Working Paper by Susan E. Dudley and Zhoudan Xie: “Behavioral research has shown that individuals do not always behave in ways that match textbook definitions of rationality. Recognizing that “bounded rationality” also occurs in the regulatory process and building on public choice insights that focus on how institutional incentives affect behavior, this article explores the interaction between the institutions in which regulators operate and their cognitive biases. It attempts to understand the extent to which the “choice architecture” regulators face reinforces or counteracts predictable cognitive biases. Just as behavioral insights are increasingly used to design choice architecture to frame individual decisions in ways that encourage welfare-enhancing choices, consciously designing the institutions that influence regulators’ policy decisions with behavioral insights in mind could lead to more public-welfare-enhancing policies. The article concludes with some modest ideas for improving regulators’ choice architecture and suggestions for further research….(More)”.
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