attributing more individual rights to be enforced 31).
(d) (follows) Incentive regulation. The fourth scheme to be considered is incentive
regulation. Under this strategy economic rewards are associated to virtuous behaviours
following an incentive scheme established in advance by the regulator. Incentive regulation is
a widely known and extensively experimented tool; what interests here is that modifying the
incentive structure of regulatees is considering only one motivation for action: the financial
28
In the UK the Office of Fair Trading (OFT, which will be replaced by the Competition Market Authority or
CMA, starting from 2014, as established by the Enterprise and Regulatory Reform Act 2013, of 25 April 2013)
can take legal action to prevent the use of unfair terms in Business-to-Consumers contracts. The aforementioned
EC Consumer Law Compendium of 2007 reports that most member States do have an “extensive system of
public control of contract terms” and administrative bodies almost everywhere (except for Spain or Italy) do
“have standing to apply for injunctions in court” (p. 424). Enforcement of Directive 2005/29/EC “is mainly
carried out by public authorities such as consumer ombudsmen (e.g. Denmark, Sweden and Finland), consumer
or competition authorities (e.g. Italy, Ireland, the Netherlands, Romania and the UK) and dedicated departments
of ministries (e.g. Portugal and Belgium). Other Member States run a private enforcement scheme led by
competitors (e.g. Austria and Germany)”. A combination of the two is however present in most of them: see EC
Commission’s “First Report on the application of Directive 2005/29/EC (‘Unfair Commercial Practices
Directive’)”,
COM(2013)
139
final,
of
14.3.2013
(http://ec.europa.eu/justice/consumermarketing/files/ucpd_report_en.pdf) at pp. 26-27).
29
Rational apathy is understandable as the reasonable assumption that my vote will have little or no effect on the
results of general elections, causing disaffection and disengagement. In the case of class action, rational apathy –
together with the little economic advantage a consumer might earn from a successful class action – if combined
with an opt-in scheme (like the one in place in Italy) may lead to a small number of participants, thus decreasing
its critical mass and following deterrent effect. For further discussion see G. AFFERNI, Class action e danno
antitrust: il caso traghetti, in Consumatori, Diritti e Mercato, 2, 2012, pp. 118-126.
30
As suggested by X. GABAIX, A. LANDIER, D. THESMAR, P. MONGIN and J. TIROLE, La protection du
consommateur: rationalité limitée et régulation, Conseil d’Analyse Economique, Paris, La documentation
française, 2012.
31
In Italy, for instance, the law governing class actions has been amended in 2012 to extend the right to initiate a
collective suit to individuals also (and not just consumers’ associations). This has been done based on the scarce
application of the law, irrespective of any analysis of the psycho-cognitive determinants of such limited success
of the tool (see new Art. 140-bis of the Consumer code).
www.federalismi.it
10
one. But people may be indifferent to economic rewards and thus react in a way regulators
may not predict. Also, biases in assessing the value of present money against that of future
money (endowment effect) may hinder the efficacy of incentive-based regulation. Such
schemes assume regulatees’ economic rationality, i.e. the very core concept cognitive
sciences have been de-constructing. Certainly incentive regulation as we know it preserves
autonomy and is quite easy to enforce. However, insights from cognitive errors of the
regulatees might help improving the incentive scheme and increase its overall efficacy. It
should be noted, though, that by combining the economic with other non-economic rationales
for action (discretion), regulators may let their vision of the world prevailing on that of other
stakeholders, besides the risk of capture that arises anytime regulators need establishing
economic incentives that benefit some groups only.
4. The emergence of new regulatory strategies: operational empowerment and nudging
In the past decades, some countries have been paying an increasing attention to the need to
cope with cognitive errors, calling for the use of behavioural insights in order to draw up new
regulatory strategies
32
. This move has been speeded up by the decline of neoliberalism, that
until the Nineties of the past Century had favoured the homogeneity, say, convergence toward
a set of well established regulatory strategies 33.
The bursting onto the scene of cognitive sciences and behavioural insights has thus
contributed to the emergence of new regulatory tools that are inclined to consider cognitive
32
In the United Kingdom, the Behavioural Insights Team of the Cabinet Office was set up in July 2010 and in
2011 implemented a consumer empowerment strategy called “Better choices: better deals. Consumers powering
choices”, a programme that brought together the industry, the government and consumers to help the latter
access their own user data so to make better deals (www.gov.uk/government/uploads/system/
uploads/attachment_data/file/31834/11-749-better-choices-better-deals-consumers-powering-growth.pdf).
In
2011 the energy regulator, OFGEM, published a report on “What can behavioural economics say about GB
energy
consumers?”
(www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Behavioural_Economics_
GBenergy.pdf). In the United States, the 2009 OIRA Report to Congress on Benefit and Cost of Federal
Regulation mentions the need for a behaviourally informed approach. In November 2010 the European
Commission published the already mentioned mighty report on “Consumer Decision-Making in Retail
Investment Services: A Behavioural Economics Perspective”, showing that private investors’ cognitive errors
may be lessened by the reduction and standardisation of information; in 2011, together with the Joint Research
Centre (JRC) it developed the Consumer Empowerment Index (CEI) describing the perceptions and behaviours
of more than 56.000 consumers of twenty-nine European countries; it then published two more documents
applying behavioural insights to develop new regulatory strategies to protect consumers: one is the already
mentioned Report on “Consumer Policy” SWD(2012) 132 final, of 22.5.2012, the other is the also mentioned
Commission’s Staff Working Document on “Knowledge-enhancing aspects of consumer empowerment, 2012 –
2014”, SWD(2012) 235 fin., of 19.7.2012. In France, in 2009 the Prime Minister-led Centre for Strategic
Analysis initiated the “Neuroscience and public policy program”, an initiative dedicated to the use of brain and
behavioural research in the formation of public policy; in 2012, the Conseil d’Analyse Economique, an
independent advisory body reporting to the French Prime Minister, published the above mentioned report on
consumer protection.
33
J.D. WRIGHT and D.H. GINSBURG, Behavioral Law and Economics, cited above, note 11.
www.federalismi.it
11
errors (they are therefore cognitive-based). This rather recent way of intervening includes
means that are aimed at: (i) preventing or help individuals avoiding cognitive errors and more
generally at improving their ability to take appropriate decisions; (ii) preventing or using their
cognitive errors to draw up soft incentives to make them behave in a way rule-makers
consider to be better for them: these techniques will be defined, respectively, as “operational
empowerment” (Para. 4.1), and “nudges” (Para. 4.2).
The main difference between the two, as we will make clear below, resides respectively in the
very avoidance of cognitive errors and the resulting willingness of regulation to interfere in
one’s set of emotional preferences.
Strengths and weakness of both operational empowerment and nudge strategies are analysed
in the following paragraphs in order to frame some concluding indications which might help
decision makers in rule-making.
4.1 Operational empowerment options
The accrued awareness that consumers should be made aware of new possibilities offered by
liberalised markets pushes the regulators to experiment new strategies to empower
and to make them more active. Empowerment is also used in the healthcare sector
35
34
them
to help
patients take self-enhancing choices and stop being passive recipients of diagnoses and
prognoses 36.
Operational empowerment builds on these strategies to which it adds an accrued relevance
given to information about individuals’ cognitive errors 37. Operational empowerment rests on
the idea that individuals depart from rational choices because they are not aware, informed, or
34
Empowerment is a multi-dimension and multi-level notion, used, with different meanings and applications in
political science, psychology, sociology, management, and marketing (for further discussion see the Joint
Research Center’s Report edited by M. NARDO, M. LOI, R. ROSATI and A. MANCA, The consumer
empowerment index. A measure of skills, awareness and engagement of European consumers, 2011
(http://ec.europa.eu/consumers/consumer_empowerment/docs/JRC_report_consumer_empowerment_en.pdf). In
2011 the Commission has no doubts about goals and tools of empowerment. Empowerment aims at welfare
maximising and enhancing competition. As per the tools, it depends on good cognitive skills, knowledge of
consumer rights, information, well functioning organisations and public authorities, accessible means of redress:
see Commission staff working paper, Consumer empowerment in the EU, SEC (2011) 469 fin., of 7 April 2011.
35
Psychology and healthcare studies, probably the first disciplines to employ the term, conceive empowerment
as self-determination deriving from information access and knowledge to be able to make informed choices; see
J. GELLER, J. BROWN, W. FISHER, A. GRUDZINSKAS and T. MANNING., A National Survey of
"Consumer Empowerment" at the State Level, Psychiatric Serv., 49, 1998, pp. 498-503.
36
R.M. ANDERSON and M.M. FUNNELL, Patient empowerment: Myths and misconceptions, in 79 Pat. Educ.
and Couns., 2010, pp. 277–282.
37
The Commission itself recognises the limits of not knowing consumers in their daily behaviours, away from
textbook models, and acknowledges that detailed portraits of European consumers is prerequisite for “helping
EU and national policy-makers design smarter regulation” (Commission staff working paper, Consumer
empowerment in the EU, cited at note 34).
www.federalismi.it
12
educated enough to act reasonably. Biases and cognitive errors leading to misjudgements can
be overcome and regulation be justified to provide more adequate and empirically-based
information and education to reach awareness and, possibly, reasonable action. The
theoretical contend implied in operational empowerment is therefore still attached to the
“enlightened” accounts of rational choice. Indeed, the latter does accept violations of or
deviations from conventional rationality, assuming that they derive from judgement errors
that decision-makers can learn to overcome and correct, by giving them the right
opportunities, information and data 38.
In this perspective, operational empowerment options principally make use of institutions,
social norms and soft law to instruct and educate individuals to act in their best interest, while
advancing some public interest 39. It gives value to self-determined virtuous behaviours and is
based on the idea that cognitive errors and biases may be avoided, corrected or overcome by
strengthening people’s reflexive capabilities 40.
Regulatory operational empowerment uses rules to tackle cognitive errors. It does so by
framing information in an over-simplified way, or by simplifying individuals’ choice itself, or
by using education so to prevent errors or help individuals overcoming their biases and
emotional responses. Regulatory operational empowerment tools can thus be understood as
truly de-biasing techniques
41
. Indeed, they are aimed at overcoming errors while preserving
autonomy and freedom of choice, and leaving individual preferences largely untouched.
(a) Information simplification. The easiest and most popular way to facilitate people’s
choices is through the simplification of information to be given to individuals. Empirical
studies have shown how reducing and standardizing information on financial products
energy bills
43
42
and
have a greater effect on the choices of investors and consumers than an
38
A. TVERSKY and D. KAHNEMAN, The Framing of Decisions and the Psychology of Choice, Science, Vol.
211, n. 4481, 1981, pp. 453-458, at p. 458.
39
In this operational empowerment differs a lot from other strategies such as C&C, as in most cases it does not
include hard law, neither does it necessarily have a legal basis.
40
For a recent position questioning the long-established theory of dual system (creative/reflexive) in human
brain, see S.M. KOSSLYN and G.W. MILLER, Top brain, bottom brain: Surprising Insights into How You
Think, New York: Simon & Schuster, 2013.
41
Recalling C. JOLLS and C.R. SUNSTEIN, De-biasing through law, Journal of Legal Studies, Vol. 35, 2006,
pp. 199-241. But diverging from them, we consider de-biasing techniques only those that are really intended to
overcome, not to elude, a bias (a function that is mostly typical of nudge).
42
See the European Commission’s report, Consumer Decision-Making in Retail Investment Services, cited
above, note 14.
43
For details on transparency obligations faced by energy providers established at EU level see the Working
Group
Report
on
Transparency
in
EU
Retail
Energy
Markets,
November
2012
(ec.europa.eu/energy/gas_electricity/doc/forum_citizen_energy/2012111314_citizen_forum_meeting_working_g
roup_report.pdf).
www.federalismi.it
13
increased amount of information (typical of information disclosure obligations), as attention is
a scarce resource 44. To overcome consumers’ inertia and attain, for instance, higher switching
rates, a simplification strategy could be used, e.g. compelling utilities to inform consumers
about how much they have been spending overtime (not just in the current month) or about
how much they could save if some suggested behaviours (e.g. using energy saving light bulbs,
installing timer for aircon, etc.) were adopted 45.
A variation is the simplification of information asked of consumers (make it easy)
46
; for
instance, the switching from one supplier to another could be made simpler by using forms
which have been pre-filled by the traditional supplier with non-sensitive information about the
consumer (such as name and address, telephone number, e-mail, etc.). This strategy might
prove effective if it results that the targeted population is affected by status quo bias.
(b) Framing: making information salient. Framing information so to make it not only easy
to understand but salient is also essential: empirical findings in the context of household
appliances’ labelling
47
show that comparative information (like scales) is more motivating,
better understood and more effective in easing choice about energy efficient products, than is
information presented generically or in technical format
48
. Thus, facing regulatees affected
44
Since Herbert Simon’s work, cognitive scientists and “behaviouralists” have discredited the idea that by
providing more information (i.e. by enacting more duties to disclose information) individuals can act more
rationally: to the contrary, “a wealth of information creates a poverty of attention and a need to allocate that
attention efficiently among the overabundance of information sources that might consume it”: H.A. SIMON,
Designing Organizations for an Information-Rich World, in M. Greenberger (ed), Computers, Communication,
and the Public Interest, Baltimore, The Johns Hopkins Press, 1971, pp. 38-52, at 40-41
(http://zeus.zeit.de/2007/39/simon.pdf). Indeed, information overload can lead to cognitive and decision errors,
such as overconfidence. For application in the financial sector, see E. MARCHISIO, A behavioural analysis of
shareholders’
meetings,
forthcoming
in
Journal
of
Corporate
Law
Studies,
2014,
(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2224589), at p. 14.
45
In the UK, since 2008, Ofgem has introduced the Energy Supply Probe, a regulation requiring energy suppliers
to send consumers an annual statement setting out how much they actually spent (in GBP) and consumed (in
KWh) in the last year, and how much they would spend in the forthcoming year if their usage and prices
remained unchanged.
46
C.R. SUNSTEIN, Humanizing Cost-Benefit Analysis, Admin. L. Rev. Conference, February 17, 2010, pp. 7-8.
“Lessons from behavioural (…): make it as straightforward as possible for people to pay tax or debts, for
example by pre-populating a form with information already held”. “One of the central findings from behavioural
science is that if you want somebody to do something you should start by making it easy for them to do it. If you
want to get people to recycle their household waste, provide them with recycling bins and arrange regular
collections. If you want people to pay their tax or fines on time, make it easy for them to do so” (Cabinet Office
Behavioural Insights Team, Applying behavioural insights to reduce fraud, error and debt, 6 February 2012;
available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/60539/BIT_Fraud
ErrorDebt_accessible.pdf, pp. 4 and 8).
47
Report “Research on EU product labelling options and consumer understanding”, delivered by Ipsos MORI,
London Economics and AEA for the European Commission, October 2012 (available at
http://ec.europa.eu/energy/efficiency/studies/doc/2012-12-research-eu-product-label-options.pdf), at p. 68.
48
A similar contend is frequently made with regard to investors’ ability to process information in the financial
market, where information overload can arise “especially when (information is) drafted without providing some
ranking”, see E. MARCHISIO, cited above note 45, at p. 14.
www.federalismi.it
14
by e.g. loss aversion, regulators might disclose themselves or ask private firms to disclose
information accordingly. In California, manufacturers must place on all new automobiles
window stickers that provide a numerical rating of greenhouse gas emissions on a scale of 1
to 10 (where 5 signifies that the effect on global warming is average compared to other cars).
Introduced at federal level in 2013, this informational intervention is enriched by new data on
fuel saving or increases in fuel costs over five years compared to the average new vehicle 49.
(c) Targeted education. In the area of health care, information alone might be insufficient to
change one’s habits, especially if the patient is affected e.g. by unrealistic optimism. In order
to reduce unrealistic optimism affecting people when assessing adverse outcomes associated
to risky activities (such as smoking), targeted education might prove particularly effective.
This finding explains the shift from an “informed consent” strategy, characterised by mere
information disclosure about disease and foreseen treatment 50, to the “patient empowerment”
one 51. By the latter, regulators aim at giving patients the means to make self-selected changes
in relation to their health, rather than simply improve their compliance to treatments
52
. More
examples can be found in the financial sector, where regulators are converging toward global
educational strategies to increase what is called investors’ financial “literacy”
53
. Education,
especially if targeted (i.e. addressed through regulation to those that suffer from some biases,
such as overconfidence), increases awareness and may be used to contrast biases. However,
49
See Environmental Protection Agency (EPA), National Highway Traffic Safety Administration (NHTSA),
DOT, Revisions and Additions to Motor Vehicle Fuel Economy Label, Federal Register, Vol. 76, n. 129, 6 July
2011.
50
D. DOUMONT and I. AUJOULAT, L’empowerment et l’éducation du patient, Bruxelles, UCL, RESO, 2002,
extrait available at: www.uclouvain.be/cps/ucl/doc/reso/documents/dos18.pdf.
51
I. AUJOULAT, W. d’HOORE and A. DECCACHE, Patient empowerment in theory and practice: Polysemy
or cacophony?, in Patient Educ. Couns., 66, 2007, pp. 13–20.
52
I. HOLMSTROM and M. ROING, The relation between patient-centeredness and patient empowerment: A
discussion on concepts, Patient Educ. Couns., 79, 2010, pp. 167–172. See also C. FESTE and R.M.
ANDERSON, Empowerment: from philosophy to practice, Patient Educ. Couns., 26, 1995, pp. 139–144.
53
See OECD, The OECD/INFE High-level Principles on National Strategies for Financial Education, 2012
(http://www.oecd.org/daf/fin/financial-education/OECD_INFE_High_Level_Principles_National_Strategies_
Financial_Education_APEC.pdf). Financial literacy is defined as “a combination of financial awareness,
knowledge, skills, attitude and behaviours necessary to make sound financial decisions and ultimately achieve
individual financial wellbeing” A. GRIFONI and F.-A. MESSY, Current Status of National Strategies for
Financial Education: A Comparative Analysis and Relevant Practices, OECD Working Papers on Finance,
Insurance and Private Pensions, No. 16, OECD Publishing, 2012. In the US, following the recent crisis, a
Consumer Financial Protection Bureau (CFPB) was created as a federal agency to “educate, enforce, study” (see
http://www.consumerfinance.gov/the-bureau/creatingthebureau/).
www.federalismi.it
15
no agreement exists as far as the efficacy of education is concerned: eventually, some
contend, it could worsen some biases 54.
(d) Simplifying choices. Other operational empowerment tools aim at facilitating people’s
choice by making comparison among products or services easier. “Pro-choice” web
applications are frequently used in the area of utilities, securities, bank and insurance services
55
; they may be required of the private sector by public authorities, or run directly by the
latter, to ensure really independent comparisons
56
. By allowing consumers to save search
costs and by providing them with easy comparisons of existing commercial offers, these tools
may prove very effective in overcoming inertia and status quo biases. In the UK, for instance,
following the energy Retail Market Review, Ofgem implemented new regulation requiring
retailers to provide consumers, via bills and annual statements, with personalised
consumption information. In addition, consumers are set to be advised on the best deal
available for them, based on medium usage of gas and electricity (the so called Tariff
Comparison Rate (TCR). The TCR, combined with the energy reports, are meant to allow
consumers to make full and accurate cross market comparisons 57.
(e) Overcoming emotional responses. Another operational empowerment strategy is
represented by cooling off or “timing of choice” rules. These are intended to help people make
considered choices and overcome emotional responses, based on a waiting period being
imposed by the regulator before a final decision (for instance, to buy) is made
58
. A cooling
off rule, eventually supported by empowerment through simplification of requested
54
See e.g. L.E. WILLS, Against Consumer Financial Literacy Education, in Iowa L. Rev., 94, 2008, p. 12
(lsr.nellco.org/cgi/viewcontent.cgi?article=1213&context=upenn_wps) contending that it could worsen problems
of overconfidence.
55
Reference to PQCWs (Price and Quality Comparison Websites) as tools to help people choosing and saving
money can be found in the Commission’s First report on the application of Directive 2005/29/CE, cited above,
note 28, at §3.4.2. On the benefits of RECAP (Record, Evaluate, and Compare Alternative Prices) regulation to
help consumers comparing “complex pricing schemes that are neither transparent nor comprehensible to
consumers” see R.H. THALER, C.R. SUNSTEIN, J.P. BALZ, Choice architecture, in E. Shafir (ed.) The
behavioural foundations of public policy, Princeton, Princeton University Press, 2013, pp. 429-438, at 435. On
“product attribute information” and “product use information” as disclosure regulatory strategies see E.
BRODI, Abitudini e preferenze di consumo, MCR, 2, 2012, pp. 393-420.
56
Price comparison web applications accessible on the regulator’s portal are frequent in Italy: AEEG’s “Find
your (energy) deal” (trova offerte); AGCOM’s (the telecom regulator) “Misura Internet” and IVASS’ (the
insurance regulator) “Your Quotation” are all aimed at easing deals’ choice.
57
See Ofgem, The Retail Market Review– Implementation of Simpler Tariff Choices and Clearer Information, of
27 August 2013 (https://www.ofgem.gov.uk/sites/default/files/docs/decisions/the_ retail_market_review__implementation_of_simpler_tariff_choices_and_clearer_information.pdf).
58
Think of the 15-day cooling off rule for purchases made on Internet, foreseen in the EC Consumers Rights
Directive 2011/83/EU.
www.federalismi.it
16
information, could be a good strategy to help those that, having misjudged commercial offers,
changed their provider and ended up paying more59. A cooling off rule could be inserted in
contracts for consumers who have switched over from one provider to another, enabling them
to return to the previous one without incurring any cost 60.
(f) Strengths and weakness of operational empowerment. Operational empowerment tools
analysed so far present many strengths as well as weak points. Most of them tend to preserve
individual choice by easing it: indeed, they do not frame the choice environment in an aim to
exploit automatic or affective responses; rather, they use framing to over-simplify the
information individuals use to act, or they aim at providing tools to help individuals
overcoming emotional responses. Therefore, operational empowerment is less prone to
criticism of manipulation than are other regulatory tools, such as nudge (see later).
With regard to targeted education, simplification and choice-easing tools, operational
empowerment makes use of information-based regulation to empower individuals to take selfenhancing decisions. In that, it assumes that cognitive errors can be avoided and biases
overcome, differently from nudge strategies and in line with the “consumer sovereignty”
paradigm.
Thirdly, easing choice and simplification can decrease the power of inertia and bring out
important benefits such as an increased compliance with regulation and greater participation
in public programs 61.
Operational empowerment, thus, allows individuals to behave at the same time coherently
with their own as well as a given public interest: while increasing market transparency and
reducing information asymmetry, it also fosters competition among service providers because
it makes choice easier. Furthermore, by strengthening individuals’ ability to exploit market
possibilities, it serves rebalancing the demand vis à vis the supply side, a contend that is of
particular value in recently liberalised markets.
Despite their many advantages, operational empowerment strategies are not without limits.
Tools in this box can be more expensive, for instance, than C&C strategies to design and
implement: to design because they require a prior identification of groups in the relevant
market that suffer from specific biases and errors; to implement because they can put an
59
C.M. WILSON and C. WADDAMS PRICE, Do consumers switch to the best supplier?, Oxf. Econ. Papers, 4,
2010, pp. 647-668.
60
Here we dissent from the Authors who classify cooling off rules among nudging tools (see e.g. R.
KOROBKIN, Libertarian Welfarism, California Law Review, Vol. 97, 2009, pp. 1651-1685, at p. 1664).
61
C.R. SUNSTEIN, Empirically informed regulation, The University of Chicago Law Review, 78, 2011, pp.
1349-1429, at p. 1351.
www.federalismi.it
17
excessive burden over the private sector 62. Furthermore, being operational empowerment still
recent, its effects and outcomes are far from being fully assessed.
Another weak point is the risk, well known in the patient empowerment debate, of aversion to
be empowered. Sometimes patients do not wish to take an active role in decisions about their
healthcare (e.g. patients in cancer treatment tend to be less willing to participate as their
conditions worsen); and the same may happen with utility or financial services’ consumers,
whose willingness to engage in costly self-education activities may be very feeble compared
with the perspective gains 63.
Finally. targeting too much may endanger the efficacy of operational empowerment as, for
instance, consumers may decide to invest less and less in self-education, ending up being
disempowered. Also, empowerment though information simplification may limit product
differentiation, which is based on consumers’ accumulation of knowledge about the products,
as well as technological innovation 64.
In these cases, where it is proven that heuristics and errors persist despite the enactment of
empowerment strategies, nudges might prove more effective.
4.2 Nudge strategies
There is no clear definition of nudging, and it can include a wide variety of approaches
65
.
According to Thaler and Sunstain nudging is “any aspect of the choice architecture that alters
people’s behaviour in a predictable way without forbidding any options or significantly
62
Indeed, many of the (regulatory) operational empowerment tools consist of requirements that the industry is
expected to implement. While the resulting costs may prove acceptable for some firms, they may be excessive
for other, smaller ones.
63
E.g. despite the simplification of bills (where there is no overload of information, but information is selected
and rationalised), there can still be room for biases and cognitive errors.
64
See X. GABAIX, A. LANDIER, D. THESMAR, P. MONGIN and J. TIROLE, La protection du
consommateur: rationalité limitée et régulation, cited above, note 30, p. 9.
65
The precise boundaries of what should or should not account as nudging are far from set. The
acknowledgment that not all strategies described in the influential book of R.H. THALER and C.R. SUNSTEIN
(Nudge: Improving Decisions about Health, Wealth, and Happiness, Yale (CN), Yale University Press, 2008)
are in fact nudges is not new. For instance,: in discussing the practice and ethics of choice architecture and
nudging, E. SELINGER and K. WHYTE (Is There a Right Way to Nudge? The Practice and Ethics of Choice
Architecture, Sociology Compass, 5/10, 2011, p. 923 ss.) clarify that many practices are mistaken or fuzzy
nudges. C.R. SUNSTEIN also seems to have had “mixed feelings” about his creature: his 2011 work
(Empirically Informed Regulation, The University of Chicago Law Review, Vol. 78, Issue 4, p. 1349 ss.)
responds to many of the criticisms but avoids even using the term nudge (one citation in a footnote out of an 80page article). From 2013 he went back campaigning for nudging, with more sophisticated classifications and
articulation (Nudges.gov: Behavioral Economics and Regulation, February 16, 2013 (forthcoming E. Zamir and
D. Teichman (eds.) Oxford Handbook of Behavioral Economics and the Law). Interestingly, the latter uses the
same classification and articulation that were used in the 2011 paper, but with nudging back at centre stage. We
should not therefore be surprised if one strategy is categorised as nudging in one place and later no longer so.
www.federalismi.it
18
changing their economic incentives”
66
. We support the idea that what should really account
as nudges are interferences that actually do influence the set of preferences of regulatees
acting in their emotional area (not in their economic sphere). Here by “emotional area” we
mean in fact the way emotional responses of our brain (the automatic, affective thinking of
the dual-process theory in psychology
67
) to external stimuli make us behave – according to
current scientific (psychological) knowledge – on average and in a specific relevant market.
Below, some nudge strategies are classified in three main categories and exemplified through
implementation in different fields. These nudge strategies are analysed only from a rulemaking point of view, meaning nudges introduced by rules, and not those originated by a nonlegislative approach (such as public information campaigns), an antitrust decision, or selfregulation.
(a) Default rule. The default rule is based on a presumption of consent unless the interested
parties exercise a positive opt-out. Considerable evidence suggests that the choice of the
default rule can have a significant effect on behaviours and outcomes, provided that it is
simple and essentially costless to opt-in or opt-out. This strategy “uses” inertia (i.e. that we
often prefer not to change our habits unless we really have to) in order to nudge people to
choose something considered to be better for them. Moreover, “the default rule might be
taken to carry an implied endorsement by those who have chosen it; people may not depart
from the default rule on the ground that it might have been selected because it is helpful or
appropriate” 68. People are also more concerned with losses than with potential gains
69
and
where the potential gains or losses of making a choice are unclear, to accept the default is
often the preferred option, because it costs nothing in time and effort
70
. Therefore, default
rules are designed in order to “alter outcomes” with respect to health care, consumer
66
R.H. THALER and C.R. SUNSTEIN, Nudge, cited at previous note, p. 6.
Or intuition (as opposed to reasoning) in D. KAHANEMAN’s view (A perspective on judgement and choice,
American Psychologist, 58, 2003, pp. 697-720). The automatic, affective system is said to require “little or no
cognitive engagement, being driven by immediate feelings and triggered by our environments”: T. MARTEAU,
Judging nudging: can nudging improve population health?, British Medical J., Vol. 342, 2011, p. 263-265. See
also F. STRACK and R. DEUTSCH, Reflective and impulsive determinants of social behaviour, Pers. Soc.
Psychol. Rev., 2004, pp. 220-247.
68
US OIRA, Disclosure and Simplification as Regulatory Tools, p. 9. See also Sec. 4. US Executive Order
13563 of January 18, 2011, Improving Regulation and Regulatory Review.
69
D. KAHNEMAN and A. TVERSKY, Prospect Theory: An Analysis of Decision under Risk, Econometrica,
Vol. 47, 2, 1979, p. 263.
70
C.R. SUNSTEIN, Impersonal Default Riles vs. Active Choices vs. Personalized Default Rules: A Triptych, 5
November 2012, unpublished manuscript, p. 11 (http://nrs.harvard.edu/urn-3:HUL.InstRepos:9876090).
67
www.federalismi.it
19
protection, the availability of human organs
71
, energy use and environmental protection
72
,
mortgages, savings and many other topics 73.
The default rule is not new. In many regulatory areas one can find examples (take for instance
the privacy regulation, where people are considered to be against the use of their personal
data, while they do not an explicitly opt in). What is new is the awareness that inertia can
have a great impact in determining behaviour and that this force can be used in order to make
regulation more effective. This rule can be drawn in a simple way (such as in the case of
automatic enrolment, for instance, in a retirement savings plan), or in a more sophisticated
way (e.g., the SMarT option feature in a retirement savings plans allows an automatic annual
increase in contributions of payroll savings).74 To sum up, whatever the reason, in some
contexts the default rule can make regulation effective
75
and can promote automatic
compliance with the law 76; though not always nor in every situation. This is to say that biases
are not universal or, at least, they have to be verified in a specific relevant market and in
relation to different individual preferences. On this ground, differentiated default rules (i.e.
based on different abilities to opt out, eventually grouped by geographical areas or people’s
past choices) might be taken take into consideration by rule-makers 77.
(b) Smart information nudge. Attention is a scarce cognitive resource and there is a limit to
the processing capacity of the human brain
78
. Because of such characteristics of human
71
Countries where people are required to opt -out of organ donation (such as Austria, Belgium, France, Hungary,
Poland, Portugal, Sweden) report significantly higher consent than those with an opt-in policy (E.J. JOHNSON
and D. GOLDSTEIN, Do Default Save Lives?, Science, Vol. 302, 21 November 2003, p. 1338).
72
D. PICHERT and K.V. KATSIKOPOULOS, Green defaults: Information presentation and pro-environmental
behavior, Journal of Environmental Psychology, 28:1, 2008, pp. 63-73.
73
C.R. SUNSTEIN, Impersonal Default Riles vs. Active Choices vs. Personalized Default Rules: A Triptych,
cited above, note 71.
74
By this well famous nudge, average saving rates for Save More Tomorrow (SMarT) program participants
increased from 3.5% to 13.6% over the course of 40 months.(R.H. THALER and S. BENARTZI, Save More
Tomorrow, cited above, note 17. See also B. ALEMANNI, Pensioni, comportamenti e regole, Analisi giuridica
dell’economia, n. 1/2012, pp. 164-187). A similar default rule introduced in Italian regulation of pension top-ups
(previdenza complementare) for the private sector had limited effectiveness (in 2009, two years after the entry into
force of the new regulation, the workers involved made up 20% of the workforce, as opposed to 13% in 2004).
75
The percentage of citizens currently signed up as donors in those countries operating informed consent systems
ranges from 4 to 28 per cent. By contrast, countries with presumed consent systems achieve donor registration
rates of between 86 per cent and 100 per cent (P. JOHN, S. COTTERILL, A. MOSELEY, L. RICHARDSON, G.
SMITH, G. STOKER and C. WALES, Nudge, Nudge, Think, Think, Experimenting with Ways to Change Civic
Behaviour, London, Bloomsbury Academic, 2011, p. 110).
76
C. SUNSTEIN, Empirically Informed Regulation, cited above, note 62, p. 1398.
77
C.R. SUNSTEIN, Impersonal Default Riles vs. Active Choices vs. Personalized Default Rules: A Triptych, cited
above, note 71.
78
“The capacity which can be allocated to various activities is limited and the limit varies with the level of
arousal” (D. KAHNEMAN, Attention and Effort, Englewood Cliffs (NJ), Prentice-Hall series in experimental
psychology, 1973, p. 13). However, while an important activity is under way, the attention of the subject is not
necessarily increased if more crucial information is given (N.N. TALEB, The Black Swan: The Impact of the
www.federalismi.it
20
perception and decision, the framing of acts, contingencies, or outcomes might change
regulatees’ perception of the desirability of an option 79. Moreover, information that is salient
“can have a larger impact on behaviour than information that is statistical and abstract” 80.
Of course, “the practice of acting on the most readily available frame can sometimes be
justified by reference to the mental effort required to explore alternative frames and avoid
potential inconsistencies”
81
. However, when it is not the case, using such knowledge about
framing and salience, the rule-makers can draft smart information nudges, in order to
encourage end-users’ choices by providing information structured and framed to be salient so
as to achieve effects on individual behaviour.
This is something different from the simplification of information given to consumers as an
operational empowerment strategy (supra Para. 4.1), which is limited to influencing
behaviour merely by facilitating people’s choice. In the smart information nudge scheme, data
are provided in a smart, say “relational” way as they include comparisons and unspoken
assessments in order to orientate individual behaviours by leveraging on their emotional
sphere. An example is the “tell people what others are doing” strategy: in many North
American cities, energy saving has significantly increased by sending out personalized
statements about energy use. Such reports rate people on their energy use compared with that
of neighbours in 100 homes of similar size where the same heating fuel was used, and also
compared with the 20 neighbours who were especially energy efficient
82
. Here, social
influence (or the perceived behaviour of peers) is used to push householders to consume less
energy, as it has been proven that perception of the norm in the pertinent community can
affect human behaviours more than rules. The main benefit of this strategy is that it requires
nearly no effort in terms of enforcement, while ensuring high rates of compliance
83
.
However, a special attention must be granted in choosing and drafting such nudges. On one
hand, their efficacy utterly depends on whether the same mental mechanism will occur
Highly Improbable, 1st ed., New York, The Random House, 2007). Therefore, as H.A. SIMON had pointed out
already in 1971, the information overload consumes the attention of its recipients (Designing Organizations for an
Information-Rich World, cited above, note 45).
79
A. TVERSKY and, D. KAHNEMAN, The Framing of Decisions and the Psychology of Choice, cited above
note 38, p. 458 (prospect theory).
80
C.R. SUNSTEIN, Empirically Informed Regulation, cited above, note 62, p. 1354; R.E. NISBETT, E.
BORGIDA, R. CRANDALL and H. REED, Popular Induction: Information Is Not Necessarily Informative, in D.
Kahneman, P. Slovic and A. Tversky (eds), Judgment under Uncertainty: Heuristics and Biases, Cambridge,
Cambridge University Press, 1982, 112.
81
A. TVERSKY and D. KAHNEMAN, The Framing of Decisions and the Psychology of Choice, cited above note
38, p. 458.
82
L. KAUFMAN, Utilities Turn Their Customers Green, With Envy, The NY Times, January 31, 2012.
83
C.R. SUNSTEIN, Empirically Informed Regulation, cited above note 62, p. 1349.
www.federalismi.it
21
everywhere in the relevant market and for all in the targeted group
84
. On the other hand, it
might produce a boomerang effect, in terms of undesirable reactions of people who behave
above the average (e.g. people who already save energy), which can be neutralised by adding
a message indicating social approval or disapproval (e.g. through a positive or negative
emoticon) 85.
(c) Exploiting the emotional response. This is a nudge strategy which encourages end-users
choices by exploiting their emotional responses (even by neutralizing them) in order to
achieve effects on individual behaviour. The Framework Convention on Tobacco Control
(FCTC) and a proposal to revise the current European directive on tobacco products 86 sets out
a standardization of tobacco product packaging (the so-called plain or generic packaging)
with the only remaining possibility being “to print brand and product names, the quantity of
the product, health warnings and other mandatory information, such as security markings” 87.
An example of a nudge to more physical activity (and so better health) could be a rule which
obliges building managers to make stairs more prominent and attractive in public buildings,
over the lifts, escalators or elevators (for instance by transforming them into a piano keyboard
which plays when stepped on) 88.
(d) Strengths and weaknesses of nudging. Nudge strategies have strong points as well as
weaknesses. They are usually cheap for regulators and are innovative approaches in areas
where traditional regulatory tools have not worked (meaning that they have not given a
satisfactory answer to the need of the regulation on which they are based). At the same time,
they risk limiting (and in the worst case, manipulating) the regulatees’ choices.
A first critical point concerns the identification of the social welfare area to be maximized – a
discretionary decision at the best of times –. Need the decision-makers nudge in order to
84
Behavioural Insight Team, Applying behavioural insights to reduce fraud, error and debt, 2012, p. 17.
Indeed, the attempt to mobilise action against a problem may lead to drafting a message which depicts it as
regrettably frequent (“Many people are doing this undesirable thing”) and in so doing they end up
communicating that “Many people are doing this” (in other words, the behaviour which is to be curtailed is in
fact being highlighted as that which everyone is doing (R.B. CIALDINI, Crafting Normative Messages to
Protect the Environment, Current Direction in Psychological Science, 2003).
86
Possible revision of the Directive n. 2001/37/EC of the European Parliament and of the Council, public
consultation document 2010.
87
E. BONADIO, Regulating Tobacco, Alcohol and Unhealthy Food and Beverages: the Impact on, and Role of,
Intellectual Property, 2nd HEC Paris Workshop on Regulation: Regulating Lifestyle Risks in Europe - The Case
of Alcohol, Tobacco, Unhealthy Diets & Gambling, 20 e 21 September 2012, http://appli6.hec.fr/forms/riskregulation-2012). However, quantitative data on the efficacy of this tool of nudge to less consumption does not
seem to exist (some undetailed information is available in the study to support a DG SANCO Impact
Assessment, Assessing the Impacts of Revising the Tobacco Products Directive, 2010).
88
One way is suggested by “the fun theory” which nudges more people to do something by making it fun.
85
www.federalismi.it
22
increase or protect the welfare of a limited group of people or that of everyone? The choice to
maximize the welfare of a single target group is not without consequences: this expression of
“pure” libertarian paternalism could encourage people to take optimal decisions for
themselves, without considering the interests of other people
89
, for instance, by refusing to
adopt an expensive system intended to limit industrial pollution (externality problem). At the
same time, is the so-called libertarian welfarism intended to consider all citizens or only the
weakest? And how are they to be correctly identified? Moreover, the identification of social
welfare is difficult when there is a high degree of uncertainty (for instance, regarding which
new energy technologies or renewable energy sources are to be incentivized), and impossible
when there are a wide variety of needs to be satisfied.
Another critical point is about the potential threat that cognitive based regulation might pose
to liberty and individual autonomy, it being difficult to identify individuals’ true preferences
90
. These difficulties may lead the regulators towards error, and end up allowing them to
impose their vision of that which is best for end-users.
A third critical point concerns transparency. The nudge strategies are less identifiable than
those connected to “traditional” paternalism. For this reason, these are usually strategies
where end-users have not participated nor shared, unless the decision-makers take steps in this
direction (for instance, explaining the expected effects of a default option during the
consultation process) 91.
These critical points might (partially) be settled in an open and transparent rule-making
process, informed by an ex ante assessment of possible regulatory options (where needed
according to the proportionality principle) 92.
Other critical points relate to specific tools.
On one side, the default rule is usually the most effective and least expensive (for regulators),
but also the most controversial of the nudge strategies. The most widespread and well89
R. KOROBKIN, Libertarian Welfarism, cited above, note 61, p. 1665 ss.
J.D. WRIGHT and D.H. GINSBURG, Behavioral Law and Economics, cite above, note 11.
91
“Perhaps there is an argument here for allowing citizens the opportunity to help design the nudges in order to
increase the legitimacy of any changes to choice architecture. In the case of organ donation, a national debate or
even a referendum on changing the registration system from an opt-in to an opt-out or a mandated choice system
might be a useful way forward” (P. JOHN, S. COTTERILL, A. MOSELEY, L. RICHARDSON, G. SMITH, G.
STOKER and C. WALES, Nudge, Nudge, Think, Think: Using Experiments to Change Civic Behavior, London,
Bloomsbury Academic, 2011).
92
However, is it undoubtedly true that “administrative law should adapt the conceptual framework and the
instruments by which it provides a real control of the way power is used by public authorities. (…) [because] the
informality and the informational asymmetry of behaviourally-informed strategies appear to circumvent
intrinsically the safeguards of the principles of legality and impartiality of public administrations” (A.
ALEMANNO and A. SPINA, Nudging Legally. On the Checks and Balances of Behavioural Regulation, NYU
School of Law – Jean Monnet Working Papers, Vol. 6/20013, forthcoming).
90
www.federalismi.it
23
founded criticisms concern its libertarian nature, and are basically connected to the ease of
opting-out, which risks being overturned if it proves to be problematic, for any reason (for
instance because it incurs costs – time or monetary – or if the opt-out possibility is not clear)
93
.
On the other side, the “smart information” and “exploiting the emotional response” nudge
strategies risk being insufficiently effective because the introduction of a new or different
consumption model could take years in order to bear fruit. In general, it is also difficult to
measure its level of efficacy due to the fact that these tools are not usually the unique
regulatory strategy. For instance, even if plain packaging is adopted for cigarettes, healthrelevant information must always be available; in addition, the advertising ban and the
prohibition of sales to minors must remain in force. At the same time, there are other nudges
used along with the plain package (such as - in Australia - the shock images of diseases
caused by smoking) which could paradoxically counterbalance the potential efficacy of the
former. Indeed, the optimistic and availability bias lead us not to consider the possibility that
these events could concern us.
5. Lesson drawing for regulators: how to choose among different regulatory options?
The paper shows that biases in judgment offer crucial information to rule-makers on the
reactions of end-users, and in so doing they enable the better formulation of rules and the
provision of more adequate responses to the public interest they are intended to satisfy.
In order to attain these results, the regulatory process must accordingly change. It is important
to open rule-making processes through consultations organised and led in order to bring out
potential cognitive errors. Moreover, when – according to the proportionality principle – RIA
is used in rule-making processes, this tool should be enriched by a risk analysis which takes
into account the use of heuristics as a risk to be assessed in terms of probability and effects
and might help rule-makers to decide whether or not to deal with cognitive errors through
regulation.
Moreover, evidence from the cognitive sciences leads to an enrichment of the traditional
regulatory options (such as those based on the command and control approach, and the
incentive-based regulation), and has contributed to the emergence of new regulatory tools
(such as operational empowerment and nudging).
93
The feasibility of the opt-out is the centrally important issue of this tool, and if the ease to opt out is not
guaranteed, this approach “sows the seeds of an illiberal system of control” (R. BALDWIN, The New
Scholarship: Celebrating the ‘I’ in Ideas, LSE Law, Society and Economy Working Papers, 5/2012, p. 12; see
also R. BALDWIN, M. CAVE and M. LODGE, Understanding Regulation, cited above, note 10, p. 123 ss.).
www.federalismi.it
24
However, the very presence of cognitive errors and biases, even if recurrent in given relevant
markets, does not (and we think that should not) per se justify a regulatory intervention (free
markets often providing significant protection against such errors)
94
. His rationale must,
indeed, be found in a general interest which is unattainable because of the cognitive error and
biases detected in a given relevant market. Nor should it justify the use of a single regulatory
tool or the preference toward one tool among the many in a toolkit. Our contention is that
many if not most regulatory tools could benefit from adopting a cognitive-based approach to
the rule-making process.
Nudging and operational empowerment are “sons” of the cognitive momentum, they bear a
“cognitive DNA”. Other regulatory strategies, being less recent, have not necessarily been
confronted by cognitive errors. Indeed, we contend that applying a cognitive-based approach
to these might help reducing some of their weak points. An exercise can thus be made to reread them through the lenses of the cognitive sciences, i.e. in relation to the cognitive errors
each regulatory strategy aims to avoid, modify or is affected by. For instance, a prohibition to
negotiate (C&C) could be preferred to a duty to disclose information about conflicts of
interest affecting a financial adviser, anytime it is demonstrated that (among other things) the
targeted population in the relevant market is affected by overconfidence, while lacking any
financial education.
Table 1 at the end of these notes summarises the characteristics, weaknesses and strengths of
the regulatory strategies analysed so far, having exclusive regard to their attitude toward
cognitive errors. While confirming that whatever selection of a regulatory strategy must be
made on a case-by-case basis, having regard to the specific relevant market and the relevant
goals (public interests) to be pursued, the main findings of the paper are now summarised so
as to provide some indications that might prove useful for regulators.
Sometimes a unique regulatory strategy may have limited efficacy and a combination of
different strategies might be suggested to regulators. This is the case of the default rules,
which tend to be coupled with framing of information regarding opt-out (an example of
operational empowerment) 95.
Similarly, nudging which tends to “exploit or neutralise” emotional responses is often
matched with other – traditional – regulations (such as, in the case of tobacco, the provision of
health relevant information and the prohibition of sales to minors).
94
For instance, operational empowerment tools are often introduced and implemented by private firms, without
any regulatory constraint.
95
Sometimes default rules can be alternatives to mandates or bans (C&C) or operate to complement other
regulatory requirements (C.R. SUNSTEIN, Empirically informed regulation, cited above, note 62, pp. 1398-99).
www.federalismi.it
25
Sometimes tools belonging to different strategies may be used incrementally to gradually
raise the effectiveness of regulatory intervention. Moreover, “smart information nudges”
could increase the efficacy of both traditional information disclosure regulation and
“information simplification” operational empowerment. So for instance, traditional
information disclosure tends to increase the amount of data provided, causing an adverse
reaction of real people to complex information, who, consequently, will go in the opposite
direction of the desired behaviour (for instance, people will hold onto risky investments, and
they will not save energy). If it is proven that too much information has effects equal to not
being informed (e.g. about financial risks and potential savings), then some operational
empowerment tools, such as framing or targeted education, could be justified to strengthen
the efficacy of traditional regulation based on information.
Also the “simplification of choice” tool could be more effective (e.g. in urging provider
switching) if coupled with “targeted information”. However, if a feedback of low switching
rates still results, regulators could consider overcoming inertia by using “smart or relational
information nudges”. In other words, they could exploit one social norm (e.g. emulation
within a group) and emphasise positive models in the community (e.g. those who switched are
better off) so to create new virtuous habits. Of course, the efficacy of such nudges utterly
depends on whether the same mental mechanism will occur everywhere in the relevant market
and for everyone in the targeted group 96.
In other cases, one (cognitive based) strategy might be preferred and considered an exclusive
regulatory answer, where is proven that the empowerment might decrease the effectiveness of
nudging
97
. Moreover, where cognitive error is evitable, we would suggest to prefer
operational empowerment regulation, which is more transparent than nudging and preserves
regulatees’ autonomy. This is especially true in the case of default rules, the only nudge
strategy that is really effective. Indeed, even if opting out is low-cost and easy to exercise, it
might end up imposing a vision of end users’ welfare that belongs to the regulator. In such
96
Even the Cabinet Office Behavioural Insight Team stresses what seems clear: this type of nudge could be
effective if it strengthens a pre-existing social norm, and that “it will not be appropriate to highlight a descriptive
social norm, in particular where large numbers are engaged in non-compliant or problematic behaviour”
(Applying behavioural insights to reduce fraud, error and debt, cited above, note 47, p. 17).
97
However, a mix of regulatory strategies is not always the best solution. An experiment concerning organ donor
registration suggests that “nudging by itself is more effective than nudging and thinking in encouraging organ
donor registration. Tailored information booklets, based around behavioural economics principles, created
increases in organ donor registrations and were more effective than combined information and discussion. It
seems that the added effect of discussion generates some uncertainty. (…) Since the discussions themselves
allowed participants to explore the complexity of the topic and reflect in more detail, this enabled them to see
different sides of the issue” (P. JOHN, S. COTTERILL, A. MOSELEY, L. RICHARDSON, G. SMITH, G.
STOKER and C. WALES, Nudge, Nudge, Think, Think, cited at note 91).
www.federalismi.it
26
circumstances, an empowerment strategy could prove less intrusive and more autonomypreserving, provided that its effectiveness in overcoming or avoiding cognitive errors is
proven. It might indeed happen that an empowerment tool increases, instead to decreasing, the
incidence of a given bias (such as overconfidence).
To sum up, when educational strategies and information (operational empowerment) do not
allow the avoidance of cognitive errors (meaning that cognitive errors are unavoidable),
regulators might use them in order to build soft incentives (nudges) so as to attain results.
However, this may not be the best option when the protected values are particularly sensitive
(e.g. health, safety, etc.) and need a strong answer
98
: in such circumstances, more effective
regulations, such as those based on command and control, might be preferable.
A final note regards the possible consequences on rule drafting and implementation of
adopting a cognitive based approach. Addressing real people, gathering information about
individuals’ errors and reactions, consulting so as to let group preferences emerge, targeting
regulation, i.e. the “core” of the new approach, entails some degree of differentiation when
drafting rules and applying them 99. In the realm of regulation differentiation, indeed, this has
often been associated with greater compliance. It follows that differentiating rules on the basis
of recurrent errors and biases within a relevant group would be not so different, with the
positive outcome of adding weight to regulation and increase the probability of greater
efficacy in spreading virtuous behaviours.
Furthermore, if following an accurate analysis of the targeted groups (differentiated by age,
income, gender, geographic location, etc.) it results that an educational strategy was not
effective in overcoming or avoiding cognitive errors, then nudge strategies such as “smart
information nudge” could be justified. We should caution, however, that using nudging as a
last resort strategy may be a source of serious consequences: if not effective, nudge strategies
risk leaving the public interest they are intended to satisfy without adequate protection.
98
For instance, R.H. THALER and C.R. SUNSTEIN claim that “we are all aware that for environmental
problems, gentle nudges may appear ridiculously inadequate – a bit like an effort to capture a lion with a
mousetrap. (…) Even libertarians tend to agree that when externalities are presents, markets alone do not achieve
the best outcomes. (…) People who celebrate freedom of choice are well aware that when “transaction costs”
(technical terms for the costs for entering into voluntary agreements [between polluters and damaged people in
order to get the first to clean up]) are high, there may be no way to avoid some kind of government action”
(Nudge, cited above at note 66, pp. 184-185).
99
For instance, “personalized default rules might be demographic; (…) alternatively, personalized default rules
could be very narrowly targeted. If enough information is available about someone’s past choice or personal
situation, we could design, for that person, a default rule with respect to health insurance, privacy, rental card
agreement, computer setting, and everything, else” (C.R. SUNSTEIN, The Storrs Lecture: Behavioral
Economics and Paternalism, Yale Law Journal, 2012, forthcoming, p. 35; see also Empirically informed
regulation, cited at note 62, pp. 1399).
www.federalismi.it
27
Therefore, the answer is always, both for operational empowerment and nudging, the endusers’ participation and transparency of the rule-making process.
www.federalismi.it
28
Table 1 – Regulatory strategies in relation to cognitive errors
STRATEGY
REGULATORY TOOL
CHARACTERS
PROS
IN
RELATION
TO
COGNITIVE
CONS
ERRORS
Command &
Control
Bans, duties, standards
(e.g. seat belts)
Avoids risk of cognitive errors;
General rules that apply to everyone
(disrespectful of cognitive errors)
Low cost design (except for standards) and
implementation;
Can help reducing creative compliance
Paternalism;
Risk of cognitive errors by the rule-maker;
Over-regulation and excessive limitations
on those not affected by the cognitive error
Disclosure
regulation
Ex ante information disclosure duties;
informed consent;
Ex post (control of) prohibitions of false
information; misleading adversiting, un
fair commercial practices
Neutral with regard to individual preferences
and cognitive errors
Preserve autonomy
Does not ensure effective comprehension;
Can esacerbate information asimmetry
(information overload)
Legal
Empowerment
Ex officio powers by public bodies to
co-enforce individual rights;
Class actions, collective reddress;
Simplification of litigation (Alternative
Dispute Resolution)
Avoids risk of cognitive errors;
Assumes weakness of regulatees (disregarding
cognitive errors)
Strengthens deterrent effect of private
enforcement;
Does not limit private autonomy
Heavily
paternalistic
(complements
individual
autonomy
with
public
intervention);
Lacks delegation;
Stuck to notional (average) consumer
Incentive
Regulation
Economic incentives;
differentiated tax regimes; subsidies
(e.g. benefits for energy savers; higher
taxes for polluters)
Assumes rationality of regulatees; General
rules that apply to everyone (disregarding
cognitive errors)
Preserves autonomy;
Easy to enforce
Operational
Empowerment
Simplification of information and smart
disclosure;
Framing;
Simplification of choice tools (e.g. price
comparison apps);
Targeted education
Overcoming emotional responses (e.g.
cooling-off rules)
Aimed to avoid or overcoming cognitive errors
(truly de-biasing techniques);
Emphasis on: education, information
simplification, overcoming emotional
responses
Preserves autonomy;
Reduces information asymmetry;
Strengthens demand vis à vis the supply;
Promotes competition
Can increase compliance with the law and
participation in public programs
Can be costly to define an incentive
scheme;
Allows regulators to let their vision prevail;
Lets economic interests prevail on other
motivations (prone to capture by private
interests)
Costly to design;
Efficacy in overcoming biases not assessed
yet;
Aversion to be empowered
Nudging
Default rules;
Smart information nudge;
Exploiting emotional responses
Is not aimed to avoid cognitive errors;
Exploits bias
Libertarian paternalism
Low cost design;
Potentially
successful
in
changing
behaviours where other tools fail
29
Risk of manipulation;
Lack of transparency;
Low coercion but still limits autonomy
Efficacy not assessed yet