Limitations of Behaviorally Informed Policy Under Social Interaction

Nudge and boost are two competing approaches to applying the psychology of reasoning and decision making to improve policy. Proponents of both the approaches claim capacity to enhance social welfare through better individual decisions. We question the validity of this claim. First, individual rationality is neither sufficient nor necessary for improving collective outcomes. Second, collective outcomes of complex interactions among individuals are largely ignored by the focus of both nudge and boost on individual decisions. We suggest that the design of mechanisms and norms can sometimes lead to better collective outcomes than nudge and boost. More generally, we present conditions under which the three approaches enhance social welfare. Furthermore, we argue that to reliably improve collective outcomes that depend on the aggregation of many decisions, it is necessary to understand the interface between the psychology of reasoning and decision making on the one hand and economics and policy on the other