Nudging Possibilities Limitations and Applications in European Law and Economics

Economic Analysis of Law in European Legal Scholarship 3
Klaus Mathis
Avishalom Tor Editors
Nudging - Possibilities,
Limitations and
Applications in
European Law and
Economics
Economic Analysis of Law in European Legal
Scholarship
Volume 3
Series Editor
Klaus Mathis, University of Lucerne, Switzerland
Editorial Board
Pierluigi Chiassoni, University of Genoa, Italy
Péter Cserne, University of Hull, United Kingdom
Bruno Deffains, University of Paris II - Sorbonne Universities, France
Thomas Eger, University of Hamburg, Germany
Mariusz J. Golecki, University of Łódž, Poland
Andreas Heinemann, University of Zurich, Switzerland
Régis Lanneau, University of Paris West Nanterre La Défense, France
Aurélien Portuese, University of Westminster, United Kingdom
Kai Purnhagen, University of Wageningen and Erasmus University Rotterdam,
The Netherlands
Lucia A. Reisch, Copenhagen Business School, Denmark
Anne-Lise Sibony, University of Liège, Belgium
Endre Stavang, University of Oslo, Norway
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Klaus Mathis • Avishalom Tor
Editors
Nudging - Possibilities,
Limitations and Applications
in European Law
and Economics
Editors
Klaus Mathis Avishalom Tor
Faculty of Law Notre Dame Law School
University of Lucerne University of Notre Dame
Lucerne, Switzerland Notre Dame. IN, USA
Faculty of Law
University of Haifa
Haifa, Israel
Economic Analysis of Law in European Legal Scholarship

ISBN 978-3-319-29560-2 ISBN 978-3-319-29562-6 (eBook)
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Foreword
Once again, it was a pleasure to welcome as the Vice-Dean of the Faculty of Law at
the University of Lucerne numerous academics and practitioners from around the
world to the 4th Law and Economics Conference here in Lucerne. The issue of
“Nudging – Theory and Applications” seemed to be the rational consequence of last
year’s issue “Behavioural Law and Economics”, since nudging is about influencing
behaviour. Although nudging has already been part of marketing strategies of pri-
vate enterprises for decades, it is only recently that this instrument has found its way
into the discourse on intelligent regulation. In that context, nudging is about influ-
encing decisions of persons for the sake of objectives of the public welfare without
command or prohibitions. A basic example given by Thaler and Sunstein is – for-
give me – a urinal with the picture of a fly right in its centre, nudging a male person
to try to hit it with the liquid jet and thereby avoiding any unwanted loss of this
liquid material by distraction. Obviously, this serves the common welfare of provid-
ing for a clean environment in the toilet. Furthermore, the instrument works just by
focusing the individual on its own action. It is debatable whether the nudge in this
example refers to the hunting instinct or rather to the play instinct. Surely, the play
instinct is concerned, when some years ago in Germany, I had the chance to try a
nudge replacing in our example the picture of the fly by a little soccer goal with a
soccer ball attached to the crossbar by a little string. Thaler and Sunstein state that
due to the nudge of the fly toilets have become cleaner by 80 %. In Germany, for the
nudge of the soccer goal, I lack any figures. However, we all know, that in 2014
Germany won the world championship in soccer.
To be serious again, both, in the USA and in the UK, the governments have
established administrative ‘Teams on Behavioural Sciences or Behavioural
Insights’. With due delay, in Germany, the Federal Government tries to establish a
similar team. However, in Germany the concept faces strong criticism – citation: ‘is
the gawk the new concept of the civilian in regulation?’ – and likewise in
Switzerland, the well-known NZZ asked, whether we all should now become petty
bourgeois (‘kleine Spiesser’).
For governments the concept of nudging has some obvious advantages. People
are led to make ‘better’ decisions and are pushed towards contributing to the public
v
vi Foreword
welfare without feeling suppressed that is without blaming the government for
interfering with their rights. When relying on advantages for the individual, regula-
tion might overcome hurdles seen by systems theory for steering different systems,
like economic behaviour being influenced by politics and law. The thought of nudg-
ing is especially attractive where major changes have to be put into effect, like the
energy strategy in Switzerland calling for decarbonization and an exit from nuclear
power in its present shape.
However, a myriad of questions remain:
• What is the underlying picture of the individual under that approach, an enlight-
ened person or a lazy ‘gawk’ looking for convenience? And does a regulatory
approach form persons according to its underlying picture of them?
• Where are the boundaries of nudging when the precautionary principle calls for
immediate action?
• Is nudging acceptable, even if it makes the state use non-transparent strategies of
marketing?
Furthermore, in literature it has been doubted that nudging is really libertarian:
There is an interesting example from the community of Zurich asking people to
make a choice between energy supply from hydropower or a mix of energy
resources, nudged by the use of colours. A warning red and a calming blue colour
were chosen to nudge people towards the hydropower. The next year the ‘general
mix’ was replaced by ‘nuclear energy mix’ and a year later, the option for choice
has vanished: sorry, there is only blue energy available in Zurich left. This has been
described as ‘nudging on a slippery slope’.
On the contrary, some might regard nudging simply as deregulation in disguise.
I would like to add a question concerning the underlying rational of nudging. Is
it really about paternalism, acting in conformity with the objectives of the individ-
ual in the long run? Some authors differentiate between the objectives of an indi-
vidual in the short run (enjoying sweets or smokes) and in the long run (suffering
from health issues). Thaler and Sunstein state that nudging aims at the common
welfare. In my analysis, intelligent regulation is only interested in nudging for the
sake of common welfare. The individual behaviour only raises the interest of the
regulator, if it might cause more costs to society, like costs for the public health
system or costs for the social welfare system. Interestingly, if that is true, then nudg-
ing shows that ‘better’ behaviour is something outside the thoughts of the so-called
rational homo economicus limited to egoistic-economical views in traditional eco-
nomic science.
Further, the question may be raised how successful nudging really is. As already
mentioned, in their example, Thaler and Sunstein state that after the use of the pic-
ture of the fly, toilets have become cleaner by 80 %. In German public toilets the fly
has vanished, but a pay and voucher system has taken over. So, under the approach
for intelligent regulation, nudging not only has to qualify by results, but by better
results than gained by concurring instruments. This is the threshold by the test of
proportionality.
Foreword vii
As the managing director of the Center for Law and Sustainability at the
University of Lucerne, I am very proud that my distinguished colleague, Klaus
Mathis, has succeeded in bringing together so many big academic elephants – if you
kindly let me exploit the logo of this conference with the big and the small ele-
phants – together in this room at the small University of Lucerne to discuss some of
the many questions raised by the concept of nudging. Obviously, the logo works in
the other direction as well: even a small elephant can nudge the big ones.
Faculty of Law Sebastian Heselhaus

University of Lucerne
Lucerne, Switzerland
December 2015
Preface
This anthology, ‘Nudging – Possibilities, Limitations and Applications in European

Law and Economics’, is the result of the 4th Law and Economics Conference held
at the University of Lucerne on 17th to 18th of April 2015. The conference was
organized in partnership with Notre Dame Law School and the Notre Dame Program
on Law and Market Behavior (ND LAMB). The main focus of the conference lay
on European legal questions as presented by European legal scholars. They were
complimented by insights from distinguished scholars from the USA in order to
foster the dialogue between the two different legal cultures. The thematic scope of
this volume spans both the theoretical and practical developments of nudging.
We take this opportunity to thank all those who have contributed to the organiza-
tion of the conference and to the successful completion of this volume. First of all,
we would like to thank Uta Dietrich and Julia Wetzel, MLaw, for their flawless
coordination and organization of the conference. Furthermore, we wish to thank
Gareth Hunt, BSc, and Lynn Gummow, MLaw, for their diligent proofreading. A
special thank goes to the Swiss National Science Foundation (SNSF), the Research
Commission (FoKo) of the University of Lucerne, the Institute lucernaiuris, as well
as the Rectorate of the University of Lucerne for supporting the conference. Finally,
we are grateful to Neil Olivier and Diana Nijenhuijzen at Springer Publishers for
overseeing the publishing process.
Lucerne, Switzerland Klaus Mathis

Notre Dame, IN, USA Avishalom Tor
December 2015
ix
Contents
Part I Foundations
1 The Critical and Problematic Role of Bounded Rationality
in Nudging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Avishalom Tor
2 Beneficial and Exploitative Nudges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Bruno S. Frey and Jana Gallus
3 The Crucial Importance of Interests
in Libertarian Paternalism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Mark D. White
4 Condorcet’s Jury Theorem as a Rational Justification
of Soft Paternalistic Consumer Policies . . . . . . . . . . . . . . . . . . . . . . . . 39
Malte Frederic Dold
5 To What Extent Should the State Protect Human Beings
from Themselves? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Peter G. Kirchschlaeger
6 Nudging Is Judging: The Inevitability of Value Judgments . . . . . . . . 69
Ariel David Steffen
Part II Applications
7 Nudging and the Principle of Proportionality . . . . . . . . . . . . . . . . . . . 93
Mark Schweizer
8 Nudging in Swiss Contract Law? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Klaus Mathis and Philipp Anton Burri
9 Designing Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Geneviève Helleringer
xi
xii Contents
10 Neutral Third-Party Counselling as Nudge Toward

Safer Financial Products? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Piotr Tereszkiewicz
11 The Potential Use of Visual Packaging Elements as Nudges . . . . . . . . 197
Kai Purnhagen, Erica van Herpen, and Ellen van Kleef
12 Nudging: Information, Choice Architecture and Beyond . . . . . . . . . . 217
Rainer Baisch
13 Nudging and Environmental Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Felix Ekardt and Jutta Wieding
14 Behavioural Regulation in International Trade . . . . . . . . . . . . . . . . . . 263
Georgios Dimitropoulos
15 Nudging in Tax Law? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Mariusz J. Golecki, Marcin Romanowicz,
and Jerzy W. Wojciechowski
16 Nudging as a Tool of Media Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
Mira Burri
17 Academic Fraud at Hogwarts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 343
Rute Saraiva
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379
Contributors
Rainer Baisch Rechtswissenschaftliche Fakultät, University of Zurich, Zurich,

Switzerland
Mira Burri World Trade Institute, University of Bern, Bern, Switzerland
Philipp Anton Burri Faculty of Law, University of Lucerne, Lucerne, Switzerland
Georgios Dimitropoulos Max Planck Institute Luxembourg for Procedural Law,
Luxembourg, Luxembourg
Malte Frederic Dold Albert-Ludwig University Freiburg, Freiburg i. Br., Germany
Felix Ekardt Forschungsstelle Nachhaltigkeit und Klimapolitik, Leipzig, Germany
Bruno S. Frey Center for Research in Economics, Management and the Arts
(CREMA), University of Zurich, Zurich, Switzerland
Jana Gallus Center for Research in Economics, Management and the Arts
(CREMA), Univeristy of Zurich, Zurich, Switzerland
Mariusz J. Golecki Department of Legal Theory and Philosophy of Law, Faculty
of Law and Administration, University of Łódź, Łódź, Poland
Geneviève Helleringer Essec Business School, Cergy-Pontoise Cedex, France
Institute of European and Comparative Law, Oxford University, Oxford, UK
Peter G. Kirchschlaeger Faculty of Theology, University of Lucerne / Yale
University, Lucerne, Switzerland
Klaus Mathis Faculty of Law, University of Lucerne, Lucerne, Switzerland
Kai Purnhagen Law and Governance Group, Wageningen University, Wageningen,
The Netherlands
Marcin Romanowicz Faculty of Law and Administraion, University of Warsaw,
Warsaw, Poland
xiii
xiv Contributors
Rute Saraiva Alamedad de Universidade, University Lisbon Law School, Cidade

Universitária, Lisboa, Portugal
Mark Schweizer Law School, University of St. Gallen, St. Gallen, Switzerland
Ariel David Steffen Faculty of Law, University of Lucerne, Lucerne, Switzerland
Piotr Tereszkiewicz Faculty of Law and Administration, Jagiellonian University
of Cracow, Cracow, Poland
Avishalom Tor Notre Dame Law School, University of Notre Dame, Notre Dame,
IN, USA
Faculty of Law, University of Haifa, Haifa, Israel
Erica van Herpen Marketing and Consumer Behavior Group, Wageningen
University, Wageningen, The Netherlands
Ellen van Kleef Marketing and Consumer Behavior Group, Wageningen
University, Wageningen, The Netherlands
Mark D. White Department of Philosophy, College of Staten Island, Staaten
Island, NY, USA
Jutta Wieding Forschungsstelle Nachhaltigkeit und Klimapolitik, Leipzig,
Germany
Jerzy W. Wojciechowski Faculty of Psychology, University of Warsaw, Warsaw,
Poland
Introduction
Cass R. Sunstein and Richard Thaler proposed in their book ‘Nudging – Improving
Decisions About Health, Wealth and Happiness’, that altering people’s behaviour in
a predictable way without forbidding any option or significantly changing economic
incentives can and should be used to help people make better decisions. This has
sparked interdisciplinary debates in academia as well as in the public sphere.
People can be ‘nudged’ in the desired direction, for instance, by means of default
rules. One example for a default rule is the objection clause in the case of organ
donations, according to which every human being is considered to be a donor after
death unless they explicitly opt out. The use of nudges, however, raises a number of
questions: who decides what behaviour is desired? Do nudging and the so-called
libertarian paternalism threaten the autonomy of people? Does the state not pretend
to have knowledge which it does not have, as Friedrich August von Hayek would
argue? Should we not better trust the spontaneous order, even if it will not always
be perfect? At the extreme, might nudging not pave the way to serfdom, to allude to
Hayek again? The present anthology analyses and discusses the issues surrounding
nudging and its use in intelligent legislation, regulation, and policy making more
generally.
In Part I the authors discuss the foundations of nudging theory from different
perspectives:
First, Avishalom Tor discusses the Nudge policy framework and draws attention
to the fact that many other policy instruments are equally suited to promoting the
goal encouraging boundedly rational people to better achieve their own ends.
Furthermore, he highlights that the tools of nudging are equally suited to promoting
goals that are excluded by Nudge’s own framework. This problem of fit between
Nudge’s goals and tools causes some of Thaler and Sunstein’s own applications to
breach the boundaries of what they define as legitimate nudges and, more signifi-
cantly, obscures the broader potential of behaviourally informed policies and the
substantial trade-offs involved in their implementation.
Bruno S. Frey and Jana Gallus state that the effectiveness of nudges in raising the
welfare of the population hinges on the policymakers employing them. They argue
that rather than being concerned about policymakers’ incapacity to raise the
xv
xvi Introduction
population’s welfare we should be concerned about their unwillingness to do so. As

a possible solution, they argue that a legal framework for the use of nudges should
be implemented on a constitutional level. Nudging should not be considered as an
innocuous exception to constitutionally based decision-making even if it appears as
beneficial at first sight. According to them, even ‘Liberal Paternalism’ may not be
imposed on the population of a democratic society without its consent.
One of the main criticisms aimed at liberal paternalism is the question of an
individual’s self-interest. In his contribution, Mark D. White argues that self-interest
has been neglected in recent scholarship aimed at defending paternalism by means
of a behavioural approach. In particular, he disputes claims that paternalism of
means can be meaningfully separated from paternalism of ends, and argues that
modern paternalism does not respect people’s true interests but instead adopts a
perfectionist or objective conception of well-being.
In his contribution Malte Frederic Dold revisits the meaningfulness of the
Condorcet Jury Theorem (CJT) and applies it to the recent debate on liberal pater-
nalism and consumer protection. In his paper, he outlines a case for the application
of a Condorcet jury voting procedure in consumer law in order to nudge rational
consumers.
From a human rights perspective, Peter Kirchschläger argues that nudging could
seem to be attractive if it would lead to a better realization of human rights. However,
he cautions that it is at the heart of human rights to protect the individual from the
collective, respectively from abuse of power by the collective. This therefore raises
the question if the argument that the ends justify the means should apply in order to
justify the use of nudging.
Ariel Steffen argues that nudges always entail ex-ante value judgements. He sees
this as troublesome when viewed from the perspective of a collapsed fact/value
dichotomy as this means that facts and values are always inextricably entangled. As
a result, the normative concept ‘rationality’ is maximized under the guise of it being
a positive concept while ‘autonomy’ is rejected as a legitimate concept for maximi-
zation on grounds of it being normatively laden. He argues for the use of pragmatic
ethics as a basis to make the normative transparent while at the same time not
exclude it from scientific discourse.
In Part II various applications of nudges are illuminated:
From the perspective of the governmental ‘Choice Architects’, Mark Schweizer
examines the potential limits the German Federal Constitutional Court imposes
through their principle of proportionality. While nudges as such generally do not
interfere with fundamental rights, their implementation will often interfere with the
fundamental rights of citizens other than the decision makers and therefore trigger
constitutional scrutiny. He concludes that the proportionality principle does not
compel the use of nudges.
Klaus Mathis and Philipp Anton Burri discuss various interpretations of the func-
tion of non-mandatory contract law along with the requirements with regard to
adequate formulation of a contract. From this basis they then proceed to discuss the
behavioural economic analysis of non-mandatory contract law, especially in view of
using it as a nudging instrument. Non-mandatory law, they argue, could be used to
Introduction xvii
steer behaviour of individuals. They support their thesis by discussing labour law
and surety contract law as two examples.
Moving from contracts to the financial sector, Geneviève Helleringer explores
the psychology of disclosure in the context of advised financial investment deci-
sions. She investigates how information about the financial advisor’s potential con-
flict of interest impacts on the participants’ judgement. The implications of her
findings for public policy are that, contrary to what is commonly suggested, prob-
lems of conflict of interest in the financial investment context may efficiently be
treated by means of disclosures, provided that such disclosures explicit the conse-
quences of the conflict for the decision maker.
Staying in the financial sector, Piotr Tereskiewicz discusses the idea of neutral
counselling as a measure of improving decisions of borrowers when choosing a
mortgage loan. The developments regarding foreign-currency mortgage loans, pop-
ular in Central and Eastern Europe in recent years, illustrate how incorrect mortgage
choices may have detrimental effects on borrowers and their families. Taking a
sceptical approach towards mandated pre-contractual disclosure as a protection
measure for borrowers, the paper advocates neutral counselling of mortgage appli-
cants in case they are offered risky types of mortgages. Drawing on the experience
of an American mortgage counselling programme, a set of recommendations is
made regarding the design of a possible neutral mortgage counselling scheme.
While the counselling solution has imminent limitations, it displays clear potential
towards improving the process of financial decision-making.
Nudges also play an important role in health and nutrition. In their contribution
Kai Purnhagen, Erica van Herpen and Ellen van Kleef argue that in order to protect
consumers in the context of making healthy food choices, internal market regulation
should focus more on pictorial health and nutrition claims and representations. They
back up their claim by research from behavioural sciences. The main focus of atten-
tion of the misleading potential of health and nutrition claims in the EU is on textual
claims.
In his contribution, Rainer Baisch discusses the traditional disclosure paradigm
based on the assumption that transparent and effectively processed information will
enable investors to make well-founded investment decisions. In particular, he analy-
ses human flaws with regard to how information is processed and how the provision
of data for consumers of financial products should be further optimized.
Nudges also play a role in both constitutional and environmental law. Felix
Ekardt’s and Jutta Wieding’s contribution addresses nudges in both areas. They dis-
cuss the criticism that nudges are too paternalistic and argue that many forms of
nudging are not paternalistic, because they do not protect an individual from them-
selves, but rather protect others from negative effects of the actions of an individual.
Especially in environmental policies, nudging therefore proves to be legitimate
approach. Unfortunately, they claim that nudging might not be as effective as policy
instrument for environmental issues, as many hope.
Georgios Dimitropoulos’ contribution proposes to recast a big part of interna-
tional trade law as behavioural regulation. The Sanitary and Phytosanitary and
Technical Barriers to Trade Agreements of the WTO include provisions on disclosure
xviii Introduction
of better information, on legal default rules and on debiasing through law that are
similar to the ones proposed in Behavioural Law and Economics literature to nudge
governments towards specific directions. Therefore, he argues that the current inter-
national trade law is already based on using nudges.
To examine nudges from an empirical point of view, Mariusz J. Golecki, Marcin
Romanowicz and Jerzy W. Wojciechowski conduct an experiment on the verifica-
tion of the hybrid based categorization hypothesis in context of the tax law regula-
tion. Their paper concentrates on the possibility and cognitive effectiveness of
nudging in a very narrow field of legislative design rather than on the debate on the
normative implications of this strategy. However, their approach to illuminating the
descriptive aspects of cognitive processes presupposes the debate on the legitimacy
of nudging from the wider normative, legal and moral perspectives. Nevertheless,
this paper provides some very useful insights on cognitive behaviour.
In her contribution, Mira Burri explores the use of nudges in Media Policy. Using
the Internet as an example, she outlines how the use of nudges as a subtle form of
state intervention is effective intervention aimed at maintaining diversity. She argues
that some form of governance is essential if the individual’s rights are to be pro-
tected and views nudges as an effective tool in the move to develop new Media
Policy.
Finally, the use of nudges in academic fraud is discussed by Rute Saraiva using
the situations or criteria presented by Harry Potter novels. By implying the identifi-
cation of the costs and benefits behind the motivation of cheating and of the risk
taken both in an individual and collective perspective, the decision to cheat can be
nudged in one direction or another. Furthermore, it is necessary to recognize the
biases behind the decision of cheating, including an eventual distortive institutional
framework. Using Hogwarts School of Witchcraft as an example, she proposes a
correct and preventive architecture of choice and nudging behaviours to decrease
academic fraud.
As this anthology highlights, nudges have a wide scope of application. While
many argue that nudges do indeed steer individuals to greater social or personal
welfare, it is also clear that there are many pitfalls and risks as discussed by the
contributors to this anthology. The 17 essays provide startling insights into the mul-
tifaceted debate surrounding the use of nudges in European Law and Economics.
Faculty of Law Klaus Mathis

University of Lucerne
Lucerne, Switzerland
Notre Dame Law School Avishalom Tor
University of Notre Dame
Notre Dame, IN, USA
Faculty of Law
University of Haifa
Haifa, Israel
December 2015
Part I
Foundations
Chapter 1
The Critical and Problematic Role of Bounded
Rationality in Nudging
Avishalom Tor
Abstract Nudging has become an increasingly popular policy tool on both sides of
the Atlantic, even while scholars and commentators continue to debate its appropri-
ate boundaries, efficacy, and legitimacy. The present chapter outlines a sympathetic,
‘internal’ critique of Nudge’s policy framework (Thaler and Sunstein 2008. Nudge:
Improving decisions about health, wealth, and happiness. New Haven: Yale
University Press) identifying a fundamental problem that has received little atten-
tion to date. Thaler and Sunstein define their key concept as the use of a particular
toolkit (rationally-neutral behavioural interventions) to promote a specific policy
goal (individuals’ self-judged well-being). To remain within the boundaries of these
defining parameters, the chosen toolkit must nudge only by helping boundedly
rational people better achieve their own ends. However, a closer look at this intui-
tively appealing approach reveals a fundamental problem of fit that should trouble
even those who support Nudge’s mission. Namely, while the tools of nudging can
sometimes promote its declared goals, other tools can often do so equally well or
even more effectively. And the tools of nudging are equally suited to promoting
goals that are excluded by Nudge’s own framework. This problem of fit causes some
of Thaler and Sunstein’s own applications to breach the boundaries of what they
define as legitimate nudges and, more significantly, obscures the broader potential
of behaviourally-informed policies and the substantial trade-offs involved in their
implementation.
1.1 Introduction
The publication of Thaler and Sunstein’s “Nudge: Improving Decisions About

Health, Wealth, and Happiness” [‘Nudge’] in 2008 brought to international, popular
attention the developing academic discourse about behaviourally-informed legal
A. Tor (*)
Notre Dame Law School, University of Notre Dame,
3163 Eck Hall of Law, Notre Dame, IN 46556, USA
Faculty of Law, University of Haifa, Haifa, Israel
e-mail: ator@nd.edu
© Springer International Publishing Switzerland 2016 3

K. Mathis, A. Tor (eds.), Nudging - Possibilities, Limitations and Applications
in European Law and Economics, Economic Analysis of Law in European
Legal Scholarship 3, DOI 10.1007/978-3-319-29562-6_1
4 A. Tor
interventions, which until then took place primarily within the pages of U.S. law
reviews.1 In the years that followed, scholars from law,2 economics,3 political
science,4 philosophy,5 psychology,6 and more have been joined by numerous com-
mentators in discussing the merits and demerits of nudging and related approaches.
Despite the explosion of interest in Nudge, many questions remain about the appro-
priate contours and boundaries of such interventions and their normative justifica-
tion. Scholars have challenged the nudge enterprise on a variety of grounds, from
public choice,7 to welfare,8 autonomy,9 and beyond.10
The present remarks contribute to this conversation by considering an important
set of foundational problems with the policy framework offered by Nudge that have
not received much attention to date. Specifically, to qualify as a nudge according to
Thaler and Sunstein, a policy intervention must use only economically-neutral
behavioural interventions. Moreover, not all economically-neutral behavioural
interventions qualify as nudges, only those employed to improve individuals’ self-
judged well-being. Yet Individuals require such nudging only insofar as they fail to
use the best means to achieve their own ends—that is, only when they fail to act
rationally. Hence, the need for nudging as defined by Thaler and Sunstein arises
only through deviations from rational action and the goal they assign to nudging can
be accomplished only by making people act more rationally (or as if they were more
rational).
Upon closer inspection, both the logic and appeal of Nudge thus ultimately rest
on a critical link among its behavioural toolkit, its well-being goal, and rationality.
Once revealed, however, the role of rationality in nudging exposes a fundamental
weakness of its framework that this chapter outlines and begins to explore.
1.2 The Tools and Goals That Define Nudging
The universe of policy interventions that qualify as nudges can be described along
two dimensions: the policy tools that aspiring nudgers legitimately may employ and
the policy goals towards which they legitimately may aim.
1
E.g., Camerer et al. 2003; Glaeser 2006; Klick and Mitchell 2006; Rachlinski 2006; Sunstein and
Thaler 2003; Zamir 1998.
2
E.g., Bubb and Pildes 2015; Sibony and Alemanno 2015; Willis 2013.
3
Bernheim 2009; Spiegler 2015.
4
Hausman and Welch 2010; Maloberti 2012.
5
Bovens 2010; Conly 2012; Hausman and Welch 2010; White 2013.
6
Glaeser 2006; Johnson et al. 2012.
7
Mitchell 2005; Mongin and Cozic 2014; Rebonato 2014.
8
Bernheim 2009, Wright and Ginsberg 2012.
9
Mitchell 2005; Wright and Ginsberg 2012; Rebonato 2014; Baldwin 2015.
10
Mitchell 2005; Menard 2010.
1 The Critical and Problematic Role of Bounded Rationality in Nudging 5
Thaler and Sunstein define nudges as “any aspect of the choice architecture that
alters people’s behaviour in a predictable way without forbidding any option or
significantly changing their economic incentives.”11 And choice architecture in the
authors’ terminology is synonymous with “the context in which people make
decisions.”12 In other words, any aspect of the context of choice can qualify as a
nudge, so long as it fulfils two additional, cumulative conditions—namely, the pre-
dictable behavioural effect condition and the rational neutrality condition.
The first condition requires nudges to produce a predictable behavioural effect.
Yet to count as nudges, behavioural decision phenomena also must fulfil the second
condition of rational neutrality. The effects they exert on behaviour must not be
achieved by substantially constraining people’s choices or changing their economic
incentives—the only types of intervention that are normatively relevant for a ratio-
nal economic actor.13
Behavioural research has shown how actual human behaviour is shaped by the
limited cognitive resources that individuals have at their disposal and subject to the
effects of motivation and affect. These and similar factors that are irrelevant to the
hypothetical rational actor describe individuals’ ‘bounded rationality’.14 Notably,
the same processes of bounded rationality that lead to deviations from rational
action also offer new tools with which behaviourally-informed approaches to policy
making, such as Nudge, can try to shape the behaviour of boundedly rational
individuals.
Thaler and Sunstein seek to constrain the tools and goals of nudging further to
allow only ‘libertarian paternalistic’ behavioural interventions. Nudge explains
that: “libertarian . . . simply mean[s] liberty-preserving. . . .”,15 so it is largely cov-
ered already by the definition of nudging as using only rationally-neutral behav-
ioural tools. The second, ‘paternalism’ component, on the other hand, addresses the
goals of nudging. The book understands “a policy [to be] ‘paternalistic’ if it tries to
influence choices in a way that makes choosers better off, as judged by themselves.”16
This definition substantially limits the universe of legitimate nudges, excluding a
great many behavioural interventions that aim to promote social welfare without
regard to the well-being of the nudged individuals or even those traditionally pater-
nalistic policies that seek to make people better off according to policy makers’
judgments.
Nudge aims to make people better off as they themselves judge the matter. As
long as people choose the best available means to further their ends, there is no
room for nudging. This observation is important because suiting means to ends is a
basic characteristic of rational action.17 Hence, when boundedly rational individuals
11
Thaler and Sunstein 2008, p. 6.
12
13
Hausman 1992.
14
Tor 2002, 2008.
15
16
17
Posner 2010.
6 A. Tor
fail to suit means to ends they necessarily deviate from the normative model of
rationality.
Because the opportunity for nudging arises only when actual behaviour deviates
from the standards of rationality, the purpose of nudging can be translated to the
promotion of (some) rational action.18 However, Thaler and Sunstein instead simply
note that “. . . in many cases, individuals make pretty bad decisions—decisions they
would not have made if they had paid full attention and possessed complete infor-
mation, unlimited cognitive abilities, and complete self-control.”19 Because these
decisions must be bad from the actor’s perspective (the only perspective that should
be relevant for nudging) they can be bad only when failing to promote the actor’s
own ends. In Nudge’s terminology, then, bad decisions are synonymous with the
consequences of deviations from rational action and the goal of nudging turns out
to be simply the promotion of more rational behaviour.
Thaler and Sunstein’s statements regarding the definition of nudging can be
summarized as follows: True nudging employs (a) only rationally-neutral behav-
ioural tools and (b) does so only to accomplish the goal of helping individuals act
more rationally in suiting means to ends. The problem with this framework is that
while nudging can be used to address the consequences of bounded rationality, it
is not necessarily always or only the best tool for accomplishing this goal.
Similarly, the tools of nudging can be used equally well and perhaps even more
effectively to promote policy goals other than the improvement of individual ratio-
nality. Nudge’s framework thus suffers from a problem of fit between its selected
tools and chosen goal.
This problem of fit is not only cosmetic, but has significant consequences for the
book’s agenda. For one, the focus on fitting the tools offered by bounded rationality
to help overcome the consequences of bounded rationality limits the scope of
Nudge’s stated ambition and practical relevance. These strictures mean that faithful
nudging cannot use behavioural tools to advance social welfare goals (say, environ-
mental protection) or even traditionally paternalistic goals that do not necessarily
promote individuals self-judged well-being (e.g., increasing seat-belt use or reduc-
ing drug abuse). In the same vein, nudging cannot legitimately involve the use of
non-behavioural means, such as incentives or legal mandates, to address the nega-
tive consequences of bounded rationality. Faithful nudging therefore is highly trun-
cated with respect to both its tools and its goals. Moreover, the book’s framing of
the policy problems it seeks to address and the cures it offers also obscures the
potentially superior fit of other tools to Nudge’s task and of its own behavioural
toolkit to other policy goals.
18
At best, successful nudging diminishes individuals’ deviations from rationality, helping them to
overcome their errors of judgment or choice and thereby promotes their rationality in fact. Effective
nudging, however, may lead people to avoid the consequences of their bounded rationality and
therefore appear as if they were more rational even without facilitating their rationality in fact, an
important distinction that is outside the scope of the present analysis.
19
1.3 Non-nudge Tools and Extra-nudge Goals
The problem of fit combines with the desire to exploit the tools of nudging more
broadly and address the goals of nudging more effectively to lead the book to cover
much ground that is outside its own framework. Many of the applications it offers,
in fact, end up transgressing its self-imposed boundaries for legitimate nudging. For
present purposes, however, two examples—one concerning non-nudge tools, the
other involving extra-nudge goals—will suffice to illustrate this point.
Some of Nudge’s applications aim to shape behaviour using tools that are not
rationally-neutral and therefore do not qualify as nudges. One example concerns the
power of social norms to shape behaviour. In one case, Thaler and Sunstein (2008)
praise the web page used by the Illinois’ organ donation program to attract prospec-
tive donors. According to their description, the page draws on the power of social
norms and social influence by suggesting that social norms favour organ donations.
But why should people be more inclined to donate organs just because they believe
that such behaviour better comports with the social norm?
The book points to two main reasons for the power of social norms to shape
behaviour: First, social norms may convey meaningful information about what is
right, good, and so on. Second, deviations from social norms may incur social con-
sequences. However, both of these reasons in fact reveal that influencing behaviour
through social norms may exceed the boundaries of legitimate nudging. Norms that
provide meaningful information about appropriate standards influence behaviour by
shaping preferences. Arguably, though, interventions that shape individuals’ prefer-
ences by providing previously unknown social norm information are not rationally
neutral.20 Even more obviously problematic is the second reason, since social norms
that operate by imposing costs are changing people’s incentives and therefore are
also not rationally neutral. A rational actor may well change her behaviour to avoid
incurring the wrath of peers or to obtain their favour. And the costs and benefits of
such social interaction often extend to the economic domain as well (e.g., people
may be reluctant to transact with those who violate social norms).
Much like it affects the tools of nudging, the problem of fit also leads the book to
advocate some extra-nudge goals. Indeed, the organ donation example above
already offers a case on point. Some may consider increasing the rate of organ dona-
tions to be a socially valuable policy goal; others may disagree. Those who consider
organ donations important may also wish to donate their own organs if the opportu-
nity arises. Individuals who oppose organ donations and perhaps even some of
those who are supportive of them in the abstract may not judge their own well-being
to be best served by joining a donor registry. Yet the social-norm nudge described
above may well result in leading some such individuals to join the registry and
thereby make them worse rather than better off.
20
Although technically, Nudge’s definitions may be read to allow the shaping of preferences, so
long as such interventions do not literally constrain choice or affect economic incentives.
8 A. Tor
Similar problems arise with respect to the use of standard nudge tools towards
extra-nudge goals. One of the paradigmatic nudges in the book involves using
defaults (e.g., of a higher rate of deduction from one’s salary paycheck) to increase
the rate of retirement savings. Even this nudge, however, already aims at an extra-
nudge goal. To wit, some individuals may wish to save more for retirement at the
cost of reducing their present disposable income but others may hold different judg-
ments of how the trade-offs involved impact their well-being. Of course, policy
makers may wish to increase retirement savings to limit the negative social effects
of retirees with limited savings who consume a great deal of public resources. But
this reasonable policy goal is one of social welfare, not a goal of self-judged indi-
vidual well-being. And even policy makers who believe that the retirees who will
have saved more will be better off than if they depended more on public resources
still are implementing a traditional, extra-Nudge paternalistic policy. The default
savings nudge in this case makes retirees better off according to the beliefs of policy
makers. It may even promote the self-judged well-being of some retirees. But the
nudge here cannot be said to promote the well-being of those employees who judge
themselves better off with more disposable income pre-retirement and lower retire-
ment savings.21
1.4 Conclusion
All in all, this brief analysis of book’s framework reveals a problem of fit between
the tools of nudging and its goals. This problem turns out to have implications
beyond mere concerns of analytical clarity. The broader significance of behavioural
interventions for policy making renders efforts to faithfully limit nudging to liber-
tarian paternalistic interventions quite frustrating. It also generates an inexorable
pressure on scholars and policy makers to nudge towards traditional paternalistic
goals or even social welfare ones. Similarly, the focus on nudging as a means for
improving individual rationality obscures the potentially superior fit of more tradi-
tional policy tools to this task.22 This aspect of the problem of fit also exerts its own
additional pressure on Thaler and Sunstein’s (2008) policy prescriptions, thereby
facilitating the inclusion of applications that draw on tools beyond nudging.
The sometimes subtle deviations from Nudge’s self-imposed constraints
described here are significant for at least two reasons. First and most obviously, the
couching of the book’s (and similar) policy recommendations as low-risk nudges
can obscure some of the significant trade-offs involved. For example, a traditionally
paternalistic nudge may require more careful justification than a nudge that truly
21
Note that this analysis concerns the goals of nudging and stands irrespective of the fact that
rational employees would be indifferent to the savings default and save exactly as much as needed
to achieve their self-judged goals. After all, boundedly rational employees may be nudged by the
default irrespective of their self-judgments of well-being.
22
Bubb and Pildes 2014.
makes people better off as they themselves judge the matter. And a nudge, that aims
to promote social welfare goals without regard to individual well-being, involves
more complex trade-offs among individuals in society that require close examina-
tion and additional justification.
Second, the book’s implicit agenda of fighting the consequences of bounded
rationality (i.e. those ‘bad decisions’) with the nudging tools offered by bounded
rationality is intuitively appealing. But the effects of the problem of fit also divert
attention from some fundamental questions regarding the Nudge enterprise and its
relationship to rationality and bounded rationality that the book leaves unanswered.
For instance, when should deviations from rational action truly be considered ‘bad
decisions’? Does it matter whether the policies that seek to address such bad deci-
sions only aim to facilitate behaviour that resembles rational action or instead try to
promote the actual rationality of individuals in society? And when are either as if or
actual rationality appropriate goals for policy making?
These questions, both regarding the trade-offs involved in nudging towards vari-
ous policy goals and concerning the role of rationality as a goal for nudging or other
interventions, demand further attention and study. Nudge’s detractors may find here
further arguments against the desirability and feasibility of behaviourally-informed
policy making. Yet these questions should be of even greater interest to those who
identify with the book’s overall ambition. After all, the recognition that we cannot
avoid facing boundedly rational individuals as they are also means that policy mak-
ers must grapple with the complexity and challenges involved in this effort.
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Chapter 2
Beneficial and Exploitative Nudges
Bruno S. Frey and Jana Gallus
Abstract The effectiveness of nudges in raising the welfare of the population hinges
on the policymakers employing them. A frequent criticism based on a logical incon-
sistency questions policymakers’ immunity from the psychological biases of indi-
viduals that are the very foundation of nudging interventions. We argue that, rather
than being concerned about policymakers’ incapacity to raise the population’s wel-
fare, we should be concerned about their unwillingness to do so. We offer a solution
to this problem. We resort to the constitutional level of decision-making in which
voters are able to determine the procedures or processes by which governments may
resort to nudging. Nudging should not be considered as an innocuous exception to
constitutionally based decision-making. It must be admitted, though, that at first sight
most nudges do seem to be beneficial to people. In a democracy, even ‘Liberal
Paternalism’ may not be imposed on the population without its consent in principle.
2.1 Nudging as a Concept
Nudging is an attractive idea. With low or even zero-cost interventions paternalists

help individuals overcome their limitations and act in their own best interest, as if
they had complete information and the perfect willpower and cognitive abilities of
the homo oeconomicus. The deviations from the standard economic model of ratio-
nality have been empirically identified and extensively analysed in ‘Psychology and
Economics’.1 It has now been securely established that human beings are not always
and in every respect perfectly maximizing their utility under complete information.
They are subject to biases or distortions defined as systematic (i.e. non-random)
1
‘Psychology and Economics’ is often labelled ‘Behavioural Economics’. We use the former
expression since economics has always dealt with human behaviour. Surveys of this literature can
be found in several books (e.g., Frey 1999, 2001; Kirchgässner 2008; Kahneman 2011) and journal
articles (e.g., Conlisk 1996; Rabin 1998; DellaVigna 2009). Congdon et al. (2011) and DellaVigna
(2009) offer useful albeit slightly different categorizations of psychological biases.
B.S. Frey (*) • J. Gallus
Center for Research in Economics, Management and the Arts (CREMA), University of
Zurich, Zurich, Switzerland
e-mail: bruno.frey@econ.uzh.ch; jana_gallus@hks.harvard.edu

12 B.S. Frey and J. Gallus
deviations from the standard model of rationality. Individuals take shortcuts and
decide on the basis of heuristics.2 Such heuristics work well in most routine
situations,3 but they may also fail and lead to value-destroying outcomes.4
Nudging provides an elegant solution to the limitations of the homo oeco-
nomicus5: Individuals are ‘softly’6 induced, or nudged, to make better decisions.
The government, i.e., politicians and public officials, offer solutions guiding people
in the right utility maximizing direction. Importantly, individual decision makers
are not forced to pursue that option if they choose not to do so. Nudging does not
reduce individuals’ freedom of choice. Hence these policy interventions are often
subsumed under the label of ‘liberal paternalism’.7 The intervention by a ‘social
planner’ is considered to be benign; the ‘choice architects’8 act paternalistically by
designing the environment so that individuals are steered towards welfare promot-
ing decisions. Individuals would arrive at the same decision if they cognitively
reflected them with sufficient information instead of relying on intuitive, or auto-
matic, decision procedures.9
There are other concepts similar to Thaler and Sunstein’s liberal paternalism,
such as ‘asymmetric paternalism’.10 All of them are designed to help people improve
their decisions and come closer to acting according to their own best interest.
Nudging, or liberal paternalism, has become highly popular in economics and far
beyond. The interventions, it is assumed, are cheap if not costless. So even if their
effect may not always be substantial, nudges can be more cost-effective than other
policy interventions. Nudging is convincingly applied in particular in the areas of
retirement savings, organ donation, and health (e.g., healthy diets, vaccination).11
The interventions offered by liberal paternalists immediately stand to reason and
appear totally acceptable. It is, for instance, difficult to reject nudging when applied
to securing a reasonable material standard in old age. It is well known that most
individuals find it difficult to look sufficiently into the future; they are subject to
‘hyperbolic discounting’.12 As a consequence, they are reluctant to take the initiative
2
See Tversky and Kahneman 1974, Gigerenzer et al. 1999, and, more recently, Camerer 2004.
3
Gigerenzer, Hertwig and Pachur 2011.
4
Conlisk 1996, Rabin 1998, and Kahneman 2003.
5
In contrast, ‘hard paternalism’ as proposed, e.g., by Conly 2012, seeks to induce people to act in
the desired way by forcing them to do so by laws and regulations whose violation is punished.
6
Although in several cases nudging does not provide a solution to, but rather exploits, behavioral
biases.
7
The idea has been propagated by Sunstein and Thaler 2003, Thaler and Sunstein 2003, 2008, and
Sunstein 2014. See also Binder and Lades 2015. The term ‘liberal’ is used in the classical sense as
discussed by Mill 1859 in his book On Liberty.
8
A term coined by Thaler and Sunstein 2008.
9
Although several policy interventions pursue social rather than individual optimality.
10
Camerer et al. 2003. Related concepts have been proposed by Gruber and Koszegi 2001,
O’Donoghue and Rabin 2003, 2006, Jolls and Sunstein 2006, Bernheim and Rangel 2007.
11
Excellent discussions are given e.g. by Schnellenbach 2011, 2012, Kirchgässner 2014, Madrian
2014, and Schnellenbach and Schubert 2014.
12
Laibson 1997.
2 Beneficial and Exploitative Nudges 13
to enter an old age pension scheme. The situation is quite different when the default
option is being enrolled in a pension scheme from which they may opt out if they so
wish. Empirical research clearly suggests that the effect is substantial. Many more
individuals are covered by voluntary old age insurance schemes, of which they
greatly benefit when reaching retirement age.13 Another related bias, the mispredic-
tion of future utility, has been identified and analysed in happiness research.14
People systematically underestimate the future satisfaction they gain from relational
contacts with friends, neighbours and relatives. In contrast, they overestimate the
future utility of material goods such as a new home or car. As people get used to a
new home or car rather quickly, the additional utility (or life satisfaction) gained
from these goods vanishes over time. This effect is less likely to take place in per-
sonal relationships because they can continually generate value.
The popularity of the nudging concept has also been supported by the fact that it
was propagated by two scholars15 from the University of Chicago, whose depart-
ment of economics is well known for its strong allegiance to free markets and its
rejection of government interventions wherever possible.16 The kind of paternalism
implied by nudging seems acceptable as it does not reduce individuals’ freedom but
increases their present and future utility by overcoming the decision biases from
which they suffer. It is also consistent with the insight that a market economy with-
out any government intervention is inconceivable, not only because the government
must set the rules under which the market works but also because there are ‘merit’
goods individuals cannot properly evaluate for many different reasons.17 Liberal
paternalism offers a reasonable way in which government interventions should take
place without violating the basic value of human freedom.
Liberal paternalism has various other favourable features. It is certainly prefer-
able to hard paternalism with its negative sanctions. It is also commendable that
academics seriously focus on real-life issues and suggest policy measures. The
establishment of ‘nudging units’, encouraging evidence-based policy making,
began in the United Kingdom in 2010 and the United States, and has more recently
been followed by countries such as Australia, Canada, Columbia, Denmark, France,
Germany, Israel, Netherlands, New Zealand, Norway, Singapore, South Africa,
Turkey and the European Union (with its planned ‘foresight team’), and even Saudi
Arabia.18 It may however be doubtful whether all of these countries are sufficiently
democratic to use nudges in their soft form.
13
E.g., Madrian and Shea 2001 and Choi et al. 2004.
14
Loewenstein et al. 2003 and Frey and Stutzer 2014. For the overestimation of the future utility
provided by material goods, see Lane 1991 and Frank 1999.
15
Richard Thaler and Cass Sunstein, see ftn 8. (Sunstein is now associated with Harvard University).
16
Leading members who promoted this ideology are Milton Friedman, George Stigler and Gary
Becker.
17
As is well discussed by Kirchgässner 2014. The concept of merit goods was introduced by
Musgrave 1957.
18
See, e.g., Madrian 2014, p. 665.
2.2 Critiques of the Nudging Concept
Despite the wide acceptance of liberal paternalism there is some well-founded criti-
cism to consider. Indeed, there has been a lively scholarly discussion about the
value of the concept.19 Here only two major points of criticism will be
mentioned.20
The first point of criticism is that the emphasis of liberal paternalism to suggest
welfare enhancing outcomes is ill-taken as it interferes too much with individuals’
freedom to decide. What should be done is to foster their critical thinking and their
capacity to decide. This ‘Autonomy-Enhancing Paternalism’ strengthens the cogni-
tive aspect of personal decisions, promotes self-empowerment, and seeks to make
people independent of external influences.21 Individuals are helped to overcome
their distortions and to take well-considered choices. This gain in autonomy enables
people to engage in mental strategies, thus de-biasing their decisions.22 The goal is
not to attempt to directly change outcomes but rather to improve the processes used
to reach a decision. Autonomy-Enhancing Paternalism takes a dynamic perspective
and wants to improve the decision-making process.
The second point of criticism notes that the political and bureaucratic decision-
makers are themselves subject to biases and distortions.23 They therefore suggest
options to the individual decision-makers that do not improve their current or future
welfare. This assumption is in line with Public Choice Theory, which has always
argued that public decision-makers are subject to the same distortions as are other
people.24 It could even be argued that they act in a less careful manner because they
decide about other people’s, and not their own, money.25 A glance at reality con-
firms this notion. Take, for example, the decision by the German government to pull
down the Wall, which until 1989 separated the German Federal Republic from the
German Democratic Republic. Only a few years later, the same government had to
newly erect parts of the Wall in order to remind people that there had been this
deadly division between the two countries. Some private persons had better predic-
tive capacity. They anticipated that the Wall would become a tourist attraction and
that it would be worthwhile to maintain it at least in some crucial parts.
However, the second criticism does not necessarily hold. There are certainly
conditions under which public decision-makers have better information and more
extensive advice from experts so that they are better able to overcome biases than
19
See e.g. the recent critique by Whitman and Rizzo 2015 of the welfare standards used by soft
paternalists.
20
See e.g. Sugden 2013, Schnellenbach and Schubert 2014.
21
Binder and Lades 2015, also Hausman and Welch 2010, Mills 2013.
22
See Larrick 2004.
23
Glaeser 2006.
24
See e.g. Mueller 1996, 2003 or Frey 1983.
25
This argument has e.g. been advanced by Tullock 1965.
are more isolated individuals. Moreover, the lengthy administrative and political
process should also help to reduce the most obvious distortions.
These criticisms shall not be further pursued because they have been well dis-
cussed in the literature. Rather, our contribution wants to consider an even more
fundamental aspect, namely, that Liberal Paternalism may turn out to be disadvan-
tageous to individuals, reducing their welfare.
2.3 Nudges from a Political Economy Perspective
The proponents of Liberal Paternalism seem to assume, as a matter of course, that

the public decision-makers want to raise the welfare of the general population. They
are thus following the ‘benevolent dictator approach’, assuming that politicians aim
to maximize social welfare and can force public officials to act accordingly.
This is an assumption that has been strongly criticized since the very beginning
of Public Choice Theory.26 Public decision-makers are as self-interested as other
persons are. Their general goal is to stay in power. In democracies this depends on
being re-elected. Politicians are prepared to produce a political business cycle in
order to reach that goal.27 They actively exploit a particular bias, namely the short
time horizon of the voters, to that effect. Before the election they spend money on
particularly popular projects, or hand out money to the population in the form of
higher old age pensions and higher transfers to lower income groups. Most impor-
tantly, they support strong interest groups by giving them special privileges, for
instance by introducing import restrictions and reducing the taxes for the export
industry, such as the tourist sector. More subtly, they may offer a sympathetic ear to
lobbyists’ concerns about, and ideas for, certain nudging interventions. The costs of
such policies are the more strongly discounted the lower is the probability of staying
in power. Thus, a government faced with a low probability of staying in power is
induced to spend more money shortly before elections because they are unlikely to
bear the negative consequences during the forthcoming election period. In contrast,
when a government expects to be re-elected, its time horizon extends over the next
election period and beyond. Under this condition it can undertake ideological poli-
cies. These preferences may, but need not, be in line with the population’s welfare.
The government may be ready to offer options nudging people into a direction
increasing the population’s welfare if this is in line with the government’s ideology.
Such social welfare enhancing policies may also be in the interest of public officials
if they can thereby demonstrate their competence and their superior knowledge
compared to ordinary people. Their behaviour is also influenced by a professional
attitude inducing them to indeed seek ways to improve the welfare of the popula-
tion. But again, this need not be the case, and there are many instances in which
bureaucracies act in their own interest, in particular with respect to the wages and
26
Buchanan and Tullock 1962, Frey 1983, Mueller 1997. See also the textbook by Mueller 2003.
27
E.g. Frey 1978, Tufte 1978, Frey and Schneider 1981.
privileges they enjoy. In that case they actively seek to exploit to their own advan-
tage the biases in decision-making they observe in the population.
Liberal Paternalism has been discussed almost exclusively in the context of dem-
ocratic countries where governments depend to some extent, and intermittently, on
the will of the voters. But many countries in the world are governed by authoritarian
rulers or by outright dictators.28 While they constantly claim to rule in the interest of
their people, this is of course not unambiguously the case. They will seek to actively
exploit the distortions in decision-making that members of the population are prone
to. They will offer additional options with the goal of nudging people in the direc-
tion benefiting them and their clientele.
The assumption that nudges will always be used in the interest of the population
is most questionable, if not plainly wrong. It should be noted that private enterprises
have always exploited individual decision distortions to sell products that are not
always in the interest of their consumers or society at large.29 An example are self-
service shops where the cheaper products are put in an inconvenient location
(mostly at the very bottom of the shelf), thereby nudging people to buy the more
expensive products with a higher profit margin for the seller. Another example is
candy bars whose convenient placement at the check-out prompts children to crave
for them.
The next section discusses a specific government intervention with a long tradi-
tion in all countries, awards. These take the form of state orders, medals, decora-
tions, and other distinctions.30
2.4 An Application of Nudging: Awards
Awards are given to individuals (and sometimes to groups) who are deemed to have
performed particularly well.31 They differ in several respects from monetary rewards
such as bonuses, which are more directly linked to specific performance. Accepting
an award nudges the recipient into a special relation of loyalty to the donor. The
respective contract is tacit, incomplete, and difficult or impossible to enforce by the
donors. The givers expect that a recipient of an award talks and behaves in a sup-
portive way towards them. If the recipient violates this tacit contract, this is consid-
ered bad form. Other people would argue that the recipient should not have accepted
28
According to the widely used measure of political regimes, Polity IV, in 2013 about 40 % of all
countries failed to meet the rather broad criteria of democratic rule. See http://www.systemicpeace.
org/CTfigures/CTfig16.htm.
29
We owe this point to Margit Osterloh.
30
Switzerland is an exception.
31
For the emerging literature on awards in economics see Ginsburgh 2003, Besley 2005, Frey
2005, 2006, 2007, Neckermann and Frey 2008, Malmendier and Tate 2009, Chan et al. 2014, Frey
and Gallus 2014, Neckermann et al. 2014, Gallus 2015, and Gallus and Frey 2015. For the socio-
logical literature see, e.g., Bourdieu 1979, 1985.
the award if he or she does not agree with the donor’s ideology and policies. In turn
the donor is expected to support the recipients materially or at least psychically if
they run into trouble. In the case of monetary compensation there is no obligation of
loyalty at all. Even the opposite may be true: payments can easily be used as justifi-
cation to work for an organization that one publicly denounces.
Awards look innocuous at first sight. After all, they are a positive reward and
only offer an option the potential recipient is free to decline. They therefore create
no serious problems in democracies, though it may be considered somewhat arro-
gant to decline an award. Notable examples concerning major awards are Jean- Paul
Sartre’s rejection of the Nobel Prize in Literature in 1964, and Thomas Piketty’s
refusal to accept the Légion d’honneur in 2015. The situation is quite different in an
authoritarian system. A person being offered an award by the ruler puts can find
himself or herself in a most unfortunate situation. If he or she rejects the award, the
ruler gets angry and can claim that his honour and that of the whole state is deni-
grated. If he or she accepts the award this signals a large measure of identification
with the ruler. It is, for example, not well possible to accept the Order of a Hero of
Labour of the Russian Federation (formerly Hero of Socialist Worker) but not to
agree with the ruling ideology and policy.
Authoritarian rulers can exploit this hidden feature of awards by offering an
award to regime critics. This puts the potential recipients in an uncomfortable posi-
tion because both, whether they accept or reject the order, the decision will strongly
reduce their welfare, while benefiting the ruler. In many cases, the potential recipi-
ent is nudged to take the award because offending the ruler imposes too high costs
on him or her. This is an instance in which the added option (being offered an
award) has a welfare decreasing effect on the persons concerned.
2.5 Making Nudges Beneficial
We have argued that nudges are not always in the interest of the population. Unlike
most of the literature on Liberal Paternalism we suggest that governments may
nudge people in a direction that fails to raise their welfare. Even seemingly glorious
bestowals of honours in the form of state orders and decorations can carry substan-
tial costs to the ostensible winners. Indeed, under significant conditions, especially
when the political system is non-democratic, rulers tend to exploit nudges for their
own benefit and to the detriment of the population’s welfare.
In a recent article,32 one of the architects behind the nudging concept admits, “[i]f
we are especially fearful of official mistakes – coming from incompetence or bad
motivations – we will want to minimize the occasions for nudging.” Rather than
minimizing the occasions for nudging, we propose that they should be subjected to
32
Sunstein 2015 forthcoming, p. 13.
constitutional rules33 in which voters are able to decide the procedures or processes
under which governments may resort to nudging.
Nudging should not be accepted as an innocuous exception to constitutionally
based decision-making, even if most applications appear to benefit people. In
democracies, even ‘Liberal Paternalism’ must be based on the population’s consent
in principle.
Acknowledgement We are grateful for the helpful discussions with Margit Osterloh.
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Chapter 3
The Crucial Importance of Interests
in Libertarian Paternalism
Mark D. White
Abstract There has been a resurgence of late in support of paternalism, due

primarily to recent findings in behavioural science that cast doubt on the ability of
individuals to make choices reliably in their best interests. The most popular form
of paternalism currently is libertarian paternalism (or ‘nudge’), which advocates
subtle changes in the presentation or framing of options to steer persons in the direc-
tion of better choices. A key issue with libertarian paternalism (as well as more
coercive forms of paternalism that share similar goals) is the nature of people’s
interests and the state of policymakers’ knowledge about them. In this chapter, I
argue that this issue has been neglected in recent scholarship defending paternalism
along behavioural grounds. In particular, I dispute claims that paternalism of means
can be meaningfully separated from paternalism of ends, and argue that modern
paternalism does not respect people’s true interests but instead adopts a perfection-
ist or objective conception of well-being.
3.1 Introduction
Stemming from the pioneering work of Herbert Simon on bounded rationality and
the work of Daniel Kahneman, Amos Tversky, and colleagues on cognitive biases
and heuristics, behavioural economics has revolutionized the way economists and
policymakers think about choice.1 No more can agents be assumed simply to maxi-
mize their self-interest with perfect willpower and calculative precision. The model
of homo economicus should now be regarded as a Platonic ideal much like perfect
competition, an abstract starting point for discussion, a cipher to be fleshed out with
realistic details and flaws appropriate to the description and prediction of agents,
firms or individuals, in the real world.
1
Simon 1955; Kahneman et al. 1982. For accessible summaries, see Kahneman 2011 and Angner
2012.
M.D. White (*)
Department of Philosophy, College of Staten Island, Staten Island, NY, USA
e-mail: profmdwhite@hotmail.com

22 M.D. White
But behavioural economics did not remain a concern merely of positive, descrip-
tive economics for long. Researchers, especially those in the law, soon saw the
potential for legal reform based on the insights of behavioural economics; the field
of behavioural law and economics studied not only how to improve compliance
with laws and the framing of evidence during trials, but also how to improve the
well-being of individuals.2 Once scholars could determine precisely how and why
people were making errors in their decision-making, they could design choice inter-
ventions to help steer them toward making better choices to further their own inter-
ests – choice interventions that often made use of the same cognitive biases and
heuristics that motivated their use in the first place. These interventions became
known as nudges, as in the title of Richard Thaler and Cass Sunstein’s bestselling
book that laid out the reasons why nudges should be used and gave examples of
their demonstrated and potential success.3 Since the publication of Nudge, a litera-
ture has quickly grown, with scholars providing arguments for and against the use
of nudges in different situations and contexts.4
This chapter will focus on one aspect of the debate over nudges and paternalism
that I feel has largely been neglected: a person’s interests and what we know about
them. After briefly summarizing problems with nudges along epistemic, ethical, and
practical lines, I will describe the nature of interests, which I maintain are complex,
multifaceted, and subjective. After detailing the background of this conception of
interests, I will then examine two recent defences of paternalism by Cass Sunstein
and Sarah Conly and two emphases they share: the importance of the distinction
between means paternalism and ends paternalism, and the rejection of perfectionism
or objective theories of well-being.5 I will argue that the nature of interests renders
both of these positions problematic and leaves paternalism open to traditional criti-
cisms that date back at least to John Stuart Mill.
3.2 Problems with Nudges
The problems with nudges can be split into three interrelated areas: epistemics, eth-
ics, and practical effects. The epistemic problem is the focus of this chapter, but it
is magnified by the other two, so in this section I will introduce all three briefly.6
The epistemic problem starts with the claim that economists and policymakers
who design nudges are steering people’s choices in their own interests. For instance,
automatic enrolment of new employees in retirement programs helps people save
2
For instance, see Jolls et al. 1998; Korobkin and Ulen 2000; Sunstein 2000; Parisi and Smith
2005.
3
Thaler and Sunstein 2008.
4
See White 2013, pp. 173–178, for a modest list of relevant literature.
5
Sunstein 2014 and Conly 2013.
6
For more detail and references, see White 2013; for similar arguments, see Saint-Paul 2011 and
Rebonato 2012.
3 The Crucial Importance of Interests in Libertarian Paternalism 23
more for retirement, and better design of cafeterias helps people eat better and have
better health outcomes. Both of these nudges, however, are designed to promote one
specific interest which is not necessary the interest that individuals are trying to
promote at any given time, and may not be among the interests they were acting
toward when they made choices that seem ‘mistaken’ to those designing the nudges.
A new employee may choose not to enrol in a retirement program because she
wants to have more money for a down payment on a home, to support her parents,
or simply to enjoy her youth in a new city. A person who chooses the huge slice of
chocolate cake in the cafeteria may be doing so to celebrate a colleague’s birthday,
to flirt with the person at the dessert counter, or simply because he likes chocolate
cake, each in full knowledge of the adverse health consequences. People have any
number of interests they are acting toward at any given time, interests that are com-
plex, multifaceted, and, most important, subjective – many times not fully known
even to the person making choices, much less an outside observer. Designers of
nudges do not and indeed cannot know these interests, and by necessity choose
interests toward which they steer people. Regardless of the intentions of the policy-
makers, they are imposing interests on people who have their own and then using
nudges to steer their decisions in those directions. I refer to this as the epistemic
problem because it focuses on the policymakers’ lack of information regarding the
true interests of the people whose interests they claim to further.
The ethical problem starts with the epistemic problem – specifically, that nudge
designers do not have knowledge of individuals’ true interests and therefore impose
other interests in which they influence choices – and connects it to the right of indi-
viduals to make choices in their own interests rather than those chosen for them.
One of the bedrock principles of a liberal society is that each person may pursue his
or her own idea of the good life, provided no one interferes wrongfully with others
doing the same. In steering people’s choices away from their true interests, however,
nudges deny people this self-directedness. Supporters argue that people are free to
make decisions other than the ones into which they are nudged, but the subtle
psychological manipulation that makes nudges so effective belies this claim. Even if
a person has a good reason not to enrol in a retirement program, the same tendencies
toward laziness that make people susceptible to default choices will lead him to
enrol if that is the default. Finally, everyone makes bad choices that do not further
his or her interests; however, the only one who knows if a particular choice is bad is
the person himself or herself, who knows whether that choice furthered his or her
interests. Because an outside observer and policymaker does not have knowledge of
these interests, it is impossible for such a person to know whether someone else has
made a bad choice (absent an admission by that person).
Finally, practical problems also result from the epistemic problem. Simply put,
nudges cannot do what they promise – to improve people’s choices in their own
interests – if policymakers do not know these interests and impose others to substi-
tute for them. Nudges are certainly effective in modifying behaviour, but there is no
way for policymakers to know if those behavioural modifications are in people’s
true interests. For instance, Sunstein and Thaler cite the success rate of their Save
More Tomorrow plan that, by default, signs new employees up for retirement plans
24 M.D. White
and then automatically increases their contributions over time.7 But they are mea-
suring success by the effectiveness of the nudge in changing behaviour, not to what
extent those new employees’ interests are advanced by the higher savings rate –
unless we assume that savings is their preeminent interest. Other possible practical
effects of nudges include long-term adverse influences on decision-making itself:
instead of acting to improve the process of choice, nudges simply attempt to elicit
the ‘correct’ choices, and the way in which they do this, by subverting rational
deliberative processes, may impair these processes in the long run.
3.3 Interests
As seen above, the ethical and practical problems stem from the epistemic problem:
the fact that policymakers do not know the true interests of the people they are
nudging, because actual interests are complex, multifaceted, and subjective.
While behavioural economists have made tremendously valuable contributions
to understanding human behaviour in all its imperfection, it clings to mainstream
economists’ myopic focus on a simplistic form of utility. There, utility is nothing
but an index of preference satisfaction, in which preferences themselves are merely
a formal ranking of options with no necessary psychological basis. In other words,
a preference for A over B need not be based on desire, happiness, or need, but
simply on the assumption that, all other things the same, one would choose A or B,
for whatever reason. This makes choice theory substantively empty and therefore
adaptable to a wide range of psychological motivations, from pure self-interest to
global altruism, or from interdependent utility with a loved one to profound hatred
for humanity. However, in practice economists implicitly assume that preferences
are based on a single criterion, so the utility resulting from assessing preference
satisfaction resembles a more substantive utility, such as happiness or well-being;
a proxy thereof, such as wealth; or a component thereof, such as health.
Behavioural economists accept this basis for economic choice in preferences
oriented toward a single goal and then question the way we pursue these preferences
given limitations on calculative rationality and willpower. Methodologically, this is
understandable: it is much easier to complicate just one aspect of a model while
leaving the rest unchanged. And certainly, valuable insights have been gained
from this approach. However, when behavioural insights regarding the process of
decision-making are incorporated into policymaking, the limited view of motivation
brought with it becomes much more problematic, because it lends a similarly
myopic focus to policymaking in turn.
Human beings, however, do not have a single goal or end that they act to further
(or ‘maximize’), but rather a range of interests that are complex, multifaceted, and
ultimately subjective. I define interests as “everything that matters to a person,
everything that is of concern to him or her, and everything that motivates his or her
7
Thaler and Sunstein 2008, ch. 6.
decisions, choices, and actions – in other words, everything he or she is interested

in.”8 This conception of interests transcends simpler ones that focus on one goal,
especially as imagined in typical economic models.
Let’s begin with the standard economic assumption of narrow self-interest,
which most economists realize is merely a heuristic assumption to simplify model-
ling. While this is adequate to describe some decisions, such as which dressing to
have on one’s salad, our self-interest, our own happiness or well-being, does not
exhaust all of the reasons and concerns that determine our decisions in broader
contexts. Most people also care about the happiness or well-being of others, includ-
ing family and friends, perhaps neighbours and co-workers, and maybe even disad-
vantaged persons in our communities or around the world. Many sacrifice significant
portions of their own happiness or well-being to benefit others; terminologically,
this altruistic interest could be rolled into one’s self-interest or happiness, but an
important distinction would be lost.
But the well-being of oneself and others still does not exhaust everything that
people care about and that motivates their choices. Personal principles and societal
ideals, both important qualitative influences on decision-making, must also be
included. Principles such as honesty and fairness constrain choices that further
well-being; in many cases, people will not lie or cheat even when it would be to
their advantage in material or financial terms. In fact, experiments have shown this
time and again, and (ironically) is a hallmark of behavioural economics.9 People are
also concerned with more general societal ideals such as justice, equality, and fair-
ness, for which they sacrifice not only their time and money but also their freedom
and lives. Again, some would collapse all of these disparate and distinct interests
into the term ‘self-interest’, but this does an inestimable disservice to understanding
and appreciating the diversity and range of human motivations and concerns.
Not only are people’s interests multifaceted, including own well-being, others’
well-being, principles, and ideals, but these are also combined in complex ways,
ever changing based on circumstance and context. Some interests take precedence
at some times and others at other times, but the combination is never predetermined
or predictable. Consider the last time you chose where to go for dinner: your pri-
mary concern may have been how good the food would taste, how healthy it would
be, the cost of the meal, the ambience of the restaurant, or how crowded it would be.
Whichever interest took precedence, the others were still relevant, and perhaps a
different one would take precedence as circumstances changed – for instance, if you
heard that an old friend was joining you and you wanted a quiet place to catch up.
Most of this is automatic or unconscious, of course; agents are never perfectly
consciously aware of all of their interests and how they are combined at any given
time, nor could they report them accurately if asked. But this not deny that behaviour
is motivated by these myriad interests, acting together through the filter of intuition
and judgment.
8
White 2014, p. 93.
9
See, for instance, Fehr and Schmidt 2006.
26 M.D. White
To reiterate, the complexity of interests stands in stark contrast to the typical

economic assumption, usually made in both mainstream and behavioural econom-
ics, of a single interest such as happiness, wealth, or health – the same assumption
that grounds nudge policies, leading to the epistemic problem at the root of the
enterprise. Again, it must be acknowledged that people themselves are rarely con-
sciously aware of their own interests or what will advance them. The psychological
literature on people’s consistently flawed estimates of their future well-being is
voluminous.10 But this does not imply that policymakers know them any better, or
that they are justified in imposing their own idea of interests on them. Rather, this
should reinforce the position that individuals should be left to make decisions in
their interests, despite any problems in instrumental reasoning towards them.
3.4 Interests and Paternalism
Defenders of nudges as well as more direct forms of paternalism maintain that they
are not questioning people’s interests but are instead merely trying to help them
make better decisions in the interests they have, referencing the original distinction
between soft paternalism, that respects interests, and hard paternalism, that imposes
others.11 In recent work on paternalism, both Cass Sunstein (advocating libertarian
paternalism) and Sarah Conly (arguing for coercive paternalism) use the distinction
between means and ends to support their soft paternalism, and also argue against
perfectionist or objective theories of well-being that would endorse imposing exter-
nal interests on people when designing paternalistic interventions (in the spirit of
hard paternalism). I will discuss these two positions in turn, arguing in response that
the epistemic problem obscures the distinction between means and ends to the point
of irrelevance, and that it also implies that any paternalistic interventions by neces-
sity impose interests based on perfectionist or objective conceptions of interests.
(Although Conly advocates in favour of coercive paternalism over nudges, her
arguments regarding means, ends, and interests parallel those of Sunstein, so I will
discuss them together).
3.4.1 Means Paternalism and Ends Paternalism
To clarify the non-judgmental nature of their brands of paternalism, both Sunstein

and Conly distinguish between means paternalism and ends paternalism, stressing
that they are advocating for the former but not the latter. They both begin their
10
See Loewenstein and Schkade 1999; Gilbert and Wilson 2000; Haybron 2008, ch. 10.
11
Feinberg 1986, pp. 12–16. The terms soft and hard have also been used to distinguish between
libertarian and coercive paternalism, while either of these could, in theory, be soft or hard accord-
ing to the traditional usage. On this, on this point, see also Conly 2013, pp. 5–6.
recent books by recounting the findings of behavioural researchers regarding cogni-

tive biases and dysfunctions that often cause people’s decisions to deviate from
their interests, and use this to justify paternalistic intervention into the process of
decision-making.12 In this sense, paternalists claim to be merely helping people to
further their ends by making better choices in pursuit of them, as opposed to steer-
ing their choices toward different ends altogether.
Both Sunstein and Conly also question John Stuart Mill’s famous passage from
On Liberty in which he asserts the individual’s self-knowledge (which Sunstein
calls Mill’s Epistemic Argument):
But neither one person, nor any number of persons, is warranted in saying to another human
creature of ripe years, that he shall not do with his life for his own benefit what he chooses
to do with it. … [W]ith respect to his own feelings and circumstances, the most ordinary
man or woman has means of knowledge immeasurably surpassing those that can be pos-
sessed by any one else. The interference of society to overrule his judgment and purposes
in what only regards himself, must be grounded on general presumptions; which may be
altogether wrong, and even if right, are as likely as not to be misapplied to individual cases,
by persons no better acquainted with the circumstances of such cases than those are who
look at them merely from without.13
Both Sunstein and Conly challenge Mill based on the aforementioned cognitive
flaws identified by behavioural researchers: Sunstein writes that “behavioural find-
ings are creating serious problems for the Epistemic Argument, because they show
that people make a lot of mistakes, some of which can prove extremely damaging,”
and Conly writes that “it is too simplistic” in that it ignores the distinction between
means and ends, as well as people’s inability to reliably choose the best means to
their end.14 Both scholars, however, interpret Mill’s statements in terms of choosing
the means and are too quick to dismiss the deeper issue of individuals being in the
best position to know his or her own ends and interests. It is unquestionable that
people make bad choices, but absent information regarding their interests, no one
can know which choices are bad except the people making them.
Put another way, emphasizing the distinction between means and ends in this
context begs the question regarding the nature and content of interests themselves.
If policymakers had information regarding people’s true interests, they may be in a
position to offer assistance, whether in the form of nudges or more coercive means,
to people to advance those interests. People who reveal that they want help manag-
ing their money can go to financial advisors, and those who want to lose weight can
join groups such as Weight Watchers; politics aside, the government could offer
such services to people as well. But these assume revelation of interests through
choice, and without such revelation, policymakers have no way to know people’s
true interests or whether choices made by individuals are effective means to promote
their ends. Sunstein writes that the “government might well accept people’s ends but
conclude that their choices will not promote those ends,” but the government does
12
Sunstein 2014, ch. 1; Conly 2013, pp. 20–23.
13
Mill 1859, ch. 4.
14
Sunstein 2014, p. 8; Conly 2013, p. 52.
28 M.D. White
not have enough information regarding people’s ends to accept them (setting aside
the issue of whether the government is in a place to ‘accept’ people’s ends anyway).15
Defenders of paternalism (in both libertarian and coercive forms) are correct to
emphasize the decision-making failures pointed out by psychologists and behav-
ioural economists that cause individuals to make choices that fail to advance their
interests. But the general possibility, or even likelihood, that people make mistakes
in decision-making does not imply that they are making mistakes in any given case,
much less that an outside observer can determine whether a given choice was mis-
taken, because that determination requires knowledge of the person’s interests
toward which he or she made the decision. Given that interests are complex, multi-
faceted, and subjective, policymakers have no way to know them, and therefore
they cannot know whether or not a person’s chosen means furthers his or her true
interests. By interfering with a person’s choice of means, policymakers have no
way to know if they are helping persons further their true interests or steering them
toward interests that are presumed and imposed by policymakers when designing
the intervention. People may make bad choices all the time, of course, but the only
ones who know they are mistakes are the people making them because only they
know why they made them.
In practice, then, means paternalism is indistinguishable from ends paternalism
because the distinction itself assumes knowledge of people’s ends, knowledge that
is unavailable to the policymaker (and perhaps to people themselves). Sunstein does
acknowledge this possibility, stating outright that even relatively benign nudges
such as fuel economy labels not only influence the choice of means but may nudge
interests themselves away from other aspects of an automobile purchase, “insofar as
it isolates fuel economy, rather than other imaginable features of cars, for compul-
sory display.”16 But while he recognizes the possibility of ends paternalism, he mini-
mizes its importance: “there may be a form of ends paternalism, but it is likely to be
of a very modest kind, perhaps so modest that we do not to worry much.”17 Given
the impossibility of distinguishing between means and ends absent knowledge of
ends, however, the degree of ends paternalism may be much higher (and not modest
at all). Sunstein approaches this position when he discusses how to define ends: if
ends are very general, such as health or happiness, then most interventions will
affect means only, but if ends are defined very narrowly, then “there may be no such
thing as means paternalism.”18 I would argue that the complex and multifaceted
nature of interests implies a high degree of specificity to the imposed ones, which is
further enhanced by the subjectivity of true interests, and if proper deference were
granted to them by policymakers, nearly all paternalistic interventions would prop-
erly be regarded as affecting ends and not merely means.
15
Sunstein 2014, p. 61.
16
Sunstein 2014, pp. 66–67; see also pp. 91–92.
17
18
The complex, multifaceted, and subjective nature of interests also implies het-
erogeneity of interests among individuals, which is widely acknowledged yet not
appreciated sufficiently. For instance, Sunstein writes that “people are highly
diverse in terms of their tastes, their values, and their situations. One size may not
fit all.”19 He also approximates the definition of interests given in this paper when
he writes that people have concerns reflecting altruism or social responsibility, as
well as different conceptions of their own well-being or happiness, on which “they
strike their own balance; different people will choose differently.”20 However, he
uses these inclusive and pluralistic conceptions of well-being to defend libertarian
paternalism, which offers more choice than do coercive interventions, rather than to
question his paternalist enterprise altogether, which in his examples relies on simple
single interests such as health or savings.
Writing for a philosophical rather than popular audience, Conly is more elabo-
rate when discussing the plurality of possible interests and its implications for pater-
nalistic interventions, which “may be downright harmful to some individuals – it
may prevent them from achieving well-thought-out ends. Obviously, different peo-
ple have some different goals and needs.”21 She responds to that problem by assert-
ing that many ends, such as health and prosperity, are common to most people – all
legislation is general by nature, after all, with unavoidably disparate impacts on
various individuals – and that, as Sunstein also maintains, cost-benefit analysis must
be applied to decide on the effectiveness of any particular intervention.22 But a one-
size-fits-all approach of either type of paternalism then defeats the purpose of
advancing people’s own ends by substituting general, simplistic ends chosen by the
policymaker, and, in its aggregation of interests, resembles welfarism more than
paternalism.23
Conly provides a fine example of the multiple interests that may lie behind a
choice when she mentions the purchase of lottery tickets, which she does twice in
her book. The first time she characterizes them as a counterexample to learning
from mistakes, imprudent choices that persist over time. But this judgment is based
on the questionable but universally implicit assumption among academics that most
people play the lottery as part of a considered long-term financial investment plan:
“Buying a lottery ticket every week doesn’t teach people that it isn’t a good use of
19
Sunstein 2014, p. 17; see also pp. 96–100.
20
21
Conly 2013, p. 64.
22
Conly 2013, pp. 63–66; Sunstein 2014, pp. 18–19.
23
See Korobken 2009. As noted above, defenders of nudge and stronger forms of paternalism often
argue that the question of justification is an empirical one depending on the cost and benefit of
specific interventions. But this takes us back yet again to the impossibility of knowing individuals’
interests, which are presumably what are to be advanced, and measurement of which would repre-
sent the benefits of paternalistic interventions. Without knowledge of actual interests, however,
advocates of paternalism are left only with the interests on which the interventions are based (or
the behaviour modified in those interests), which places a heavy thumb on the scale in favour of
intervention.
30 M.D. White
their money.”24 The second time, she acknowledges that there may be other reasons
to play the lottery, such as enjoyment, in her defence of means paternalism over
ends paternalism: “If my subjective end is happiness, and I think playing the lottery
will promote that, not because the suspense gives me some evanescent pleasure, but
because I really think I have a reasonable chance of winning, I am mistaken about
my means.”25 Her argument seems to be that if people play the lottery for the thrill
(quite reasonably priced at a dollar), they may be making a reasonable choice, but
if they are hoping for riches, they are not. This is valid, but while she likely knows
her own subjective ends when assessing the lottery, she does not know those of
anyone else. If policymakers were to intervene paternalistically to limit lottery play
in the interest of people’s finances, they would be more likely be influencing lottery
players’ enjoyment – which would have an impact on people’s actual ends while
trying to improve the choice of means toward others.
Conly is careful to make a distinction between transitory desires and preferences
and more stable, long-term goals and desires, and argues that paternalism should act
to block the former when they do not correspond to the latter. But without knowl-
edge of what people’s true long-term interests are, this distinction is of no use to
crafting policy that respects those interests. It is impossible for a policymaker to
know when choices over short-term means are trivial or an integral part of advanc-
ing deeper interests. When suggesting areas of life in which paternalism may not be
effective, Conly mentions choices regarding marriage or career, in which even the
smallest choices are deeply personal and linked to the larger enterprise itself.
Because the means and ends in such situations are more difficult to identify, the
prudent option is to leave these choices to the decision-maker, despite the ever-
present chance of bad choices. This is a valuable insight, but one I would argue
applies not only to choices about marriage and career but all choices in life; to sepa-
rate these areas out requires a judgment call about the relative importance of differ-
ent choices, which is itself an external opinion about interests. Conly writes that:
requiring that people save more than they now do, that they don’t amass huge debts through
avaricious credit schemes, that they don’t buy cigarettes, that they don’t eat things with
likely lethal effects, doesn’t seem to interfere with the basic life choices rights are intended
to protect.26
These may not seem like important choices to an outside observer, who cannot
judge what a person regards as an important choice to his or her interests. A person
may have any number of reasons to save, borrow, smoke, and eat to an extent or
degree that another person may think imprudent based on his or her judgment on
what is best. But this judgment cannot be made without imposing interests on the
person making the choices, which modern paternalists deny that they do.
Modern paternalists’ focus on long-term interests as opposed to short-term desires
recalls the concept of ideal or rational preferences favoured by many economists
24
Conly 2013, p. 27; on this point, see also LeGrand and New 2015, pp. 147–150.
25
Conly 2013, p. 43.
26
Conly 2013, p. 65.
and philosophers who study personal welfare and well-being.27 Because of the vari-
ous cognitive biases and dysfunctions as well as informational problems to which
we are subject, some economists and philosophers argue that agents’ preferences
may not reflect their true interests and should be replaced in the policymaker’s tool-
box by ‘rational preferences’, the ones “he would have if he had all the relevant
factual information, always reasoned with the greatest possible care, and were in a
state of mind most conducive to rational choice.”28 Sunstein and Thaler invoke this
concept when they argue that the bad decisions people make may be “decisions that
they would change if they had complete information, unlimited cognitive abilities,
and no lack of self-control.”29 Conly echoes this line of thinking when she describes
the point of paternalism as “to help the person what achieve what in the long run he
wants, and what he would want now if he were not a flawed thinker.”30
But the construction of these rational preferences also, by necessity, involves
external judgment, being essentially counterfactual and hypothetical, and bearing
no necessary relation to a person’s actual interests. As Robert Sugden asks:
How, without making normative judgments, do we determine what counts as complete
information, unlimited cognition, or complete willpower? Even if we can specify what it
would mean to have these supernatural powers, how do we discover how some ordinary
human being would act if he were somehow to acquire them?31
Such idealized preferences may, in theory, counter faults with actual preferences,
but have little tie to actual interests, given their judgment-laden nature, and once
again defeat the stated purpose of paternalists to advance the true ends of people
affected by interventions.
3.4.2 Perfectionist or Objective Theories of Well-Being
The practical irrelevance of the distinction between means and ends, given the lack
of knowledge on the part of policymakers regarding people’s true interests, is symp-
tomatic of the problem with modern paternalism’s claim to respect those interests
and merely improve people’s decision-making toward them. This theme is empha-
sized throughout recent work, from Sunstein and Thaler’s choice of the term ‘liber-
tarian paternalism’ to Conly’s description of her coercive paternalism as
‘benevolent’, both corresponding to soft paternalism in the original sense of the
term. In their recent work, both Sunstein and Conly flatly reject perfectionist or
objective theories of welfare. Sunstein is clear that, “though paternalists might have
any number of views about what would make people’s lives go well,” he is “inter-
ested in defending paternalists who respect choosers’ own views about their ends,
27
On the theory of rational preferences and their relationship to well-being, see Griffin 1986, chs.
1 and 2.
28
Harsanyi 1982, p. 55.
29
Sunstein and Thaler 2001, p. 1162.
30
Conly 2013, p. 36.
31
Sugden 2008, p. 232.
32 M.D. White
and who seek to increase the likelihood that their decisions will promote those
ends.”32 Conly writes that what she advocates “is not a paternalism about ultimate
ends; that is, I do not argue that there are objectively good ends, or objectively ratio-
nal ends, or ends objectively valuable in any way, which everyone should be made
to pursue.”33 Instead, it “promotes the satisfaction of people’s long-term desires,”
recalling the discussion of rational preferences above.34
This position is untenable, however, given the nature of interests: if interests are
subjective and therefore externally unknowable, then paternalists cannot intention-
ally and effectively advance them. Either paternalists do claim to have knowledge
of subjective interests, or they are implicitly imposing their own idea of interests,
which is more consistent with an objective theory of welfare. I argue that while they
argue the former, they are in fact engaging in the latter.
Both Sunstein (with and without Thaler) and Conly, in defence of their respec-
tive brands of paternalism, assume a number of central interests common to all. In
fact, Blumenthal-Barby notes that, in most of examples of nudges in the literature,
“there is a sense of an underlying perfectionist standard of the good, namely health
and wealth, to which the various nudges direct the masses.”35 Sunstein and Thaler
famously give examples of promoting health by rearranging items in a cafeteria and
savings by enrolling new employees in retirement programs by default, both inter-
ests they implicitly take to be universal and important. In his most recent book,
Sunstein writes that policymakers can improve people’s lives by implementing
nudges “that give health, wealth, and well-being the benefit of the doubt.”36 Conly
writes, “I would argue that we (most of us) have a stable desire to be healthy and
prosperous, and furthermore have a relatively clear idea of what constitutes a satis-
factory degree of health and prosperity.”37 Both health and prosperity are vague and
common interests, to be sure, but neither of them corresponds precisely to how
individuals understand them or balance them with other interests. I agree that each
of us has a relatively clear idea of what health and wealth mean to us, but that is an
individualized conception that is not available to the policymaker.38
32
33
Conly 2013, p. 43.
34
Conly 2013, p. 50; see pp. 102–112 for a thorough discussion of perfectionism that never con-
fronts the issue of the substitution of interests. See also Cholbi 2013, who defends a Kantian
paternalism predicated explicitly on the interests of the individuals subject to it: “what triggers
justifiable paternalism is not the nature of the good person pursues but the exogenous imprudence
with which she pursues it” (p. 124).
35
Blumenthal-Barby 2013, p. 180.
36
37
Conly 2013, p. 124.
38
Blumenthal-Barby recognizes the epistemic problem in principle, but agrees with Conly regard-
ing its practical irrelevance: “while differences in preferences exist to be sure, there is much less
variety than one might think, and much more data about what really does (and does not) make
better off” (2013, p. 187). But this assumes that people’s interests consist solely of (or can be
described completely) by well-being, and that defining and measuring well-being is not subject to
same epistemic problems described above; on both, see White 2014.
One of the examples of paternalism Sunstein discusses in his 2014 book is fuel
efficiency standards designed to save consumers money on gas.39 He considers the
possibility that people do not want to buy fuel-efficient cars, and that fuel-economy
standards may be a form of paternalism that elevates one value above all others, but
then concludes that consumers simply “may not give sufficient attention to the long-
term or aggregate costs.”40 He cites empirical research that supports his point that
consumers do not purchase energy-efficient products despite the cost savings, but
this interpretation again assumes that cost savings is the only or the most important
factor when buying these products. Sunstein is careful to make qualifications, such
as when he writes “if, for example, consumers want to make a sensible trade-off
between up-front costs and long-term fuel costs.”41 I argue that this is a big ‘if,’ and
itself contains assumptions regarding what is a sensible trade-off between current
and future costs. Furthermore, cost is certainly an important factor to many people,
but there is no reason to believe that it overwhelms other considerations such as
aesthetics or additional features, which are often ignored when assuming what
people’s true interests are.
In her lengthy and detailed discussion of paternalistic interventions in health
care, Conly assesses several paternalist interventions, such as portion size control
and cigarette bans, along four criteria, including whether they advance people’s
interests. In each case, however, she defines the interests for people. For instance, in
the case of New York City’s trans-fat ban, she cites the primary interest advanced
as “staying alive, and being able to function normally while we are alive,” as “some-
thing we want.”42 This is certainly a common interest, but it is both trivial and vague:
of course, most all people want to stay alive and be able to function, but this does
not mean they avoid all risks to that interest, and they balance their interest in con-
tinued life with their interest in truly living. These objections aside, longevity may
be a very reasonable, prudent, and common interest, as is health in general (cited
elsewhere), but it is not the only interest of any person (even self-professed ‘health
nuts’), much less an entire population. It is an interest defined and assessed by
someone other than the people affected, and in this way resembles an objective
theory of good as described as Derek Parfit: “According to this theory, certain
things are good or bad for people, whether or not these people would want to have
the good things, or to avoid the bad things.”43
Paternalists may argue that people should take an interest in their health based
on value judgments backed by scientific evidence; as Colin Camerer and his
colleagues point out, “health and food regulations are heavily informed by scientific
understanding… and by a widespread belief among professionals that average
folks require information, prodding, and often regulation to improve their health
39
Sunstein 2014, pp. 42–44.
40
41
42
Conly 2013, p. 153.
43
Parfit 1984, p. 499.
34 M.D. White
and diet.”44 But this is to take an objective view of interests: the fact is that some
people do not take a strong interest in their health, despite Conly’s characterization
of it as a ‘dearly held interest’, so scientific evidence regarding diet, exercise, and
sleep are of little import to advancing their true (subjective) interests.45 Conly argues
that health is at least an integral instrumental interest, necessary for the promotion
of other (intrinsic) interests. Once again, this may be a reasonable assumption but is
hardly necessarily true, and many people knowingly and willingly sacrifice aspects
of their own health, as medical professionals would characterize it, to pursue other
ends. Furthermore, among people who do take an active interest in their health, foci
differ, with some emphasizing weight loss, others strength, and yet others sugar
intake. ‘Health’ is much too vague a term to impose on people as an interest in
which paternalists will influence decisions.46
Conly’s analysis is more elaborate, however, and does not restrict itself to this
single interest. For instance, in considering bans on using food stamps for soda,
she lists other interests, such as “being found conventionally attractive, and social
acceptance generally,” which lessens the “psychological burden of being unattract-
ive by conventional standards”; in assessing portion size regulation, she lists as an
interest avoiding the stigma and (in the case of women) diminished job opportuni-
ties stemming from obesity.47 She also considers interests that may be negatively
affected at the same time that health (and attractiveness by conventional standards)
is promoted, such as “loss of enjoyment and loss of status,” but while she takes these
very seriously, at the same time she frames these interests as ‘costs’ rather than par-
allel concerns of equal status to health in the pantheon of subjective interests. While
she admirably goes to great length to list many possible interests that might speak
against the positive effect of an intervention, this also reveals the multifaceted nature
of interests and neglects the complex ways in which they combine and interact –
most important, in ways that are subjective and unknowable to the outside observer.
With regard to smoking, Conly asks (and answers), “Do smokers get sufficient ben-
efit from smoking to make this a rational choice, given their ends? It seems likely
that it is not.”48 While this conclusion may be amenable to many people, neverthe-
less it involves an arbitrary external judgment regarding not only the interests of
smokers but also how they balance and combine them. As much care as policymak-
ers might take in trying to specify every interest that might be affected, they can
never be certain that they have identified all of them or considered them in the same
proportions or priorities as assigned by people themselves. Because of this lack of
information, policymakers who choose to influence decisions must impose interests
that, no matter how reasonable and prudent, are nevertheless not the subjective
interests of people themselves, and instead correspond to objective theories of
well-being or interests.
44
Camerer et al. 2003, p. 1222.
45
Conly 2013, p. 169.
46
See White 2016.
47
Conly 2013, p. 156 and p. 164.
48
Conly 2013, p. 170.
In some cases, such as marriage, Conly explicitly admits that “we just don’t
know enough” to intervene paternalistically, because (as described earlier) the
choices themselves are such an intrinsic part of the enterprise itself that the distinc-
tion between means and ends is blurred. But she maintains that less significant deci-
sions are different, and she uses the example of selecting food as an example. “I
don’t particularly value making nutritional food choices per se; I want to enjoy
eating and I want to have food that doesn’t do me harm, and someone else can do
the legwork as to how best to do that. Romance, however, is obviously different.”49
I disagree that this difference is obvious for everyone: her attitudes towards her food
choices are not necessarily anyone else’s, and may be closer to how she regards
marriage (which, to some, may be more instrumental). As Claire Hill writes, mod-
ern paternalists
sometimes speak as though they have access to the knowledge of what people really want
apart from what they choose. This position is ultimately untenable… As convenient and
tempting as it may be to extrapolate from our own introspection that others want what we
do, or should, want, we simply have no access to others’ beliefs and desires.50
My argument is that in most all cases of choice, policymakers simply don’t know
enough about interests, including the relative importance of different kinds of inter-
ests, to justify interfering with decision-making. Given this lack of information
regarding people’s true interests, policymakers are very unlikely to further those
interests by promoting others of their own choosing, regardless of how prudent and
reasonable they may seem. Instead, policymakers would best promote people’s true
interests by giving them the benefit of the doubt regarding their own interests and
how they choose to pursue them.51
To summarize, any interests that are not embodied specifically in individuals’
choices, but rather are chosen by policymakers, are presumed interests that reflect,
by definition, an objective theory of interests. As Dan Brock writes:
Paternalistic interference involves the claim of one person to know better what is good for
another person than that other person him- or herself does. It involves the substitution by
the paternalistic interferer of his or her conception of what is good for another for that
other’s own conception of his or her good. If this involves a claim to know the objectively
correct conception of another’s good—what ultimate values and aims define another
competent individual’s good, independent of whether that other accepts them—then it is
ethically problematic.52
49
Conly 2013, p. 184; see pp. pp. 183–186 in general.
50
Hill 2007, p. 448.
51
Note that I have not mentioned the effect of paternalism on autonomy understood as an intrinsic
value; I made my argument in this chapter on the purely welfarist grounds favored by Sunstein and
Conly. For a defense of the importance of an intrinsically valuable sense of autonomy—that is,
autonomy not understood simply as a component of well-being—see White 2013, ch. 7, and refer-
ences therein (especially on p. 170 n. 11). (Autonomy is discussed in both Sunstein 2014, ch. 7,
and Conly 2013, ch. 1; both are critical of autonomy as an intrinsic value but incorporate it in an
instrumental sense in their proposed cost-benefit analysis).
52
Brock 1988, p. 559.
36 M.D. White
Advocates of nudge or paternalism in general cannot maintain that they are respecting
subjective interests while imposing external, objective ones. It would be much
simpler, and would avoid many conceptual inconsistencies, were paternalists to
embrace explicitly the objective theories of interests that they implicitly use, “to admit
that choice environments are designed to direct people towards generalizable good”
and not each person’s true interests.53
3.5 Conclusion
The distinction between means and ends paternalism and the denial of objective
theories of well-being ground the approach of modest paternalists, as exemplified
by Cass Sunstein and Sarah Conly in key quotations from their recent work. Sunstein
writes that the reasoning behind his version of paternalism is that “government does
not believe that people’s choices will promote their welfare, and it is taking steps to
influence or alter choices for their own good.”54 Likewise, Conly writes that
The reason for intervention is that we don’t trust you to choose rightly. We are taking away
freedom of choice in these cases because we don’t think people will choose well them-
selves. We don’t think preserving your autonomy, your freedom to act based on your own
decision, is worth the costs, in part because your decision making is done so badly that your
freedom is used very poorly.55
Although the tone of these two statements is very different, they share the same
element of judgment: ‘the government believes’ people’s choices promote their
interests, and ‘we don’t think’ people can be trusted to make these choice for them-
selves. But this judgment presumes knowledge of people’s true ends and interests
that is unavailable to the paternalist.
Of course, people do judge some of their own decisions to be bad, and they often
take steps to improve these choices. At the end of the day, only a person knows
whether his or her choice in a given situation furthers the interests he or she has at
that time. As Mill wrote, in the context of voluntary risk-taking, “no one but the
person himself can judge of the sufficiency of the motive which may prompt him to
incur the risk.”56 Without this knowledge, the prudence of chosen means cannot be
assessed, and the distinction between means and ends is rendered meaningless for
the purposes of designing paternalistic interventions.
Furthermore, the complex, multifaceted, and subjective nature of interests poses
serious problems for paternalists who claim to be promoting people’s true interests.
Conly writes that “interference is justified on paternalistic grounds only when it
reflects individuals’ actual values, not the values we might like them to have.”57
53
54
55
Conly 2013, pp. 179–180.
56
Mill 1859, ch 5.
57
Conly 2013, p. 150.
Paternalists need not be imposing values that they ‘might like’ people to have, but
nonetheless they are necessarily imposing values as implied by their lack of infor-
mation, and this substitution of interests introduces perfectionist or objective values
into the practice of paternalism, whether libertarian or otherwise. Paternalists could
avoid this conundrum by embracing the objective theories of welfare that inform
their theory and practice, although it would diminish the attractive claim of modern
paternalism to be helping people further their own interests. As I have argued, this
claim is false; why it is so readily accepted by so many is a question worth
investigating.
Bibliography
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Chapter 4
Condorcet’s Jury Theorem as a Rational
Justification of Soft Paternalistic Consumer
Policies
A Philosophical Note
Malte Frederic Dold
Abstract The aim of this note is to revisit the meaningfulness of the Condorcet
Jury Theorem (CJT) and apply it to the recent debate on liberal paternalism and
consumer protection. The CJT consists of two parts, (a) stating that a jury of experts
is always more competent than a single expert given a certain level of competence,
and (b) asserting that for large juries, the collective competence approaches infalli-
bility. This note argues that these insights suggest the application of a Condorcet
jury voting procedure in case of nudging boundedly rational consumers. The note
proposes a simple calculus for finding an optimal jury size and advocates consum-
ers’ meta-preferences as the jury’s evaluative dimension for designing soft paternal-
istic policies.
4.1 Introduction
The individual at a point in time is assumed to be both a farsighted planner and a myopic
doer.1
Consumers often do not make rational decisions, either due to natural constraints
(uncertainty about the future), a lack of cognitive ability (slow or wrong information
processing) or systematic decision biases (loss aversion, anchoring and framing
effects, status quo bias, overconfidence, etc.). Especially recurrent systematic deci-
sion biases are ubiquitous and often lead to serious economic and psychological
welfare losses.2 Evidence from behavioural and experimental economics show that
Thaler and Shefrin 1981, p. 39.

1
Kahneman 2011.
2
M.F. Dold, M.A. (*)

Albert-Ludwig University Freiburg, Freiburg i. Br., Germany
e-mail: malte.dold@vwl.uni-freiburg.de

40 M.F. Dold
our preferences are often unstable, context-dependent and inconsistent with our
own long-term preferences.3 Shortly, we depict incoherent preferences. Being in the
role of consumers, we, for example, often overrate our forecasting abilities and
underestimate the likelihood of contingent charges such as overdraft fees for bank
accounts, lagged payment fees for credit cards, minibar charges in a hotel rooms or
roaming charges for international mobile calls.4 In such cases, the ex-ante overcon-
fidence in our own consuming abilities repeatedly leads to severe ex post welfare
losses. Therefore, consumers’ cognitive limitations and psychological biases are
(besides the classic market failures) another potential source of market
inefficiency.
One possible way of tackling the problem of incoherent preferences and system-
atic decision biases was introduced by Thaler and Sunstein (2003, 2008).5 Although
not fundamentally new, their approach of libertarian paternalism (which in the lit-
erature sometimes also appears under headings like soft, asymmetrical or new
paternalism) argues for a purposefully designed choice framing, so called ‘nudg-
ing’, in cases of boundedly rational individuals. Optimally, these nudges are non-
monetary incentives in choice situations that de-bias consumers decisions in a
predictable and desired way. Thaler and Sunstein think of advising a choice archi-
tect who is in charge of framing the decisions of the individuals that could be “any-
one who must design plans for others, from human resource directors to bureaucrats
to kings.”6 They argue in favour of such an interference with individual decision
making when the shaping of the choice architecture is in the ‘best interest’ of the
affected individuals, and the freedom of choice is preserved, i.e. individuals have
the liberty to opt out of the recommended choices at no or only little costs. Thus,
libertarian paternalism takes the individual’s own subjective welfare as the basis for
regulatory recommendation: soft paternalistic policies shall be designed with the
intention that the framings imposed on each individual improves the welfare of that
individual as judged by their own lights. Therefore, the definition of nudging explic-
itly excludes legislation or interventions that are dedicated at regulating external
effects by directly altering relative prices, i.e. economic (monetary) incentives,
through taxes, subsidies or bans.
Thaler and Sunstein’s position evoked a debate on how far policy makers shall
go in shaping the choice situation of other people. One of the critics’ main argu-
ments is that choice architects, who are in charge of soft paternalist policymaking,
might be prone to the very same systematic decision errors, biased beliefs and cog-
nitive flaws like the consumers themselves, just in a more complex way and on a
higher organizational level.7 Above all, due to the Hayekian ‘knowledge problem’,
policy-making agents cannot know what is in the best interest of the affected indi-
3
Camerer et al. 2004; Rabin 2002.
4
Armstrong and Vickers 2012.
5
Sunstein and Thaler 2003; Thaler and Sunstein 2003, 2008.
6
7
Glaeser 2006.
4 Condorcet’s Jury Theorem as a Rational Justification of Soft Paternalistic… 41
viduals, rather the individuals themselves should know their preferences far better
than any third party does.8
The following note will mitigate this argument against the concept of nudging by
pointing to the implications of the Condorcet Jury Theorem (CJT). Given we have
a situation of uncertainty and there is a true welfare maximizing means for an indi-
vidual. Then, the CJT states that (under certain conditions) a jury of experts, whose
decision procedure is simple majority voting without any group deliberation, is
more competent in finding the welfare maximizing means than the respective indi-
vidual herself. So the CJT defends Thaler and Sunstein’s notion of liberal paternal-
ism against the critique of the knowledge problem and enriches their approach in
two ways: (a) it can be taken to normatively justify soft paternalistic interventions
and (b) it gives a hint who should be in the position to make suggestions about
paternalistic consumer protection policies, namely, a jury of experts.
Most of the recent work on the Jury Theorem only deals with its formal robust-
ness when altering the theoretical assumptions but not with the very fundamental
question of the jury size.9 Since this is a crucial issue for practical implementation,
this note offers some first reasoning on the optimal jury size when considering
expected transaction costs in form of individual decision error costs and monetary
compensation for the jurors.
The structure of the note is as follows: After presenting in part 2 the knowledge
problem as a widespread point of criticism against the notion of soft paternalism,
part 3 introduces the Condorcet Jury that can sidestep most of the difficulties ema-
nating from the knowledge problem. Part 4 then discusses a simple model for find-
ing the optimal jury size and advocates educative nudges in order to minimize
expected social costs. Before concluding, part 5 proposes consumers’ meta-
preferences as the jury’s evaluative dimension in order to rebut some possible
critique.
4.2 Libertarian Paternalism and the Knowledge Problem
In the aftermath of Thaler and Sunstein’s articles, many authors have raised objec-
tions to the use of behavioural economics to normatively justify paternalism. From
a philosophical point of view, some critics complain that libertarian paternalism
circumvents attempts of rational persuasion in that it does not appeal to critical
thinking of consumers but simply ‘shapes’ their choices in a predefined direction.10
Furthermore, many critics believe that libertarian paternalism lacks a clear welfare
criterion that a paternalistic policymaker could follow to define the desired choice
direction.11 Some critics also question the political legitimacy of nudging.
8
Rizzo and Whitman 2009; Schnellenbach 2012; Sugden 2008.
9
Kaniovski 2010; Kaniovski and Zaigraev 2011; Peleg and Zamir 2012.
10
Hausman and Welch 2010.
11
Grüne-Yanoff 2009, 2012; Mitchell 2005.
42 M.F. Dold
They argue that libertarian paternalistic policies shift the responsibility of policy-
makers to the level of individual decision-making. Therefore, nudging can be seen
as a form of ‘obfuscation policy’ that circumvents democratic control.12
Taking a traditional economic viewpoint, critics doubt the efficiency-enhancing
character of soft paternalistic interventions since, in the long run, such interventions
would hinder learning processes and reinforce the status quo.13
One of the most serious points of criticism, however, concerns the problem of
knowledge collection or information aggregation. Critics argue that Thaler and
Sunstein do not sufficiently answer the question who should be in the position to
frame individual decisions and how these policymakers should have access to the
knowledge needed to implement soft paternalist policies.14
For instance, Sugden argues that Thaler and Sunstein’s libertarian paternalism
presupposes a wise social planner with the ability to collect information about indi-
viduals’ true points of views that reflect “complete information, unlimited cognitive
abilities, and no lack of self-control.”15 So the planner needs to know about the
individuals actual preferences to identify what stimulates her welfare and what does
not. Then, guided by that information, she would be able to install the right decision
framework to promote the individual good from a neutral point of view – in Smithian
terms: the view of an impartial spectator. Yet, Sugden argues that such a planner
notoriously will fail since no person or organizational body can distinguish between
a person’s expressed preferences that potentially could be biased and her true desires
behind.16 Similarly, Rizzo and Whitman think that policymakers do not have access
to the kind of knowledge needed to impartially implement welfare-enhancing pater-
nalist policies17 and quote Hayek that such kind of knowledge does usually not
“[…] exist[s] in concentrated or integrated form, but solely as the dispersed bits of
incomplete and frequently contradictory knowledge which all the separate individu-
als possess.”18
In line with Hayek, most of these authors argue for the market as the best welfare
creating mechanism since it establishes conditions under which the necessary infor-
mation is more likely to be mobilized and used. By tacitly approving market trans-
actions, individuals give their rational consent and hereby decentrally maximize
overall welfare, which no social planner would be capable of achieving.
However, in putting up this principle of mutual advantage, these critics of liber-
tarian paternalism depict an inconsistency in their argument. They believe in welfare
maximizing (or enhancing) decisions of individuals on markets although substantial
findings of behavioural economics demonstrate that consumers on markets repeat-
edly and systematically behave in boundedly rational ways due to cognitive biases
12
Holler 2015.
13
Glaeser 2006; Schnellenbach 2012.
14
Rizzo and Whitman 2009; Schnellenbach 2012; Sugden 2008.
15
16
Sugden 2008.
17
Rizzo and Whitman 2009.
18
Hayek 1945, p. 519.
(in form of loss aversion, anchoring and framing effects, overconfidence, etc.). This
bounded rationality leads to severe individual and collective welfare losses.19 So
given this empirical evidence, consumer sovereignty and market transactions alone
should not be the methodological utensils of welfare economics since they cannot
answer the question of good, i.e. welfare-enhancing, policies.
In what follows, this note will show that the CJT provides the missing link to
circumvent the knowledge problem in paternalistic welfare economics while
acknowledging the insights of behavioural economic theory. If its conditions hold,
the Condorcet jury is a tool to approach the knowledge of a benevolent wise planner
that can nourish decentral market transactions of the individuals with soft paternal-
istic nudges to improve the welfare of individuals by their own standards. Following
a Condorcet jury procedure, individuals might be steered away from erroneous con-
sumption decisions while preserving their individual freedom of choice.
4.3 The Condorcet Jury as a Wise Social Planner
The Condorcet Jury Theorem (CJT) goes back to Marquis de Condorcet and his
seminal work Essai sur l’application de l’analyse á la probabilité des décisions
rendues á la pluralité des voix from 1785. Therein Condorcet argues for a calculus –
later called the Condorcet Jury Theorem – that provides a proper guarantee for
majority decisions of a parliament or an assembly being correct. In its classic inter-
pretation the CJT is applied to find a common social or moral good,20 however in
this note the new focal point is the quest for ‘the right’ means to achieve individual
welfare in consumption decisions. In line with the general logic of libertarian
paternalism,21 this note considers a nudge always to be means-oriented, it does not
attempt to alter individuals’ ends but rather helps them to order their short-term
preferences to achieve their given long-term goals.
In order to grasp the framework of the CJT when it comes to consumption, let us
make the following assumptions: There is a group of consumers in which everyone
is striving for her own welfare and there are no external effects of consuming goods.
Let us simplify and say all individuals are identical and have the same welfare goal
Π which shall be a long-term goal like life satisfaction, health, or material welfare.
Now there is a finite set of consumption options C = {c1 ,,c2 ,,…} to achieve Π. These
options are means to reach the welfare goal and could include daily activities such
as spending, saving, insuring, fasting, eating, etc. This set C is the same for all the
individuals, i.e., it is collectively congruent. The exact identity of the subset C* ⊂ C
that represents the optimum alternatives is unknown to the individuals. Although
the individuals have clear preferences over Π, they themselves are unsure about
which subset of C fits best their long-term welfare goal.
19
Camerer et al. 2003.
20
See, for one, Grofman and Feld 1988.
21
44 M.F. Dold
Let us now consider a group of experts N = {1, 2,… n} and call them ‘the jury’.
The members of this jury also face uncertainty about the best means to bring about
Π, yet each juror can rank any pair of means out of the set of consumption options
C with respect to what she believes are their respective effectiveness for fulfilling Π
(criterion of the possibility to rank-order of CJT). With respect to the choice between
any pair of alternative means, every juror i ∈ N has a probability pi to be correct in
picking the one option that promotes good Π relatively better. With respect to each
juror’s competence, we assume, pi > 0.5 so that a juror is better than a fair coin flip
to pick the better option (criterion of competence of CJT). Each member of the jury
is equally competent, i.e. p = pi for all i in N (criterion of homogeneity of CJT).
The jury’s decision procedure is a simple majority rule, i.e., the jury decides
between any two alternatives by means of a majority vote. There is no group com-
munication or deliberation among the jurors in order to avoid correlation between
the individual votes of the jurors, i.e., the probability that any juror i, i ≠ j, votes for
the better alternative is independent from j’s voting behaviour (criterion of indepen-
dence of CJT). In addition, there is no strategic voting behaviour of the jurors, i.e.,
each juror votes sincerely in the sense that she reveals her true expert knowledge
about the matter and not her personal preferences when deciding about the better
alternative (criterion of truthfulness of CJT). Moreover, it exists the possibility of a
‘correct’ ordering of means (for example, from best to worst in efficiently bringing
about Π), i.e. the jury votes upon matters that contain truth-value (criterion of truth-
aptness of CJT). In order to make this possible, the ultimate welfare goal Π of the
individuals must first be signaled by the individual to the jury. Based on these sig-
nalled evaluative parameters, the jury then can vote on the consumption means to
best reach welfare goal Π. Hence, the jury’s decision is about practical wisdom
about the right means to bring about a given end (in Kantian terms: the jury mem-
bers express a hypothetical imperative in their votes).
If these conditions hold, the CJT states that any jury of odd number of jurors is
more likely to select the correct consumption options C* from C than any single
juror, i.e. the probability that a jury majority may vote for the relatively better alter-
native exceeds pi (non-asymptotic theorem) and the likelihood of picking the correct
alternative tends to 1 as the size of the jury approaches infinity (asymptotic theo-
rem). So, if there exists a welfare goal that can be signalled to a jury and the jury
knows about the available but unsecure consumption options, the outcome of a jury
majority voting process is an effective way of identifying the best means of maxi-
mizing individual welfare. That is, under our assumptions, the same as collective
welfare.
Following Grofman, Owen and Feld the CJT calculus can be formally illustrated
as follows.22 Let PN be the probabilistic accuracy that the majority of a jury of size
N picks the better means for our group’s welfare goal Π in a pairwise comparison of
alternatives. If we assume N to be odd, simple majority m is ( N +1) / 2 . Let p be the
22
Grofman et al. 1983.
individual accuracy level of the jurors. Then, if the jurors vote independently, fol-
lowing the binomial distribution, the jury’s probabilistic accuracy is
h =m
N
PN = ∑   ( p)h (1 − p) N −h .
N  h 

If p > 0.5, then the majority’s probabilistic accuracy is
lim PN → 1.
N →∞
And if p < 0.5, the majority’s probabilistic accuracy is
lim PN → 0,
N →∞
while when p = 0.5, then, of course,
PN = 0.5.

This shows that for the same jurors’ accuracy level p, and p > 0.5, a jury decision
following majority voting is better than a single juror’s decision, i.e. PN > pi for all
N greater than 1. The outcome of the majority vote gets better if one adds more
members to the jury since Nlim PN → 1. Yet, if the accuracy level of the jurors is
→∞
p < 0.5, i.e. any single jury is more likely to vote incorrectly, then it generally holds
that adding more jurors makes things worse since Nlim PN → 0 . In this case the
→∞
optimal jury would consist of a single member.
The same logic can be applied to the quest for the true best nudging policy. Let
us assume that there is a finite set of possible nudging policies P = {p1 ,,p2 ,,…} .
Such a nudging policy pi depicts a non-monetary incentive structure that makes it
more likely for an individual to choose a certain consumption bundle from the set of
consumption options C. We further assume the jury faces uncertainty about the best
p* ∈ P that brings about the optimum subset C* most effectively. Then, if each juror
can rank any pair of means out of P with respect to their effectiveness for realizing
C*, and every juror has a probability pi > 0.5 to be correct, then the same CJT calcu-
lus holds. This time, the best consumption bundle C* would be the given end, and
the right nudge policy pi the identifiable means. Although this quest for the right
nudging policy might require some more expertise on behalf of the jury about how
individuals react to incentive structures, there is no fundamental argument against
applying the depicted (instrumental) calculus in this question, too.
Even when relaxing some assumptions, the main implications of the CJT still
hold. For one, if we assume the jurors to have different competence levels (i.e. a
varying p), but average accuracy level is p > 0.5 , and judgmental competence is
normally distributed, then the probability of the jury making the correct choice
46 M.F. Dold
under majority rule still increases to 1 as the group gets large.23 Further, Kirstein and
Wangenheim illustrate that situations exist in which the individual jurors’ accuracy
level is smaller than 0.5 but the jury decision generates a higher expected welfare
than an individual decision.24 Kaniovski demonstrates that allowing for correlation
between the jurors voting behaviour, i.e. dropping the criterion of independence,
leads to a trade-off so that the probability of the jury voting in favour of the better
option increases with the jurors’ competency but decreases with positive correlation
among their competencies.25
The limitation of the CJT to binary choice settings is much less important than it
might first appear. In situations with more than two alternatives, the decision proce-
dures can be decomposed into sequences of pairwise choices without any loss of
information.26 However, in any case, the criterion of truthfulness has to hold, other-
wise the main results of the theorem would not necessarily follow anymore.27
For the purpose of this note, let us consider the CJT in its very restrictive version
where the jury is homogeneous and there is no correlation since the main implica-
tions of the CJT also hold under heterogeneous jury competencies.28 Accepting
these assumptions, the convergence of the majority’s probabilistic accuracy PN is
strong, e.g. if the individual probability of the jury members is only p = 0.7 (which
might be a reasonable assumption since we deal with experts) and there are n = 11
jurors, then there is a probability PN larger than 0.9 that the jury picks the correct
alternative under majority vote.
First experimental studies of simple majority jury decision rules support these
theoretical predictions in the laboratory. Guarnaschelli, McKelvey and Palfrey find
strong experimental evidence for the effectiveness of small juries to find ‘the truth’
(in their study they call it ‘the signal’). If pi = 0.7, n = 6 and there is no group delib-
eration, then ‘[u]nder majority rule, the subjects voted the same direction as their
signals more than 94 % of the time.’29 Another experimental study by Ladha, Miller
and Oppenheimer illustrates that judgmental accuracies of majority rule are empiri-
cally robust and real juries do even better than predicted by the theoretical results of
the CJT. They also show that groups do clearly better than single individuals, even
in an experimental setting that was designed to maximize the advantages of uninfor-
mative voting by individuals.30
Given these results, the CJT has found its way back into academic discussion
mainly to normatively justify majority decision procedures within representative
23
Grofman et al. 1983.
24
Kirstein and Wangenheim 2010.
25
Kaniovski 2010. See also Berg 1993, Ladha 1993 or Peleg and Zamir 2012 for an in-depth dis-
cussion of the criterion of independence.
26
Berg 1996.
27
Feddersen and Pesendorfer 1998.
28
Grofman et al. 1983; Berg 1996.
29
Guarnaschelli et al. 2000, p. 413.
30
Ladha et al. 1996.
democratic institutions.31 However, as already indicated in the illustration of the

CJT calculus, its insights can also be applied to questions of consumer protection
and give reason to consider jury decisions in cases of boundedly rational individu-
als. Apart from hard regulatory effort, consumer protection policies are typically
designed to nudge consumers so that they are better-off. However, such policies
often lack any clear welfare criteria and, above all, miss any evaluative procedure
how to find the right decision framings for welfare-enhancing consumption. Now
following the implications of CJT, policymakers shall acknowledge that there are
different long-term welfare criteria Π, which they do not decide upon, but which can
be signalled to them by the consumers. Then, a Condorcet jury may be a good
evaluative instrument to filter available consumption options C how to best reach
this given welfare goal Π and to identify an appropriate nudging policy p* subse-
quently, such that the individuals are more likely to consume C*.
So, in practice, the Condorcet jury voting procedure would be three-staged when
it comes to consumer protection: First of all, consumers have to signal their long-
term welfare goals to the jury. Secondly, the jury has to elect the best short-term
consumption bundle by majority rule and, thirdly, the jury votes upon the best
choice architecture to frame individual behaviour given the optimal consumption
bundle derived in step two, again following majority voting. In both of the latter
stages, the Condorcet voting procedure is applicable since the underlying evaluative
dimensions, i.e. the welfare goal Π and the consumption bundle C*, are fixed and the
assessing issue is truth-apt inasmuch as we deal with questions of practical wisdom.
Given uncertainty, at both the second and the third stage, a jury might be the better
judge than the individuals themselves if the jurors all have a certain level of exper-
tise with respect to the underlying normative dimensions. Then, it follows that –
even in a situation in which a single consumer might have a higher competence than
a single member of the jury – it is reasonable to entrust the framing of the decision
to a jury since the jury’s majority accuracy level will be mostly higher than the one
of the single individual.
Consequently, the CJT can be considered as a rational justification of soft pater-
nalistic framings of consumption decisions. The Condorcet jury approximates a
rational self in identifying the best consumption bundle and, by means of the nudg-
ing policy, rules out problems of bounded willpower or present bias consumption.
Therefore, the CJT delivers a counterargument to the critique that a soft paternalis-
tic planer is prone to the very same decision biases as the nudged individual
herself.
4.4 The Optimal Jury Size and Educative Nudges
Given the theoretical insights of the CJT, it would be optimal to establish large
juries following the maxim: the bigger, the better. The more experts there are, the
likelier a jury would approach infallibility. However, it does not need a lot of sceptic
31
Black 1958; Grofman and Feld 1988; List and Goodin 2001; Miller 1986.
48 M.F. Dold
to see that this would be an impractical suggestion. Self-evidently, experts cause

economic costs. It is very unlikely that they will give their information pro bono.
Installing a jury will cause transaction costs since the jurors want to be compensated
monetarily for their expertise and their time effort. Accordingly, a bigger group of
jurors N will cause higher costs for the boundedly rational individuals who have an
interest in self-regulatory nudging. On the other hand, if we had a bigger jury, the
economic costs from decision flaws could be reduced since a larger jury is more
likely to install the right kind of decision framework to nudge the individuals to a
welfare maximizing behaviour. Considering these aspects, the costs of decision
flaws and the transaction costs, we can model both expenses for the individuals
depending on the size of the jury of n experts.32
Let Φ denote the monetary damage of an individual’s decision errors (‘the error
costs’), whereas a given parameter α indicates the cognitive ability of the respective
individual, i.e. a higher α shows that the individual has a decent expertise in making
the right consumption decision with respect to her long-term welfare goal and so
reduces the likelihood of the occurrence of individual decision errors. The probabil-
ity of the jury members PN to vote correctly is given, homogeneous and significantly
higher than 0.5.
Since the likelihood of decision flaws decreases with an increase of jury mem-
dΦ
bers, Φ (n;2 α) is a probability function decreasing in n, so < 0 . Let us further
dΦ dn
assume < 0 , indicating the positive but decreasing effects resulting from the
dn 2
right kind of nudges implemented by a larger jury. This seems to be a realistic
assumption since a larger jury approaches a better result but does so in an asymp-
totic way (see the asymptotic theorem above).
Let Ψ denote the transaction costs of the jury experts (‘the jury costs’) and β a
parameter that indicates the monetary aspiration level of the experts.
Straightforwardly, let us assume Ψ (n; β) to be strictly increasing and linear in n,
dΨ
with Ψ (0) = 0, reflecting the basic assumption of a homogeneous jury, i.e. >0
dΨ dn
and = const . For simplification, we assume that there are no other costs for the
dn
individuals apart from error costs and the jury costs. Consequently, we can sum up
these two forms of costs to get the total costs for the group of individuals, denoting
it as Θ:
Θ (n; α ; β ) = Φ (n; α ) +Ψ (n; β ).
The competence effect of a larger jury is depicted in the falling decision error curve
Φ (n; a) and the increasing costs of a larger jury is shown by the ascending jury cost
function Ψ (n; β). The total cost curve Θ is obtained by summing vertically the two
32
This idea is based on Calabresi’s seminal work The Costs of Accidents (1970) which deals with
efficiency analysis of tort law. Therein, Calabresi argues that the goal of tort law is the minimiza-
tion of total expected accident costs, which include both the expected costs of the accidents and the
spent costs for avoiding the accidents.
functions Φ (n; α) and Ψ (n; β) at every level of jury size n. Although the negative
effects of decision errors would diminish when installing larger juries, the jury costs
would increase naturally. So there is a trade-off between the error costs emanating
from decision flaws and transaction costs emanating from a larger jury. At small
jury sizes, there were almost no transaction costs, but a high likelihood for the
occurrence of decision errors. Because the total cost curve Θ (n; α; β) is U-shaped,
there is a cost minimizing team size of n individuals, denoted n*, which follows
from the first-order condition:
dΨ dΦ
=− .
dn dn
So at the optimal team size n*, the marginal costs of one more jury member equals
the marginal benefits of a reduction in one monetary unit of decision errors. Facing
this trade-off, individuals will have to accept a certain threshold of decision error
costs when designing the optimal size of a jury. The first-best solution in a
transaction-cost free world would be at n → ∞ , but considering the positive trans-
action costs in form of monetary compensation for jurors’ information, n* turns out
to be the second-best solution in the set of achievable jury sizes.
This very stylized discussion shall illustrate the following. First, since the costs
arising from decision errors and the jury costs will differ with the individuals cogni-
tive abilities α and the jurors’ monetary aspiration level β, there is not one optimal
jury size for all soft paternalistic issues. Secondly, these parameters α and β indicate
regulating screws, i.e. the political scope, for reducing the total costs.
On the one hand, one can try to get a juror’s information at a lower per unit cost,
e.g. by subsidizing the jury’s work, so that β decreases. Then the jury cost function
Ψ (n; β) turns to the right and the optimal jury size n* gets bigger, but the total social
costs Θ are reduced in the optimum. Yet, this approach would be inefficient over
time since the subsidies themselves have to be constantly financed somehow (e.g.
by taxing individuals), and, more importantly, the error proneness of the individuals
would stay the same.
Therefore, a better – i.e. dynamically more efficient – solution for reducing the
total costs would be to directly improve the consumers’ cognitive abilities α. If α
increases, the error cost function Φ (n; α) turns to the left and both the jury size n*
and the social costs Θ get smaller so that the need for a jury and the overall social
costs are gradually reduced.
In order to increase α, the jury can implement educative nudges.33 Contrary to
mere manipulative nudging, where individuals are unaware of the nudging process,
educative nudges (in form of feedbacks or reminders) promote learning and address
the information level of the consumers directly. Consider, for example, decisions in
which consumers have difficulty linking their actions with the later outcomes. Here,
the implementation of a feedback nudge can provide better information about the
link between actions and outcomes. Such a feedback nudge would be educative in
33
50 M.F. Dold
the sense that it depicts an investment in consumers’ ‘stock of knowledge’ about the
consequences of their own behaviour.34 In a meta-analysis, Darby (2006) shows that
providing consumers with feedback on home energy consumption (e.g., a real-time
energy use display monitor) reduces energy consumption by 5–15 %.35 Such feed-
back information make consumers rethink their short-term preferences. By pointing
to the medium- or long-term choice consequences, these educative nudges debias
individuals’ choices. Naturally, there are costs emerging from implementing these
educative nudges in the first place. Yet, this form of nudging is more efficient than
constantly subsidizing the jury’s work, since they reduce the error costs of the con-
sumers over time by increasing the consumer’s cognitive ability α gradually.
Another good example for an educative nudge is a fair trade label for clothing.36
This labelling informs consumers about the labour conditions in the production pro-
cess, makes the channel of distribution more transparent and explains the composi-
tion of the end prices to the consumers. In doing so, such a nudge goes beyond the
mere price signal and informs the consumer about the shrouded attributes of the
product.37 Consumers are able to learn something about the product in their act of
consumption. This ‘moment of education’ makes it more likely that individuals
align their preferences with the true (i.e. long-term) value they attach to that good.
So educative nudges bring actual individuals closer to the hypothetical version of
themselves that has fully informed preferences about the world.38 When nudging
consumers in this way, they themselves increase their knowledge and understand-
ing of decision biases (in this case, for example, impulsive buying of low-cost prod-
ucts), so that they can make better choices for themselves (in this case, for example,
buying products that meet their moral standards).
4.5 R
ebutting Some Critique: Thinking in Hierarchical
Preference Structures
Let us sum up: If the welfare criterion Π can be signalled to a group of jurors (stage
1), effective means to reach Π might be identified using the Condorcet jury proce-
dure (stage 2). Based on the found consumption bundle the jury can frame the indi-
viduals’ choice in such a way that it is easier and more likely for the individuals to
pick the most effective consumption option(s) with regard to their long-term welfare
goals (stage 3). The optimal jury size will then depend on the individuals’ cognitive
abilities and the jurors’ monetary aspiration level. In order to reduce overall costs,
educative nudges might be efficient since consumers can make better choices for
34
Gigerenzer 2014.
35
Darby 2006.
36
For example in form of the well-known FLO International’s Fairtrade certification.
37
Loureiro and Lotade 2005.
38
The individual with “complete information, unlimited cognitive abilities, and no lack of will-
power” is the normative benchmark individual for Thaler and Sunstein 2003, p. 176.
themselves, which in turn reduces the need for the jury over time. So far, so good.
Now critics might struggle with the idea that individuals are able to express their
welfare criterion in the first place. How should consumers be able to signal their
long-term goal Π to the jury, if they have contradictory and context-dependent pref-
erences as demonstrated by various behavioural and experimental economic
insights?
A way out of this dilemma is a richer understanding of human reasoning in hier-
archical preference structures.39 In Thaler and Shefrin’s terms: “The individual at a
point in time is assumed to be both a farsighted planner and a myopic doer.”40
On the one hand, in daily consumption decisions individuals are myopic doers.
They often express outcome-oriented desires that can be contradictory and prone to
many decision biases resulting from, what Kahneman calls, System 1 thinking.41
This is an automatic, emotional and mostly intuitive way of thinking that requires
only little cognitive engagement, is driven by impulsive desires and marked by
direct responses to incentives in the environment. On the other hand, in long-term
considerations individuals are farsighted planners. They can name stable, non-
contradictory, long-term wishes like health, wealth, or happiness.42 These consider-
ations result from System 2 thinking, which is an effortful, logical and conscious
way of making decisions based on knowledge about facts and values. This kind of
thinking portrays our values and intentions, which requires focused cognitive effort.
In line with Kahneman’s distinction of two cognitive modes, one can relate short-
term preferences to System 1 and long-term preferences to System 2 thinking.
Kahneman’s conception explains why daily preferences are rather myopic and
prone to decision biases and long-term preferences are rather thoughtful, stable and
well-defined. Myopic preferences can be called first-order preferences and long-
term preferences can be named second-order or meta-preferences to indicate the
hierarchical relation between these two types of preferences. Since the latter ones
are reflective and well-defined they should – from a normative point of view – over-
rule the first-level ones.
An example for a conflicting hierarchical preference structure is a ‘shopaholic’
person who maximizes her short-term, myopic utility by impulsively buying all
sorts of new goods to get a thrill of the consuming act but whose second-order,
long-term preference is such that she would in fact prefer to not surrender to her
addiction and smooth her consumption path over time.43 Another example for a
conflicting hierarchical preference structure would be a person who despite her
long-term wish to lose weight, still buys the chocolate bar at the checkout in the
supermarket and thus violates her meta-preference for a healthy lifestyle.
39
Frankfurt 1971; Thaler and Shefrin 1981.
40
Thaler and Shefrin 1981, p. 39.
41
Kahneman 2011.
42
Strack and Deutsch 2004.
43
Mueller et al. 2010.
52 M.F. Dold
Of course, such consuming decisions can also reflect a conscious act by an indi-
vidual who values short-term pleasures in life more highly than their health.44
However, if it reflects a non-deliberate, impulsive act that is accompanied by feel-
ings of ex post regret, the individual might be better off, if she had listened to her
long-term wishes since they more likely reflect her true intentions. Some econo-
mists deny this fundamental, normative gap between values or intentions on the one
hand, and affective, impulsive behaviour on the other hand.45 They argue that espe-
cially System 1 behaviour would depict the true costs and benefits of decisions and
long-term preferences would be systematically biased towards all sorts of utopian
wishes. However, after compulsive System 1 consuming acts many people express
severe ex post regrets for what they have done.46 So there is an actual (and often
material) welfare loss people are suffering from due to present biased decisions
emanating from System 1 thinking. Since second-order preferences reflect System
2 thinking that is consistent over time, there is a further normative argument that
they should have authority. Further, their level of information is higher and the ex-
ante estimation of costs and benefits is more in line with the factual ex post
realization.47
So Kirchgässner rightly states that
[…] the fact that human persons, reflecting on themselves, usually take on the long-run
perspective rather provides evidence for the long-run preferences, as does the fact that
individuals often heavily underestimate the costs of the actions that are guided by their
short-run preferences. Otherwise it is difficult to understand why people regret their own
earlier behaviour when foreseeable consequences become obvious that were not taken into
account before.48
Depending on the choice context, individuals depict different, contradictory

short-run preferences. Referring to one of these preferences does not make sense
when searching for the true preference signals for designing the right nudge. Short-
run preferences imply a multitude of possible nudges. It would never be possible for
a jury to pick one of these and name it superior to all the others if they had no supe-
rior criterion to judge the right preference.49
Yet, if we accept the fact that individuals have stable long-term preferences
resulting from System 2 thinking, we can also assume that individuals are able to
signal them coherently to a jury of experts.50 So considering the fact that individuals
do have non-contradictory meta-preferences is a way of handling the problem of
incoherent short-term preferences that is puzzling for some critics of libertarian
paternalism.
44
On the importance of pleasure, see Dolan 2014.
45
Schnellenbach 2012.
46
Mueller et al. 2010. Sunstein 2015.
47
Sunstein 2015.
48
Kirchgässner 2014, p. 15.
49
Kirchgässner 2013.
50
For empirical arguments backing the existence of stable long-term preferences, see: Kahneman
2003, or Strack and Deutsch 2004.
Consumers might express their meta-preferences in reflective situations that acti-

vate deliberate System 2 thinking, e.g. in polls, through questionnaires, or in public
debates.51 Based on the expressed meta-preference (e.g. for ethical clothing) the
jurors are in charge of aligning the available short-term consume options (e.g. low-
cost shirt vs. locally produced shirt vs. oversea fair trade shirt) by means of nudges
(e.g. by fair trade labelling) with the individuals’ long-term goals.
Having in mind this distinction of preference expression, the notion of libertarian
paternalism is still compatible with methodological individualism. The individual
herself is the one who autonomously expresses her long-term preferences, it is only
the jury who implements the right incentive structure so that the individual is capa-
ble of aligning her short-term preferences with her long-term welfare goals. The
individual herself stays the bearer of preferences and can always opt out at no costs
from the incentivized consumption bundle. The jury, on the other hand, is commit-
ted to sincerely voting on means and therefore does not interfere with the realm of
individual values. Applying the CJT respects consumer sovereignty over long-term
preferences, and helps consumers to behave rationally in the short run by giving and
framing information. These framings of the individual choice architecture can be
understood as individual self-imposed rules established via the rational means-end
calculation within the Condorcet jury. In its voting procedure, the jury focuses on
means (i.e. choice framings to circumvent biases), not ends (i.e. individuals’ long-
term preferences).
In general, besides labelling, a jury could think of a wide variety of nudging poli-
cies to make individuals’ choices more likely to fit their long-term welfare goals:
providing palatable information about what others are doing (‘social norm feed-
back’), telling risk narratives to accompany dangerous products, changing a passive
default rule to an active choosing scenario, including cooling-off periods before
making complex market transactions, or altering habitual and expected product
placements.52 This non-inclusive list of examples gives a first hint regarding how a
jury might effectively frame decisions by accepting that System 1 thinking is domi-
nant in consumption decisions, but System 2 intentions need to be executed through
the right choice architecture to fulfil the individual’s actual long-term welfare goals.
Of course, identifying the right nudges requires expertise on the part of the jurors
about how an individual reacts to modifications of incentives in her consumption
environment. In this regard, recent, neuro-economic and psychological research
might support the hypothesis that experts are quite good in empathizing with the
thinking of third-party individuals.53 Moreover, as illustrated above, this empathiz-
ing process does not need to be ideal. It is completely sufficient, if the members of
a jury do it in a way that their single probability to make a correct assessment stays
larger than 0.5. Taken these two points together, we should not bother too much
about the ‘empathizing problem’ in the debate.
51
For an in-depth discussion on how to identify meta-preferences, see Beshears et al. (2008). The
authors identify six approaches that jointly contribute to the identification of, what they call, nor-
mative preferences: structural estimation, active decisions, asymptotic choice, aggregated revealed
preferences, reported preferences and informed preferences.
52
Camerer et al. 2003; Thaler and Sunstein 2008.
53
Fehr and Singer 2005; Singer and Hein 2012.
54 M.F. Dold
4.6 Concluding Remarks
Consumers make daily choices under uncertainty that are subject to systematic
decision biases. Based on this observation, Thaler and Sunstein have proposed an
effective framing of the choice architecture in order to help individuals to make bet-
ter decisions.54 However, in their notion of soft paternalism they make no suggestion
who should be in the position to design the choice architecture and they also do not
give an answer to the knowledge problem many critics associate with it. This note
has mitigated both points of criticism by considering implications of the Condorcet
Jury Theorem. The theorem offers majority voting as an effective means for electing
the right nudging policies to frame individuals’ consumption options. Considering
the costs arising from decision errors and the jury implementation, this note has
shown, on a very general level, how to compute the optimal jury size and advocated
meta-preferences as a welfare criterion upon which the jury can base its calculus for
educative nudges. In times when many are against experts or regulatory measures,
and mainly favour the plain outcome of markets, this note argues for jury panels to
improve the choice architectures of consumers within markets.
This note has discussed the theorem and the respective issue of the optimal jury
size in a stylized way. The assumptions of the original version of the Jury Theorem
are restrictive and assume independence among the jurors. Some authors have
shown that dependence among jurors need not make the Condorcet Jury irrelevant,
only negative correlation between the voters is crucial for its applicability.55
However, as Holler and Leroch rightly point out,56 negative correlation is a ques-
tionable condition since empirical evidence suggests that opinions within juries
often tend to move towards extreme views.57 This alludes to the need for further
studies on the issue of the right institutional design to reach the outcome of an unbi-
ased Condorcet jury. Here, the combination of economic thinking in incentive
structures and psychological work about judicial juries could lead to further, essen-
tial suggestions for unbiased Condorcet juries in the field of soft paternalistic
policy-making.
First experimental evidence on Condorcet juries supports the proposition of the
CJT and displays that the main results of the theorem hold in the laboratory.58 Other
recent experimental studies underpin the view that it is often more rational if exter-
nal third parties make decisions when uncertainty or risk is involved.59 In this con-
text, further empirical and experimental studies should be conducted, especially on
the question whether a group of jurors is able to show enough empathy to e ffectively
54
Thaler and Sunstein 2003, 2008.
55
Kaniovski 2010.
56
Holler and Leroch 2010.
57
See also Sunstein 1999.
58
Guarnaschelli et al. 2000; Ladha 1996.
59
Brock 2011.
nudge the decisions of consumers in a desired direction while preserving the latters’
freedom of choice.
The effectiveness of educatively nudging real-life consumption decisions needs
to be further assessed in field studies. Many traditional approaches in consumer
protection depend on making appeals to System 2 thinking.60 Based on providing
reasonable information, the goal is to change beliefs and attitudes by explaining the
prospects of future benefits. Still, at the most, these efforts have been modestly
effective in changing consuming patterns.61 Therefore, when implementing educa-
tive nudges one might also address System 1 thinking, since then information is
much easier processed and translated into action. This means educative nudges
should be accompanied by sound emotional framings like graphic warnings or
reminders62 and effective default rules.63
Allowing for heterogonous consumers, the discussed jury nudging procedure
does not have to be the gold standard in every branch of consumer protection. Here,
Camerer et al. give some powerful ideas when a jury might be a good way to go.
According to the authors, a nudging policy should only be applied if its imple-
mented incentive structure works asymmetrical, i.e. those can be helped who are
prone to decision biases but the rational consumers must not be disturbed or fined in
their consumption patterns. By considering this rule of thumb, one is able to circum-
vent the problem that nudging might only help the boundedly rational consumers
but relatively weaken the position of the wise ones.64 One should also be very cau-
tious to democratically legitimize juries by the affected consumers to not undermine
their normative and factual force.65 Above all, expert decision procedures should
always be transparent and open to public scrutiny.
Acknowledgement I thank Manfred J. Holler for an in-depth discussion on the draft of the paper
and I am grateful for the valuable comments of Christian Schubert, Jan Schnellenbach and the
participants of the 4th Law and Economics Conference in Lucerne on Nudging. All errors, of
course, remain mine.
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Sunstein, Cass R., and Richard H. Thaler. 2003. Libertarian paternalism is not an oxymoron. The
Thaler, Richard H., and Hersh M. Shefrin. 1981. An economic theory of self-control. The Journal
of Political Economy 89: 392–406.
Review 93(2): 175–179.
WHO. 2008. Behaviour change strategies and health: the role of health systems. Regional
Committee for Europe.
Willis, Lauren E. 2011. The financial education fallacy. The American Economic Review 101:
429–434.
Chapter 5
To What Extent Should the State Protect
Human Beings from Themselves?
An Analysis from a Human Rights Perspective
Peter G. Kirchschlaeger
Abstract Nudging could seem to be attractive from a human rights perspective if

this nudging would lead to a realization of human rights. At the same time it is pre-
cisely part of the nucleus of human rights to protect the individual from heteronomy,
respectively from abuse of power by a collective. In other words, human rights
protect all the powerless from the powerful. Human beings enjoy human rights as
individuals, independent of any collective. However, human rights struggle also
with the particular interests of states and non-state actors. Furthermore, from a
human rights perspective, there is a necessity to respect the autonomy of an indi-
vidual in order to remain coherent with the core concept of human rights. This
necessity to respect the autonomy of an individual goes as far as that human rights
themselves need a moral justification because autonomy entails knowing why one’s
freedom should be restricted by somebody or something. Therefore the questions
arise if and how this aspect could be combined with the above-mentioned argumen-
tation that the end would justify the means, and if and how nudging could be justi-
fied. In the following paper these issues will be addressed and it will be attempted
to develop a solution to the question as to what extent the state should protect human
beings from themselves.
5.1 Introduction
Cass R. Sunstein and Richard Thaler suggest in “Nudge – Improving Decisions

About Health, Wealth, and Happiness”1 that the challenges of today’s world could
be better met if states would nudge humans via libertarian paternalism by correcting
cognitive biases. From a human rights perspective, this could seem to be attractive
1
Sunstein and Thaler 2008.
P.G. Kirchschlaeger (*)
Faculty of Theology, University of Lucerne / Yale University,
Frohburgstrasse, 6002 Lucerne, Switzerland
e-mail: peter.kirchschlaeger@unilu.ch

60 P.G. Kirchschlaeger
if this nudging would lead to the realization of human rights. The latter would be
extremely welcome:
On the one hand, nudging by the states protecting human beings from them-
selves could be understood as part of the responsibility of the states for the imple-
mentation of human rights.
On the other, it belongs precisely to the nucleus of human rights to protect the
individual from heteronomy, respectively from abuse of power by a collective. In
other words, human rights protect all the powerless from the powerful. The univer-
sality of human rights implies that human rights apply to all human beings and are
therefore universal. Human beings enjoy human rights as individuals, independent
of any collective. All human beings are holders of human rights, irrespective of
what they do, where they come from, where they live, and which nationality they
have or which community they belong to. Human rights struggle exactly, however,
with the particular interests of states and non-state actors, e.g. states limiting human
rights of their citizens by claiming the priority of their sovereignty over the univer-
sality of human rights. Human rights violations e.g. by traditions, cultures, civiliza-
tions, religions, or value systems are often allegedly justified by cultural and
religious leaders concerned about a possible loss of institutional power and influ-
ence and usually not by core elements of the traditional, cultural, or religious ‘truth’
shared by the communities.
Furthermore, from a human rights perspective, there is a necessity to respect the
autonomy of an individual in order to remain coherent with the core concept of
human rights. This necessity to respect the autonomy of an individual even goes so
far as to require that human rights themselves need a moral justification as auton-
omy entails knowing why one’s freedom should be restricted by somebody or
something including human rights. Therefore the questions arise if and how this
aspect could be combined with the above-mentioned argumentation that the end
would justify the means, and if and how nudging could be justified.
In the following paper these issues will be addressed. It will be attempted to
develop a solution to the question to what extent the state should protect human
beings from themselves.
5.2 The Realization of Human Rights
Human rights protect every human in the essential elements and spheres of human
existence needed for survival and for a life as a human being. They do not represent
a high ideal but a minimal standard and are therefore fundamental. Actually it seems
to be a shame that this minimal standard is sometimes called an ideal or even a
utopia2 because human rights build a rather minimalistic approach. As they protect
every human in exactly the same way, they are universal and egalitarian – belonging
to every human regardless of skin colour, nationality, political convictions, religious
2
Moyn 2010.
5 To What Extent Should the State Protect Human Beings from Themselves? 61
beliefs, social standing, gender, sexual orientation, age,… Human rights are indi-
vidual rights because humans are holders of human rights as individuals. As one
does not have to fulfil any requirement (e.g. having a certain income, paying taxes,
respecting the law) for the entitlement to human rights, human rights are categori-
cal. Furthermore, human rights are enforceable. The enforceability in a legal system
embraces the implementation of human rights, which must be possible and realized
in order to guarantee every human this minimal standard for survival and for a life
as a human. Human rights embrace four dimensions: legal, historical, political, and
moral dimension.3
Although there is a generally recognizable positive tendency of acceptance of
human rights by states and non-state actors, an increasing international institution-
alization for the protection of human rights, a progress in the mechanisms for moni-
toring human rights performance by states to respect the universality of human
rights, and some contributions by the corporate world in the area of human rights,
at the same time it has to be stated that the implementation of human rights is not
yet where it should be. The vast majority of humans still suffer violations of their
human rights. Human rights are still a minority phenomenon, with only a minority
of humans enjoying full or partial human rights. Difficulties in implementing human
rights raise the question as to whether human rights are achievable at all, if they are
not just abstract ideals and if some of them should be given up.
The status quo of the implementation of human rights does not keep up with the
universality of human rights. Of course this does not mean that human rights are not
universal because the universality of human rights can be justified in the moral
dimension of human rights4 and therefore is still valid. But it indicates that there
exists urgency and necessity to enhance the implementation of human rights as law
which is not fully implemented and respected and, in reality, could lose its concrete
significance and ultimately its legal impact – both leading to its decomposition. This
is hard to imagine in the case of human rights because human rights are a ‘Monument’
which cannot be overseen and passed without taking notice of it, but the necessity
of a better realization of human rights must be addressed.5
Beyond that, the human rights discourse entails criticisms challenging the uni-
versality of human rights which can be categorized according to Georg Lohmann in
three groups6: The third challenge to the universality of human rights represents a
critical relativism based on scepticism related to the small potential of realization of
human rights and differences within this potential between the three categories of
human rights. This criticism introduces the failure of implementation of certain
human rights as a reason for cancelling them out of the human rights-catalogue.
Again, of course it can be justified why this cancellation cannot be pursued, but the
idea itself should already be taken as a serious warning sign and as indication of
existing problems.
3
See Kirchschlaeger 2013b.
4
See Kirchschlaeger 2013a.
5
See Joas 2011, p. 280.
6
Lohmann 2008, pp. 218–228.
A positive change in favour of human rights lies especially in the hands of

those – be it state or non-state actors – with greater power and influence. Therefore
one could argue that in this case the end – the realization of human rights – would
justify the means – nudging of humans by states.
5.3 Human Rights Protecting the Individual as Part

of a Community
This nudging though would have to respect human rights because human rights
protect all humans as individuals from all violations of essential elements and
spheres of human existence necessary for survival and for a life as a human, and
they are categorical. The latter means that – as mentioned above – no one needs to
fulfil any conditions to be entitled to human rights (being human is enough). Every
human is entitled with human rights which means that the nudging by a state must
respect human rights.
The bearers of human rights are individuals, not collectives which however does
not make them ‘individualistic’. In distinction from ‘individualistic’ indicating that
the individual rules, human rights are individual rights which embrace correspond-
ing duties as they are not exclusive rights but human rights. As one shares them with
all other humans, these rights come with the corresponding duties to contribute to
the realization of human rights of all other humans. Human rights and correspond-
ing duties form an asymmetric relationship because due to the categorical nature of
human rights mentioned above, entitlement to human rights does not depend on
fulfilment of the corresponding duties. “These rights are not forfeited by wrong
behaviour. Men and women do not have to prove themselves worthy of being granted
human rights.”7 In addition, one must consider Article 29 of the Universal
Declaration of Human Rights of 1948 as well: “Everyone has duties to the commu-
nity in which alone the free and full development of his personality is possible.” It
states that the individual as holder of human rights is embedded in a collective
which she/he needs for her/his own development and for which she/he should take
care as well. Finally rights possess always a social rather than an ‘individualistic’
component, as it has to be part of a social system because without at least a second
individual there would be no need for law.
But is it even legitimate for human rights to entail corresponding duties and
obligations? Is it justified that all humans are holders of human rights which can
limit one’s personal freedom e. g. because every right-holder needs to respect the
human rights of all other humans as well? Do the specific human rights that con-
cretely limit an individual’s actions possess any legitimacy? These questions show
the necessity of a justification of human rights as well.
7
Wolbert 2003, p. 176.
5.4 Autonomy: The Nucleus of Human Rights
Human rights need a moral justification in order to prove their legitimacy and in
order to remain coherent with their own core concept of the autonomy of the indi-
vidual because autonomy embraces the claim to know the reason why one’s free-
dom should be restricted by human rights. These challenges lead to the question
how human rights can be justified. Every human merits a justification why she/he is
a right-holder and also a duty-bearer of human rights as the responsibility corre-
sponding to human rights to respect the human rights of all other humans limits her/
his freedom.8 Robert Alexy ties the existence of human rights exclusively to the
possibility of their justification.9 Emphasizing the status quo of human rights as a
historical, political, and legal consensus enjoying global acceptance does not satisfy
as a justification either due to its descriptive and not normative nature or due to the
particular origin of historical, political, and legal consensus in general.
The relevance of this question how to justify human rights grows even further
when e.g. there are attempts to exclude a specific group of humans from human
rights in general or from some rights, when human rights in general are neglected,
when some rights are denied, or when nudging by a state could violate specific
human rights or disrespect human rights in general. Facing these realities, reasons
justifying human rights are necessary. An ethical model of justification of human
rights which is based on the principle of vulnerability contributes to meet this chal-
lenge and shows that human rights can be justified.10 The justification-model based
on the principle of vulnerability11 represents an approach ex negativo and starts with
a human being’s self-awareness of his/her own vulnerability. The awareness-
building of one’s own vulnerability is a self-recognition-process, whose empirical
correctness is not relevant. It is crucial though that humans are willing to do some-
thing about this awareness, namely to protect themselves from vulnerability or to
find a reasonable way to deal with it. During this awareness-building-process a
human being recognizes ex negativo the “first-person-perspective”.12 Human beings
understand that they make and interpret this basic anthropological situation of vul-
nerability as a subject (meaning as the first person singular) who is acting, deciding,
and suffering, and is living as a human being. “By acting and suffering, human
beings experience themselves as living beings, which are not just living like all
other beings but which live by living their own lives. To relate to themselves, to act
neither compulsively nor arbitrarily but to be guided by reasons and to pursue
freely-chosen purposes constitutes the life form which connects them with all
human beings as their own kind. This life form makes them vulnerable as the self-
relation which is inherent in this life form depends on fundamental conditions for
8
See Kirchschlaeger 2007, pp. 55–64.
9
Alexy 1998, pp. 244–264.
10
See Kirchschlaeger 2013a.
11
See Kirchschlaeger 2013a, pp. 231–335.
12
Runggaldier 2003, pp. 143–221.
realization”.13 During the awareness-building-process of one’s own vulnerability

and of one’s own “first-person-perspective”, human beings put themselves in a rela-
tionship with the self and with all other human beings, recognizing their own vul-
nerability and the vulnerability of all other human beings. They become equal in
terms of vulnerability; they make themselves equal. Human beings share this
vulnerability.
During the awareness-building-process of their own vulnerability and of their
own “first-person-perspective”, human beings understand that they share not only
the vulnerability with other humans but also the individual “first-person-perspective”
on their individual vulnerability and on the vulnerability of all humans, and the
individual self-relation that every human is the subject of his/her life. They recog-
nize not only the equality of all humans in their vulnerability, but also in the
“first-person-perspective” and “self-relation”. They realize that the “first-person-
perspective” and “self-relation” are prerequisites for human life.
Based on this entire multi-layer awareness-building-process leading to recogni-
tion of the vulnerability of the “first-person-perspective” and the “self-relation”
shared with all human beings, a human is prepared to entitle all humans and him/
herself to human rights in order to reduce vulnerability and to actively balance and
compensate in the case of a transformation from vulnerability to violations.
Beyond the ethical justification of human rights based on the principle of vulner-
ability, human rights protect the autonomy of the individuals also by specific human
rights enabling the participation of the individual in political opinion-forming and
decision-making-processes14 which could be at risk because of nudging by states, e.
g. with article 19 (right to freedom of opinion and expression), with article 20 (right
to freedom of peaceful assembly and association), and with article 21 of the
Universal Declaration of Human Rights of 1948, also called the ‘democracy
principle’:
1. Everyone has the right to take part in the government of his country, directly or
through freely chosen representatives.
2. Everyone has the right of equal access to public service in his country.
3. The will of the people shall be the basis of the authority of government; this shall
be expressed in periodic and genuine elections, which shall be by universal and
equal suffrage and shall be held by secret vote or by equivalent free voting
procedures.
Democracy can also be seen as the institutional expression of the respect of the
autonomy of the individual giving the individual the possibility to participate in the
opinion-forming- and decision-making-process of the legal system she/he is living
in as a citizen. Human rights and democracy go hand in hand as democracy is the
political system which is embodying the autonomy of the individual inherent within
the idea and concept of human rights. Therefore the respect of human rights is part
of a democratic system. Consequently a democracy must integrate mechanisms
which ensure that human rights are respected respectively which exclude elements
13
Honnefelder 2012, pp. 171–172.
14
See Kirchschlaeger 2014, pp. 112–125.
violating human rights regarding the access to democratic opinion-forming- and

decision-making processes and in the way these processes are taking place, and that
the possibility of a democratic decision violating human rights is impossible from
the start. Human rights are the frame of reference for a democracy. Different forms
to guarantee the respect of human rights within a democratic system are known,
such as the Constitutional or the Supreme Court and need to be established in
democracies without such institutional measures in coherence with human rights
and in order to further the realization of human rights.
Human rights may open a global horizon but they start locally at the same time.
In 1958 Eleanor Roosevelt said, on the occasion of the tenth anniversary of the
Universal Declaration of Human Rights of 1948:
Where, after all, do universal human rights begin? In small places, close to home – so close
and so small that they cannot be seen on any maps of the world. Yet they are the world of
the individual person; the neighbourhood he lives in; the school or college he attends; the
factory, farm or office where he works. Such are the places where every man, woman and
child seeks equal justice, equal opportunity, equal dignity without discrimination. Unless
these rights have meaning there, they have little meaning anywhere. Without concerned
citizen action to uphold them close to home, we shall look in vain for progress in the larger
world.
5.5 Conclusion
From a human rights perspective, scepticism towards the approach of nudging

remains high, firstly as long as nudging crosses the legal and ethical frame of refer-
ence of human rights and secondly as long the state does not protect humans from
human rights violations and does not contribute to the realization of human rights.
The fundament for the first reason for scepticism entails the protection of autonomy
by human rights, the guarantee of participation by the individual in opinion-
forming- and decision-making-processes, and the character of human rights as indi-
vidual rights, not as rights of the collective. Nudging can end up in contradicting or
violating some of these elements and therefore it can be criticized from a human
rights perspective.
The basis for the second reason embodies the possibility that nudging contrib-
utes to the stopping and prevention of human rights violations and to the realization
of human rights. Nudging is justified from a human rights perspective if nudging
furthers the realization of human rights. Even in that case thought nudging must
respect human rights because of the principle of indivisibility of human rights which
entails that the entire human rights-catalogue must be respected, implemented, and
realized. All specific human rights must go hand in hand.
The concerns which provoke the call for nudging of humans by states would be
addressed from a human rights perspective, thirdly, with – if even possible – nudg-
ing within the legal and ethical frame of reference of human rights only and exclu-
sively if it serves the realization of human rights.
Fourthly, the response to these concerns would be the emphasis of the autonomy
of the individual protected by human rights.
Fifthly, these concerns would be answered by pointing out that the chal-
lenges provoking the call for nudging of humans by states could be met by over-
coming the naïve assumption that every human being is born democratic and with
the skills and competencies to participate in a democratic opinion-forming- and
decision-making-process, and by furthering human rights education. Thomas
Hammarberg emphasizes: “Educating citizens in their human rights creates an
informed society which in turn strengthens democracy”.15 In the occasion of an
expert-seminar during the preparation-process of the UN Declaration on Human
Rights Education and Training in Marrakech 2009,16 Navanethem Pillay, UN-High
Commissioner for Human Rights, outlined the expectations in human rights educa-
tion: “Human Rights Education is essential for the prevention of human rights
abuses, the promotion of non-discrimination, equality and sustainable development,
and the enhancement of people’s participation in democratic decision making pro-
cesses”. The fundamental role of human rights education is to empower citizens to
defend their own rights and those of others. “This empowerment constitutes an
important investment for the future, aimed at achieving a just society in which all
human rights of all persons are valued and respected”.17 The idea of ‘empower-
ment’ means the capability to determine one’s own present and future with self-
confidence and awareness of one’s own rights and – in solidarity – of the rights of
all humans and to participate actively in political processes. The UN Declaration on
Human Rights Education and Training (Article 2/2) is defining human rights educa-
tion and training as:
Human rights education and training comprises all educational, training, information,
awareness-raising and learning activities aimed at promoting universal respect for and
observance of all human rights and fundamental freedoms and thus contributing, inter alia,
to the prevention of human rights violations and abuses by providing persons with knowl-
edge, skills and understanding and developing their attitudes and behaviours, to empower
them to contribute to the building and promotion of a universal culture of human rights.
(a) Education about human rights, which includes providing knowledge and understand-
ing of human rights norms and principles, the values that underpin them and the mech-
anisms for their protection;
(b) Education through human rights, which includes learning and teaching in a way that
respects the rights of both educators and learners;
(c) Education for human rights, which includes empowering persons to enjoy and exercise
their rights and to respect and uphold the rights of others.
From a human rights perspective, it is necessary to choose alternatives to nudg-
ing of humans by states if nudging is violating human rights. And there are alterna-
tives to nudging.
15
Hammarberg 2008.
16
The author has contributed as a consultative expert to the development of the UN Declaration on
Human Rights Education and Training during the entire preparation process of the Declaration.
17
DeMello 2004, p. 3.
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Verfassungsstaat. In Philosophie der Menschenrechte, ed. Stefan Gosepath and Georg
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171–178. Stuttgart: J.B. Metzler.
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am Main: Suhrkamp.
Kirchschläger, Peter G. 2007. Brauchen die Menschenrechte eine (moralische) Begruendung? In
Menschenrechte und Kinder, Internationales Menschenrechtsforum Luzern (IHRF) Bd. IV, ed.
Peter G. Kirchschlaeger, Thomas Kirchschlaeger, Andrea Belliger, and David J. Krieger,
55–64. Bern: Staempfli Verlag.
Kirchschläger, Peter G. 2013a. Wie können Menschenrechte begründet werden? Ein für religiöse
und säkulare Menschenrechtskonzeptionen anschlussfähiger Ansatz, ReligionsRecht im Dialog
Bd. 15. Münster: LIT.
Kirchschläger, Peter G. 2013b. Die Multidimensionalität der Menschenrechte – Chance oder
Gefahr für den universellen Menschenrechtsschutz? MenschenRechtsMagazin 18(2): 77–95.
Kirchschläger, Peter G. 2014. The relation between democracy and human rights. In Globalistics
and globalization studies: Aspects & dimensions of global views, ed. Leonid E. Grinin, Ilya
V. Ilyin, and Andrey V. Korotayev, 112–125. Volgograd: Uchitel Publishing House.
Lohmann, Georg. 2008. Zu einer relativen Begründung der Universalisierung der Menschenrechte.
In Gelten Menschenrechte universal? Begruendungen und Infragestellungen, ed. Günter
Nooke, Georg Lohmann, and Gerhard Wahlers, 218–228. Freiburg i. B: Herder.
Moyn, Samuel. 2010. The last Utopia. Human rights in history. Cambridge: Harvard University
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Quitterer, and Edmund Runggaldier, 143–221. Paderborn: Schöningh.
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Chapter 6
Nudging Is Judging: The Inevitability of Value
Judgments
Consequences of the Collapse of the Fact/Value
Dichotomy for Behavioural Law and Economics
Ariel David Steffen
Abstract This article shows that there can never be nudging without judging.
Specifically, the essay analyses the impact of the collapse of the fact/value dichot-
omy on rational choice and behavioural law and economics. Not only does a nudge
require an ex-ante value judgment, but facts and values are almost always inextrica-
bly entangled. Thus, the real problem does not lie in “getting the facts right” (i.e.
judging people as neutrally as possible), but in the so-called “facts” themselves,
which already contain value judgments. In the context of rational choice and behav-
ioural law and economics, the term ‘rational’ is at the same time used in its positive
meaning (how things are) and in its normative meaning (how things ought to be). As
a result, researchers in BLE engage in both positive and normative science. Instead
of accepting the normative and making it explicit, however, it is often shunned by
researchers. In doing so, an unscientific double standard is maintained with the
explicit positive science in the fore and the implicit normative science looming in
the background. As a result, the normative concept ‘rationality’ is maximized under
the guise of it being a positive concept while ‘autonomy’ is rejected as a legitimate
concept for maximization on grounds of it being normatively laden. Pragmatic eth-
ics could serve as a basis to make the normative transparent while at the same time
not exclude it from scientific discourse.
A shortened, more concise version of this essay is scheduled to be published in German at Nomos
Verlag in 2016.
A.D. Steffen, Ph.D. Candidate (*)
Faculty of Law, University of Lucerne, Frohburgstrasse 3, 6002 Lucerne, Switzerland
e-mail: ariel.steffen@unilu.ch

70 A.D. Steffen
6.1 Introduction
It was not until what Vivian Walsh calls the “second phase” of the “revival of clas-
sical [economic] theory during the twentieth century”, heralded by Amartya Sen in
the late 1960s1 and developing into the Capabilities Approach during the 1980s, that
the simplified view of the unmitigated self-interested and unboundedly rational
homo oeconomicus maximising his or her individual utility came under attack.2 The
“first phase” was characterized by a simplistic analysis of Adam Smith’s An Inquiry
into the Nature and Causes of the Wealth of Nations stripping it of its ethical back-
ground.3 As Sen succinctly puts it:
Indeed, it is precisely the narrowing of the broad Smithian view of human beings, in mod-
ern economics, that can be seen as one of the major deficiencies of modern economic the-
ory. This impoverishment is closely related to the distancing of economics from ethics.4
The wrong and narrow view that Smithian economics can be distilled down to
the principle of the invisible hand and its tripartite constituents – enlightened self-
interest, limited government, and a solid currency in a free-market economy – is
still widespread, both in academia where it is taught in most, if not all, introductory
courses to economics as well as in the common knowledge of the general public.5
Roughly at the same time as Sen, Herbert A. Simon objected to this concept of
perfect rationality arguing that “the decision-making process in problem situations
conforms closely to the models of bounded rationality”.6 According to Simon,
“rationality is bounded when it falls short of omniscience”, that is to say, whenever
there is imperfect information in regard to alternatives, relevant exogenous events
or, more generally, whenever we are unable to properly calculate consequences.7
This criticism is fundamental: it is directed against the assumption of perfectly
rational behaviour. Taking up Simon’s critique, Daniel Kahneman and Amos
Tversky published Prospect Theory (1979), a behavioural economic theory based
on empirical research describing how individuals choose between probabilistic
alternatives that involve risk, where the probabilities of the outcomes are known.
The theory further weakened the assumption of perfect rationality as Kahneman and
Tversky found that people are generally loss averse and hence fail to maximise their
expected utility, as fully rational individuals would do, when risk is involved.8 Since
1
For an early critique of rational choice theory see for example Sen 1967.
2
Walsh 2000, p. 5.
3
Cf. Smith 1776/2008.
4
Sen 2000, p. 272.
5
See e.g. http://www.investopedia.com/articles/economics/09/adam-smith-wealth-of-nations.asp
(last accessed on 10 April 2015).
6
Simon 1979, p. 507 (emphasis added).
7
See Simon 1979, p. 502.
8
See Kahneman and Tversky 1979, pp. 263–292.
6 Nudging Is Judging: The Inevitability of Value Judgments 71
then, many empirical studies have independently found a myriad of other so-called
systematic cognitive heuristics, which may give rise to biased behaviour.9
In the wake of this development away from rational choice economics to behav-
ioural economics, a new branch of law and economics – called behavioural law and
economics – emerged. Ultimately, in so far as the aim of behavioural law and eco-
nomics is to “influence the choices of affected parties in a way that will make choos-
ers better off”, it is paternalistic.10 This sort of paternalism has been called ‘soft’ or
‘libertarian’ because circumventing heuristics and biases is achieved by means of a
‘nudge’, which is defined as “an aspect of choice architecture that alters people’s
behaviour in a predictable way without forbidding any options or significantly
changing their economic incentives”.11 Much has been argued in favour of nudging
as well as in its disfavour.12 Two issues lie at the very core of the critique of
nudging:
• The critique that nudging theorists derive an ‘ought’ from an ‘is’, which is in
violation of Hume’s Law.
• The critique that for nudging theorists, deviating from perfect rationality justifies
the implementation of a nudge, the aim of which it is to re-install perfect ratio-
nality. Other possibly relevant parameters, such as autonomy (from Ancient
Greek αὐτο-νομία: self-governing), are neglected.13
The main criticism can be boiled down to accusing nudging of judging. It tells
people what is ‘good’ and what is ‘bad’ for them. In other words, it tells people that
perfect rationality is desirable and ought to be encouraged while bounded rational-
ity is undesirable and ought to be discouraged. Since autonomy entails bounded
9
For an overview of the most important heuristics and biases, see Mathis and Steffen 2015,
pp. 31–48. For further details on heuristics and biases, see Schweizer 2005; Rachlinski 2000,
pp. 95–115; Sunstein 2002, pp. 61–107; Jolls and Sunstein 2006, pp. 199–241; Thaler and Sunstein
2008; Kahneman and Tversky 1981, pp. 453–458; Tversky and Kahneman 1974, pp. 1124–1131,
1991, p. 1039; Kahneman 1997, p. 105, 2003, p. 697, 2011; Tversky and Fox 1995, pp. 269–283;
Thomas and Millar 2011, pp. 139–149; Meyerowitz and Chaiken 1987, pp. 500–510; Kahneman
et al. 1990, pp. 1325–1348; Kahneman et al. 1991, pp. 193–206; Christensen-Szalanski and
Fobian-Willham 1991, pp. 147–168. For a general discussion of behavioural law and economics,
see Sunstein 2000; Arlen 1998, p. 1765; Issacharoff 1998, p. 1729; Jolls et al. 1998, pp. 1471–
1550; Kelman 1998, p. 1577; Korobkin and Ulen 2000, pp. 1051–1144; Parisi and Smith 2004;
Jolls 2009; Englerth 2007, pp. 60–130. For an overview of libertarian paternalism and the prob-
lems associated with it, see van Aaken 2015 (focussing on the legal limits of paternalistic nudges);
Mitchell 2005, pp. 1–42; Sunstein and Thaler 2003, pp. 1159–1202.
10
Sunstein and Thaler 2003, p. 1162. Note that Sunstein and Thaler do not elaborate on how the
nudger is reliably able to find out how the nudgee judges his or her choice. It is implied, however,
that the nudgee’s revealed preferences (outset) systematically deviate from his or her rational pref-
erences (goal). The rational preferences are supposed to be value-neutral and universally accepted,
derived from the allegedly equally value-neutral and universally accepted rational choice theory. In
other words, rational preferences serve as an axiom and are closed to debate.
11
Thaler and Sunstein 2008, p. 6 (emphasis added).
12
For arguments in favour of nudging, see for example Sunstein and Thaler 2003, pp. 1159–1202.
For arguments against nudging, see for example van Aaken 2015 and Mitchell 2005, pp. 1–42.
13
See van Aaken 2015.
72 A.D. Steffen
rationality, nudging can never truly propagate autonomy. Furthermore, nudging

presupposes a value-neutral, universal and complete theory of rationality and of
‘good’ (perfect rationality) and ‘evil’ (bounded rationality).14 Proponents of nudg-
ing seem to imply that, since libertarian paternalism focusses on systematic heuris-
tics and biases only, it is indeed value-neutral and universal. In this respect, they use
the term ‘rational’ in its positive sense (they make the empirical observation that
people systematically deviate from perfect rationality). At the same time, however,
they make a value-judgment when they differentiate between ‘good’ (perfect) ratio-
nality and ‘evil’ (bounded) rationality. In this respect, they use the term ‘rational’ in
its normative sense.
If we break this down to the level of preferences, nudging theorists seem to argue
that people’s revealed (boundedly rational) preferences are systematic deviations
from their (perfectly) rational preferences, the latter of which being, on the one
hand, value-neutral and universal aims of both individuals and society and, on the
other hand, inherently ‘good’.15 This seems illogical and indeed it is. In fact, the
nudging theorists’ claim is untenable due to the entanglement of fact and value.
Rational choice theory is neither value-neutral, nor universal, nor complete. As a
result, it is a conscious non-value-neutral choice to prefer perfect rationality to
bounded rationality or, in other words, to prefer (perfect) rationality to (boundedly
rational) autonomy based on the idea that rational choice is faultless whereas auton-
omous choice is faulty. Hence, the argument goes, everybody can be made better off
(in terms of both economic efficiency and personal preference) when rationality
rather than autonomy is maximised. I shall argue that this argument rests on shaky
ground. Not only will it be hard, many times impossible, to unequivocally deter-
mine the (most) perfect rational choice (and doing so may lead to high cost), but
autonomy in itself might be inherently important and valuable to people, even if it
leads to them making rationally ‘wrong’ choices.16 In sum, people might be better
off choosing wrongly but autonomously than choosing rightly but heteronomously.
The name 'liberal paternalism' seems to suggest that it is a form or liberal-
ism. However, in liberalism it has long been acknowledged that individuals know
best what is best for them. We should not forget that autonomy is one of the fore-
most liberties. Jeopardising autonomy may lead to unintended effects. To name just
a few, preventing mistakes may lead to stultification and foregone missed learning
effects, as von Humboldt already pointed out in the eighteenth century.17
Furthermore, the multitude of lifestyles arising from autonomy via originality and
14
Note how this is closely connected with the ‘naturalistic fallacy’, which claims that it is falla-
cious to explain e.g. the concept of ‘goodness’ reductively in terms of natural properties, such as
‘being pleasant’ or ‘being desirable’. For further information on the naturalistic fallacy, see George
Edward Moore, Principia Ethica, 1903, §10.
15
See for example the complete transcript of the BBC HARD talk interview with Richard Thaler,
held in October 2012, accessible via http://tvguide.lastown.com/bbc/preview/hardtalk/richard-
thaler-behavioural-economist.html (last accessed on 10 April 2015).
16
See van Aaken 2015.
17
See von Humboldt 1792/1989.
creativity may be important for the wellbeing of both individuals and society (free-
dom of choice of lifestyle may lead, via innovative creativity, to new forms of liv-
ing, which may be better adapted to new living conditions on an individual level,
which may promote innovation on the level of society).18
In the following, I will elaborate – from a philosophical point of view – why
behavioural law and economics is not the long-yearned-for value-neutral doctrine
of salvation it purports to be. More specifically, after an introduction to the fact/
value dichotomy (6.2), I will analyse Putnam’s critique of rational choice theory
and its repercussions for behavioural (law and) economics (6.3). This is followed by
concluding remarks on nudging and judging (6.4). I will close with an outlook (6.5).
6.2 The Fact/Value Dichotomy
Although following almost directly from W. V. O. Quine’s critique of the analytic/

synthetic dichotomy in his eminent essay Two Dogmas of Empiricism (1951), and
although agreed upon by most, if not all, pragmatists, the view that fact and value
are inextricably entangled is one that remains contested by the majority of the less
analytically-minded, be it by researchers in philosophy, other subjects, or by the
general public. The most prominent account of the collapse of the fact/value dichot-
omy has hitherto been given by Hilary Putnam.19 According to Putnam, the fact/
value dichotomy and the analytic/synthetic dichotomy made up the very basis of
classical empiricism and logical positivism. To abandon these dichotomies, there-
fore, means treading new ground. Or, to put it in Star Trek terminology: to boldly
go where no man has gone before. As Putnam puts it:
[T]he fact/value dichotomy (“is” versus “ought”) and the analytic-synthetic [sic] dichot-
omy (“matters of fact” versus “relations of ideas”), was foundational for classical empiri-
cism as well as for its twentieth-century daughter, logical positivism. Thus to come to think
without these dogmas is to enter upon a genuine “post-modernism” – to enter a whole new
field of intellectual possibilities in every important area of culture.20
I will now give a brief overview of how Putnam arrived at his reasoning. First, I
will introduce the reader to the basic concept of the analytic/synthetic and fact/value
dichotomy, with which the validity of (classical) empiricism stands and falls. A
special emphasis is laid on Hume’s Law. Also, logical positivism as its heir will be
discussed. Second, Quine’s collapse of the analytic/synthetic dichotomy will be
analysed. Indeed, it is a journey with far-reaching consequences we will embark on,
but one that is worthwhile partaking of. After all, if we truly believe in progress in
the way the natural sciences do, we cannot choose but abandon our old idées reçues
grounded in metaphysics. We do indeed have to boldly go where only few have
dared to go before.
18
See Mill 1859/1869.
19
See Putnam 2002/2004.
20
Putnam 2002/2004, p. 9.
74 A.D. Steffen
6.2.1 From Empiricism and Hume’s Law to Logical Positivism
As researchers and especially as scientists, it is unlikely that there is a more devas-

tating reproach than when someone insinuates that one’s research includes, or even
worse is based on, undeclared value judgments. It is deeply engrained in both our
ordinary as well as scientific mind and language that what is meant by that reproach
is that one’s research is subjective rather than objective. It is ‘unscientific’ and there-
fore, at least from an academic point of view, nonsense.21
At the very heart of this reasoning lies Immanuel Kant’s distinction of analytic
truths – true by virtue of their meaning/definition (e.g. oncologists are doctors) –
and non-analytic truths, which Kant termed synthetic truths – true only via infer-
ence (e.g. oncologists are rich). In other words, whenever the subject-concept
(oncologist) contains the predicate-concept (to be a doctor), a proposition is ana-
lytic. Whenever the subject-concept (oncologist) does not include the predicate-
concept (to be rich), it is synthetic.22 Even before Kant, David Hume stated that an
‘ought’ cannot be inferred from an ‘is’ (today known as Hume’s Law).23 In other
words, when we are confronted with positive facts (‘is’), it is invalid to derive from
them normative values (‘oughts’). Anticipating Kant’s analytic/synthetic distinc-
tion, “Hume assumed a metaphysical dichotomy between ‘matters of fact’ and
‘relations of ideas’”.24 The problem with this is that Hume’s Law stands and falls
with his metaphysics of ‘ideas’, which he seems to have adapted from John Locke’s
concept of ‘perceptions’. In An Essay Concerning Human Understanding (1689),
Locke writes that perceptions are “whatsoever the mind perceives in itself, or is the
immediate object of perception, thought or understanding”.25 Hume divided these
perceptions into ‘impressions’ and ‘ideas’, the latter being “faint copies” of impres-
sions “less forcible and lively”.26 Thus, ‘ideas’ only resemble the actual thing, which
is apprehended via ‘perception’ and which induces a ‘sentiment’, or an emotion.27
According to Hume, other ‘facts’ do not exist. Using the example ‘crime’, Hume
says:
Where is that matter of fact that we call crime; point it out; determine the time of its exis-
tence; describe its essence or nature; explain the sense or faculty to which it discovers itself.
It resides in the mind of the person who is ungrateful. […] [T]he crime of ingratitude is not
any particular fact; but arises from a complication of circumstances which being presented
21
See Putnam 2002/2004, p. 7.
22
See Kant 1781/1998, A6-7/B10-11. Immanuel Kant further distinguishes between a priori propo-
sitions (propositions whose justification do not rely on experience, such as “2+2=4”) and a poste-
riori propositions (propositions whose justification rely on experience, such as “chairs exist”).
23
Cf. Hume 1738/1978, pp. 469–470.
24
Putnam 2002/2004, p. 14.
25
Locke 1689/2008, II.viii.8.
26
Hume 1748/2008, II.3–4.
27
Hume 1748/2008, II.1.
to the spectator excites the sentiment of blame, by the particular structure and fabric of his
mind.28
We may thus conclude that by Hume’s standards, judgments of vice and virtue
are not facts, but sentiments: no one can “point out” something that “resides in the
mind”. Per analogiam, any utterances containing normative concepts – such as
‘good’, ‘bad’, ‘right’, ‘wrong’, etc. – are emotions and not facts.
Indeed, this is exactly what the logical positivists did: they built on Hume’s (and
Kant’s) concept that ethical judgments are not facts, and hence are non-scientific
nonsense. As Rudolph Carnap puts it in The Unity of Science (1934):
All statements belonging to Metaphysics, regulative Ethics, and (metaphysical)
Epistemology have this defect [namely, that they are “pseudoproblems” barred from ratio-
nal discourse – AS], are in fact unverifiable and, therefore, unscientific. In the Vienna
Circle we are accustomed to call such statements nonsense. […] [Such] [c]onceptions can
be associated with any arbitrarily compounded series of words.29
Putnam criticises Carnap’s conclusion, on the one hand, because it precludes

(non-metaphysical) epistemological value judgments used in science on a daily
basis (such as ‘coherence’ and ‘plausibility’) and, on the other hand, because it turns
ethics into an irrational, unscientific subject on grounds of inflating a mere (useful)
distinction between ethical judgments and other sorts of judgments into a full-
grown metaphysical dichotomy (metaphysical because facts are claimed to exist
while ethics is claimed to be an “arbitrarily compounded series of words”).30
According to Putnam, to make the step from a mere distinction to a dichotomy is the
decisive element of logical positivism. This step, however, is invalid. At best,
Putnam says, “the fact/value dichotomy is […] not a distinction [in the sense of an
either/or dualism – AS] but a thesis, namely the thesis that ‘ethics’ is not about
‘matters of fact’”.31 The decisive element in the positivists reasoning was that they
pretended to know what a ‘fact’ was:
According to the positivists, in order to be knowledge, ethical ‘sentences’ would have to be
either analytic, which they manifestly are not, or else ‘factual’. And their confidence that
they could not be factual, just like Hume’s confidence that ‘the crime of ingratitude is not
any particular fact,’ derived from their confidence that they knew exactly what a fact was.32
However, logical positivists failed to clearly define the concept of ‘fact’.

Relativity theory and quantum physics radically changed what might be considered
‘fact’ and what not. Certainly it is no longer tenable to adhere to the definition of
fact as sense impression when facing curved space-time.33 Although Carnap revised
his theory in Foundations of Logic and Mathematics (1938) – so that the system of
scientific statements as a whole had factual content – he still held that the language
28
Hume 1777/1975, pp. 287–288 (original emphasis).
29
Carnap 1934, p. 22.
30
Putnam 2002/2004, p. 19, p. 31.
31
Putnam 2002/2004, p. 19 (original emphasis).
32
Putnam 2002/2004, p. 21 (original emphasis).
33
See Putnam 2002/2004, p. 22.
76 A.D. Steffen
of science, in order to be cognitively meaningful, ought to resemble the language of

physics (i.e. ‘factual’ language must at least be reducible to observation terms).34
Although ultimately untenable, this narrow definition of ‘scientific language’ rely-
ing on a narrow definition of ‘fact’, according to Putnam, was a great mistake that
had far-reaching implications up to the present. As Putnam concisely summarises:
The logical positivist fact/value dichotomy was defended on the basis of a narrowly scien-
tistic picture of what a ‘fact’ might be, just as the Humean ancestor of that distinction was
defended upon the basis of a narrow empiricist psychology of ‘ideas’ and ‘impressions’.
The realization that so much of our language is a living counterexample to both (classical
empiricist and logical positivist) pictures of the realm of ‘fact’ ought to shake the confi-
dence of anyone who supposes that there is a notion of fact that contrasts neatly and abso-
lutely with the notion of value. […] A deeper problem is that, from Hume on, […] many
[…] failed to appreciate the ways in which factual description and valuation can and must
be entangled.35
After a brief overview of how Quine let the analytic/synthetic dichotomy col-
lapse (namely, by showing that scientific statements conflate ‘conventions’ and
‘facts’), we will examine Putnam’s argumentation more closely and in doing so see
how “factual description and valuation” are indeed often inextricably “entangled”.36
6.2.2 The Collapse of the Analytic/Synthetic Dichotomy

Following W. V. O. Quine
According to Putnam, “it is widely recognized since Quine’s 1951 attack on this
overblown form of the analytic-synthetic dichotomy that it has collapsed”.37 In
fact, in 1951 Quine showed in his eminent essay Two Dogmas of Empiricism that
there are two essential, but ill-founded, dogmata in modern empiricism: one is the
belief in a clear-cut cleavage between analytic truths and synthetic truths, the other
is the belief that meaningful statements are reducible to logical constructs referring
to immediate experience.38 Quine argues that abandoning these dogmata results in
a blurring between the boundary of ‘soft’ metaphysical – in the sense of non-phys-
ical, thus allegedly speculative – sciences (such as liberal arts and moral sciences),
and ‘hard’ fact-based natural science.39 This leads, as Quine argues, to a shift away
from empiricism and towards pragmatism.40 Quine stresses that his analysis is not
limited to ordinary language, but that it extends to scientific language and even
holds true for precise constructed and formal languages (such as logic) with explicit
34
See Putnam 2002/2004, pp. 23–25.
35
Putnam 2002/2004, pp. 26–27 (original emphasis).
36
Putnam 2002/2004, pp. 26–27.
37
Putnam 2002/2004, p. 8.
38
Quine 1951, p. 20.
39
Quine 1951, p. 20.
40
Quine 1951, p. 20.
rules for interpretation since these rules, in order to reveal analytic statements,
must presuppose the existence, or at least the notion, of analyticity.41 As Quine suc-
cinctly puts it:
[T]ruth in general depends on both language and extralinguistic fact. […] Hence the temp-
tation to suppose in general that the truth of a statement is somehow analyzable into a lin-
guistic component and a factual component. Given this supposition, it next seems reasonable
that in some statements the factual component should be null; and these are the analytic
statements. But, for all it’s a priori reasonableness, a boundary between analytic and syn-
thetic statements simply has not been drawn. That there is such a distinction to be drawn at
all is an unempirical dogma of empiricists, a metaphysical article of faith.42
Quine’s reasoning has a profound impact on the logical positivists’ verification

theory of meaning, which contends that only statements about the world that are
empirically verifiable (or, in the case of analytic statements, logically necessary) are
cognitively meaningful. Consequently, liberal arts and moral sciences – in fact, all
of science concerned with evaluative judgements – are cognitively meaningless,
carry no objective truth value and hence are but an “arbitrarily compounded series
of words”.43 In short, they lose their raison d’être as science.
As far as the dogma of reductionism is concerned, Quine argues that it is “inti-
mately connected with the other dogma”.44 According to Quine, the focus on indi-
vidual statements is too narrow. It is impossible that an individual statement can,
“taken in isolation from its fellows, admit of confirmation or information at all”.45
Statements about the factual world, Quine says, are never individually confirmed
via sense experience but always as a cluster, a “corporate body” as he calls it.46
Quine goes even further and argues that “[t]he unit of empirical significance is the
whole of science.”47 If this reasoning is sound, then it makes no sense to speak of
analytic statements at all. To summarize in Quine’s own words:
The totality of our so-called knowledge or beliefs, from the most casual matters of geogra-
phy and history to the profoundest laws of atomic physics or even pure mathematics and
logic, is a man-made fabric which impinges on experience only along the edges. […] A
conflict with experience at the periphery occasions readjustments in the interior of the field.
[…] Re-evaluation of some statements entails re-evaluation of others, because of their logi-
cal interconnections […]. But the total field is so undetermined [sic] by its boundary condi-
tions, experience, that there is much latitude of choice as to what statements to re-evaluate
in the light of any single contrary experience. […] [I]t becomes folly to seek a boundary
between synthetic statements, which hold contingently on experience, and analytic state-
ments, which hold what may. Any statement can be held true come what may, if we make
41
Quine 1951, pp. 33–34.
42
Quine 1951, p. 34.
43
Carnap 1934, p. 22.
44
Quine 1951, p. 38.
45
Quine 1951, p. 38.
46
Quine 1951, p. 38.
47
Quine 1951, p. 39.
78 A.D. Steffen
drastic enough adjustments elsewhere in the system. […] Conversely, by the same token, no
statement [including basic logic laws – AS] is immune to revision.48
Carnap and the logical positivists realized early on that different categories for
ontological issues and scientific hypotheses can only be upheld by postulating a
clear and “absolute distinction between the analytic and the synthetic”.49 In other
words, they make a category mistake (they treat the analytic and the synthetic as if
they were two distinct categories, when in effect they belong to the same category,
namely myths about reality – the two concepts differ only in degree, not in kind). In
a similar vein, Jürgen Habermas, Karl-Otto Apel and Robert Alexy realized that
different categories for objective normative truths and subjective normative claims
can only be upheld by postulating a clear and absolute distinction between facts and
values. The latter has to undergo the scrutinizing trial of discourse in order to
become the former.50 It is a vain if heroic attempt to save the concept of universal,
absolute truth by clinging on to the dogma of a clear-cut cleavage between the fac-
tual and the counter-factual. Habermas, Apel and Alexy’s method prescribes that a
set of rules, so-called Diskursregeln, be introduced in order to realize an ideal
speech situation.51 Thus, Habermas, Apel and Alexy stumble into the same pitfall as
Carnap and the logical positivists have before them: both fail to see that the rules
they introduce already presuppose (and hence cannot prove) the existence, or at
least the notion, of – in the case of Carnap and the positivists – analyticity and – in
the case of Habermas and the discourse analysts – facticity. In addition, rules are
never void of values. In fact, they seem to be the very essence of values. It is of little
help to seek to objectify these first-order rules by introducing yet another set of
second-order rules which all first-order rules have to comply with. This would only
lead to an infinite regress, but not to new insight.
To sum up, the totality of science is underdetermined by experience. The rest is
fiction. However, this is not to say that these fictitious myths do not have their place
in real life. Quite on the contrary, they make up most of human reality and are
indeed very useful. But they are neither true ipso facto, nor are they in any way
reducible to sense experience, nor are they objectifiable through discourse. In sci-
ence, it is only natural that a myth lacking in some aspect is superseded by its supe-
rior cousin. All science is an infinite series of evolving myths, constantly adjusted
and readjusted to actual and very real current human needs and wants. Hence, if we
want to be upright scientists, be it in the natural sciences or in the liberal arts, we
must not cling to the overcome myth that a clear-cut distinction can be drawn
between the analytic and the synthetic; between facts and values; between right and
wrong; between living being and dead un-being (think Schrödinger’s cat). This is
not to say that there is no real difference between these states, but that this difference
is always a matter of degree (a gradual difference) and never a matter of kind
48
Quine 1951, pp. 39–40.
49
Quine 1951, p. 43.
50
See Habermas 1992/1998, 1992/1996, 1999. Also see Brune 2010.
51
For an overview see Ott 2001, pp. 165–166.
(a dichotomy). The latter is a clear category mistake. Furthermore, the difference,

being gradual, tends to be fuzzy rather than discrete. This means that there is always
uncertainty as to where exactly, say, a given sentence is located in the ‘fact-value
spectrum’. As in the case of Schrödinger’s cat, it is often the case that we have no
other choice but to assume that both states are equally true: the cat is already dead
even while it is still alive and kicking. Put differently, the sentence “Kant was ratio-
nal” may equally be read positively/descriptively, namely Kant put his reason to
use, or normatively/prescriptively, meaning that it was good that Kant put his reason
to use.
6.3 A Critique of Rational Choice and Behavioural

(Law and) Economics
In 6.2, we saw that the analytic/synthetic dichotomy cannot be upheld and that, by
analogy, the fact/value dichotomy is equally doomed. In this chapter, I shall scruti-
nise rational choice theory, on which behavioural (law and) economics is based,
against the backdrop of our findings.
In the next section, we will see that rational choice theory is incomplete.52 It is
incomplete because of Gödel’s first incompleteness theorem which, broadly speak-
ing, states that there are statements in the language of a consistent formal system F
which can neither be proved nor disproved in F (they may still be true, however).53
Insofar as rational choice and behavioural (law and) economics affirm the fact/value
dichotomy, it logically follows that a statement in these systems must either be a
fact or a value, tertium non datur. However, statements that are at the same time
facts and values exist. These can be neither proved nor disproved in rational choice
or behavioural (law and) economics. The problem with complete and transitive
preferences, a central theorem in rational choice, will serve as an example. Thus,
these theories are incomplete. It follows that they are neither objective nor univer-
sal. Hence, the decision to maximise ‘rationality’ rather than any other parameter is
a conscious, non-value-neutral choice. As such, its pros and cons need to be care-
fully weighed against other conscious, non-value-neutral choices. This, however, is
usually neglected in the literature of behavioural (law and) economics.
In a second step, I will briefly show that maximising rationality is highly likely
to lead to a lower utility level than maximising autonomy. Further empirical research
needs to be carried out in this field.
52
An axiomatic theory T is said to be complete if, and only if, it is consistent and if for every sen-
tence σ in the language of T it holds true that either T ˫ σ (the sentence σ is provable in T) or T ˫ ¬
σ (the sentence not-σ is provable in T, i.e. the sentence σ is refutable in T).
53
For more information on the two Gödel incompleteness theorems, please refer to the respective
entry in the Stanford Encyclopedia of Philosophy, available at: http://plato.stanford.edu/entries/
goedel-incompleteness/ (last accessed: 23.10.2015).
80 A.D. Steffen
Finally, we will see that ‘opting out’ is in fact a bogus claim. It is not the re-
instalment of autonomy it purports to be, but since the nudge leads to a transvalua-
tion of people’s preferences, deciding against the ‘socially desirable’ option by
opting out is bound to lead to an inner conflict, also known as ‘cognitive disso-
nance’ in social psychology. Psychologists agree, and it has been widely empiri-
cally confirmed, that people strive to reduce the negative emotions associated with
cognitive dissonance by avoiding dissonance whenever possible.54 As a result, only
very few people will ever opt out of a nudge. Again, further empirical research
needs to be undertaken in this subject.
6.3.1 Rational Choice and Behavioural (Law and) Economics

Are Incomplete
To follow in the wake of Vivian Walsh and Hilary Putnam, I maintain that rational
choice theory is incomplete.55 The basis for my reasoning is that logical positiv-
ism – particularly verificationism – is too narrow in claiming that statements must
be verifiable either on logical or on empirical grounds to carry meaning. Whereas
rational choice is based on logical positivism insofar as it endorses the viewpoint
that ‘rational’ is logically verifiable (analytic, in other words), behavioural econom-
ics is based on logical positivism insofar as it deems ‘rational’ to be empirically
verifiable (synthetic, in other words). Thus, rational choice and behavioural eco-
nomics affirm logical positivism as well as the analytic/synthetic and the fact/value
dichotomy implicit therein. Rational choice theory as well as behavioural econom-
ics claim that the sort of ‘rational’ they mean is strictly positive/descriptive rather
than normative/prescriptive. This, however, can only be maintained as long as we
believe in clear-cut dichotomy between positive/descriptive facts and normative/
prescriptive values. As we have seen, this seems implausible. It is much more plau-
sible to argue that the relationship between facts and values is one of a fuzzy, grad-
ual difference and that most of the time facts and values are entangled.
The incompleteness of rational choice and in its wake behavioural economics
becomes particularly clear when focussing on the rationality of preferences. Both
theories rely on the existence of completely rational agents. A completely rational
agent is characterised and defined by a complete and transitive preference ordering.
A preference ordering is complete and transitive, if and only if, the agent knows
whether she prefers a certain bundle of commodities to another or is indifferent
amongst them (completeness) and if her preference ordering is consistent, i.e. does
not contradict itself (transitivity).56 In other words, if it is true for all x, y, and z that
54
See for example Aronson et al. 2008, pp. 163 et seqq.
55
Cf. Putnam 2002/2004, pp. 79–95.
56
Cf. for example Mas-Collel 1982, pp. 72–82.
(where R here refers to the weak preference relation and may be read as is weakly
preferred to, ∨ means or, ∧ means and, and ⇒ means it follows):
1. xRy ∨ yRx (completeness)
2. xRy ∧ yRz ⇒ xRz (transitivity)
This, however, presupposes that the two commodity bundles are in fact compa-
rable, that is to say, that they belong to the same category. If the categories differ,
then the commodity bundles are incomparable. Notwithstanding, the decision
maker may still consider both. Let us look at a concrete example. Suppose Dr
Faustus is considering two ways of living which he holds to be both equally worthy
of pursuing and incommensurable: the religious life (z) and the sensual life. If he
chooses the sensual life, he would prefer to have a romantic relationship with the
intelligent Gretchen (x) rather than her less intelligent little sister, Betchen (y).
Thus, he prefers alternative x to alternative y (xRy). Since he has not made up his
mind whether he prefers either of the two alternatives (x or y) over the religious life
(z), however, he is yet indifferent between x and z as well as between y and z (more
accurately, he does neither weakly prefer x to z or z to x, nor y to z or z to y). In
other words, for all x, y, and z it holds true that:
¬xRz  ¬zRx and ¬yRz  ¬zRy (where ¬ means not )
Now, since the negation of the weak preference relation (R) must also be transitive,
it holds furthermore true that:
xRz  zRy  xRy
From a logical point of view, the agent cannot at the same time weakly prefer x to
y (xRy) and not weakly prefer x to y (¬xRy) as this is inconsistent with transitivity.
Hence, the traditional view deems such behaviour to be irrational. But in reality it
may be rational to hold both xRy and ¬xRy at the same time, provided that the agent
has not yet decided which one to prefer. Following the traditional view, however, a
regulating authority might conclude that, since ¬xRz and since z seems preferable
from the point of view of the authority, the agent will be given z. In a second step,
the Mephistophelian authority might see that ¬zRy and since y is readily available
while z is not, will choose to give y to the agent. To come back to our example, a
regulating authority may move the (rationally acting) agent Dr Faustus – e.g. with a
nudge – from a romantic relationship with Gretchen to a religious life (since he is
indifferent between x and z) and then from a religious life to a romantic relationship
with Betchen (since he is also indifferent between z and y). Thus, Dr Faustus will
eventually end up with the less intelligent Betchen instead of the intelligent
Gretchen, although he clearly and rationally prefers the latter. The regulating
authority will not increase, but decrease welfare, even if we assume transaction
costs to be zero. What to do? There is an easy way out of this conundrum: simply
leave the doctor alone and let him reach a decision on his own. Sapere aude!
82 A.D. Steffen
6.3.2 Autonomy Instead of Rationality?
The point that has been overlooked in the previous discussion is autonomy.57 It
might be a mistake to believe that, because the agent has not yet formed a weak
preference – and hence is deemed by the regulator to be indifferent – between x and
z (z and y), the agent cannot have any meaningful reasons to object being given z
rather than x (y rather than z).58 The agent might want to reflect and to choose
according to her own free will rather than being given a predefined solution, even if
this entails a ‘wrong’ choice in the sense of prescriptive rationality. In other words,
the autonomous end result is incommensurable with the nudged end result, even if
the result is the same. Furthermore, neglecting the importance of free choice leads
to a commodification: the inherent value of autonomy is neglected and in its stead
autonomy and heteronomy become interchangeable goods. By the same token, the
choosable alternatives become commodities too, if the regulating authority is only
concerned about maximizing rationality. In its extreme form, such reasoning would
prefer a dictatorship propagating rationality to a democracy propagating autonomy.
The twentieth century has shown how this road leads: to serfdom. Indeed, as Putnam
points out, “[t]hinking of everything as a ‘commodity’ will necessarily blind one to
the most elementary facts about moral life.”59 A bit less provocatively, we might
state that in certain circumstances, some people may have a (weak) preference for
autonomous decision-making independent of the outcome. This is all it takes to
prove that paternalism, no matter how soft, may decrease rather than increase wel-
fare as measured by total individual well-being.
To sum up, if this reasoning is sound, then replacing autonomy with a nudge will
always result in a decrease in the utility of some people. For the nudge to be effi-
cient, two conditions have to be met: (1) the losses incurred by the people who value
autonomy have to be outweighed by the gains of the people who do not value auton-
omy. Even if condition (1) is met, it might still be the case that the transaction costs
accompanying the implementation of a nudge outweigh the gains. Thus, condition
(2) requires the resulting profits to be at least as large as transaction costs. In most
cases, this hurdle will probably not be cleared. To be sure, only a combination of
qualitative and quantitative studies will be able to yield a conclusive answer as to
whether and, if so, how much people value autonomy and whether the resulting
profit after transaction costs will be positive.
But perhaps ‘autonomy instead of rationality’ is the wrong question? After all,
most nudging theorists agree that people should always have the option to ‘opt out’
of an imposed default (a pre-set, nudged solution to a given problem). Does this not
re-install autonomy once again and hand back the full power to make decisions to
the individual? I shall argue in the next subsection that, due to psychological rea-
sons, it does not. In fact, opting out seems to be a bogus claim.
57
Cf. Putnam 2002/2004, pp. 82–86.
58
Putnam 2002/2004, p. 82.
59
Putnam 2002/2004, p. 83.
6.3.3 ‘Nudging’ as Transvaluation: ‘Opting Out’ a Bogus

Claim?
We have seen that people may have a (weak) preference for autonomous decision-
making independent of the outcome. Followers of Schopenhauer might raise the
following objection: “Is it not irrational to let the agent ponder on her preferred
choice if what determines her choice eventually is nothing but the pre-existing
strongest (external) motive rather than her (internal) free will?” This strategy makes
two claims: (1) that the rational preference ordering is predetermined, and (2) that it
makes no difference whether external variables or the (equally external) decision of
the legislator tip the scales in favour of an alternative (in Schopenhauer’s sense,
neither of them is autonomous, both are heteronomous). While the first proposition
presupposes a deterministic world, the second proposition assumes that there is no
rational basis to form a preference for autonomous decision-making over heterono-
mous decision-making since both are external. Autonomy does not exist because
the free will is not free. In other words, Schopenhauer transvalues autonomy into
heteronomy.
Both of these topics are far too complex to explore in any depth in this essay.
Suffice it to say that the first argument only works in a deterministic world which,
from today’s scientific point of view (in light of modern physics) seems highly
unlikely to be universally true. The second argument, however, is misleading insofar
as it builds upon a perverted notion of ‘autonomy’: autonomy does not entail that
everything lying outside of my self is precluded from influencing me. To interpret
autonomy in the strict sense of absolute freedom is a false interpretation of the origi-
nal concept of autonomy. The Ancient Greek αὐτο-νομία literally means self-
governing. Thus, I am not completely free, but I rule over myself. This does by no
means exclude external motives from influencing my (autonomous) decision. In
fact, it is quite clear that in its original Greek form, autonomy precludes absolute
freedom and encourages one to thoroughly analyse and carefully weigh different
external motives against each other, as good rulers does. Schopenhauer’s interpreta-
tion of autonomy is unsound. Even worse, it may justify a paternalistic intervention
in a two-step transvaluation: first, it ‘unwills’ the agent, undermines her set of val-
ues and superimposes a specific set of values (the set of values of the Schopenhauerian
speaker, the regulating authority or the legislator) in its stead; second, it judges
agents on grounds of the superimposed set of values rather than on the set of values
of their own. In other words, by negating the agent’s second order desires (to have
the will one wants to have), this strategy also negates the agent’s first order desires
(to do what one wants to do).60 By means of this simple strategy, any paternalistic
intervention may be justified.
Surely though, no one today would be so shrewd as to apply this strategy. After
all, we are living in an enlightened world. Notwithstanding, the strategy is similar
to what Sunstein and Thaler are doing when they declare that one’s own will may
60
Cf. Bernstein 1991, pp. 203–204. Also see Frankfurt 1988, p. 22.
84 A.D. Steffen
be irrational (boundedly rational, to be precise) and thus ought to be discouraged.

To be fair, Sunstein and Thaler introduce the option to opt out into the equation. But
opting out clauses do not in fact reintroduce autonomous decision-making, since,
when an opting out clause becomes effective, the transvaluation will already have
taken place. Superficially it seems like the agent’s second and first order desires are
reinstated. In fact, however, the agent commits a transgression against the new
order as soon as she opts out. This transgression is likely to lead to cognitive dis-
sonance, that is to say, a situation involving conflicting attitudes, beliefs or behav-
iours. This conflict produces a feeling of discomfort. In an attempt to reduce this
negative feeling and to restore balance, the agent seeks to alter one of the conflicting
attitudes, beliefs or behaviours in such a way that the conflict disappears.61 In other
words, by staying true to herself, the agent opts for ‘irrationality’ in the new order.
Her decision is not approved by society and might meet with heavy criticism, even
from friends. In a worst case scenario, she might be discriminated against and ostra-
cized. She might anticipate this and even seriously consider to not opt out. Consider
a smoker who is well-informed about the risks of smoking but still decides to smoke.
In today’s society, her decision is bound to be criticized. The resulting tension is a
form of cognitive dissonance. In an attempt to avoid this tension, she might refrain
from smoking. This, however, makes her worse off as she does not maximize her
individual, boundedly rational benefit, but the perfectly rational benefit of the ideal
society as interpreted by the nudger. Apart from (in most cases admittedly rather
low) transaction costs, this may be a reason why people refrain from opting out.
Hence, it is plausible to assume that people only very rarely opt out, which indeed
appears to be the case.62
6.4 Conclusion: Nudging Is Judging
The repercussions for rational choice and behavioural (law and) economics in gen-
eral, and nudging in particular, are straightforward: rational preferences, while
empirically observable, are only a marginal phenomenon. It is not an axiom (from
Ancient Greek ἀξίωμα: that which is thought to be self-evident). This has been
empirically tested by behavioural economics. However, to believe that this short-
coming may be remedied by paternalism, and this is the final goal of behavioural
law and economics, is an elementary mistake. Empirics can give us valuable insights
into our behavioural patterns. However, ‘rationality’ – treated by rational choice
and behavioural (law and) economics as a non-normative, positive concept – is in
fact a fuzzy term, that is positive and normative at the same time. The positive and
the normative are like two sides of the same coin. The concept is positive only inso-
far as it is treated as a neutral supposition (as in the question: do people have
61
See e.g. Aronson et al. 2008, pp. 163 et seqq.
62
Cf. Carney 2007. Retrieved on 31.08.2015 via: http://archive.wired.com/medtech/health/
news/2007/05/india_transplants_donorpolicy
perfectly rational preferences?). Behavioural economics has shown that this sup-
position is observable some of the time, but not all of the time. The concept becomes
normative as soon as it loses its neutrality as a supposition and is treated as a goal
for individuals, companies or whole societies. In this manner, rational choice and
behavioural law and economics propagate and superimpose a specific value-system,
which is claimed to be non-normative and value-neutral because it only leads back
to the point of origin (completely rational preferences). This is a mistake. ‘Perfect
rationality’ becomes the touchstone against which all behaviour is judged with the
implicit notion that whatever is ‘perfectly rational’ is ‘good’ (‘boundedly rational’
is ‘bad’) and hence must (not) be in the interest of the individual, the company,
society. In doing so, other parameters – such as autonomy – are not only neglected,
but (on grounds of their alleged normativity) negated. Autonomy and rationality
may both be a fact and a value at the same time. They may have a qualitatively dif-
ferent, equally important, utility to the agent. Indeed, it seems plausible that people
are only able to build up a sound internal value system via autonomous experience.
The interests, values and reasons so acquired may very aptly be called their ‘ratio-
nality’. After all, since they have reasons for doing so, they follow their interests
‘rationally’ and hold their values equally ‘rationally’, even if these interests are
deemed to be ‘irrational’ by the touchstone of perfect rationality. To say that the
concept ‘rational’ means ‘perfectly rational’ is equally nonsensical as to interpret
the concept ‘free will’ as ‘perfectly free’. Paternalistic measures may increase ‘per-
fectly rational welfare’. However, this is the wrong unit of measure. It is not equal
to the ‘boundedly rational welfare’ experienced by individuals. Additionally, indi-
viduals will hardly ever choose to ‘opt out’ in order to prevent cognitive dissonance.
Moreover, missed learning effects might necessitate implementing further paternal-
istic measures in the future.
It would thus appear that, even if the regulatory agency were perfectly informed
or at least better informed than its citizens in certain matters (a supposition that is in
itself highly contested), it should still refrain from engaging in paternalistic mea-
sures, as soft as they may be, since they seem to generally decrease rather than
increase welfare. From a legal point of view, government should limit its activity to
a comprehensible legislation that is mostly limited to negative obligations of its citi-
zens since positive obligations – such as the duty to act rationally – may quickly
conflict overarching negative obligations.63 Governments, however, may have a
positive obligation to focus on encouraging the free development of their citizens’
‘autonomous rationality’ (via providing information and room for experience)
rather than simply forcing them to adopt a specific concept of rationality. As has
been shown, it is nonsense to assume the existence of a neutral, universal and ulti-
mately justified rationality.
A further implication of the fact/value dichotomy is that nudging theorists can-
not delegate the delicate task of identifying ethical goals to philosophers or politi-
cians, as they themselves engage in both positive and normative science all the time.
Today, many researchers present behavioural (law and) economics as a strict
63
See for example: Bastiat 1848/1995, chapter 2.
86 A.D. Steffen
positive, empirical science. In doing so, an unscientific double standard is main-

tained. This could and should be remedied by making the normative explicit and by
incorporating it. Being part of a social science, propagators of nudging should also
take heed not to fall prey to apriorism (i.e. the doctrine that knowledge rests upon
unquestionable principles that are self-evident) or authoritarianism (i.e. the require-
ment to obey postulated rules or laws without allowing for individual freedom).
Both, apriorism and authoritarianism, are unreasonable. Researchers need to realize
that all science, both positive and normative, is fallible but may still yield funda-
mental knowledge in a step-by-step evolutionary way. The idea of a complete (i.e.
objective and universal) behavioural (law and) economics is absurd. Reality is char-
acterized by pluralistic values and these values are inseparably entangled with facts
(and vice versa). Ultimately, what is imperative in behavioural (law and) economics
as well as in other (positive-normative) sciences, is to make the values behind the
facts (and the facts behind the values) transparent by explicitly accepting and incor-
porating rather than shunning the normative.
6.5 Outlook: Amalgamation of Kant and Aristotle,

or ‘Pragmatic Ethics’
To sum up, judgments of reasonableness and rationality presuppose normative

judgments, epistemic or otherwise.64 In the day of modern science, looking for uni-
versal truths is chasing the overcome ghost of Plato. An approach both more suit-
able to the challenges of the twenty-first century and more fruitful too would be
pragmatism, also in regard to ethical questions that arise in behavioural law and
economics and other such sciences. An ethics that is at the same time fallible and
practical. Pragmatic ethics is the belief that ethics, as well as other normative sci-
ences, develop in the same way as positive sciences do: by inquiry into the truth of
hypotheses. That a given hypothesis cannot be rejected does not prove the hypoth-
esis. But until it is superseded by a more adequate hypothesis, scientists act upon the
hypothesis as if it were true. It is thus important to leave enough room to test
hypotheses rather than accept them as universally true axioms.
Such a pragmatic ethics could be an amalgamation of the ethics of Kant and
Aristotle in the pragmatist spirit of John Dewey.65 It is often said that the ethics of
Kant and Aristotle stand in such stark contrast to each another that the two will
never meet. In fact, however, the stark-naked skeleton – stripped of its metaphys-
ics – of abstract Kantian ethics (as an abstract method) could profitably be fleshed
out by the meaty chunks of concrete Aristotelian ethics on Eudaimonia (from
Ancient Greek εὐ-δαιμονία: literally ‘good spirit’, usually translated as ‘the good
64
Putnam 2002/2004, p. 145.
65
Cf. Putnam 2005, pp. 31–32.
life’ in the sense of ‘a virtuous way of living’) (content).66 In pragmatic ethics, we

can still speak of (conditional) truth and (conditional) objectivity, but not of ‘final
truths’ and ‘perfect objectivity’.
If behavioural law and economics accepted its normative content, it could gain a
lot from incorporating rather than shunning its normative content including ethical
issues. A ‘pragmatic turn’, for example, would open the gates to concepts hitherto
frowned upon for being unscientific, such as autonomy. This would allow to impar-
tially weigh the pros and cons of rationality and autonomy against each other. Only
a pragmatic ethics can do justice to the pluralistic values in life and strive to restore
individual autonomy while at the same time being part of scientific discourse.
Acknowledgement I would like to sincerely thank Prof. Dr. iur. Klaus Mathis, MA in Economics,
and Katrien Van Den Bergh, MA, for their valued input and careful proofreading.
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Part II
Applications
Chapter 7
Nudging and the Principle of Proportionality
Obliged to Nudge?
Mark Schweizer
Abstract While the ethics and politics of nudging have received a great deal
of attention, the legality of non-coercive interventions aimed at changing
human behaviour has not been the object of much study. In this contribution, I
examine firstly which limits, if any, the principle of proportionality
(‘Verhältnismäßigkeitsgrundsatz’) as applied by the German Federal Constitutional
Court imposes on governmental ‘choice architects’. While nudges as such generally
do not interfere with fundamental rights, including the very broad ‘right of personal
development’ of Art. 2(1) Basic Law for the Federal Republic of Germany, their
implementation will often interfere with the fundamental rights of citizens other
than the decision makers and therefore trigger constitutional scrutiny. Since pater-
nalistic motives are – in principle – not accepted as legitimate ends that may justify
an interference with fundamental rights, nudges solely intended to protect the deci-
sion maker from self-harm may not pass the proportionality test. Secondly, I exam-
ine whether the necessity prong of the proportionality principle may force the
legislator to choose a non-coercive nudge over a more traditional coercive measure.
Given the empirical evidence of the limited effectiveness of nudges in changing
behaviour compared to traditional regulatory means, I come to the conclusion that
the proportionality principle does not compel the use of nudges.
M. Schweizer (*)
Law School, University of St. Gallen, Dufourstrasse 50, 9000 St. Gallen, Switzerland
e-mail: mark.schweizer@gmail.com

94 M. Schweizer
7.1 Introduction
The ethics and politics of ‘nudging’ citizens towards a choice that – in the govern-
ment’s opinion – is in the citizens’ own best interests have been hotly debated.1 The
legality of nudging has received much less attention.2 The question whether govern-
ments might be obliged to nudge has been largely ignored so far. Prima facie, the
principle of proportionality – a German legal export widely adopted in (continental)
European legal doctrine3 – might provide a rationale that compels nudging. Reduced
to its core, the principle of proportionality requires that a government action which
abridges a fundamental right is suitable for achieving a legitimate public interest
and is necessary in the sense that there is no less restrictive alternative – i.e. a mea-
sure that infringes the fundamental right(s) less – that achieves the same end. A
nudge, as a non-coercive measure to influence choice, is generally a milder measure
than traditional coercive measures (i.e., prohibitions or commandments). If the
nudge achieves the same end, the principle of proportionality dictates that it has to
be chosen over the coercive measure.
In this contribution, I will examine whether the above plausible conjecture holds
up to closer scrutiny. The article is structured as follows: first, nudging is defined
and an example is introduced that will be used throughout the text to illustrate the
concept. Secondly, the principle of proportionality is explained in some depth. I will
primarily rely on the German doctrine, as it is more finely tuned than that of many
other jurisdictions,4 the modern principle of proportionality being a German con-
cept that plays a huge role in German constitutional law.5 Then, each prong of the
proportionality test is applied to nudging to see whether it prohibits or promotes
nudging. Unsurprisingly, it turns out that things are not as simple as set out above.
Tentative conclusions end this contribution.
1
An exhaustive overview of the literature is impossible, some starting points are Camerer et al.
2003; Thaler and Sunstein 2003; Rachlinski 2003; Glaeser 2006; Hill 2008; Sugden 2008; Bovens
2009; Hausman and Welch 2010; White 2010; Selinger and Whyte 2011; Blumenthal-Barby and
Burroughs 2012; Goodwin 2012; Sunstein 2014; 2015 and the contributions by Bruno S. Frey/Jana
Gallus, Peter G. Kirchschläger and Mark D. White in this volume; from a German perspective van
Aaken 2006; Schnellenbach 2011; Kirchgässner 2013; Neumann 2013; Fischer and Lotz 2014.
2
But see Alemanno and Spina 2014; van Aaken 2015a, b.
3
Saurer 2012, p. 8; Wahl 2013, p. 823
4
Classen 2012, p. 659; Wahl 2013, p. 836.
5
Pieroth 2014, para. 289; Sodan and Ziekow 2014, p. 227. For an overview over the historic devel-
opment see Koch 2003, pp. 4 et sq.
7 Nudging and the Principle of Proportionality 95
7.2 ‘Choice Architecture’ and ‘Nudging’
One of the core insights of the psychological study of judgment and decision making
is that judgments and choices are context-sensitive. How a choice is framed influ-
ences the choice. An outcome framed as a loss is treated differently than the same
outcome framed as a gain.6 The bigger a plate, the more one eats.7 Whether a choice
has immediate consequences or the decision maker commits to an action in the (far)
future makes a difference – I want a chocolate bar right now, but next week, I will
eat an apple a day.8 Whether an option is a default or requires an active choice (‘opt-
in’) makes a huge difference.9 Few people choose to be organ donors, however,
when organ donation is the default, few people opt out.10 The list of ‘biases’ seems
endless.11
One takeaway is that humans are hopelessly incompetent to make choices that
actually further their own best interests, and that the government should – if not
making those choices for them – at least direct them towards the ‘right’ choice. This
justification of nudging has received a lot of criticism.12 Another view is that since
choice is unavoidably context-based, there is no such thing as an unbiased choice
that truly reveals the individual’s preference.13 Replacing one biasing context by
another is justified if there is evidence that one option is actually better than the
other, and the new context leads to that option being chosen more often.14 The activ-
ity of organizing the context in which a decision is made is termed ‘choice
architecture’.15 A nudge is defined as “any aspect of the choice architecture that
alters people’s behaviour in a predictable way without forbidding any options or
significantly changing their economic incentives.”16 In other words, the choice set
remains the same, it is only structured differently.
Sunstein and Thaler use the example of a buffet at a school cafeteria to illustrate
the concept of choice architecture.17 If meats and fatty foods are presented promi-
nently, they will be chosen more often than when they are presented less conspicu-
ously. Since there is evidence that eating too much processed meat and partially
6
Tversky and Kahneman 1981.
7
Wansink and van Ittersum 2006.
8
Read and van Leeuwen 1998.
9
E.g., Nessmith et al. 2007; but see Bronchetti et al. 2011; Russell 2015.
10
Johnson and Goldstein 2003.
11
The chapter headings in Pohl 2004 give an overview over the most widely studied fallacies and
biases in thinking, judgment and memory.
12
Rachlinski 2003; Englerth 2007, pp. 23 et sq.
13
Thaler and Sunstein 2003, p.175.
14
15
16
17
96 M. Schweizer
hydrogenated oils (which contain trans fats) leads to coronary heart disease,18 it
would be desirable for most people to reduce their intake of those foods. Sunstein
and Thaler suggest that the presentation of the food be structured such that healthy
foods, such as salads and vegetables, are placed more prominently, for example by
highlighting them.19 Other nudges include putting unhealthy food (e.g. cheese) fur-
ther out of reach than healthy food (e.g. broccoli) and providing spoons for healthy
foods items and tongs for unhealthy food items (tongs have less capacity). This is
shown to reduce intake of the unhealthy food items by as much as 8–16 %.20 Even
simply placing menu items at the beginning or end of their category increases their
popularity by about 20 %.21
The example also shows that while a nudge is non-coercive on the decision
maker, its mandated introduction may well rest on coercion. I.e., if the cafeteria is
run by a private company and the government legislates that food items in school
cafeterias must be presented in a certain way, the compliance of the company is
presumably enforced by coercive means or changing economic incentives (i.e.,
non-compliant companies will lose the contract).22 Behind a nudge for the consumer
lies a coercive measure for service providers. We will come back to this.
7.3 The Principle of Proportionality
Proportionality has been a concept of law since antiquity, primarily in criminal law
(‘let the punishment fit the crime’, i.e., be proportionate).23 Its modern form was
developed in nineteenth century German administrative law as a restriction on the
executive (‘police’) power.24 It is only after the Second World War that it has
become an important part of German constitutional law, restricting the freedom of
the legislator.25 Today, the principle is recognized in many countries as part of con-
stitutional law.26 It is enshrined in the Charter of Fundamental Rights of the
European Union (Art. 52(1)) and plays an important role in the adjudication of the
18
Mensink et al. 2003; Micha et al. 2010.
19
20
Dayan and Bar-Hillel 2011.
21
Rozin et al. 2011.
22
Since the government is largely free to set contract terms (as long as they are not discriminatory),
contracting only with companies that agree to adhere to ‘behavioral food presentation’ may not
trigger any constitutional concerns. It is easy to imagine, however, that the government would try
to mandate these measures for all restaurants, which would clearly entail coercion.
23
Koch 2003, pp. 39 sq.
24
Koch 2003, pp. 45 sq.
25
Schlink 2001, p. 445.
26
Koch 2003, pp. 48 sqq; Saurer 2012.
European Court of Human Rights.27 American law, on the other hand, has not been
receptive to balancing in the context of fundamental rights adjudication.28
While the principle of proportionality as such is recognized in many jurisdic-
tions, its application varies to a great degree. Namely the level of scrutiny applied
when assessing the proportionality of a measure differs greatly. A discussion of the
application of ‘the’ principle of proportionality to nudging must therefore remain at
a very abstract level, limiting its usefulness. I will therefore concentrate on German
doctrine, which is very finely tuned. I will also limit myself to the principle of pro-
portionality in the context of fundamental rights. The principle of proportionality
has other applications, but it is hard to see how they could relate to nudging.
The principle of proportionality is usually presented as a three prong test for
administrative measures that assesses (a) whether a measure interfering with a right
is suitable to achieve its objective, (b) whether it is necessary for that purpose and
(c) whether it excessively burdens the individual compared with the benefits it aims
to secure.29 In the assessment of legislative acts it becomes a four prong test, the first
prong being the assessment whether the measure serves a legitimate public inter-
est.30 This prong is often neglected because in practice, it has little bite. The German
Constitutional Court understands legitimate public interest so broadly that almost
any interest suffices. It may, however, have some bearing on the constitutionality of
paternalistic nudges, as will be explained below.
The principle of proportionality limits the interference of the state with funda-
mental rights. The German Constitution (‘Grundgesetz’) recognizes explicitly that
laws may interfere with fundamental rights, or in other words, the scope of funda-
mental rights may be restricted by parliamentary act.31 The proportionality principle
materially limits the extent such interference is permissible; it restricts the restric-
tions (‘Schranken-Schranke’).32 The principle of proportionality is therefore trig-
gered by an interference with a fundamental right, which raises the question whether
a ‘nudge’ can ever be considered an abridgment of a fundamental right.
27
Arai-Takahashi 2002, pp. 14 sq.
28
See District of Columbia v. Heller, 554 U.S. 570 (2008), for a discussion Cohen-Eliya and Porat
2009; historical overview Porat 2014.
29
E.g. Michael 2001a, p. 148; Stein and Frank 2010, p. 245.
30
E.g. Zippelius and Würtenberger 2008, p. 219; Ipsen 2014, para.184; Sodan and Ziekow 2014,
p. 228.
31
See Art. 3(2), 5(2), 8(2), 12(1) Basic Law, and more often. For the understanding of ‘law’ as
parliamentary act see Pieroth 2014, paras. 272 et sq.
32
Pieroth 2014, paras. 285 et sq.
98 M. Schweizer
7.4 Does Nudging Interfere with Fundamental Rights?
7.4.1 A Constitutional Right Protecting Personal Autonomy
The German Constitution recognizes a fundamental right to freedom of personal

development and the right to private and family life (Art. 2(1) Basic Law for the
Federal Republic of Germany, hereinafter ‘Basic Law’). In the early days of the
German Constitution, there was considerable debate whether the freedom of per-
sonal development only protected important lifestyle choices or any choice at all.33
The German Constitutional Court soon sided with the proponents of a wide inter-
pretation of Art. 2(1) holding that the freedom of personal development was to be
understood as a general freedom of choice. The wording of the original draft that
“everybody can do as he pleases” had only been replaced because it was not consid-
ered solemn enough for a constitution, but no change in scope had been intended.34
Subsequently, the Constitutional Court held for example that horse riding in the
forest and feeding pigeons in a park were activities protected by the right to freedom
of personal development.35
The view that art. 2(1) protects the freedom of choice as such can be considered
reigning today,36 despite recurring criticism.37 The protection afforded by the right
to personal development extends to ‘everything that is in the interest of a person’s
autonomy’.38 It is undisputed that any state act interfering with personal choice is
subject to constitutional scrutiny.39 However, since nudging never prohibits a
choice, freedom of choice seems unaffected. But autonomy is more than freedom of
choice – while freedom concerns the ability to act, autonomy concerns the indepen-
dence and authenticity of the desires that move one to act in the first place.40 It has
been argued that the consciously employed organization of the choice context to
influence the decision maker interferes with an individual’s autonomy.41
While there are many definitions of personal autonomy, personal autonomy is
“generally understood to refer to the capacity to be one’s own person, to live one’s
life according to reasons and motives that are taken as one’s own and not the prod-
uct of manipulative or distorting external forces.”42 At the heart of the debate
33
Peters 1963, pp. 47 et sq.
34
BVerfGE 6, 32, pp. 36 sq. – ‘Elfes decision’.
35
BVerfGE 54, p. 143 – ‘pigeon feeding’; BVerfGE 80, 137, pp. 152 et sq. – ‘riding in the
forest’.
36
Ipsen 2014, para. 771; Pieroth 2014, paras. 386 et sq.
37
See the references cited in Cremer 2003, p. 81.
38
Möller 2014, p. 163.
39
Zippelius and Würtenberger 2008, p. 244.
40
Christman 21.3.2015, 1.1 Basic Distinctions.
41
Hill 2008; Sugden 2008; White 2010; Blumenthal-Barby and Burroughs 2012; Goodwin 2012;
Miller and Gelinas 2013; Wilkinson 2013; van Aaken 2015b.
42
Christman 21.3.2015, Introduction; cited approvingly by van Aaken 2015b, p. 9.
whether nudging interferes with personal autonomy lies therefore the question
whether nudges – some or all of them – are ‘manipulative and distorting external
forces’.
7.4.2 Nudging and Personal Autonomy
From the perspective of autonomy, not all nudges are created equal. Nudges that
merely provide information, or make certain information more salient, clearly do
not interfere with autonomy and do not trigger constitutional scrutiny. Autonomy
requires informed consent, so nudges that are designed to inform the decision maker
about the consequences of his decision actually enhance autonomy.43 In a similar
vein, the Federal Constitutional Court has held that the provision of truthful infor-
mation by the government cannot be considered an interference with fundamental
rights, even if the information ‘names and shames’ certain competitors and causes
them considerable losses.44 Efficient markets depend on transparency, and measures
enhancing market transparency are prima facie constitutional.45
While it is widely accepted that the provision of purely factual information does
not interfere with fundamental rights, Lüdemann argues convincingly that educa-
tional campaigns designed to change social norms or instil new social norms can be
an indirect interference with fundamental rights, namely personal freedom in the
sense of Art. 2(1) Basic Law.46 The violation of a social norm can have conse-
quences that are at least as severe as a minor fine. While these consequences – such
as social shaming or even ostracism – are not directly attributable to the govern-
ment, if the government actively tries to establish a social norm, it is indirectly
responsible for those consequences. According to Lüdemann, such educational
campaigns require a legal basis in a law in the formal sense and for them to be pro-
portional it must be shown that other measures are not effective in changing the
citizens’ behaviour in the desired way.47
The more difficult issues arise not with informational nudges designed to engage
the audience on a conscious, cognitive level, but with nudges that work on a sub-
conscious or emotional level. Critics argue that such nudges are manipulative and
irreconcilable with personal autonomy.48 Van Aaken distinguishes nudges targeting
the formation of preferences and ‘nudges’ aimed at correcting cognitive errors in
order to help people pursue their own preferences rationally. The former require
43
Sunstein 2015, p. 30; van Aaken 2015a, p. 13.
44
BVerfGE 105, 252, p. 268 – ‘glycol warning’.
45
BVerfGE 105, 252, p. 267 – ‘glycol warning’.
46
Lüdemann 2004, pp. 123 et sq.
47
Lüdemann 2004, pp. 127 et sq.
48
Blumenthal-Barby 2013, pp. 190 et sqq.; Yeung 2012; Wilkinson 2013.
100 M. Schweizer
greater scrutiny than the latter, because they interfere with personal autonomy.49
Particularly problematic are nudges that engage the automatic, unconscious ‘System
I’ of thinking and from which the individual, for lack of awareness, cannot escape
by reflection.50 Such nudges, which van Aaken terms ‘invisible’, are held to inter-
fere with personal autonomy.51
The argument that nudges aimed at changing preferences deserve special scru-
tiny seems to rest on the premise that there are stable preferences that are indepen-
dent of the decision context, and the psychological literature teaches us that this is
not the case.52 If all preferences depend on context, it is hard to see why one con-
text – for example framing a decision as choosing between losses instead of gains –
is more manipulative than another one.53 There must be some context of the decision,
and we might as well choose a context that is more likely to lead to better choices
for more people.54 Even appeals to emotion are hard to be considered manipulative
if one truly accepts the context-dependence of any choice.55 Graphic displays of the
health consequences of smoking on cigarette packaging may well appeal not only to
the rationality of smokers, but also to their emotions. But beautifully shot displays
of healthy, handsome, happy smokers conquering the desert, jungle or the opposite
sex are no less appealing to emotion. It is simply impossible to say what the ‘true’,
context-free preference for smoking is, and there is no indication that the current
context is the one that reveals the ‘true’ preferences of the decision maker.
The aforesaid could lead to the conclusion that non-coercive ‘choice architec-
ture’ never interferes with personal autonomy, but that would not be justified. There
are instances of nudges that are truly manipulative and cannot be reconciled with
respect for personal autonomy. Blumenthal-Barby uses the example of someone
who wishes to convince his overweight roommate to lose weight by replacing all
mirrors in the house with distorting mirrors that make the person look fatter.56 Even
if the goal is ‘good’ it is hard to dispute that the measure taken interferes with the
autonomy of the target, not only because the target is unware, but also because the
nudge is based on providing false information.57 Pointing out that the choice archi-
tects do not pursue selfish motives is hardly sufficient to alleviate the fears over such
manipulations.58
49
van Aaken 2015b, p. 10; Yeung 2012, p. 138, similarly distinguishes between ‘non-exploitative’
nudges that seek to ensure a rational, informed choice, and ‘expoitative’ nudges that “are designed
to alter behaviour by taking advantage of cognitive irrationalities”.
50
van Aaken 2015a, p. 10; 2015b, p. 15.
51
van Aaken 2015a, p. 18; 2015b, p. 14.
52
For an overview see Lichtenstein and Slovic 2006.
53
54
55
More careful Sunstein 2015, p. 38.
56
57
Yeung 2012, p. 134.
58
Kelly 2013, p. 220.
Some ‘invisible’ nudges therefore potentially infringe on personal autonomy,

and if one subscribes to the notion that Art. 2(1) Basic Law in essence protects
autonomy, interfere with a fundamental right. But which nudges are truly ‘invisi-
ble’? Van Aaken considers a nudge invisible if the decision maker is not aware of
the effect of the nudge on his or her choice, because the cues are processed by the
automatic ‘System I’ of thinking.59 I argue that this is not sufficient to consider a
nudge as interfering with personal autonomy. To illustrate with an example, in a
widely cited study a picture of eyes was put above the coffee machine in an office
environment in which the payment for the coffee relied on an honour system, i.e.,
users of the coffee machine were expected to pay into a coin box next to the machine,
but the machine would dispense coffee irrespective of payment. The result of the
field experiment was that in weeks where a poster of human eyes was displayed,
voluntary contributions were almost three times as high as in weeks when a poster
of flowers was displayed.60
This nudge is invisible in the sense that the coffee drinkers were not aware that
the poster altered their behaviour. But can it be considered interfering with auton-
omy? To say so, one would have to argue that the ‘true self’ is revealed in the pres-
ence of a picture of flowers, or a naked wall, while in the presence of the poster of
the eyes, the person is not true to himself or herself. If one accepts that no choice is
context-free and that there is therefore no ‘unbiased’ environment that reveals the
true preference of the individual, this argument is hard to sustain. Accepting the
context-dependence of any choice means that most changes to the choice architec-
ture cannot be considered an interference with personal autonomy. It is not suffi-
cient that the decision maker is unaware of the (intended) effect of the manipulation;
he or she has to be unaware of the manipulative cues – such as in the case of sub-
liminal advertising or the subtly distorting mirrors – that one can consider the nudge
an interference with personal autonomy. The nudges suggested by Sunstein and
Thaler do not fall into this category. Such nudges do not interfere with the right ‘to
do as one pleases’ even if one accepts that the state must respect the individual’s
autonomy. Changing the default for organ donation from opt-in to opt-out does not
affect an individual’s autonomy61; it merely assigns the burden differently.62 Pictures
of people dying of cancer on cigarette packaging are not an interference with auton-
omy since there is no ‘emotion free’ preference for smoking. Replacing spoons with
tongs – certainly manipulative in the sense that most people won’t notice the choice
architecture – does not affect people’s preference for certain foods. It increases,
marginally, the effort required to fulfil those preferences. But having to reach twice
for the same amount of cubes cannot be considered an interference with personal
autonomy even under the most stringent standard. And providing a (large) spoon is
just as ‘manipulative’ as providing tongs, as it forces people that wish to select only
59
van Aaken 2015a, p. 11; 2015b, pp. 13 et sqq.
60
Bateson et al. 2006.
61
As long as it is reasonably easy to opt-out. For a view of default options as effective mandates see
Bubb and Pildes 2014, pp. 1616 et sq.
62
For a different view see van Aaken 2015a, p. 10.
102 M. Schweizer
one or two cheese cubes to be extra careful. The only truly context free choice
would be to provide no serving utensils and ask students to bring their own.
To summarize, the provision of purely factual information will enhance rather
than diminish personal autonomy. Nudges aimed merely at increasing the aware-
ness and information of citizens do not lead to constitutional concerns. Reminding
students to enrol in higher education by sending them text messages,63 for example,
is no interference with personal autonomy. Educational campaigns aimed at chang-
ing social norms, on the other hand, can indirectly interfere with fundamental
right(s). Changes to the decision context intended to influence choice will not gen-
erally interfere with personal autonomy as long as they are not imperceptible in the
sense that not only their effect is unnoticed, but the manipulated cue as such is
unnoticeable. Most of the commonly discussed forms of nudging therefore leave
the decision maker’s autonomy unaffected and do not trigger constitutional
scrutiny.
However, as the example with the tobacco health warning demonstrates, many
nudges will coerce actors other than the decision maker, in this case tobacco com-
panies. Unsurprisingly, the German Supreme Court held that mandated health
warnings interfere with the economic rights of Art. 12(1) Basic Law (but came to
the conclusion that the interference was proportional).64 Many nudges are coercive
for actors other than the decision maker. Informing home owners that they use more
energy than their neighbours may induce them to use less energy without using clas-
sic (financial) incentives,65 but forcing energy providers to supply the information
interferes with their economic freedom. A 14 day cooling off period that allows
rescinding any contract entered into online may be a nudge from the consumers’
perspective,66 but it is certainly coercive on the vendors that have to accept it.
Many nudges will therefore interfere with fundamental rights not of the decision
maker, but other citizens. They will therefore trigger constitutional scrutiny, which
leads to the first prong of the proportionality test: do they serve a legitimate end?
7.5 Applying the Principle of Proportionality to Nudging
7.5.1 Legitimate Public Interest and Nudging
The first prong of the proportionality test requires the identification of a legitimate
public interest (‘Gemeinwohlziel’) that is served by the proposed measure. The
legitimate public interest may itself be derived from the constitution, but does not
63
Castleman et al. 2014.
64
BVerfGE 95, p. 173 – ‘warnings on cigarette packaging’. The plaintiffs also argued that their
freedom of speech was affected, the Constitutional Court denied this, id. at 181.
65
Allcott 2011.
66
According to van Boom and Ogus 2010, p. 2. I am not even sure I would call this a nudge at all.
necessarily have to be.67 It can be any economic, cultural or social purpose. The
protection of minors, minorities, socially disadvantaged persons, public health, the
environment or the advancement of families or gender equality are often cited
examples of legitimate public interests.68 Goals that are unconstitutional, such as
discriminatory purposes, are obviously not legitimate.69
Measures are considered paternalistic if they interfere with the liberty or auton-
omy of a person without that person’s consent and do so just because the measure
will improve the person’s welfare.70 According to the prevailing German doctrine,
an interest is not a ‘public’ interest if the goal of the measure is paternalistic in this
sense.71 The measure must rather be aimed at preventing social harm, or in modern
economic parlance, a negative externality. Paternalistic motives cannot sustain an
interference with a fundamental right except when the person protected from self-
inflicted harm is a minor or mentally handicapped adult.72 In its early case law, the
Federal Constitutional Court has explicitly endorsed this view. It held that the state
does not have the task of ‘educating’ its citizens and therefore no right to interfere
with their autonomy merely to ‘better’ them.73 A ‘missionary’ purpose is not a legit-
imate purpose for interfering with fundamental rights.
This does not bode well for paternalistic nudges, which is a rather large sub-
category of nudges.74 The fact that most nudges will only trigger constitutional scru-
tiny because they interfere with the liberty or autonomy of actors other than the
person being nudged does not make them non-paternalistic. Measures that interfere
with the autonomy of one person to protect another person from self-inflicted harm
are ‘indirectly paternalistic’.75 Their ultimate motive lies in the protection of the
other person from self-harm. If paternalistic motives are insufficient to justify the
interference with fundamental rights of the person to be protected from self-harm,
they are (all the more) insufficient to justify interference with the fundamental rights
of other persons.76 A full prohibition of the sales of tobacco products based on pater-
nalistic motives could be challenged not only by smokers, but also by the suppliers
67
Hufen 2014, p. 119; Ipsen 2014, para. 187; unless the fundamental right intefered with is an
‘unconditional’ right (ohne Gesetzesvorbehalt), in which case it may only be intefered with based
on competing constitutional right(s), Michael 2001b, p. 655. For a different view see Fischer 1997.
68
e.g., Hufen 2014, p. 119.
69
Instead of many Sodan and Ziekow 2014, p. 229.
70
Dworkin 2013, p. 29.
71
Hillgruber 1992, p. 119; Fischer 1997, p. 273; van Aaken 2006, p. 136. Möller 2005 accepts
paternalistic motives as legitimate if the measure is aimed at preserving integrity.
72
The protection from self-harm of people considered incapable of fully using their mind is con-
sidered autonomy-preserving, van Aaken 2015b, p. 3. ‘Soft paternalistic’ measures are widely con-
sidered legitimate and will not be considered further here.
73
BVerGE 22, 180, pp. 219 et sq. – ‘youth welfare’.
74
Not all nudges are paternalistic, of course. Non-paternalistic nudges will generally pass the legit-
imate aim prong, van Aaken 2015a, p. 20.
75
Feinberg 1986, pp. 9 et sq.
76
Enderlein 1996, p. 136.
104 M. Schweizer
of tobacco products, on the basis that paternalistic motives cannot justify the inter-
ference with a fundamental right.
The case law of the Federal Constitutional Court shows, however, that it does not
stringently apply the condition that the measure must be aimed at preventing a
social harm.77 In later cases, it held that ‘generally’, an interference with a funda-
mental right must be aimed at the protection of others,78 leaving open the possibility
that exceptionally, the protection from self-inflicted harm may be a legitimate pur-
pose.79 It upheld helmet laws and seatbelt laws,80 and laws curtailing sports bet-
ting.81 In the former case, one may argue that it is the public that bears the health
care costs in a country that knows compulsory health insurance, and in the latter
case, it is the public that through mandatory social security supports the gambling
addict that is unable to feed him or herself. These arguments are, however, hardly
convincing.82 Not primarily because they would justify almost any paternalistic
intervention, but because mandatory health insurance and social security are them-
selves paternalistic interferences with personal freedom. There is no opt-out of
health insurance or social security in Germany. Everybody who is able to must
contribute to them. The benefit of basic health care is forced upon the individual for
his or her own good. It seems hard to justify further paternalistic interventions based
on a first paternalistic intervention that spreads the consequences of self-inflicted
harm onto other citizens. In any case, harm to third parties by way of social security
could be easily avoided by the less restrictive alternative of merely excluding cer-
tain harms from coverage, e.g., compulsory health insurance would not pay for
injuries sustained because the injured failed to wear a helmet while riding a
motorbike.
In its helmet and seat belt law decisions, the Federal Supreme Court has right-
fully not only relied on the indirect social consequences of not wearing a helmet or
a seat belt, but sought direct social harm. In case of the motorcyclist not wearing a
helmet it pointed out that he may be unable to help others after having caused an
accident, while the helmet-wearing rider may remain conscious and able to help.83
The driver not wearing a seat belt may be thrown from the car and collide with
bystanders.84 These reasons seem rather strained, and they show to which argumen-
tative lengths the Federal Supreme Court goes to avoid accepting a purely paternal-
istic motive as legitimate public interest. A fair summary of the Federal Supreme
Court’s case law with regards to measures aimed at protecting the life and health of
citizens from self-harm is that it accepts paternalistic motives as a legitimate i nterest
77
van Aaken 2015a, p. 20.
78
BVerfGE 90, 145, p. 172 – ‘cannabis’.
79
In BVerfGe 60, 123, p. 132 – ‘transgender I’, it even held without further elaboration that protec-
tion from ‘serious’ self-inflicted harm is a legitimate end.
80
BVerfGE 59, p. 275 – ‘motorcycle helmet’; BVerfG, NJW 1987, p. 180 – ‘seat belt law’.
81
BVerfGE 115, p. 276 – ‘sports betting’.
82
But see Ueltzhöffer 2005, p. 17.
83
BVerfGE 59, p. 275 – ‘motorcycle helmet’.
84
BVerfGE, NJW 1987, p. 180 – ‘seat belt law’.
if the averted harm is very severe and irreversible, namely severe bodily harm or
death. Doctrinally, this has been justified by the argument that personal autonomy
includes an objective dimension of integrity, i.e., the state has a duty to protect a
person’s integrity from irreparable harm.85
Most nudges will not, however, fall into this category. The harm from not saving
enough for retirement is hardly on the same level as smashing one’s brain through
a windshield. Even health nudges – a very popular sub-set of nudges – are for the
most part aimed at preventing long-term health issues resulting from, for example,
obesity. While coronary heart diseases and diabetes are serious and potentially
deadly afflictions, they do not fall into the category of serious bodily harms that the
Federal Supreme Court has so far held to justify paternalistic interventions. No mat-
ter what ethical justifications there are for such nudges, it is hard to square paternal-
istic nudges that trigger constitutional scrutiny with the requirement that any
interference with personal autonomy must serve a public good, i.e., prevent social
harm.86
Another area where the Federal Constitutional Court has grappled with the legit-
imate means test is consumer protection. Consumer protection measures are mostly
aimed not at preventing bodily harm, but rather financial harm to consumers.
Preventing someone from entering into an agreement that is disadvantageous for
him or her seems like a classic case of paternalism. There is a loss of freedom when
consumers are prevented from, for example, buying consumer goods from commer-
cial vendors without a 2 year period to claim defects.87 A well informed consumer
may rationally prefer a cheaper good without warranty to the more expensive good
with a warranty.88
The Federal Constitutional Court has relied on two lines of arguments to uphold
potentially paternalistic consumer protection regulation in the face of constitutional
scrutiny. Firstly, it is argued that there often is a structural imbalance between con-
tracting parties which leaves one party essentially at the mercy of the other. Under
circumstances where one party can in reality dictate the terms of the agreement
there is no free choice, the weaker party – typically the consumer or employee – is
forced to accept the offer as it is. The court then considers it justified to restrict
freedom of contract to prevent exploitation.89 Arguably, this is not protection from
self-inflicted harm, but protection from harm by third parties.
Secondly, the court argues that the inexperience of the decision maker with the
specific transaction and its associated risks or social pressure may justify cogent
85
Möller 2005.
86
van Aaken 2015a, p. 21.
87
Art. 437(3) in connection with Art. 474 Bürgerliches Gesetzbuch.
88
Warranty is used in the sense of ‘Gewährleistung’, i.e., the vendor must only warrant that the
good was not defective when the risk passed. If the defect occcurs within 6 months after the pass-
ing of the risk, it is presumed that it existed when the risk passed, Art. 476 Bürgerliches Gesetzbuch.
89
BVerfGE 81, 242, p. 255 – ‘sales agents’; BVerfGE 89, 214, p. 232 – ‘debt guarantee’.
106 M. Schweizer
private law.90 These motives are hard to interpret as anything but paternalistic.91
One cannot shake the impression that while in principle and in theory, paternalistic
motives are not accepted as legitimate ends for interfering with a fundamental right,
in practice the Federal Constitutional Court accepts paternalistic motives in the con-
text of consumer protection and employee protection.92
The conclusion so far is therefore that nudges that trigger constitutional scrutiny
must in principle serve other than purely paternalistic goals to pass the legitimate
means test of the proportionality principle, unless they are aimed at preventing
irreparable harm to a person’s integrity. The case law of the Federal Constitutional
Court namely in the area of consumer protection law indicates that the court does
not apply the prohibition of paternalistic motives strictly, however.
7.5.2 Suitability and Nudging
A means interfering with a fundamental right in the interest of a legitimate public

good is suitable when it is, at least in principle, possible that it furthers the stated
public goal.93 It is not required that it is the optimal means to further the public
interest,94 or that it serves all the stated public interests if more than one is pleaded.95
It is also not required that the state shows that the means demonstrably furthers the
public interest, the ‘abstract potential’ that it helps achieving it is enough.96
Unsurprisingly, hardly any legislative measure ever fails this prong of the propor-
tionality principle.97
Measures that change the context of a choice to nudge the decision maker
towards a choice preferred by the policy maker will pass this prong even if their
effectiveness is potentially more limited than early advocates of nudging cared to
admit (see next section). The evidence that nudging works to some degree is over-
whelming, and that is all that is required under the suitability test. The fact that not
all decision makers make the desired choice is irrelevant as long as more decision
makers make the desired choice after the intervention than before the intervention.
Nudging is therefore, like any not wholly irrational legislative measure, suitable in
the sense of the principle of proportionality.
90
BVerfGE 89, 214, p. 235 – ‘debt guarantee’; BVerfGE NJW 1999, pp. 2749 et sqq.; BVerfGE 60,
329, p. 345 – ‘pension adjustment’.
91
Enderlein 1996, p. 143.
92
See also van Aaken 2015a, p. 21, who considers the Constitutional Court’s jurisprudence ‘eva-
sive’ and ‘less rigorous’ than the doctrine.
93
BVerfGE 115, 267, p. 308 – ‘old debts’.
94
BVerfGE 30, 292, p. 316 – ‘oil reserves’.
95
Michael 2001b, p. 656.
96
BVerfGE 67, 157, p. 175 – ‘surveillance law’. For a critique see Bickenbach 2014, pp. 320 et sq.
and the references cited therein.
97
Hufen 2014, p. 119.
7.5.3 Nudging as the Least Restrictive Alternative?
A means is required (or necessary) when there is no other means available that is
equally suitable to further the public interest but less infringing on the constitution-
ally protected right(s).98 When there are several equally effective means to achieve
a given objective the state is required to choose the ‘mildest means’, i.e., the inter-
vention least restrictive of personal liberties.99 If there is doubt whether the pro-
posed measure or a less restrictive alternative are equally effective, the less
restrictive measure must be chosen.100 A measure is less restrictive if it interferes
less intensely with a given fundamental right, or interferes with a less weighty fun-
damental right, or affects less people.101 The legislator is not obliged to choose the
less restrictive alternative, even if it is considerably less restrictive, if it serves even
one of the stated public interests marginally less than the proposed policy.102 On the
other hand it is not required that the least restrictive alternative does not interfere
with any fundamental right at all, it is sufficient that it interferes less.103
A nudge will generally be less restrictive than a coercive measure. This even
holds for nudges that are coercive on actors other than the ultimate decision makers,
because the coercive alternative will often also coerce those actors. Take the exam-
ple of health warnings on cigarette packaging. These warnings – clearly intended to
influence smokers to quit – are burdensome on tobacco companies. A traditional
financial incentive with a similar effect is increasing the tax on tobacco products.
But if this measure is as effective as health warnings (in reducing smoking), it is no
less coercive on the tobacco companies, and arguably more coercive on smokers.104
The same goes for forcing the operators of cafeterias to provide tongs rather than
spoons for unhealthy food items. The coercive alternative of banning certain foods
altogether, or increasing their price by taxation, is more coercive on the consumer,
and equally coercive or more coercive on the operator. Changes to the choice archi-
tecture will therefore generally pass the necessity prong of the proportionality
principle.
Van Aaken argues that from a set of potential non-coercive interventions, the
government should choose transparent nudges that rely on information and raising
awareness, rather than nudges that work on a subconscious level.105 As desirable as
98
BVerfGE 67, 157, p. 176 – ‘surveillance law’.
99
BVerfGE 53, 135, p. 145 – ‘chocolate easter bunny’; Sodan and Ziekow 2014, p. 230.
100
Schlink 2001, p. 458, argues that the burden of proof that the measure is required lies with the
state, therefore, if there remain doubts, the measure is not justified.
101
Michael 2001b, pp. 656 et sqq.
102
Michael 2001b, p. 657 and Michael and Morlok 2014, p. 308.
103
Michael and Morlok 2014, para. 620.
104
Health warnings on cigarette packaging may be covered by special sleeves, thereby preventing
exposure to the warning. There is no legal way to avoid paying tobacco tax, however. The provision
of sleeves by tobacco companies may be illegal, but nobody seems to argue that the end consumer
is prohibited from using such sleeves, Wilson et al. 2006.
105
van Aaken 2015b, pp. 31 et sqq.
108 M. Schweizer
this may be from an ethical perspective seeking to maximize autonomy, legally, it

only follows from the proportionality principle if the transparent, information-based
measure is as effective as the subconscious nudge. This is at least doubtful.106 It
would have to be empirically shown that, for example, providing the patrons of a
cafeteria with information on the risks and benefits of certain food items is as effec-
tive as placing those food items at the back of the line, or that letting the users of a
coffee machine in an office know that without their contribution, no more coffee
can be bought, increases donations as much as hanging a picture of eyes next to the
machine.
The more interesting question is whether the state may actually be forced to
choose a non-coercive measure over a coercive measure under this prong. This is
the case if the non-coercive measure is as effective as the proposed coercive mea-
sure. While early proponents were convinced that nudging is an effective way of
changing behaviour, often as effective as coercive approaches,107 empirical evi-
dence casts doubt on this.108 After the UK government famously installed a
‘Behavioural Insights Team’ – a small team of civil servants and academics based in
the Cabinet Office tasked with advising the British government in non-coercive
interventions to change public behaviour – the House of Lords Select Committee on
Science evaluated the effectiveness of non-coercive forms of behaviour change in a
2011 report.109 The Committee heard a large number of witnesses, many of them
academics both engaged in primary research as well as those tasked with changing
behaviour at government agencies and private companies.110 The report came to the
conclusion that nudges – a subset of what the report describes as “non-regulatory
interventions”111 – “would be unlikely to have a significant effect [on behaviour] if
used in isolation.”112 The Select Committee on Science “urge[d] ministers to ensure
that policy makers are made aware of the evidence that non-regulatory measures are
often not likely to be effective if used in isolation and that evidence regarding the
whole range of policy interventions should be considered before they commit to
using non-regulatory measures alone.”113
Lauren E. Willis specifically examined the effectiveness of default rules to
induce behaviour change. She notes that while there is evidence that automatic
106
Englerth 2007, p. 239.
107
108
Marteau et al. 2011; Rayner and Lang 2011; Salazar 2012; Costa-Font et al. 2014; Bubb and
Pildes 2014, pp. 5 et sq.; Russell 2015, pp. 22 et sq.; Ito et al. 2015.
109
House of Lords Science and Technology Select Committee 19.07.2011, see id. Box 7 at para.
5.3 for the role of the Behavioural Insights Team. Today, the Behavioural Insights Team is a private
enterprise – partially owned by the UK government – “whose mission is to help organisations in
the UK and overseas to apply behavioural insights in support of social purpose goals”, see www.
behaviouralinsights.co.uk/about-us (last visited 8 February 2016).
110
See list of witnesses in House of Lords Science and Technology Select Committee 19.07.2011,
Appendix 2.
111
House of Lords Science and Technology Select Committee 19.07.2011, Table 1 at para. 2.3.
112
House of Lords Science and Technology Select Committee 19.07.2011, paras. 5.8, 8.14.
113
House of Lords Science and Technology Select Committee 19.07.2011, paras. 5.15, 8.16.
(default) enrolment in a retirement savings plan dramatically increases the partici-

pation rate, this is not the case for many other defaults intended to protect consum-
ers from self-harm. She attributes the difference primarily to the incentives of the
private actors. When defaults are deployed in an environment where one side of the
bargain – usually the better informed side – has an interest to change the default, the
default turns out to be not very sticky at all. Worse yet, those consumers who opt
out of the default option are often the ones that would benefit the most from it,
because conversely, the contractual partner has the strongest incentive to make
them switch.114 Willis concludes that “where a party with the means to influence
consumer choice opposes them, government nudges are likely to fail.”115 To be
effective in the face of opposition, nudges “must be supported by a web of regula-
tion and government marketing so strong that the cost of cutting through that web
exceeds the benefits to firms of doing so”,116 which makes them effectively as bur-
densome as traditional coercive regulation. In the same vein, Bronchetti et al. find
that default options are not sticky in the face of pre-determined spending plans by
low-income tax filers.117 Similar to Willis, Bubb and Pildes argue that more than
nudges are needed to achieve the stated policy goals of increasing retirement sav-
ings, protecting consumers from predatory lending practices and improving fuel
economy.118 They accuse proponents of nudging of deliberately avoiding drawing
the full conclusions from the body of (psychological) research they are building on,
which would lead them to endorse traditional regulatory interventions that limit
freedom of choice, to offer a political third way – ‘libertarian paternalism’ – that
generates political consensus.119
Both empirical evidence as well as theoretical considerations – namely taking
into account the strategic behaviour of market participants – therefore puts the
effectiveness of freedom of choice preserving interventions in furthering public
policy goals in doubt. Since under the necessity test of the principle of proportional-
ity a less restrictive alternative only has to be preferred if it is equally effective as
the proposed measure in all regards, the legislator will rarely be compelled to choose
nudging over more traditional regulatory means. Perhaps unsurprisingly,120 it all
comes down to the last and most controversial prong of the principle of proportion-
ality, balancing proper.
114
Willis 2013, p. 1186, p. 1228.
115
Willis 2013, p. 1161.
116
Willis 2013, p. 1229.
117
Bronchetti et al. 2011.
118
Bubb and Pildes 2014, pp. 1647 et sqq. and more often.
119
Bubb and Pildes 2014, pp. 1596 et sqq.
120
Classen 2012, p. 652; Möller 2014, p. 156.
110 M. Schweizer
7.5.4 Balancing and Nudging
The last prong of the proportionality test requires the interference of the proposed
intervention with the fundamental right(s), and its other undesired effects, to be
weighed against the importance of the public interest the means seeks to achieve
(‘Verhältnismässigkeit im engeren Sinn’, ‘Angemessenheit’ or ‘Zumutbarkeit’).121
Balancing requires that the “weight of the interference must not be disproportionate
to the weight of its justifying reasons”.122 The legislator must put the abridged indi-
vidual right and the public interest served by the intervention into perspective. The
balancing test may result in the finding that a suitable and required means is uncon-
stitutional because the interference with the fundamental right(s) weighs more
heavily than the interests the measure seeks to protect.123 The less severe the inter-
ference with fundamental rights is, the more easily it can be accepted in view of the
protection of important goals by the measure.124
If this all sounds a bit vague to you, you are not alone. The Federal Supreme
Court acknowledges the fuzziness of the balancing test insofar as only dispropor-
tionate measures are unconstitutional.125 In other words, the balancing test does not
require that the measure is proportionate; it only requires that it is not disproportion-
ate. This is meant to preserve the legislator’s freedom to choose among several
suitable and required measures (‘Einschätzungsprärogative’).126 It is nonetheless
evident that the balancing test is a value judgment much more than the suitability
and necessity prongs of the proportionality test, which require an empirical assess-
ment of the proposed measure’s impact.127 For critics of the balancing test, the
courts overreach into the proper domain of politics when they engage in unstruc-
tured balancing.128 The weighing of interests to reach a compromise is a typical
activity of legislators and should be reserved for democratically elected
politicians.
Considerable doctrinal effort has therefore been spent on structuring the balanc-
ing test and making it more predictable. The best known of these efforts is probably
Robert Alexy’s weight formula.129 In a partially simplified form, the weigh formula
takes into account the interests (or principles) to be balanced:
121
Hufen 2014, p. 121; Sodan and Ziekow 2014, p. 230.
122
BVerfGE 118, 168, p. 195 – ‘basic account data’: “Dieses Gebot verlangt, dass die Schwere des
Eingriffs bei einer Gesamtabwägung nicht außer Verhältnis zu dem Gewicht der ihn rechtfertigen-
den Gründe stehen darf”.
123
BVerfGE 115, 320, pp. 345 et sq. – ‘dragnet search II’.
124
BVerfGE 118, 168, p. 195 – ‘basic account data’.
125
BVerfGE 100, 226, p. 242 – ‘heritage site preservation’.
126
Zippelius and Würtenberger 2008, pp. 124 et sqq.; Ipsen 2014, para. 195; Michael and Morlok
2014, para. 626.
127
Schlink 2001, p. 458.
128
Schlink 2001, pp. 461 et sqq.; Pieroth 2014, para. 303; and the references cited in Saurer 2012,
p. 31.
129
Alexy 2003, pp. 783 et sqq.; for an English exposition see Jestaedt 2012, pp. 155 et sqq.
a = interest pursued by the interference with a fundamental right (aim of the

interference)
b = interest burdened by the interference
The further elements of the weight formula are W = weight (or value) of the
interest (‘the importance of satisfying the interest’), P = probability of interference
and I = intensity (or gravity) of interference. The weight formula then reads
Wa Pa I a Ga
=
Ga ,b =
Wb Pb I b Gb

A measure is disproportionate if Ga,b <1. Put into words, the weight formula requires
taking into account the weight of the fundamental right, the intensity and probabil-
ity of its infringement by the proposed measure on the one hand, and the weight of
the public interest to be served, the probability and degree of its achievement by the
proposed measure on the other side, and finds the measure disproportionate if the
latter is larger than the former. Besides the difficulty of expressing such abstract
notions as the ‘weight of an interest’ as real numbers – which has to be possible
unless one considers the interests incommensurable130 – the problem with the
weighing formula is that it explains a lot, but predicts little.131 Few would disagree
that the weight formula identifies correctly the parameters required for proper bal-
ancing, but it gives no guidance how the proper weight is assigned to various inter-
ests, or principles, in specific cases.132
Alexy and his supporters posit that it is at the least possible to put the affected
interests into three categories of ‘little’, ‘intermediate’ and ‘most’ worth protect-
ing.133 Applied to fundamental rights, the freedom of personal development (Art.
2(1) Basic Law) is least protected, while more specific rights such as the right to life
(Art. 2(2)), freedom of opinion (Art. 5(2)) or the privacy of correspondence and
telecommunication (Art. 10(1)) fall into the second category. The highest category
is reserved for unconditional134 rights, such as freedom of religion (Art. 4(1) Basic
Law). In the same way the public interest(s) the measure seeks to further can be
categorized, with the protection of constitutional goods having the most weight. In
this category fall not only the protection of the fundamental rights of others, but also
the protection of constitutionally mandated public goods, such as the protection of
the environment (Art. 20a Basic Law). More controversially, it is claimed that other
130
Alexy 2003, p. 781, argues that the German constitution, by allowing the inteference with fun-
damental rights based on parliamentary act, assumes commensurability of rights and public inter-
ests. For a more pessimistic view see Endicott 2014.
131
Klement 2008, p. 761.
132
Jestaedt 2012, pp. 164 et sqq.
133
Alexy 2003, p. 773; Wienbracke 2013, p. 153; Michael and Morlok 2014, para. 624.
134
‘Vorbehaltlose Grundrechte’ in German. In this context this means that the German Constitution
does not expressely state that these rights may be abridged by a law, as it does for many fundamen-
tal rights.
112 M. Schweizer
public interests can be categorized according to their weight, too.135 Finally, the
epistemic probability of the measure having the desired effect or the feared interfer-
ence with the fundamental right can be divided into the three categories of certainty,
plausible and ‘not evidently false’.136
Given the vagueness of the balancing test it is difficult to assess on an abstract
level how nudging interventions will fare. Nudges will often only interfere with the
economic freedom (‘Berufsfreiheit’, Art. 12 Basic Law) in the sense of the
‘Berufsausübungsfreiheit’, i.e. the freedom of how to specifically conduct a gainful
activity, of those having to implement the nudge, rather than completely prohibiting
certain gainful activities.137 This economic freedom is afforded little weight unless
the exercise of a profession is completely forbidden,138 which would indicate that
most interventions in choice architecture will pass the balancing test. Since the bal-
ancing test also requires taking into account the weight of the public interest pur-
sued by the measure, a more definite answer is impossible without knowing which
public interest the nudge seeks to further. The fact that the state chose a non-coercive
and therefore most likely less effective measure to further a public may by itself
indicate that the public interest pursued is not very important.139 Nonetheless it is
hard to see how a nudge that serves a legitimate public interest and is both suitable
and required would fail the balancing test unless the sub-set of people that would
exhibit the undesired behaviour absent the nudge is so small that even the relatively
minor inconvenience imposed by certain nudges on the overwhelming majority of
citizens outweighs the benefits to those whose behaviour is changed by the
intervention.
The balancing test, both as proposed by Alexy as well as practiced by the Federal
Constitutional Court, does not take into account the availability of less restrictive
alternatives. The relevant question is only whether the interference of the proposed
measure with a fundamental right is proportionate in view of the harm that likely
occurs in the absence of the measure. Therefore, the balancing test cannot force the
legislator to choose a non-coercive intervention over a proposed coercive measure.
7.5.5 Consistency and Nudging
In recent times, the Federal Constitutional Court has explicitly referred to the lack
of consistency (‘Folgerichtigkeit’) of a proposed measure when judging its propor-
tionality.140 When implementing measures protecting a public interest, the legislator
must not create exceptions without a rational basis, or in other words, the proposed
135
Alexy 2003, pp. 780 et sqq.; Michael and Morlok 2014, para. 624 (p. 310 at the top).
136
Alexy 2003, p. 789.
137
The scope of protection of the ‘Berufsfreiheit’ is far reaching, see Ipsen 2014, paras. 634 et sq.
138
Ipsen 2014, paras. 656 et sq.
139
Payandeh 2011, p. 607 (for inconsistent legislation).
140
BVerfGE 115, 267, p. 310 – ‘sports betting’; BVerfGe 121, 317, pp. 362 et ssq – ‘smoking in
bars’.
measure must be consistent with its stated aim. The ‘consistency requirement’ had
been developed in the court’s tax jurisprudence, where it is based on the principle of
equality (Art. 3 Basic Law) and requires taxation according to the subject’s eco-
nomic capacity.141 Its application in the framework of the proportionality test for the
interference with fundamental rights has been greeted with a healthy dose of scepti-
cism if not outright hostility. It was pointed out that requiring consistency in the
interference with fundamental rights may lead to the absurd consequence that a
measure that interferes more substantially with a fundamental right, or the funda-
mental right(s) of more persons, may be proportional, while a less restrictive mea-
sure may be considered disproportionate.142 These concerns are mostly based on the
specific reasoning of the court in its decision regarding the constitutionality of
smoking bans in bars, restaurants and the like.143 The specific legislation permitted
separate smoking rooms if the inn also offered a non-smoking room. Small corner
bars were unable to benefit from the exemption – since they only had one room,
which room had to be smoke-free. The court considered that the proposed legisla-
tion did not pass the balancing test because it had a disproportionate impact on
small bars, which would lose customers to larger establishments where smoking
remained possible.144
At first blush, the requirement of consistency may put choice architectural mea-
sures at risk. By their nature non-coercive, they are inconsistent in the sense that
they allow interested subjects avoiding the intended behavioural change. If the gov-
ernment really believed that certain harms should be averted, should it not make
sure that they are actually averted, rather than leaving compliance up to the
individual?
A closer look at the consistency requirement puts these doubts to rest, however.
In practice, it serves two purposes. On the one hand, the consistency requirement is
simply an application of the principle of equal treatment specifically to competi-
tors.145 While regulations that differ based on the facts of the case rather than the
person are generally compatible with the equal treatment requirement of Art. 3
Basic Law, if a facts-based distinction disparately impacts certain competitors, their
economic freedom is infringed.146 Nudges as such will not lead to unequal treatment
of competitors; they equally affect everybody in a given market. They may if they
are combined with other regulations – such that only companies above a certain size
must implement them – but the disparate impact then results not from the nudge as
such, but rather from the circumstances of its implementation.
On the other hand, inconsistent legislation is a signal that the state has hidden
motives other than the protection of a legitimate public interest.147 When regulating
141
Bumke 2010, pp. 87 et sq.
142
BVerfGe 121, 317, p. 385 – ‘smoking in bars’ (Mansing dissenting).
143
Payandeh 2011, p. 606.
144
BVerfGE 121, 317, pp. 355 et sq. – ‘smoking in bars’.
145
Michael 2008.
146
Michael 2008, p. 878.
147
Petersen 2013.
114 M. Schweizer
sports betting, for example, the government may restrict economic freedom to pro-
tect gambling addicts from financial ruin. It may not, however, restrict economic
freedom to protect its fiscal interests by exempting state owned entities from regula-
tions that apply to private outfits.148 The regulation therefore has to be consistently
aimed at protecting gambling addicts to be constitutional.149 The fact that the gov-
ernment chooses a nudge over more traditional coercive regulation may indicate
that the true motive is paternalistic. Nudges are tempting because they seem to
interfere little with fundamental rights. If the government was fully convinced that
a legitimate public interest was at stake, coercive measures could easily be justified
if the only fundamental rights at stake are personal and economic freedom. If the
court comes to the conclusion that the end of a choice architectural intervention is
purely paternalistic, however, the proposed regulation should fail the first prong of
the proportionality principle, rather than be considered inconsistent.
In sum, changes in the decision context are not inconsistent under the ‘consis-
tency requirement’ developed in the latest case law of the Federal Constitutional
Court. The fact that not all individuals exposed to the changed decision context will
change their behaviour in the expected way is a virtue, not a vice, of nudging.
7.6 Conclusion
Subjecting governmental non-coercive changes to a decision context designed to

influence human behaviour in a predictable way to the proportionality test raises a
number of interesting questions. Firstly, it has to be assessed whether a true ‘nudge’,
which does not limit the choice set, can be considered an interference with a funda-
mental right under the German Constitution. In this contribution I argue that most
nudges per se do not interfere with personal autonomy, as there is no truly ‘unbi-
ased’ context that would reveal the ‘true’ preference of the decision maker. All
choices are influenced by context in some way, and there is no right to a context-
free choice. However, the implementation of nudges will often involve coercive
measures against persons other than the decision maker, and therefore trigger con-
stitutional scrutiny as they interfere with the personal freedom of those forced to
implement the nudge.
Secondly, nudges that are solely aimed at preventing the decision maker from
harming him- or herself do not serve a legitimate end that would justify the interfer-
ence with a fundamental right unless the harm prevented is serious bodily harm or
death. It does appear, however, that the Federal Constitutional Court allows
paternalistic interventions in the domain of consumer and employee protection if
not in theory, then at least in practice.
Thirdly, most nudges – like any not wholly irrational intervention – will pass the
suitability prong of the proportionality principle. Fourthly, nudges will usually pass
148
BVerfGE 115, 276, pp. 303 et sqq. – ‘sports betting’.
149
BVerfGE 115, 276, pp. 309 et sqq. – ‘sports betting’.
the necessity prong as well, as there will generally not be any less restrictive alterna-
tives. It is namely doubtful that purely cognitive interventions aimed at providing
information to the decision maker are as efficient as measures that alter the decision
context. On the other hand, the legislator will rarely if ever be forced to choose a
nudge over a coercive measure under the necessity test, because nudges are hardly
ever as effective in changing behaviour as traditional prohibitions or
commandments.
Fifthly, it is difficult to assess in the abstract whether nudges will pass the bal-
ancing test. Since most nudges will only interfere with personal freedom or eco-
nomic freedom, which are given little weight in the balancing against competing
(public) interests, nudges should generally fare well under the balancing test. On the
other hand, the fact that the government chooses nudging rather than a coercive
measure may indicate that it does not consider the interest to be furthered by the
measure to be very important.
Finally, nudges will generally be consistent in the sense of the ‘consistency
requirement’ recently employed by the Federal Constitutional Court also in the
assessment of the proportionality of interventions with fundamental rights. While
nudges will by their nature not affect every decision maker, this does not mean that
they are inconsistent in the sense that they violate the equal treatment clause of the
German Constitution because all the decision makers are exposed to the interven-
tion in the same way.
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Chapter 8
Nudging in Swiss Contract Law?
An Analysis of Non-mandatory Default Rules from a
Legal, Economic and Behavioural Perspective
Klaus Mathis and Philipp Anton Burri
Abstract This essay discusses various interpretations of the function of non-

mandatory contract law and the ensuing requirements with regard to formulating its
content adequately. After some preliminary remarks on non-mandatory contract law
(Sect. 8.1) initially two theories are introduced: Friedrich Carl von Savigny’s theory
based on the autonomy of contracting parties and the theory of Oskar Bülow and
Rudolf Stammler focusing on heteronomous evaluations (Sect. 8.2.1). There fol-
lows a presentation of a classical economic perspective on contract law, which con-
ceives of non-mandatory norms as means for reducing transaction costs and which
upholds efficiency as the central standard (Sect. 8.2.2). Next, attention is turned on
the behavioural economic analysis of non-mandatory contract law, and the funda-
mental possibility of using non-mandatory law as a nudging instrument to steer
behaviour is introduced, making reference to two concrete examples of its applica-
tion in labour law and in surety contract law. In conclusion, the most important
findings are summarised (Sect. 8.3).
8.1 Introduction
Present-day private law systems are based on the principle of private autonomy.
According to this principle private legal subjects are fundamentally free to arrange
their legal relationships themselves, according to their own will, within the bounds
of the legal system.1 One of the means available to them for precisely this kind of
private autonomous arrangement is the instrument of the contract. Under the
principle of freedom of contract, it is fundamentally left up to them to determine
1
Gauch et al. 2008a, p. 59.
K. Mathis (*) • P.A. Burri
Faculty of Law, University of Lucerne, Frohburgstrasse 3,
6002 Lucerne, Switzerland
e-mail: klaus.mathis@unilu.ch; philipp.burri@stud.unilu.ch

122 K. Mathis and P.A. Burri
whether and with whom they wish to conclude, terminate or amend a contract.2 In
particular, it is also left to the parties to define the content of the contract within the
bounds of the law: provided that they do not thereby violate any compelling regula-
tion, agree any impossible or illegal content, or contravene public morals,3 they are
free to regulate performance, consideration, and all other conditions of the contract
as they wish.4
For a private agreement to be recognised as a contract, the legal order demands
that the parties must have agreed a “meaningful whole”.5 This means that at least
the essential points, the essentialia negotii, of the (natural6 or normative7) consensus
must be covered. Any lack of agreement about (non-essential) ancillary points, the
accidentalia negotii, on the other hand, does not prevent the contract from coming
into being (for Switzerland cf. Art. 2 para. 1 of the Swiss Code of Obligations).8
Although such ancillary points can likewise be regulated freely – within the
aforementioned bounds – there is, theoretically, an infinite number of ancillary
points and it is unreasonable to expect the parties, and indeed not even possible for
practical reasons, to anticipate and consensually regulate all eventualities that might
come into play during the lifetime of their contract.9 This means that all contracts –
even after an interpretation of the contractual provisions – contain loopholes to a
greater or lesser extent.10
This initial situation makes it clear that a system of contract law based on private
autonomy is dependent on a mechanism for closing such loopholes, if any disputes
arising over non-contractually regulated points are not to go unanswered by the
court.11 The closing of these loopholes is referred to as completion of the contract.12
As possible instruments for such contract completion, the following cascade of
completion mechanisms has become established: non-mandatory statutory law,
customary law and contract completion by the court.13 In the case of the last method,
the court has to be guided by the hypothetical will of the parties, and apply those
rules which the parties themselves would have agreed if the question concerned had
2
Schwenzer 2012, p. 171.
3
Decision of the Swiss Federal Court BGE 96 II (18), 20, E.1.
4
Cf. on the entire issue, Schwenzer 2012, 180–181, 249–257; Gauch et al. 2008a, pp. 122–152.
5
Schönenberger and Jäggi, marg. no. 84 to Art. 1 of the Swiss Code of Obligations.
6
7
8
Gauch et al. 2008a, pp. 330 et seqq..
9
Belser et al. 2000, p. 174.
10
Korobkin 1998, p. 609; Schäfer and Ott 2012, p. 455.
11
On the theoretically conceivable options for reacting to incomplete contracts in the event of dis-
putes, see Cziupka 2010, p. 1 and for a brief comparative presentation on the treatment of loop-
hole-closing instruments in civil law and common law systems, see ibid. pp. 59–63.
12
Gauch et al. 2008a, pp. 283 et seqq.; Schwenzer 2012, p. 269.
13
8 Nudging in Swiss Contract Law? 123
led to a contractual provision.14 If the balance of interests in the case to be ruled

upon fits a generalizable constellation, the court must act modo legislatoris to estab-
lish a general norm and apply this to the concrete case.15 In exceptional cases, non-
mandatory statutory law makes reference to the discretion of the court or to custom
and practice.16
The present study focuses on the analysis of non-mandatory statutory law and,
for that reason, refrains from presenting the other methods of contract completion.
8.2 Theories on Non-mandatory Contract Law
Non-mandatory contract law17 comprises those norms of private law which only
come into application if the parties to a contract have not agreed their own provision
overriding the statutory regulation.18 It satisfies the principle of private autonomy
that a large number of the norms in private law exhibit this permissive character,
whereby they cede precedence to the regime arrived at consensually between the
contracting parties.19
Thus, a major part of private law and especially contract law seems to consist of
a kind of substitute regime20 which is only conceived, from the start, for the eventu-
ality that the parties fail to regulate a certain legal question themselves, and is only
intended to take effect if their contract turns out to contain a loophole in this
respect.21 Seen in this light, the state is providing a mere service to private individu-
als by holding a safety net of norms in readiness, its sole purpose being – in cases
where the common will of the parties to the contract has not been stated com-
pletely – to complete this and to resolve any disputed issues appropriately.
This is not, however, the only way of looking at non-mandatory law, which can
also be understood as a kind of state proposed rule22 from which the parties can,
and in some circumstances must, take guidance.23 Considered from this angle,
non-mandatory norms sketch out the legislatorial idea of an adequate regulation of
the given aspect of life, and thereby give expression to normatively charged
14
15
16
17
Also: dispositive law, ius dispositivum, voluntary law (under civil law).
18
For Swiss contract law: Huguenin 2012, p. 6; Gauch et al. 2008a, p. 283–285; Schwenzer 2012,
p. 252.
19
Cf. Bucher 1977, p. 249.
20
Thus, Schäfer and Ott 2012, p. 455.
21
Schmid and Stöckli 2010, p. 11.
22
Cf. Cziupka 2010, p. 207.
23
On the “guiding principle” function of non-mandatory law, with further citations, Cziupka 2010,
pp. 126 et seqq.
behavioural expectations.24 From this standpoint, a divergent private agreement

appears to be an exception from the “normal order”25 regarding the matter con-
cerned and, as such, may impose an obligation upon the parties to justify their
divergent provision.26
What has been said until now indicates that the phenomenon of non-mandatory
law in our private law system is of central importance, on the one hand, and that on
the other hand, the function of this type of law is neither definitively explained and
nor does it appear to be trivial. This essay takes up these problems and inquires into
the function of non-mandatory law and, in conjunction, into the adequate content of
non-mandatory norms, which on the one hand emerge as a necessary supplement
for the incomplete contracts, and on the other hand may serve the parties as a legis-
latorial example of contractual regulation of their legal relationships.
To this end, initially the two major juridical theories27 on non-mandatory law are
presented: on the one hand, the theory of Friedrich Carl von Savigny, focusing on
autonomy and free will; on the other hand, an approach that goes back to Oskar
Bülow and Rudolf Stammler, which brings to the forefront the objective regulatory
function as well as imperatives of justice that are codified not only in mandatory
norms, but are also reflected in non-mandatory norms.28
Further, two different theories arising from an economic analysis of non-
mandatory contract law will be presented. The first to be introduced is a classical
economics perspective, which understands non-mandatory contract law essen-
tially as a vehicle for facilitating legal transactions and as a mere instrument for
lowering transaction costs. Ultimately, non-mandatory law can also be understood
as a potential nudging instrument.29 After introducing some fundamental insights
from behavioural economics, the specific mode of operation of non-mandatory
contract law will be described and the resulting nudging opportunities presented
with reference to specific applied examples in the domains of labour law and
surety contract law.
24
Cziupka 2010, p. 5.
25
Raiser 1935, p. 293.
26
On this, cf. citing Enneccerus et al. 1959, § 49; Cziupka 2010, p. 91.
27
There are numerous variations and modes of both theories. For the purposes of the present essay,
it suffices to give a schematic presentation illustrating the fundamental field of tension between
autonomous and heteronomous norming in non-mandatory contract law.
28
For a comprehensive presentation of these theories, see Cziupka 2010, pp. 66 et seqq.
29
Cziupka 2010, pp. 486 et seqq.
8.2.1 Juridical Theories on Non-mandatory Contract Law
Savigny and the Hypothetical Will of the Parties
Friedrich Carl von Savigny’s entire legal thinking is characterised throughout by

autonomy and the freedom of the private legal subjects.30 Consequently he con-
ceives of non-mandatory law as a mere interpretation of the common will of the
parties, which has only been expressed incompletely in the contract.31 He thereby
attests non-mandatory law to have a pure convenience function.32 Its task consists
solely in completing the incompletely articulated definitions of the will of the con-
tracting parties.33 To that extent, the role assigned to non-mandatory law is merely
subservient.34
Logically, then, the will of the contracting parties has to be taken as the only
reasonable standard for the content of non-mandatory law.35 Since this will, in the
case in question, has definitely not been expressed by the parties explicitly, nor can
it be deduced implicitly from their behaviour, reference must be made to a
presumed,36 a hypothetical37 will of the parties in order to close any eventual loop-
hole in the contract. According to Bernhard Windscheid’s wording, the content of
this hypothetical will is nothing but what the parties themselves would have agreed
if they had reached an agreement on the question concerned, and thus, the actual
will of the parties.38 This hypothetical will of the parties is reflected in the typical39
will of the parties that can be recognised in legal dealings in the contractual arrange-
ments covering uniformly recurring business situations.40 Hence, the origin of non-
mandatory law is referred to as sedimentary in nature, in contrast to the eruptive
creation of law by the legislator.41
It is evident without further discussion that in such a conception, the parties are
free without any justification to reach an agreement diverging from non-mandatory
law, considering that according to this view, the very fact of an autonomous agree-
ment is deemed to have an intrinsic “value in itself”42 which legitimises a deviation
30
On this, see Cziupka 2010, p. 70.
31
Von Savigny 1840, p. 58.
32
Cziupka 2010, p. 67.
33
See von Savigny 1840, p. 59.
34
35
36
37
38
Windscheid 1887, pp. 263–264.
39
von Savigny 1840, p. 58.
40
41
Laband 1888, p. 164.
42
from non-mandatory law.43 A contractual agreement that also covers ancillary points
appears desirable indeed, given that non-mandatory law defines itself as a mere
instrument for facilitating legal dealings and seeks to claim only subsidiary validity
from the outset.44
Bülow, Stammler and the Binding Force of the Legal Order
The following theoretical approach, which essentially goes back to Oskar Bülow
and Rudolf Stammler, must be characterised almost as an antithesis to Savigny’s
theory. Whereas Savigny made the autonomy of private persons the starting point
of all considerations, in Bülow and Stammler the “binding force of the legal order”
is absolutely primary to the conception of non-mandatory law and contract law.45
The institute of the contract is not understood here as a consequence arising from
any pre-legal autonomy of individuals, but as an instrument made available by state
law.46 Non-mandatory law in this context reflects the order laid down by the legisla-
tor as an adequate provision, whilst also empowering private individuals if need be
to choose a provision better adapted to the given circumstances of life as a proxy for
the legal order.47 In this respect, non-mandatory law does not complete the incom-
plete contract; on the contrary, the contract is understood as a medium for the con-
cretisation of objective law.48 Thus, it becomes impressively clear that non-mandatory
law, too, has a mandating dimension.49
From this perspective, the orientation point for the content of non-mandatory
norms is obviously no longer the hypothetical will of the parties; far rather, it is
“constantly the material and ethical needs of the totality” that the legal order must
serve.50 The pure convenience function of non-mandatory law in Savigny’s concep-
tion is marginalised here, and substituted over broad areas by a value-setting func-
tion.51 Bülow and Stammler address precisely this area of tension when they write
that non-mandatory law is “not exclusively subservient to the declaration of private
will”52 but a “power independently encountering” the will of the parties.53
43
44
45
With further citations, Cziupka 2010, p. 91.
46
See also Huber 1933, p. 40: “There is no natural freedom to conclude a contract, but rather, there
is a state-regulated institution of the free contract”.
47
See extensive discussion of this in Cziupka 2010, pp. 108–109, pp. 108-109; Stammler 1886,
p. 24.
48
In this vein, Cziupka 2010, pp. 108–109.
49
With further citations, Cziupka 2010, p. 205.
50
Stammler 1886, p. 25.
51
52
Stammler 1886, p. 24.
53
Bülow 1881, p. 108.
Under this regime, any deviation by the contracting parties from non-mandatory
model provisions is no longer self-evident by any means. Instead, such an approach
calls for objective reasons to be brought forth, i.e. in the form of an “unusual con-
stellation of facts and interests not covered by the law”.54 Thus, instead of leaving
the parties unbounded latitude to make their arrangements, a “varied spectrum of
possible forms of arrangement”55 is made available to them, from which they may
select one of the possible state-recognised provisions.56
This is the underlying concept of the guiding principle theory (Leitbildtheorie)
that is recognised in Germany today, which draws on non-mandatory law as a stan-
dard in the context of controlling the contents of general terms and conditions of
business.57
8.2.2 Economic Theories on Non-mandatory Contract Law
Having set out the two foundational juridical theories on non-mandatory contract
law, two economic views on non-mandatory contract law will be introduced in the
following section.58 This involves a change of perspective. Whereas the two juridi-
cal theories are developed directly from a priori values – autonomy for Savigny, and
the “material and ethical needs” of the legal community in the case of Bülow and
Stammler – economic analysis of law begins by examining human behaviour under
various conceivable institutional framework conditions. The focus, then, in this first
stage, is on how people’s expected behaviour changes (positive analysis) when cer-
tain (non-mandatory) legal norms are specified.59 Not until the second stage are the
expected consequences of different legal arrangement options compared with each
other and assessed on the basis of normative criteria (normative analysis).60
Essentially, any criteria may be chosen for the assessment of these consequences.
Economic analysis itself, however, makes use of the instruments of welfare eco-
nomics offer its own criteria for the assessment of social conditions. Accordingly,
the key parameter used for this assessment is the welfare of society as a whole,
54
Enneccerus et al. 1959, §49 III.
55
Cziupka 2010, p. 111.
56
Cziupka 2010, p. 104.
57
58
At this point, a further theory discussed in the economic analysis of law discourse can be men-
tioned: this theory describes the possibility of utilising non-mandatory contract norms as penalty
default rules. The pivotal aspect of this is that non-mandatory norms that are disadvantageous for
both parties compel them to find their own contractual provision. In the negotiation process the
parties would then disclose information that they would otherwise have held back, had non-man-
datory law already proposed a provision advantageous to them. Foundational, Ayres and Gertner
1989; critical in relation to the practical relevance of penalty default rules, Posner 2006; also criti-
cal of the whole matter, Kähler 2012, p. 149 et seqq.
59
Mathis 2009, pp. 7 et seqq.
60
which is composed of the individual welfare of each of that society’s members. A

condition associated with higher welfare is preferred over one with lower welfare.
If welfare rises as a result of a measure, the measure concerned is deemed to be
efficient.61 In this regard, two constellations can be differentiated: if a measure or
transaction results in greater welfare for at least one person without making another
person worse off, the measure concerned is Pareto efficient.62 If, in contrast, a mea-
sure that makes at least one person worse off improves the lot of at least one other
person, and if the better-off person’s gain weighs more heavily than the worse-off
person’s loss, this transaction is referred to as Kaldor-Hicks efficient.63
Economic analysis thus directs its attention to how individuals make choices and
to what extent these choices can be steered in a particular direction – normally in the
direction of efficiency – by means of legal frameworks. Individuals do not make
their decisions in a vacuum, but always act in a concrete decision-making context
that is constituted through social and legal norms and rules. The legislator can help
to shape this decision-making context by passing laws. This setting has come to be
discussed as a particular ‘choice architecture’64 within which individuals make their
choices. There are two ways in which influence can be exerted on individual choices
in this process. On the one hand, legal norming can be used to alter the incentive
structure by modifying the cost-benefit relationship of alternative choices. Measures
of this type appeal to people’s rational side; thus they are geared towards the behav-
iour of the classical homo oeconomicus. Levying taxes on fuel is one example of the
use of this method to increase the costs of consuming energy from fossil sources.
Ceteris paribus this leads to a reduction in consumption of the taxed energy sources.
On the other hand, people also react to a multitude of other factors, such as how a
particular decision-making situation is presented to them; they take their guidance
from ‘normal’ behaviour or tend to comply with specified norms per se. Such mea-
sures tend to appeal more to people’s irrational side.
Reducing Transaction Costs by Imitating the Market
The Coase Theorem as the Theoretical Departure Point
To determine the consequences of different norms, economic analysis of law tradi-

tionally reaches for the behavioural model of neoclassical economics theory, namely
the heuristic figure of homo oeconomicus.65 This model is constructed on three fun-
61
Efficiency or efficient can mean – in a relative sense – that state of affairs A is preferable to state
of affairs B or – in an absolute sense – that a certain state of affairs is the best possible and thus
represents an optimal state. Mathis 2009, p. 32.
62
For an extensive presentation and critique, see Mathis 2009, pp. 35 et seqq.
63
For an extensive presentation and critique see Mathis 2009, pp. 42 et seqq.
64
Thaler and Sunstein 2008, p. 81 et seqq.
65
Mathis 2009, p. 14; comprehensively on homo oeconomicus, Kirchgässner 2008; on its applica-
tion in legal science in particular, Lüdemann 2007.
damental assumptions: human beings (1) think and act rationally, (2) align their
choices exclusively with their own self-interest and (3) are equipped with unlimited
willpower to put their choices into practice.66 Starting from this model of human
behaviour, predictions can be derived about how people will adapt their behaviour
on the basis of changes – especially legal changes – to the framework conditions.
This model of human behaviour can now be made fruitful for the analysis of non-
mandatory contract law. In order to demonstrate this, first a brief introduction is
necessary of an important foundational theorem of economic analysis of law: the
Coase theorem. In his famous essay “The Problem of Social Cost”67 written in 1960,
Ronald H. Coase describes how, in a world in which there are no transaction costs
of any kind and in which all property rights are clearly allocated, economic resources
are constantly directed to where they be will put to most economically efficient
use.68 If a person possesses a right that is valued more highly by another person, this
second person will offer the other a high enough price to secure the first person’s
agreement to transfer the right. Both persons are better off after the transaction than
before; thus, the transaction is Pareto efficient. If there is nobody who is willing to
buy the right from the first person at the price asked, the explanation is that the first
person is the one who values the right most highly.
Reducing Transaction Costs as the Principal Task of Non-mandatory

Contract Law
Reality – and that is precisely the point that Coase intended to make69 – obviously
does not adhere to the idealising assumption of zero transaction costs. In actual fact,
costs are incurred for every transaction to a greater or lesser extent: searching for a
business partner, obtaining information about the product to be bought or the rights
in it, negotiating the contract, checking compliance with the contract, and enforcing
the contract.70 If the costs of a transaction in total are so high that the gain in utility
arising from it equals or even exceeds them, then rational and utility-maximising
individuals will refrain from the transaction. Any potential gain in utility is thus
inhibited by unduly high transaction costs, ruling out a theoretically possible Pareto
improvement.
Against this backdrop it is now the task of the law to provide institutional frame-
work conditions which reduce the actual transaction costs as far as possible so as to
enable Pareto-efficient transactions or, in the most extreme case, even to render a
transaction superfluous by itself allocating the rights directly to the most efficient
place of use.71 From this viewpoint, the economic role of non-mandatory contract
66
67
Coase 1960.
68
For thorough treatment of the Coase theorem, see Mathis 2009, pp. 53 et seqq.
69
Coase 1960, p. 6.
70
For an enumerated list see Weigel 2003, p. 46 citing Alchian 1979.
71
Cf. on this, with further citations, Mathis 2009, pp. 61 et seqq.
law now becomes apparent: it consists in reducing the costs of negotiating contracts
and efficiently allocating rights and obligations.72 If contracting parties need not
make contractual provision for every possible contingency that might occur every
time they conclude a contract, but can trust that non-mandatory statutory law will
contain an adequate provision, this saves them a great part of the costs of contract
negotiation.
In terms of content, this means that non-mandatory law should suggest those
rules which the contracting parties might be expected to prefer. Since rationally act-
ing homines oeconomici wish to maximise their utility, in any given case they will
favour the rule with the most likely prospect of efficient outcomes.73 So where the
transaction costs of negotiating an efficient agreement are too high, the utility-
maximising market solution should be imitated by non-mandatory law.74
In effect, this theory exhibits an unmistakable similarity with Savigny’s will-
based theory. Indeed, effectively these two positions are largely convergent.75
Nevertheless, it makes a difference whether a theory is based on the principle of
individual autonomy or of efficiency, since the latter places the focus on collective
welfare. Lorenz Kähler makes this explicit for contract law by means of the follow-
ing example76: It can be argued that a clause (provided by non-mandatory law) in a
transport contract whereby bus passengers undertake to donate blood to each other
in the event of an accident increases their common utility. In spite of this, a theory
based on autonomy would probably register reservations about such a rule. No the-
ory respecting the autonomy of individuals would condone the (albeit non-
mandatory) withdrawal of certain highly personal rights, even if on average a gain
in utility could be expected from such a provision.
The two theories also differ in the ways in which they determine the appropriate
content of non-mandatory contract law. In Savigny’s theory, fundamental impor-
tance is ascribed to the typical provisions chosen by the individuals in similar situ-
ations in contractual reality. Economic theory suggests that in reality, however,
prohibitively high transaction costs prevent the parties themselves from finding a
solution that is efficient. It therefore derives the content of non-mandatory norms
from theoretical considerations of efficiency. It proposes the norm that the parties
would have agreed themselves in a world without transaction costs, and not the
norm that is typically chosen in reality, where transaction costs are a given.77
72
Schäfer and Ott 2012, pp. 455–456; Kähler 2012, p. 140.
73
74
With further citations, Unberath and Cziupka 2009, p. 49; and Cziupka 2010, p. 296.
75
Unberath and Cziupka 2009, p. 41.
76
Kähler 2012, pp. 148–149.
77
Question of Departure from Non-mandatory Law in the Classical Conception

of Economic Analysis of Law
In Savigny’s theory, a departure of the parties from non-mandatory law is possible

without any problem; as an expression of private autonomy in legal arrangements,
in fact, it is actually welcomed. Under the conception of Stammler and Bülow, in
contrast, such an approach appears suspect; in certain circumstances, objective rea-
sons may be demanded for having defied the order put in place by the legislator, if
the protection of the legal system is to be invoked.
From an economic analysis of law perspective, the question is framed differ-
ently: in which circumstances if any will the parties want to make their own agree-
ment, departing from the statutory rules suggested? The answer to this is supplied
by the economic behavioural model. Rational and utility-maximising contracting
parties will always reach their own agreement if the expected utility from the agree-
ment in question is greater for the parties than the transaction costs incurred for the
additional necessary contract negotiations.78 The observed fact that the parties in a
concrete case have not reached any agreement of their own may occur for a great
many reasons: the statutory suggestion already fits very well into the structure of
their legal relationship; they do not expect any notable benefits from a waiver
because they assume that there is only a very slender probability that the contin-
gency in question will occur; they are confronted with especially high information
costs because they are inexperienced in business; or the low transaction volume
may not justify extensive contractual protection.79
Concrete or Abstract Norms in Non-mandatory Contract Law?
As a precondition for substantial costs to be saved and transactions made easier

through the use of non-mandatory law, it must provide rules that are suitable for the
concrete business transaction of the parties. Otherwise the parties in turn would
have to carry on negotiations in order to replace the unsuitable stipulations of the
law with a provision better adapted to their circumstances.
At first glance, therefore, an ideal condition would be attained if, in every indi-
vidual case, non-mandatory law suggested the provision that the concrete parties
themselves would have agreed if they had invested the necessary time and energy
in the negotiation. In view of the great number and heterogeneity of the contracts
concluded in reality, this is naturally an illusion. The jungle of regulations that
would grow up from regulating the detail of every contract in any kind of regular
use would be preposterous from the viewpoint of practicability.80 For one thing,
such an approach would be doomed to failure by the fact that the legislator does not
78
Korobkin 1998, pp. 613–617; 2000, with reference to the influence of standard form contracts
pp. 123–125.
79
Kähler 2012, pp. 141–142.
80
On the practicability of the law in general, see Mathis and Anderhub 2009.
possess the necessary information to pass the corresponding statutory norms; for
another, the application of law in a dispute would likewise be very complicated,
since it would first be necessary to determine the category into which the contract
falls – and hence the applicable norm – which, given a theoretically infinite number
of types of contract, would be a practically impossible exercise.81 Furthermore a
tightly-worded statutory proposed rule may even be a hindrance to the parties in
formulating their contracts; simple and rapidly comprehensible norms can more
easily be waived than complicated ones, however balanced in terms of content.82
Another option for arriving at individually adapted provisions would be for the
legislator to define only a few principles, keeping them abstract, which would then
have to be concretised by the courts in individual cases.83 This would save both the
parties and the legislator from having to pass detailed norms with regard to concrete
individual cases. However, this approach also brings problems in its wake. Firstly,
when they conclude the contract, the parties can barely anticipate how a judge will
resolve any potentially arising dispute; in other words, this approach would leave
them with very little legal certainty.84 Secondly, handing down just rulings will be
very arduous for the courts if they have to ascertain and weight all the details of the
concrete case and first concretise the general principles before ultimately being able
to apply them to the matter at issue. Whatever this variant saves in terms of legisla-
tive work, it results in additional judicial effort, which is ultimately reflected in
higher court costs.85
From what has been said, it can be concluded that neither unduly abstract nor
unduly detailed norms appear to have any merit. The question therefore arises as to
whether a middle path86 might deliver an optimum – although not an ideal – result.
This would require the legislator to confine itself to dividing all common contracts
into a manageable number of groups, which are internally as homogenous as pos-
sible but externally distinct from other groups.87 Next, the essential elements of each
type of contract and frequently occurring matters of dispute would be regulated in
such a way as to find an efficient solution for the majority of contracts actually con-
cluded which fall into the given group. But this means that a minority exists which
now has to live with the fact that they are subject to non-mandatory norms which
are suboptimal for their specific contractual relationship. This can be justified by
means of the following arguments: First, such a solution is Kaldor-Hicks efficient if
it can be assumed that the transaction-cost savings for the majority exceed the costs
81
82
Kähler 2012, p. 142.
83
Unberath and Cziupka 2009, pp. 60 et seqq. The same applies to the reference to a hypothetical
will of the parties, which relates to what bona fide parties in the contracting parties’ place would
have agreed in good faith, cf. Schwenzer 2012, p. 270. This concept is likewise very abstract and,
in the application of law, requires great concretisation by the courts.
84
Cziupka 2010, p. 410.
85
86
On this, see Cziupka, p. 415.
87
Unberath and Cziupka 2009, p. 48
incurred by the minority due to inadequate provisions or waiving of the same.88

Note that here it is evident that the non-mandatory nature of contract law norms
proves to be extremely helpful from an economic perspective, since it leaves the
parties with the option of waiving a norm – to the tune of the additional transaction
costs – that is inefficient for them.89 Second, it serves the purpose of legal certainty.
Particularly after having signed the contract, the parties can obtain information at
relatively low cost about how a court will most likely rule on a possible dispute.90
Third, in cases in which the parties have not agreed any contractual solution despite
blatantly unfit non-mandatory law, the judicial completion of contracts with refer-
ence to general principles can be invoked as a useful corrective instrument.91 Though
inappropriate as a primary means of loophole closure, judicial completion of con-
tracts which have “fallen through the net of the statutory typological system” can
certainly be used to good purpose here.
In Switzerland, the middle path just outlined seems to be found in positive law.
The typical contracts, in the sense mentioned – in part still subdivided down into
subtypes – are regulated in the special part of the Swiss Code of Obligations.92 Even
on the typical innominate contract, a stable line of adjudication has been established
which can be counted as functionally equivalent to non-mandatory contract law. In
the Swiss literature, the view continues to be advocated that non-mandatory con-
tract law is the first and foremost instrument to be referred to for contract comple-
tion.93 Non-mandatory statutory law can only be called upon to close loopholes,
however, if the norm in question is applicable to the case at all. If the norm does not
fit the content of the contract, so that applying it would give rise to a “disharmony”,
then clearly the norm is not tailored to the particular contract and is not therefore a
workable instrument for contract completion.94 In the case of idiosyncratic con-
tracts, the judge’s task is to find a solution that he deems appropriate to the problem
laid out before him. His guideline in this is the hypothetical will of the parties.95 If,
in the concrete case, the judge spots a generalizable set of interests, he is required to
act modo legislatoris by establishing a general rule and applying this to the case in
question.96
88
Unberath and Cziupka 2009, p. 52. Here the additional assumption is made that the legislation
costs and court costs for this variant are lower than for the two extreme variants. This is a plausible
scenario under the assumption of rising marginal costs.
89
Cziupka 2010, p. 420.
90
Cziupka 2010, p. 417.
91
Schäfer and Ott 2012, pp. 457–458; Cziupka 2010, pp. 417–418.
92
Schmid and Stöckli 2010, pp. 5 et seqq.
93
Gauch et al. 2008a, p. 284, citing by way of a rationale the judge’s obligation to the statute (Art. 1
para. 1, Swiss Civil Code); for a contrasting opinion, see Schwenzer (2012, pp. 270–271), who
cites the principle of freedom of contract as a basis for prioritising the hypothetical will of the
parties.
94
Gauch et al. 2008a, pp. 284–285.
95
Gauch et al. 2008a, pp. 285–286.
96
Gauch et al. 2008a, pp. 285 et seqq.; Art. 1 para. 2 of the Swiss Civil Code.
General terms and conditions of business as a (partial) substitute for non-

mandatory contract law
General terms and conditions of business are a frequent occurrence in contract prac-
tice. They can partially fulfil the function of non-mandatory law. Normally they
contain a comprehensive specification of the rights and obligations that are relevant
in the business relationship concerned, which renders further negotiation over
details unnecessary. Thus, they are eminently suitable for lowering transaction
costs.97 However, general terms and conditions of business are frequently biased
towards the welfare of one individual contracting party, and not towards maximis-
ing the welfare gain of both parties in line with economic efficiency criteria. On the
contrary, market power, asymmetric distribution of information and transaction
costs often mean that general terms and conditions of business provide for an inef-
ficient allocation of rights and obligations.98
8.2.3 Behavioural Economic Analysis: Non-mandatory

Contract Law as Nudging?
Until now, economic analysis of law has suggested that the main reason for the
omission of contractual agreements and the ensuing reliance on non-mandatory
statutory law resides in transaction costs that are too high in relation to the utility
derived by parties from their own agreement. In the following, however, it will be
shown that apart from the issue of transaction costs there is also a multitude of other
reasons why parties often refrain from allocating rights and obligations themselves
at variance with non-mandatory law.
All of these essentially stem from the fact that real people do not match up to the
ideal model of homo oeconomicus but diverge from its strictly rational behaviour in
all manner of ways.99 Thus, empirical studies from cognitive psychology research
show that individuals generally underestimate risks (overoptimism), make distorted
assessments of probabilities on the basis of selectively available information (the
availability heuristic), give too little consideration to the long-term consequences of
their actions (hyperbolic discounting), prefer the status quo over other alternatives
(status quo bias), follow a natural inclination to comply with norms (norm compli-
ance), and allow their choices to be influenced by irrelevant factors (anchor effect).
97
Schäfer and Ott 2012, p. 456 citing Kötz 2003, pp. 209–214.
98
Schäfer and Ott 2012, p. 456 citing Kötz 2003, pp. 209–214; see also Belser 2000, pp. 184
et seqq.
99
Schnellenbach 2012, pp. 595–596, with further citations; see also the extensive discussion in
Mathis and Diriwächter 2011 and Mathis and Steffen 2015. On constrained rationality in general,
see also McFadden 1999.
Reasons for the De Facto Stability of Non-mandatory Law in Reality
According to the neoclassical model, the allocation of rights by negotiable law is of

relatively minor importance.100 If the non-mandatory norm does not match the inter-
ests of the parties, they simply elect to waive it (given proportionate transaction
costs).101 Empirical studies show that in practice, however, reliance is placed on
non-mandatory law far more frequently than the neoclassical model would pre-
dict.102 In the following, the above-mentioned behavioural economic reasons for this
will be elucidated.
Overoptimism
People tend to overestimate their own abilities and power to influence particular
events, and systematically underestimate the probability that they will be affected
by a negative event (hence overoptimism).103 For example, most people’s estimation
of the probability of a car accident is considerably lower than the probability actu-
ally is for the average car driver.104 So this overoptimism ensures that people sys-
tematically overestimate the probability of positive events and underestimate the
probability that negative events will occur. Accordingly, the parties concluding a
contract tend to neglect explicit provisions concerning risks that could materialise
in the course of the term of their contractual relationship, since they assume too low
a probability of any such occurrence.105
Availability Heuristic
Another reason why parties tend to leave out provisions for particular risks is that,
out of strategic considerations, they do not even mention these during contract
negotiations. For if one side introduces a particular risk into the discussion, the
other contracting party might assume that the counterpart considers the risk to be
especially high.106 This impression is amplified by what is known as the availability
heuristic, whereby people overestimate the probability of events that they can read-
ily associate with a real-life situation.107 The more easily a person can imagine a
particular situation, the higher they estimate the probability that the event in
100
Korobkin 1998, pp. 621–623.
101
102
Korobkin 1998, pp. 633–646; see also Listokin 2009.
103
Jolls 2009, pp. 77–78.
104
See DeJoy 1989.
105
With further citations, Kähler 2012, p. 169.
106
Kähler 2012, p. 169.
107
See Jolls et al. 1998, p. 1537.
question will occur.108 By raising the risk as a topic, a contracting party vividly
draws attention to it in the other party’s mind.109 Therefore, to pre-empt the avail-
ability heuristic, a party who is dependent on the other as a business partner will
often avoid mentioning certain risks, even if, viewed objectively, it would seem
worthwhile to agree provisions on them.110
Hyperbolic Discounting
A further effect which, at the time of concluding a contract, discourages parties

from taking trouble over unduly detailed negotiations is the phenomenon of hyper-
bolic discounting,111 whereby individuals assign far too little weight to the conse-
quences of current choices that will only occur in the distant future, resulting in
time-inconsistent preferences.112 What this means is that people tend to neglect both
positive and negative consequences that may arise from a choice made in the here
and now. Because of this short-sightedness, they later come to regret decisions
taken at an earlier point in time. This phenomenon explains why, for example, many
people have to struggle with unhealthy behaviours such as smoking113 or unhealthy
eating, and – of their own volition – save too little for their old age.114 In the short
term these activities bear fruit in the form of results perceived as benefits; smoking
a cigarette and eating sugary foods serve to gratify an immediate need; neglecting
to save adequately for old age has the direct consequence that more money is avail-
able for consumption today. In the long run, however, the said behaviours often
yield undesirable results: obesity, lung and cardiovascular disease, and poverty in
old age. A parallel can be seen in the signing of half-baked contracts: usually, the
risks against which contractual precautions ought to be taken only manifest them-
selves in the distant future, whereas the transaction costs of negotiating the contract
are incurred right away. The upshot is that many people tend to conclude contracts
hastily, without waiving inappropriate non-mandatory norms as rational individuals
would have done.
108
Tversky and Kahneman 1974, p. 1127.
109
Kähler 2012, p. 170.
110
Kähler 2012, p. 170.
111
Foundational discussion, Laibson 1997.
112
113
Gruber 2002, p. 54–55.
114
Thaler and Sunstein 2008, p. 73, pp. 112–115.
Status Quo Bias
For many of the choices encountered in the course of life, one of the possible options
is the non-choice. Many people have a strong inclination to “choose” precisely this
option, thereby clinging onto the existing state of affairs (hence, status quo bias).115
A vivid and prominent example of this phenomenon is the opt-out solution for
organ donorship, whereby all human beings are essentially organ donors after their
deaths – unless they make an explicit choice during their lifetimes not to be. In
comparison with the opt-in solution, whereby organ removal is only possible with
express consent, such a provision may motivate considerably more people to donate
their organs even though the transaction costs for an opt-out declaration are very
low.116
For the contracting parties, non-mandatory law – since it takes force when they
do not actively opt for an alternative provision – represents the status quo.117 This
means that its content has far greater influence on contractual reality than the neo-
classical model would predict.
The various phenomena listed as causes of the status quo bias are presented
below.
Endowment Effect
One explanation for the status quo bias is provided by a phenomenon called the
endowment effect. This effect describes how people attach a higher value to some-
thing if they already own it.118 For legal norms, this means that those to whom non-
mandatory law allocates a subjective right are only willing to relinquish this right in
a contract negotiation in return for a relatively high payment.119 The following
extract from a study by DiMatteo will clarify this:
When a penalty clause was part of the status quo (standard form scenario), the subjects
demanded a higher price to remove the clause than they were willing to pay to insert one.
In fact, by an overwhelming margin, the most popular response to the request to remove the
standard clause was: ‘will not agree to remove Penalty Clause at any price.’ […] In con-
trast, when the clause was part of a standard form contract, 74.5 % of the subjects were
unwilling to agree to its removal ‘at any price.’ The survey confirmed Professor Korobkin’s
findings that the framing of a contractual term as the norm impacts the preferences of the
contracting parties.120
In this experiment, the subjects were asked how much they would be prepared to
pay in order to insert into the contract a contractual penalty in their favour, and how
much they would accept in return for giving up a pre-existing contractual penalty in
115
See Samuelson and Zeckhauser 1988.
116
Thaler and Sunstein 2008, pp. 187–188.
117
Cf. Korobkin 1998, pp. 630–633.
118
Cf. Kahnemanet al. 1991.
119
Cf. Korobkin 1998, p. 656.
120
DiMatteo 2006, p. 897, citing Korobkin 1998).
their favour. The result is surprisingly decisive. Although the two constellations are
identical from an economic point of view, in the case of the pre-existing penalty
clause 74.5 % of participants were not prepared to give up the contractual penalty at
any price, whereas only 32 % were willing to pay the stated maximum price for the
insertion of the clause.121
If one party is only willing to give up a right to which it is entitled under the
status quo in return for a relatively high payment, and meanwhile the other party
attaches relatively little value to a right that it was not allocated by non-mandatory
law, it can be concluded that the allocation of rights by non-mandatory law substan-
tially influences the final outcome of the distribution of rights and obligations.122
Loss Aversion
A further phenomenon closely related to the endowment effect, which can partially
explain the stability of non-mandatory law in contractual reality, is loss aversion,
whereby individuals attach greater weight to losses than to gains.123 If a person loses
100 francs the loss of utility suffered is greater than the gain in utility experienced
from receiving 100 francs. For this reason, the parties tend to be unwilling to give
up – i.e. lose – rights in order to receive – i.e. gain – other rights in return.124
Omission Bias
The so-called omission bias states that people perceive negative events to be worse
if they are caused by a definite action than by inaction.125 Parents perceive it as
worse, for example, when their child is made ill by a vaccination than by a disease
that a vaccination might have prevented.126 This effect is even stronger if the conse-
quences of the action are unknown at the time of making the decision. Since in
many cases the parties cannot clearly anticipate the consequences of a contractual
provision at the time of concluding the contract, in accordance with the omission
bias the parties will tend to bear the risks assigned to them by statute rather than
making private agreements and taking upon themselves new risks created by their
own deliberate action.127
121
With further references on the endowment effect in conjunction with non-mandatory law, see
Kähler 2012, p. 180.
122
123
Kahneman and Tversky 1979.
124
Korobkin 1998, pp. 655–656.
125
126
127
On this, see Kähler 2012, p. 182.
Norm Compliance
A further reason that contributes to the tendency of contracting parties to cling to

non-mandatory law is the phenomenon of norm compliance. This is manifested in
the fact that the addressees of norms tend to adhere to the rules laid down, irrespec-
tive of whether their contents confer any benefits.128 This can be motivated by the
associated gain in reputation of being an honourable person, a boost in self-esteem,
and a general trust in the legal system.129
Anchor Effect
Furthermore, people tend to use information as a basis for their choices, even infor-
mation that has no objective connection with the choice situation in question (the
anchor effect).130 In a study by Kahneman and Tversky, students were asked to
estimate the proportion of African states in the United Nations Organization. Before
the estimation task, the experimental subjects spun a wheel of fortune which “ran-
domly” stopped at the number 65 or 10. Students in the group whose lucky number
was 65 estimated the proportion of African states in the UN at 45 % on average; for
the group with the lucky number 10, the mean estimated value was 25 %. Thus, the
completely arbitrary number on the wheel of fortune, by serving the experimental
subjects as an anchor, had a substantial influence on their estimation.131
What this means for contract law is that even if the parties make a divergent
provision, it is not unusual for the non-mandatory legal norm to act as their anchor.132
So private agreements take place in the shadow of non-mandatory law, which func-
tions as an important reference scale.133 Or to put it another way: “The default rule
can be very ‘sticky’”.134
Possibility of Steering Behaviour by Means of Nudging
The analysis of these variations leads to a new behavioural model which more ade-
quately describes human behaviour. Apart from explaining why the contracting
parties often omit a contractual provision, more importantly, these insights also
shed light on the possibility that, in principle, it is possible to use the cognitive
characteristics of real individuals as reference points for measures to influence their
128
Kähler 2012, p. 182.
129
With further citations, Kähler 2012, p. 182. For a thorough treatment of trust in the legal system,
see Kähler 2010, pp. 441 et seqq.
130
Tversky and Kahneman 1974, p. 1128.
131
Tversky and Kahneman 1974, p. 1128 and Mathis and Diriwächter 2011, p. 61.
132
On the so-called anchor effect, see Tversky and Kahneman 1974, p. 1128.
133
Möslein 2010, p. 2864.
134
behaviour.135 Since these measures are not normally dependent on exerting direct
compulsion, but rather act as a kind of signpost for those concerned or steer them
subliminally in the direction of a certain choice, such measures are referred to in the
literature as ‘nudges’. A measure counts as a nudge if it causes negligibly low
costs – if any – to the person affected, and hence has a substantial influence on the
behaviour of homo sapiens, but none – or very little – on that of homo
oeconomicus.136
A new interpretation of the function of non-mandatory contract law now emerges:
It seems natural to take into account the errors and omissions of individuals’
decision-making when formulating non-mandatory norms in contract law, not least
because it opens up options for the legislator to use non-mandatory law to exert
substantial influence on private legal arrangements without having to restrict the
private autonomy of the parties by passing mandatory norms.
With regard to the content of non-mandatory contract law, two points have to be
addressed. The first is that the alignment of the content of non-mandatory law to the
contractual provisions typically chosen in contractual reality, as demanded by
Savigny’s theory, is not very convincing. Often, because of cognitive deficits, the
parties will negotiate suboptimal contracts. Furthermore, such contracts are always
dependent on currently applicable non-mandatory law, so that the real hypothetical
will of the parties is not completely expressed in the contracts actually concluded.137
The question which then arises is what should serve as the guideline for formulating
the content of non-mandatory norms.
In principle it is always up to the legislator which objectives it wishes to pursue
with the said measures. For instance, by means of targeted nudging it may promote
the efficiency of the contracts concluded, but may also bring in ideas of justice, for
example, by seeking to protect the typically weaker contracting party. It must be
borne in mind that the cognitive deficits identified by behavioural economics can
themselves be the reason that makes it seem appropriate for the legislator to inter-
vene correctively in the arrangement of contracts by private individuals. For if, as a
result of overoptimism or other cognitive anomalies, individuals enter into contracts
which they would not have concluded in this form as entirely rational individuals,
the question that arises is whether the legislator should protect these people from
their own weaknesses by means of (non-mandatory) norms.
Such an approach is generally discussed under the heading of “libertarian
paternalism”.138 The paternalistic part of this concept consists of influencing the
decisions of individuals for their own welfare, because they would otherwise fail to
honour their objective interests optimally due to the cognitive distortions.139 The
135
Jolls et al. 1998, p. 1447.
136
137
138
Foundational, Sunstein and Thaler 2003; critique of their work, Horn 2013, p. 14 and
Schnellenbach 2012, pp. 594 et. seqq.
139
liberal aspect is that whichever measures are enacted, the individual should essen-
tially be free to choose a different option than that provided by the legislator.140
In order to protect individuals from their own irrational decisions, or to make
targeted use of their cognitive weaknesses in order to steer their behaviour in a par-
ticular direction, various strategies are available. What is known as debiasing141 is
the attempt to alleviate the cognitive anomalies by means of appropriate measures.
The goal of this is to help people towards the possibility of making rational choices.
One example is supplied by the warnings on dangerous products. Based on overop-
timism, consumers tend to underestimate the risk arising from certain dangerous
products.142 Complicated packaging inserts which are factually correct but present
the statistical risk to the consumer in a confusing way are not normally a suitable
way to counteract the overoptimism bias. It is much more effective to draw the
consumer’s attention to the danger by means of intuitively understandable symbols.
This method is far more likely to succeed in helping the consumer to recognise the
risk and make a conscious, rational choice.143
Another possibility of protecting individuals from suboptimal decisions is the
prohibition of certain courses of action.144 This does not prepare the ground for a
rational choice but, far rather, prohibits an irrational choice from the outset. An
example would be the prohibition of the consumption of hard drugs. Ultimately it is
also conceivable in principle to make targeted use of people’s cognitive deficits in
order to steer their behaviour in a certain, socially desirable direction. Such an
approach is referred to as rebiasing. It is neither an attempt to facilitate a rational
choice nor to prevent an irrational choice. The aim is rather to make use of irrational
behaviours in order to accomplish societal objectives. For example, the state could
make a rule whereby electricity from renewable energy sources was the default
option. Purchasing electricity generated by nuclear or coal-fired power plants would
still be possible, but would have to be actively chosen by individuals. Based on the
status quo bias it is likely that, under such a rule, there would be greater demand for
electricity from renewable sources.
Making reference to applied practice in two fields of law, the possible practice of
regulation informed by behavioural economics will be set out below. The first
example concerns labour law. In this field of law there are many norms to protect
the typically weaker contracting party, namely the employee. The aim is to protect
the latter from abuse of the employer’s position of superior economic power. The
relevant norms are frequently mandatory in nature. The following sets out to show
that non-mandatory norms can also play their part in improving labour conditions.
Law on contracts of surety serves as the second example. Here the problem has
a different emphasis. The central concern is not the protection of the weaker party,
but rather, the protection of the surety from himself or from his own limited
140
141
Grundlegend Jolls and Sunstein 2006, pp. 199–241; see also Mathis and Diriwächter 2011,
pp. 63 et seqq.
142
Jolls and Sunstein 2006, p. 208.
143
Jolls and Sunstein 2006, pp. 207 et seqq.
144
Jolls and Sunstein 2006, p. 207.
cognitive capabilities. Since surety contracts are often agreed – commonly among
close family and friends – as accommodation surety contracts, these are usually
uncompensated. The surety does not profit from any payment for guaranteeing the
principle debtor’s obligations. It can thus be said that here, the protection of the
stronger party from himself is the prime consideration.
Nudging in Labour Law
One possible applied field for such nudges is in labour law.145 According to Swiss
labour law, an employee is fundamentally obliged to perform any hours of overtime
required (Art. 321c para. 1, Swiss Code of Obligations). If the employee agrees,
these hours can be compensated by means of additional days of holiday. Otherwise
the additional work is to be remunerated. According to Art. 321c para. 3, Swiss
Code of Obligations, a premium of 25 % is payable on top of the normal rate of pay.
This stipulation is non-mandatory in nature, however. That is to say, it can be
adjusted both up as well as down, by means of a written agreement, a normal
employment contract or a collective employment contract (cf. Art. 321c para. 3,
Swiss Code of Obligations).146
Against the backdrop of the discussed insights from behavioural economics, this
stipulation can be understood as a nudge in favour of the employee. Initially Art.
321c para. 3 of the Swiss Code of Obligations functions as the default rule, and thus
is always applied if the parties have not agreed anything to the contrary – which will
presumably, thanks to the status quo bias, often be the case. But even if the parties
should reach a divergent agreement, the premium of 25 % specified by non-
mandatory law acts as an anchor. The parties allow themselves to be influenced by
this figure and will therefore tend to agree rates of remuneration higher than 100 %.
Now a possibility of increasing average remuneration in contractual reality comes
to light: if the legislator were to raise the premium to 50 % as standard, the expected
consequence would be that employees on average would receive higher hourly
remuneration for overtime worked.
By making use of nudging in a similar way, for example, the average length of
annual leave actually granted could be increased. According to Art. 329a para. 1 of
the Swiss Code of Obligations, the employee has a right to at least 4 weeks annual
leave per business year.147 Supposing that the legislator altered this stipulation to the
effect that the standard duration of annual leave was now 6 weeks, but never less
than 4 weeks, then on the basis of the outlined behavioural economic phenomena a
considerable number of employees would begin to benefit from longer holidays. It
would be harder for employers to grant just 4 weeks annual leave if statutory
norming succeeded in surrounding a 6-week leave allowance with the “aura of
145
See, for example, Sunstein 2002, who supports assigning certain rights to employees in accor-
dance with non-mandatory law.
146
On the whole issue, Dunand 2013, p. 93.
147
Cerrotini 2013, p. 370.
normality”148 and employees increasingly demanded that as “their rightful due”. On

the basis of the anchor effect, a 5-week annual leave allowance would be considered
more reasonable than under the currently valid law, so that holiday durations of
only 4 weeks would probably occur less frequently in contractual reality than today.
At this point, however, it is necessary to mention the limits of such an approach.
For if one party which possesses a certain market power has a great incentive to
diverge from non-mandatory law, this counteracts those forces thanks to which the
parties often follow the non-mandatory statutory suggestion.149 In such situations,
then, the stickiness150 of “default rules” no longer holds true to the same extent, so
that in this context Willis talks about “slippery defaults”.151 Furthermore, in practice
collective labour agreements and – especially outside of labour law – general terms
and conditions of business are widespread. If contracts are no longer negotiated in
detail, the behavioural economic effects of non-mandatory statutory law obviously
lose their impact. Instead, collective labour agreements for employees and general
terms and conditions of business for consumers now take the place of non-mandatory
law as the status quo. These, in turn, exert the impact that the findings of behav-
ioural economics have attested for non-mandatory law.152 To what extent non-man-
datory law might also have an influence on the formulation of general terms and
conditions of business and collective labour agreements remains largely unexplored
at the time of writing.
Surety Contract Law as Nudging
Behavioural Economic Motivation of the 1942 Reform of Swiss Law

on Contracts of Surety
Switzerland’s current law on contracts of surety (Art. 492–512, Swiss Code of
Obligations) can be interpreted as a regulatory intervention motivated by behav-
ioural economics. The legislator inserted these particular stipulations into the Code
of Obligations in the year 1942 as a reaction to an actual surety crisis. In the wake
of the Great Depression of the 1930s, a large number of sureties and their families
became destitute because they had entered into surety contracts, which they could
not cover economically.153 In its dispatch from 1939, the Swiss Federal Council
justified its view of the necessity for reform as follows:
It is immediately clear that these are instances of abuses of the surety contract system,
which – because they are not just rare and exceptional cases – constitute pathological
symptoms in the body of the economy, which the legislator may not heedlessly pass by. Its
148
Unberath and Cziupka 2009, p. 73).
149
Willis 2013, pp. 1200 et seqq.
150
Cf. Sunstein and Thaler 2003, p. 1175.
151
Willis 2013, p. 1174.
152
Luth 2010, pp. 195 et seqq.
153
With further citations, Kuhn 2011, p. 695 et seqq.; Swiss Federal Gazette BBL 1939 841, p. 845.
task is here to look to justice, to draw the future surety’s attention to the risks he is proceed-
ing to enter into, to protect him from his own inexperience, credulity and kind-heartedness
but also from his own imprudence. The prevention of excessive burdens through surety
contracts is not just in the interest of the surety himself, but also of the creditor and of any
healthy economic and credit policy whatsoever. It may be true that the experiences of recent
years exert an inhibiting effect in any case, so that today people exercise more caution and
restraint over signing a surety contract. But this applies least of all to those would need it
most, namely the incorrigible optimists. Also, it cannot be disregarded that such experi-
ences are quickly forgotten when the economy improves again, and that children have to try
out their parents’ experiences themselves in order to grow wise. Nor may one succumb to
the deceptive hope that it will suffice to draw attention to the risks by means of public infor-
mation work in schools and for the general public. Even today, every Swiss child knows the
aphorism: “Bürgen tut würgen” [“signing surety leads to strangulation”]. The knowledge
that can be passed on in this way is not enough, however, to protect sureties from falling
prey to the powers of persuasion of a debtor in difficulties and, in a careless moment, plac-
ing his signature on a risky surety obligation in the belief that this time it really is just a
formality. Here, only a reform of the law on contracts of surety can help.154
It is immediately evident that, in this case, the Swiss Federal Council did not set
out from the ideal image of homo oeconomicus, but instead pays attention to those
attributes of real people which are being emphasised once again today by behav-
ioural economics. Indeed the Swiss Federal Council’s arguments could almost have
been taken from a current behavioural economics study, considering that wide-
spread, irrational overoptimism is so exactly identified as one of the main causes of
the dire straits suffered by many sureties.
The Swiss Federal Council also anticipated another behavioural economic phe-
nomenon in its arguments, namely hyperbolic discounting. With regard to the surety
contracts issue, the Swiss Federal Council writes the following in its dispatch of
1939:
Psychologically, the risk of entering into burdensome surety contract obligations is that
what is promised is not an immediate but a future payment, which possibly will not materi-
alise at all. This lures optimists into underestimating the risk.155
As becomes evident from this extract, entering into surety contract obligations
involves an interplay between overoptimism and hyperbolic discounting. Firstly, the
surety systematically underestimates the risk of actually being called upon to meet
the liability. Secondly, the surety attaches too little weight to the costs, which will
often only be incurred – if at all – in the distant future.
Interpretation of Swiss Law on Contracts of Surety as Nudging

Of greatest interest to the present study is the manner in which the Swiss Federal
Council wishes to counteract the problem of surety contracts entered into carelessly
and give better protection to sureties. Although the majority of the stipulations in
154
Swiss Federal Gazette BBL (1939 841, p. 846) (emphasis added by authors).
155
Swiss Federal Gazette BBL (1939 841, p. 869) (emphasis added by authors).
surety contract law are prima vista mandatory in nature,156 nevertheless a set of
norms exist, which are aimed at protecting the surety and are non-mandatory in
nature.
If the parties have not expressly agreed a joint and several surety contract, for
example, then the surety only becomes liable if the principal debtor has been
declared bankrupt or has made enforcement of the claim considerably more difficult
by relocating his domicile abroad (known as a simple surety contract; Art. 495 para.
1, Swiss Code of Obligations).157 The parties are free, however, to insert a joint and
several surety provisions in their contract, the upshot of which is that the surety can
be sued as soon as the principal debtor has defaulted on debt repayment and the
creditor has issued a reminder to no avail (Art. 496 para. 1, Swiss Code of
Obligations).158 That is a non-mandatory protective norm favouring the surety.
Moreover, the surety’s maximum liability decreases with the passing of time,
according to non-mandatory law. Pursuant to Art. 500 para. 1 of the Swiss Code of
Obligations, the amount of the liability amortises by 3 % p.a. or by 1 % p.a. in the
case of legally secured mortgage debts if the surety is a natural person. For their
part, the parties are free to waive this protective mechanism favouring the surety by
making a divergent agreement.159 If, in contrast, the contracting parties do not
actively opt out of amortisation, this protective mechanism favouring the surety
comes to bear as the default rule.
As a matter of principle the surety can also demand the liquidation of any pledges
deposited by the principal debtor before he can be sued (Art. 495 para. 2 and 496
para. 2, Swiss Code of Obligations). Equally, the surety can waive this right in a
contractual agreement.160 In the absence of an active waiver, the insistence on prior
liquidation of pledges remains open to him as a means of defence.
The non-mandatory nature of the stipulations of surety contract law is very much
more extensive, however. The reason for this is a peculiarity of Swiss credit security
law: in accordance with the express will of the legislator, the agreement of a con-
tract of guarantee in place of a surety contract is readily possible, which means that
surety contract law can be circumvented relatively easily.161 Therefore, the whole of
surety contract law is de facto non-mandatory in nature, since the parties can
exclude the applicability of the stipulations in question in globo by means of their
own agreement.
With the contract of guarantee, the guarantor promises a payment to a benefi-
ciary in the event that a certain event described in the contract of guarantee occurs.
Indeed, the parties are free to define the non-repayment of the debt as the event
156
Kuhn 2011, p. 687.
157
Kuhn 2011, p. 705.
158
Kuhn 2011, p. 707.
159
Kuhn 2011, p. 698.
160
Kuhn 2011, pp. 707–708.
161
Kuhn 2011, p. 679 citing Decision of the Swiss Federal Court BGE 129 III 702 E.2.3 and
Gutzwiller 1984, p. 127. Another alternative, because functionally related, is the joint assumption
of liability, Kuhn 2011, p. 678.
invoking the guarantee.162 This so-called surety guarantee bears a strong resem-
blance to a true surety contract. From an economic perspective its use achieves the
same result. The main difference from a surety contract in terms of juridical techni-
calities resides in the lack of accessoriness of the guarantee payment to the funda-
mental relationship, i.e. the relationship between debtor and creditor.163 What this
means in particular is that – in contrast to the contract of surety – a guarantee pay-
ment must be made even if the debtor in the fundamental relationship could have
raised objections against the creditor.164 Thus, the guarantee is clearly the “more
severe” security instrument. Furthermore, surety contract law contains numerous
other mandatory (formal) rules in favour of the surety, none of which are applicable
to the guarantee.165
Thus, Swiss law provides two different legal arrangement options for the same,
economically identical, transaction: on the one hand, the form-bound contract of
surety, which provides numerous protection mechanisms for the surety, and on the
other, the contract of guarantee, which is valid without formal requirements and
entirely in keeping with freedom of contract.
This situation may seem unsatisfactory at first glance, i.e. the possibility and
indeed the permissibility of circumventing even the mandatory stipulations of surety
law without problems. Furthermore this outset situation leads to difficult questions
of differentiation in practice. Where there is doubt, have the parties agreed a con-
tract of surety or a contract of guarantee?166 Legal theory criticises the legal situa-
tion as “bad legislation”167; the Swiss Federal Supreme Court talks about an
“inconsistency of the legal order”.168 To address the problem, in its adjudication it
asserted that any “surety relationship” in the private sphere should be presumed to
be a contract of surety in the technical sense, if its legal nature does not clearly
emerge from the agreement or other circumstances.169 If the parties are experienced
in business, on the other hand, or if it is an international agreement, then the reverse
assumption applies: in this case, it is fundamentally presumed to be a guarantee
unless the parties clearly intended to agree a surety contract.170
162
On the concept and outward forms of the contract of guarantee, Gauch et al. 2008b,
p. 334–335.
163
Gauch et al. 2008b, p. 337.
164
Cf. Kuhn 2011, pp. 694, 730 et seqq. and pp. 734 et seqq.
165
Kuhn 2011, p. 678; if the surety is a natural person, the surety declaration is required to be in
writing (Art. 493 para. 1 Swiss Code of Obligations) and, for amounts over CHF 2,000, drawn up
as a public deed. For the contract of guarantee, the principle of freedom from compliance with any
particular form pursuant to Art. 11 para. 1 Swiss Code of Obligations applies; moreover, surety
contract law overall is characterised by rules for the protection of the surety, Kuhn, p. 69.
166
Decision of the Swiss Federal Court BGE 113 II 438 E.2. Likewise, the distinction between the
surety contract and the joint assumption of liability is a matter of great uncertainty in practice;
alongside the said presumption, various additional criteria are referred to, see only Kuhn 2011,
pp. 678 et seqq.
167
Kuhn 2011, p. 679.
168
Decision of the Swiss Federal Court BGE 129 III 702 E.2.3.
169
Kuhn 2011, p. 683 citing court rulings.
170
Kuhn 2011, p. 684 citing court rulings.
All in all, surety contract law becomes the default option for people in particular
need of protection. Relatively frequently, these parties – often without knowing it –
will agree a true surety contract and thereby allow the protective norms put in place
by the legislator in favour of the surety to apply.
Despite this de facto non-mandatory regulation, there has been considerable suc-
cess in suppressing ill-considered accommodation surety contracts, and hence
reducing hardship for sureties.171 At the same time, the law leaves broad scope for
surety contracts and guarantees between parties experienced in business, and does
not intervene beyond the necessary extent in security promises between private
individuals. This points to the possibility of employing more non-mandatory law in
general, so as to prevent the conclusion of risky contracts or to alleviate the conse-
quences of such unreflected behaviour.
Once again, however, a caveat is appropriate here on at least two counts. Firstly,
it is important to remember that credit financing in particular is heavily dominated
by banking practice. Banks as parties to business transactions are normally legally
knowledgeable and, furthermore, possess sufficient market power to waive non-
mandatory stipulations largely in their own favour.172 Legal dealings among private
individuals do, however, fundamentally remain a field of application for nudging
via non-mandatory contract law.
Secondly, not all risk-laden or non-self-interested behaviour should be viewed as
suspect with undue haste. Even surety contracts among private persons have their
good side; they can serve as the last resort in situations where there is no other way
out. That the surety exposes himself to a certain risk and shoulders the debtor’s
burden is in the nature of the matter, and need not be evaluated purely negatively by
any means. The very act of accepting major risks to help a good friend can also be
seen as a value in itself.173
8.3 Conclusions
From a legal viewpoint, non-mandatory law is caught between the competing ideas
of autonomy and material justice. Whereas Savigny thought that non-mandatory
law should be oriented exclusively to the hypothetical will of the parties, Bülow and
Stammler called for it to be oriented exclusively to objective ideas of justice.
From the perspective of classical economics, non-mandatory contract law is
purely a means for reducing transaction costs. The law, by offering ready-made
contractual provisions for use by private individuals, releases them from taking
arduous precautions against every minuscule risk so that they can confine themselves
171
Kuhn 2011, p. 696.
172
On slippery defaults, see remarks above and Willis 2013, p. 1174.
173
One only need think of the positive account of the readiness for self-sacrifice and loyalty
between friends in Friedrich Schiller’s “Die Bürgschaft” (The Hostage), on which see Bergenthal
1947, pp. 45 et. seqq.
to answering the questions that matter for their concrete contractual relationship. In
effect this theory exhibits a strong convergence with Savigny’s theory, since it simi-
larly suggests that the guideline for the content of non-mandatory contract law
should be the hypothetical result of detailed contract negotiations. This connection,
however, is a purely superficial one. The normative lodestar of economic analysis is
not the autonomy of individuals but the efficiency of the contract concluded and of
the contract-conclusion process itself.
More closely related to the theory of Bülow and Stammler are the suggestions
that can be derived from behavioural economic insights. Here, as there, a purely
laissez-faire approach is assessed critically. But while the theory of Bülow and
Stammler is directed at the normative level and expressly calls for the content of
non-mandatory contract law to be oriented to objective values, the behavioural eco-
nomic analysis emphasises the de facto influence of non-mandatory norms on con-
tracting behaviour, resulting in no clear answer to the question of appropriate
content.
Nudging measures can have the welfare of the parties in mind, in the spirit of
libertarian paternalism, and can particularly seek to protect them from their cogni-
tive deficits. Since nudging does not force the individual into any particular behav-
iour, it constitutes a form of soft paternalism. Nevertheless, the instrument can also
be used in order to realise particular social values, which need not necessarily be in
the interests of the individual concerned. To that extent, nudging is therefore a
double-edged sword.
Acknowledgement We are grateful to Kilian T. Keller, BLaw, for his critical review of the
manuscript.
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Chapter 9
Designing Disclosures
Testing the Efficacy of Disclosure in Retail Investment
Advice
Geneviève Helleringer
Abstract This chapter explores the psychology of disclosure, as a nudging instru-

ment, in the context of advised financial investment decisions. It investigates how
information about the financial advisor’s potential conflict of interest impacts on the
participants’ judgement, whether as to attitudes or actions. Contrary to what is com-
monly suggested, problems of conflict of interest in the financial investment context
may efficiently be treated by means of disclosures, provided that such disclosures
explicit the consequences of the conflict for the decision maker. It remains to anal-
yse how explanatory disclosures can be drafted so that their influence on the trust in
the advice also translates into modified action.
9.1 Introduction
Important work has been conducted on the ways in which people deal poorly with
information, facts and numbers, opening the door to ‘nudging’ policies that com-
pensate for such limitations or even leverage them.1 Disclosure requirements,
alongside default rules and simplification, are among the concrete manifestations of
a low-cost, choice-preserving, behaviourally informed approach to regulatory
problem, also known as ‘nudge’.2 However, to realize their potential as behav-
iourally informed regulatory tools and helpfully contribute to shape the background
against which decisions are made, disclosures need to be take into account insights
1
Thaler and Sunstein 2008; Calo 2014.
2
Thaler and Sunstein 2008; Sunstein 2013.
G. Helleringer (*)
Essec Business School, av Bernard Hirsch, CS 50105 Cergy,
95021 Cergy-Pontoise Cedex, France
Institute of European and Comparative Law, Oxford University,
St Cross Road, OX1 3UL Oxford, UK
e-mail: helleringer@essec.edu

154 G. Helleringer
about how information is processed or they are likely to lack efficacy.3 The present
chapter focuses on whether people are good at evaluating the source of the informa-
tion.4 Individuals often make decisions after consulting with, or being influenced by,
others. ‘Judge-advisor system’ controlled experiments have enabled to analyse dif-
ferent aspects of the effect of advice: whether people act upon the advice they are
given or discount it; how confident advisors and decision makers are; how accurate
the final decision, etc.5 The ‘judge’ in this context refers to the person who receives
the advice, and must decide how to treat it to make a decision. In order to model the
decision-making structures in an advice-giving/advice-taking context, expertise dif-
ferences between judges and advisors, individual pre-advice decision and other
independent variables have been manipulated. Research in this area has also focused
on the potential incongruence between decision-maker’s goals and the advisors’,
i.e. the ‘agency problem’ in the terminology of agency theory,6 which raises impor-
tant legal issues.7 Experiments have been conducted to explore specific relation-
ships in which advice might be biased because of a conflict of interest,8 such as the
patient-doctor relationship. In this context, it has been demonstrated that even
advice that is known to be biased may nevertheless influence a patient’s judgement.9
This persistent bias is the result of four main factors: first, the difficulty of counter-
ing bias,10 and anchoring in particular11; secondly, the inability to unlearn false or
misleading information12; thirdly, the fact that advice from a biased advisor is not
sufficiently discounted, since people assume that an honest advisor will disregard
his own interest13; and fourthly, the fact that advice is not necessarily discounted
more when the advisor’s conflict is voluntarily disclosed than when it is not dis-
closed, the due to a specific perverse effect of disclosure: the ‘insinuated anxiety
effect’.14 While disclosure can decrease the advisee’s trust in the advice, it can
simultaneously increase pressure to comply with the same advice. It is believed to
result from the fact that advice recipients feel obliged to help satisfy their advisor’s
personal interests after such advisor has disclosed them. This work adds to the scep-
ticism towards mandatory disclosures to treat conflict of interests15 and extends such
3
Ben-Shahar and Schneider 2010.
4
For a review of work about how people evaluate advice, see Bonaccio and Dala 2006; see also the
seminal experimental data on advertising, Harris 1977.
5
Harvey and Fischer 1997 and Yaniv 2004.
6
Moore et al. 2010.
7
Issacharoff 2010.
8
Moore et al. 2010.
9
Loewenstein et al. 2012 and 2013.
10
Mussweiler and Strack 2000.
11
Tversky and Kahneman 1974; Strack and Mussweiler 1997; Cain et al. 2004.
12
Mussweiler 2003; Camerer 2003.
13
Ross and Nisbett 1991.
14
Sah et al. 2012 and 2013.
15
Ben-Shahar and Schneider 2010, 2014.
9 Designing Disclosures 155
scepticism towards voluntary disclosures. It reinforces the common idea that disclo-
sure can burden those it is intended to protect.
Other asymmetric relationships remain relatively underexplored: for example,
whether people make good use of information and advice in the context of financial
decision-making has been little researched.16 A recent study17 using trading and
survey data from a sample of customers of a large German bank, found that over
half of the surveyed customers stated that they consistently relied on the advice of
their professional advisor. A survey18 showed however that more than half of the
individual investors in retail finance products thought that the financial advisers
gave completely independent advice or information. It seems therefore that inves-
tors are largely ignorant of conflicts of interest. The present study focuses on the
extent to which people allow for the information they receive about the goals of the
financial advisor and whether the advisor’s goals are congruent with their own. Do
they assess the objective reliability of a financial advice in the opinion they form
about the advice and in the investment decisions they make? In attempting to answer
this question, this paper explores the psychology of receiving and making use of
advice.
The question is particularly relevant in the context of retail investment decisions,
since professional advice is ubiquitous19 and advisors are subject to competing
motives. The professional has a duty to give objective and impartial advice to the
client, but his interest in maximising his own gain may be in conflict with this duty.
In particular, the advisor’s fee structure will exacerbate the conflict if the fee is
calculated by reference to the sum invested rather than the gain made by the client
or as a flat fee.20
The present chapter offers insight into the following question: is mandatory dis-
closure of professional conflicts of interest a desirable policy approach to deal with
the problem of conflicts of interest? More specifically, to what extent which people
take into account information about the goals of the financial advisor and whether
the advisor’s goals are congruent with their own: can one successfully assess the
objective reliability of a financial advice? In Sect. 9.2., I present background infor-
mation relating to this question and describe the design and result of an original
experiment that was designed to assess whether making explicit divergence of
objectives has an influence on the investors ‘behaviour. In Sect. 9.3, I present the
main findings. Finally in Sect. 9.4, I highlight public policy implications before
concluding in Sect. 9.5.
16
For a thorough presentation of the role, practices, and related issues, of intermediaries, see Judge
2015.
17
Hacketal et al. 2009.
18
Chater et al. 2010.
19
Judge 2015.
20
For a review, see Chater et al. 2010.
156 G. Helleringer
9.2 Testing Disclosure Designs
9.2.1 Background
Legal disclosures regarding conflicts of interest can be strengthened in various

ways, up to the point of imposing a compulsory ‘health warning’ that spells out why
the advisor is not, and cannot be, fully impartial and objective.21 However, such
disclosure requirement assumes that people will be able to take advantage of the
disclosure to make better decisions. It assumes that they will not only pay attention
to the disclosure, encode and remember it, but also actively recall and use the infor-
mation when making their decisions.22 There is an ambiguity on these issues. Some
experimental data provide evidence that an advisee can follow such advice, namely
if the advisee believes that benefits will outweigh costs.23 For instance, decision
makers are expected to make an effort to adjust from their pre-advice decision in
response to an advice they received, if the stakes for making a correct decision are
high and if the advisor is known to be trustworthy. However, other studies provide
evidence that advisees do not follow their advisors’ recommendations as much as
they should have to benefit from them and discount the advice instead. Among the
commonly evidenced mechanisms are the fact that discounting of advice increases
as the distance between the decision maker’s opinion and the advisor’s recommen-
dations increases,24 which is an effect that is similar to the effect identified in classic
studies of attitude change.25 Also decision makers tend to discount recommenda-
tions all the more when they are very different from the recommendations of other
advisors.26 It was suggested27 that over-reliance by advisees on their initial opinion
and the corresponding discount of advice could be a function of how the informa-
tion is encoded (e.g., the information is relative to the pre-advice opinion or it is a
constant), the complexity of the information (e.g., how many piece of advice were
received), how the information is processed (e.g., in a step-by-step manner or advi-
see have to wait until after all of the advice has been received).
21
For experimental data, see Chater et al. 2010.
22
Issacharoff 2011.
23
Payne et al. 1993; Harvey and Bolger 2001; Schrah et al. 2006.
24
Yaniv 2004.
25
Bochner and Insko 1966; Scherif and Hovland 1961.
26
Harries et al. 2004.
27
Bonnacio and Dalal 2006.
9.2.2 Experiment Presentation and Hypotheses
The reported experiment aimed at exploring the way in which compulsory disclo-
sure of potential biases in the advice influences the judgement of an individual
investor in two respects: first, how does it affect trust in the received advice? And
secondly, how does it affect the perceived likelihood that he will actually act on the
advice?
The experiment was computer-based: participants were shown fictional adver-
tisements accompanied by investment advice from a named advisor. They were
asked, in each case, to rate their trust in the advisor and their willingness to invest
in the advertised product. The experiment manipulated (i) the strength of language
for the advice to invest provided by the advisor, (ii) the existence of a conflict of
interest for the advisor deriving from their fee structure, and (iii) the salience of the
conflict of interest via an ‘explanatory disclosure’.
The experiment was designed to assess whether drawing the investor’s attention
to the conflict of interest in writing would impact on participants’ ratings of trust or
perceived willingness to invest. As the experiment did not require participants to
make actual investments, the data reflect attitudinal answers, i.e. the participants’
stated willingness to invest and their stated trust in the advisor, rather than behav-
ioural answers.28
There were good reasons to expect that decision makers would discount financial
advice to a greater extent if they know, or suspect, that their advisor’s goals differ
from their own. There is empirical evidence that such is the case in different con-
texts.29 There were however also good reasons to expect that decision makers might
still follow the financial advice if they knew of the conflict of interest pursuant to
the insinuated anxiety effect described above. There is empirical evidence support-
ing such predictions in different contexts.30 Also, trust in the advice reflects an atti-
tude, whereas willingness to invest reflects an action and perceived willingness to
invest, the perception of the probability to act. Hence trust and willingness to invest,
or perceived willingness to invest, are potentially dissociable variables.31 It was
therefore difficult to firmly predict whether, in a financial context, investors’ trust in
the advice and willingness to invest would be negatively related to the existence of
a conflict of interest.
28
For details about the collected data and statistical analyses, see Helleringer, Trust Me I Have a
Conflict of Interest, forthcoming.
29
Sniezek and Van Swol 2001.
30
E.g., patient – doctor relationship: Sah et al. 2012, 2013.
31
Hewstone et al. 2012.
158 G. Helleringer
9.3 Main Findings
The experiment was designed to assess whether drawing the investor’s attention to
the conflict of interest in writing would impact on participants’ ratings of trust or
willingness to invest. It was however difficult to firmly predict whether, in a finan-
cial context, investors’ trust in the advice and willingness to invest would be nega-
tively related to the existence of a conflict of interest.
The experiment set out to experimentally test the impact of conflicts of interest
and disclosure of such conflicts in a simplified context involving advice for invest-
ment. The experiment mirrored a real-life situation: information search by would-
be retail investors is not in-depth and does not involve shopping around for the best
deal. It relies on financial websites or magazines and, above all, staff of banks,
insurance or other financial institutions for advice.32 However such financial advice
may not always be disinterested. Advisors’ monetary incentives are apt to create
interests that are not aligned with the investors’ interests. The experiment manipu-
lated the disclosure to the investor of how many his goals and those of the advisor
were incongruent because of the fee structure. The experiment thereby gave some
insights into the potential impact of a regulatory tool e.g., mandatory explanatory
disclosures of the concrete implications of the advisor’s fee structure for the deci-
sion makers.
Participants provided a rating of their trust in the advice out of a scale of one to
seven after reading a financial advertisement, which displayed a handwritten note
making a recommendation to invest. The advertisement also set out the fee structure
of the advisor. In half of the cases, the advertisement included an additional note,
one version of which explained that the interests of the advisor were aligned with
those of the participant, and the other version of which explained that their interests
were not so aligned.
9.3.1 Limited and Conditional Effectiveness of Disclosures

and Advice
Disclosures are more likely to be effective when they include an explanatory disclo-
sure that spells out for the advice receiver the ‘take home message’ from the disclo-
sure. Beyond simplified disclosures, explained disclosures with an explicit
description of implications for the advice receiver are therefore more effective. One
needs however to bear in mind that the relationship is dyadic: previous research
suggests that experts who have disclosed their biases may give biased advice more
freely and indulge their private interest.33 Hence the beneficial caution derived from
32
Chater et al. 2010.
33
Cain et al. 2005.
warning disclosures might, in practice, be offset by the fact that the advice they get
is correspondingly even more biased.
Explanatory or ‘Warning-health’ types of disclosure were found to be effective,
whereas impersonal information about the fee structure was not. The difference
between the two types of information was that the first type made explicit a point
that was only implicit in the fee structure information. Hence it appears that busi-
ness school students are pretty bad at seeing what this implication of the fee struc-
ture is. One can expect that results would only be weaker in a more diverse sample.
This finding comes as a support for numerous works on information overload in the
financial context34 and in relation with advisors’ commission in particular.35 It calls
for future research on how to convey information in this context.
9.3.2 Differences Between Trust and Willingness to Invest
Two theoretical observations support the hypotheses that collected data show a dif-
ference in the effect of disclosure between willingness to invest and trust. First,
there is a discrepancy between what people think (in theory) and how they act (in
practice). It has been shown that professional investors rate harshly the quality of
rating agencies’ grading. Nevertheless, their pattern of investment collectively
closely follow the agencies’ ratings.36 Similarly, the present data suggests that a
sharp decrease in trust conditions is not matched by the same drop in willingness to
invest. This might be explained by the fact participants are mainly business school
students, who are likely to believe they can independently assess how interesting
the investment opportunity might be. The fact that they spent a rather long time
reading each advertisement supports this hypothesis. It would be interesting to test
whether the decoupling between trust and willingness to invest is a feature of pro-
fessional investors and investors trained in business school. Testing a different
sample, e.g. arts students, might be of interest. It would also be interesting to test
whether the cultural background – high or low interpersonal trust culture – makes a
difference.
Second, and more substantively, willingness to invest should logically depend
both on how much one trusts the advisor and on one’s judgement of how good the
investment is. The difference between the two measures might be greater for a busi-
ness school students sample than for other groups, because business students might
place more weight on their independent analysis and rely relatively less on the rec-
ommendation of an advisor. Such a hypothesis would require to be tested.
Third, the question of how much participants trust the advice could be described
as an abstract assessment, because it could be corrected based on the outcome of the
investment. For this reason, the collected score captured the participants’ trust ‘in’
34
Marotta-Wurgler 2010; Mercer et al. 2010, Beshears et al. 2009.
35
Lacko and Pappalardo 2004.
36
see e.g. Hill 2009.
160 G. Helleringer
the advisor, i.e. an assessment of an internally based attribute, based on beliefs as to

what motivates the other or the other’s values. Trust ‘in’ differs from trust ‘that’ the
other will have or had a certain behaviour, i.e. a prediction regarding the other’s
behaviour.37
A follow-up would include a factor analysis to identify latent variables explain-
ing the variable ‘trust’ and how it is structured (e.g. how does it relates to expertise,
past experience, etc.).
9.3.3 Contrast Between One-Shot Judgment and Upon

Multiple Comparison Judgment
Finally, there is a difference between the result found in the within-subject analysis
and the between-subject analysis. There are two possible interpretations of the
within vs. between differences: interesting psychological insight or demand
characteristic.
A substantial explanation may be suggested to explain that, although willingness
to invest and trust were correlated, they were impacted in an asymmetric manner by
disclosure. In the ‘between-subject’ design, data captured what happens in the first
round: that is before participants had had a chance to experience other conditions.
By contrast, the ‘within-participants’ analysis is critically about what happens when
subjects get to experience a range of conditions as they make judgements. The dif-
ference in the results may reflect a difference between the way in which people
make decisions regarding stated attitude (whether to trust the advice), and stated
behaviour (whether to invest). Trusting a piece of advice reflects the confidence that
the advisor can adequately provide a judgement in the considered context.38 Effects
on this variable, or as in our experiment on the perceived trust, may be adequately
captured in a between-subject analysis. Deciding to invest, however, represents a
different psychological process from trusting and because there is a risk of loss.
This remains true at the level of perceived probability to invest that is reflected in
the present data. Even if in practice investors do little shopping around and often do
not consider many options to find the best one.39
When expressing their stated intention, they are likely not to choose the first
opportunity offered. This behaviour gives them the opportunity to compare other
options. The implication is that effects on the WTI variable may be more adequately
captured in the within-subject analysis.
However, another interpretation cannot be ruled out. In the within-design
approach, participants perform for every condition. They may try to decipher the
purpose of the experiment and behave as they feel they are asked to. In this
37
For this distinction, see Hill and O’Hara 2005.
38
Hardin 2001; Bacharach and Gambetta 2001.
39
Retail Investment Purchase Process European survey, in Chater et al. 2010.
perspective, the findings of the present study have to be treated with caution. Now
that general trends have been identified, an incentivised controlled experiment
could be set up to refine the results on the basis of backed hypotheses.
9.4 Public Policy Implications
The presented study has generated insights into the mechanisms underlying the
reception of potentially biased financial advice. These insights present some rele-
vant information for policy makers for regulating financial advice: they have
increasingly been empowered to do so and need to rely on efficient tools. Typically
the US Consumer Financial Protection Bureau (CFPB) is authorised pursuant to the
2010 Dodd-Franck Act to ensure that ‘consumers are provided with timely and
understandable information to make responsible decisions about financial transac-
tions’. The CFBP shall also ensure that information is “fully, accurately, and effec-
tively disclosed to consumers in a manner that permits consumers to stand the costs,
benefits, and risks associated with the product of service, in light of the facts and
circumstances”. To be attained these goals demand that precise behavioural studies
be conducted.
The described experiment tends to support disclosure at a prescriptive level, as it
shows that some information in writing may help investor discount biased advice.
The fact that the explanatory disclaimers about the presence of a conflict of interest
did not make a significant difference in the perceived willingness to invest might be
understood as evidence that disclosures on this topic do not change anything in the
outcome and that there are therefore no reason to require them. However the fact
that there is a significant difference in the perceived trust levels leads to a different
conclusion. First, trust in financial advisor and in intermediaries in general is a com-
ponent of trust in the market, which is an important component of capitalist econo-
mies and a policy goal that is frequently stressed by legislators and regulators. EU
directives in consumer law systematically refer to it. Some studies have shown that
trust in the market does impact investors’ and consumers’ behaviour. Second, the
effect found on perceived willingness to invest in the within-subject design gives an
indication that, under certain conditions, there is some correlation between the per-
ception of a conflict of interest and the contemplated investment. Thirdly, the design
and framing of the explanatory disclaimer is a dimension that could be improved in
order to make the consequence about the conflict of interest more salient. A recent
study stressed the specific difficulty experienced by subject to gasp the problem
underlying disclosures as compared to good ability to process information provided
in such disclosures.
The described effects qualify the scepticism that has developed over half a
decade towards the effectiveness of disclosure to influence behaviours.40 It supports
40
Ben-Shahar and Schneider 2010; Sah et al. 2012 and 2013.
162 G. Helleringer
behavioural findings along with theoretical considerations relating to people’s

autonomy in their decision making, pursuant to which the more carefully disclosure
(e.g., by resorting to certain findings of neuroscience to increase their salience) are
delivered the more effect they have.41
Against the backdrop of ambiguous findings in other fields, the present study
aimed at ascertaining general trends in the use of disclosure and financial advice.
This approach justifies to use reasonably abstract (e.g., there was no significant
distinction between the products advertised) and simplified (e.g., the fee structure
was basic and transparent, whereas commissions are largely hidden) decision-
making scenarios. If, as currently discussed, the future new European directive on
markets in financial instruments (MiFID) were to mandate disclosure of conflict of
interest, such as commission payments to financial advisors,42 future research
should be conducted to determine the best form and format for disclosure. The find-
ings of the present study evidenced the need for explanatory disclosure. Subsequent
experimental work with more realistic financial products and with representative
samples of consumers should ideally be conducted to optimise the implementation
of any proposed policy intervention.
It is worth stressing, however, that although the experiment’s paradigm tested
sensitivity to, and use of, disclosed information in the context of financial invest-
ment, the purpose was not to replicate perfectly a real investment situation. Any
policy conclusions that may be drawn would need to take account of the potential
for optimism bias in experiments43 and in stated attitude (trust) or act (willingness
to invest) in particular. Any policy recommendation must be based on (i) a set of
assumptions about how consumers and firms behave in a considered market, and (ii)
theories of how policy interventions will interact this behaviour.44 For instance, the
present study deals with the conflict of interest between advisors and advised cus-
tomers and how disclosure of this conflict of interest may affect consumers’ reac-
tion to advice. The question for policy makers to consider is not only to what extent
consumers wary about such conflict, but also which form of disclosure will trigger
a reaction and will improve efficiency. As there is little scope to test such policy in
the real world, randomised, controlled experiments represent a valuable alternative.
Manipulating factors of interest in study a enables to directly test and to quantify, in
relative terms, the potential impact of policy measures on the behaviour of consum-
ers. Such experimental evidence can be used to determine more effective policy
remedies to improve an identified market failure. The interaction between conflict
and explanatory disclosure revealed by the analyses (within-subjects analysis)
stresses the importance of this observation.
41
Calo 2012.
42
Inderst and Ottaviani 2012.
43
Sharot 2011.
44
Chater et al. 2010.
9.5 Conclusion
Previous research has been inconclusive and inconsistent as to the efficacy of dis-
closure and the effects of biased advice on advisees. In the doctor-patient context,
evidence has suggested that there is little value in disclosure; by contrast, research
in the judge-advisor context has indicated a positive effect. The described study
explored the psychology of disclosure in the context of advised financial investment
decisions. It investigated how information about the financial advisor’s potential
conflict of interest impacts the participants’ judgement, whether as to attitudes or
actions.
Participants were asked to read a financial advertisement that displayed a hand-
written note recommending that they should invest; they then rated their trust in the
advice on a scale of one to seven after. The advertisement also set out the fee struc-
ture of the advisor. In half of the cases, the advertisement included an additional
note, one version of which explained that the interests of the advisor were aligned
with those of the participant, and the other version of which explained that their
interests were not so aligned.
The results of the experiment reveal, first, that participants’ ratings of their will-
ingness to invest was reliably affected by the presence of conflicts of interest only
when the specific implication of the conflict was made explicit in the explanatory
disclosure; and secondly, that their rating of trust in the advice was in all cases
affected by the presence of a known conflict of interest, but more strongly so when
accompanied by an explanatory disclosure. Even then, in ratings relating to the first-
seen advertisement, the disclosure primarily affected stated trust in the advisor
rather than willingness to invest, only affecting the latter when participants had the
opportunity to compare offers, advice and disclosures across multiple
advertisements.
The results suggest that, from the perspective of the recipients of advice, prob-
lems of conflict of interest may not be as impossible to treat by means of mandatory
disclosure as has been commonly suggested.45 Reported failures of disclosure to
improve the quality of decision may turn out to reflect inadequate disclosure design.
Our findings suggest that what needs to be disclosed is not the existence of a conflict
but the consequences of the conflict for the decision maker.
Furthermore, it is now recognised that the only feasible solution to the problem
of conflict of interest is to focus attention on the recipient of the advice. Recent
experimental work focusing on the effect of disclosure as perceived by the advisor
has revealed that it is not sufficient for the advisor to attempt to consciously com-
pensate for biasing influences on his judgement: for psychological reasons, he may
not be able to make adequate correction for his own bias despite his best efforts. The
problems arising out of conflict of interests may be more profound that is commonly
assumed.46 In a capitalist world (in which professional advice is ubiquitous and
45
Ben-Shahar and Schneider 2010.
46
Moore et al. 2010.
164 G. Helleringer
usually given for a commission) it is not possible to eliminate conflicts of interest

by neutralising every partisan allegiance: well-designed forms of disclosure may
have to be recognised as the only practical solution. It remains to analyse how
explanatory disclosures can be drafted so that their influence on the trust in the
advice also translates into modified action.
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Chapter 10
Neutral Third-Party Counselling as Nudge
Toward Safer Financial Products?
The Case of Risky Mortgage Loan Contracts
Piotr Tereszkiewicz
It is a terrible thing when, for example, unsophisticated people

are inveigled into an unaffordable mortgage on unconscionable
terms. But this happens (and the mortgage crisis occurred)
despite the magnificent edifice of disclosures that was
conscientiously debated when it was adopted, that has been
repeatedly revised and expanded, and that has been supervised
by an agency that has poured effort and expertise into it
(Ben-Shahar and Schneider 2013, p. 184).
Abstract This paper discusses the idea of neutral counselling as a measure of

improving decisions of borrowers when choosing a mortgage loan. The develop-
ments regarding foreign-currency mortgage loans, popular in Central and Eastern
Europe in recent years, illustrate how incorrect mortgage choices may have detri-
mental effects on borrowers and their families. Taking a sceptical approach toward
mandated pre-contractual disclosure as a protection measure for borrowers, the
paper advocates neutral counselling of mortgage applicants in case they are offered
risky types of mortgages. Drawing on the experience of an American mortgage
counselling programme, a set of recommendations is made regarding the design of
a possible neutral mortgage counselling scheme. While the counselling solution has
imminent limitations, it displays clear potential toward improving the process of
financial decision-making.
This research has been financed by the National Science Centre, Poland within the framework of
the research project: 2015/17/B/HS5/00495.
P. Tereszkiewicz (*)
Faculty of Law and Administration, Jagiellonian University of Cracow,
Olszewskiego 7, 31-007 Cracow, Poland
e-mail: piotr.tereszkiewicz@uj.edu.pl

170 P. Tereszkiewicz
10.1 Introduction
Mortgage credit loans are a prime example of a financial contract concluded by

consumers. The decision to take out a mortgage loan is of paramount importance
from the perspective of borrowers, for mortgage loans are taken out usually once or
twice in a lifetime. When completing a mortgage loan transaction, the borrower
enters into a relationship with a lender, which is designed to last decades. The single
act of choosing an improper mortgage loan may have a dramatic impact on the life
of borrowers and their family.
A highly relevant recent example of risky mortgage contracts are foreign-
currency indexed mortgage loans, broadly marketed in a number of central and
eastern European countries, in particular in Poland and Hungary, a few years ago.
Around a decade ago, as interest rates were much lower in Switzerland than in
Poland and other central and Eastern European countries, the Swiss franc emerged
as an attractive currency for mortgage loans. Since 2000 about 770 000 mortgage
loans denominated (indexed) in Swiss francs have been concluded in Poland. In
2010 around 64 % mortgage loans were indexed in foreign currency (mostly CHF)
with the total value of 40 billion euro.1 Other Central and Eastern European coun-
tries, including Austria, Hungary, Croatia and Romania, witnessed similar develop-
ments. In Austria, 25 % of mortgage loans in 2010 were indexed in foreign currency,
with the total value of 30 billion euro.2 In Hungary, by the second half of 2008, the
household debt was close to 40 % of the country’s GDP, and two thirds of that debt
was denominated in foreign currency, where over 90 % of the household’s foreign
currency debt was denominated in Swiss francs.3 In 2014 the total value of foreign-
currency indexed mortgage loans in 2014 was 10 billion euro.4
Both in Poland and Hungary, the most intense accumulation of foreign-currency
indexed mortgage debt resulted between 2004 and 2008, which is before the recent
financial crisis. The sharpest marketing of foreign-currency mortgage loans in
Poland took place around 2006 and 2007. In order to promote foreign-currency
indexed mortgage loans, the financial industry framed the option for a mortgage
1
Rzeczpospolita from 26 January 2015, http://www.ekonomia.rp.pl/artykul/710047,1174464-
Kim-jestes-frankowcu-.html?referer=redpol; Rzeczpospolita from 5 February 2015, http://www.
ekonomia.rp.pl/artykul/710047,1177051-Gdzie-mieszkaja-frankowicze.html?referer=redpol; The
Economist from 15 November 2014, Forint exchange, http://www.economist.com/news/
finance-and-economics/21632651-hungarys-government-gives-struggling-borrowers-break-
forint-exchange.
2
See the official position of the Austrian Financial Market Supervision Authority (Österreichische
Finanzmarktaufsicht, FMA) on foreign currency loans: Position der Finanzmarktaufischt zu
Fremdwährungskrediten und Informationen zur derzeitigen Lage, https://www.fma.gv.at/de/
sonderthemen/fremdwaehrungskredite.html.
3
Balogh and others 2011, p. 1.
4
The Economist from 15 November 2014, Forint exchange, http://www.economist.com/news/
finance-and-economics/21632651-hungarys-government-gives-struggling-borrowers-break-
forint-exchange.
10 Neutral Third-Party Counselling as Nudge Toward Safer Financial Products? 171
loan of 300.000 PLN for the duration of 30 years as follows: On the one hand, a
monthly instalment payable if a mortgage loan was in Polish currency would be
2.130 PLN. On the other hand, a monthly instalment payable if a loan was indexed
in Swiss francs would be 1.409 PLN, given the currency exchange rate between the
Polish and Swiss currencies at that time. Apparently, a monthly instalment of a
CHF-indexed mortgage loan was around 30 % lower compared to a mortgage loan
in Polish currency.5 It is claimed that 75 % of examined clients considered the
foreign-currency indexed mortgage loan to be cheaper.6 The first 2 or 3 years of the
mortgage contract’s duration may have justified the decision to choose it, as the cur-
rency exchange rates remained beneficial for borrowers. From 2010 on, the situa-
tion began to change abruptly. The value of Swiss franc began to rise, from around
2.1 to 2.3 francs per zloty in 2006–2007, toward 3.5 or close to 4 francs per zloty in
2014.7 This dramatic rise of currency exchange rates had a huge impact on the
extent of the monthly credit instalments in foreign-currency indexed loans which
increased automatically. The increase of debt value around 30 % means that bor-
rowers have to repay amounts which clearly exceed the value of the property
financed with the foreign-currency indexed mortgage. This also means that selling
property will not generate enough funds to repay the foreign-currency indexed
loan.8 In general, unexpectedly higher instalments weaken debtors’ ability to pay
and significantly increase the probability of default.
Some countries have reacted to the drama of struggling borrowers with far-
reaching regulatory measures. For instance, Hungary passed the law allowing bor-
rowers to convert outstanding foreign-currency mortgage loans of globally about
$11 billion from franc and euro into forint, but generally at market rates.9 By con-
trast countries like Poland, where no regulatory strategy has been implemented until
now, are witnessing a growing number of law suits by financially struggling bor-
rowers against lenders claiming misrepresentation by lenders and unfair contract
terms.10
With hindsight, it is justified to claim that the lending industry marketed the
foreign-currency indexed mortgage loans on the basis of a flawed analytical
5
Rzeczpospolita from 2 March 2015, http://www.ekonomia.rp.pl/artykul/1183012.html.
6
7
The development of exchange rate of franc versus PLN is accessible at the website of the Polish
central bank (Narodowy Bank Polski), http://www.nbp.pl/homen.aspx?f=/kursy/kursyen.htm.
8
Rzeczpospolita from 2 February 2015, reports on struggles of borrowers http://www.ekonomia.
rp.pl/artykul/710047,1176120-Oferta-sprzedazy-mieszkan-zadluzonych-we-frankach.
html?referer=redpol.
9
The Economist from 15 November 2014, Forint exchange, http://www.economist.com/
news/finance-and-economics/21632651-hungarys-government-gives-struggling-borrowers-break-
forint-exchange.
10
As this contribution was submitted, the Polish Parliament was working on a draft law allowing
borrowers to convert outstanding foreign-currency mortgage loans into the Polish currency, under
specific requirements.
model.11 It assumed a stable currency exchange rate, and downplayed interest

rates fluctuation risks in the future. The risk of radical changes of currency
exchange rates was transferred exclusively on to borrowers who were at the time
not familiar with that type of speculative loan product.12 The lending industry did
not introduce any institutional or contractual safeguards against a radical change
of currency exchange rates, but instead chose to expose its contractual partners
to this risk. It is justified to claim that the financial sector demonstrated a lack of
any appropriate risk management regarding mortgage indexation in foreign cur-
rency, which also contributed to the financial stability risk.13
By nature, foreign-currency indexed loans were complex legal products. Mostly,
foreign-currency mortgage loan contracts did not involve paying out loans in for-
eign currencies, mostly Swiss franc, but the foreign currency was used as an index
parameter to determine the amount of the borrower’s monthly instalment. Typically,
funds were advanced and repaid in a national currency of the borrower, while a
virtual account in Swiss francs was established to provide an index parameter.14
However, the amount of monthly instalments was determined by reference to the
exchange rate for a foreign currency, which served as a denomination index. In
truth, Polish lenders did not possess enough Swiss currency to be able to extend
credit to borrowers in Swiss francs.15
To illustrate the contractual design of foreign-currency indexed mortgage loans
it is worthwhile to use the example of contract clauses judged recently by the Court
of Justice of the European Union in the first two cases brought before it regarding
this type of mortgage contracts.16 A typical contract clause stipulated that “the
amount of the loan in foreign currency will be determined at the buying rate for the
foreign currency applied by the bank on the date of advance of the funds”.
Furthermore, “after the funds have been advanced, the amount of the loan, the
related interest, the administration fees and default interest and other charges will be
determined in the foreign currency”, mostly the Swiss franc. According to another
11
See the interview with the former Head of the Polish Financial Supervision Authority (Komisja
Nadzoru Finansowego), Stanisław Kluza, accessible at http://www.polskieradio.pl/42/273/
Artykul/1358788,Stanislaw-Kluza-o-franku-banki-powinny-wziac-odpowiedzialnosc.
12
The Economist from 15 November 2014, Forint exchange, quoting a bank official: “Now, with
the benefit of hindsight, we can see that it was a mistake,” says a senior official at an Austrian bank
that issued lots of franc loans, “Most of the clients did not recognise the risk and in some cases we
did not inform them properly.”
13
Balogh and others 2011, p. 4.
14
Rzeczpospolita from 3 February 2015 “Dlaczego frankowicz wygra w sądzie”, http://www.eko-
nomia.rp.pl/artykul/1176588.html, quoting some typical provisions of foreign-currency indexed
mortgage loan contracts.
15
In order to maintain stability of the Polish financial system, the Swiss Central Bank was forced
to provide liquidity to the Polish Central Bank in the beginning of 2009, cf. Schweizerische
Nationalbank, Geschäftsbericht 2009, available at http://www.snb.ch/de/iabout/pub/annrep/id/
pub_annrep_2009.
16
Judgment of the Court of Justice of the European Union of 30 April 2014, Case C-26/13, Kásler
vs. OTP Jelzálogbank Zrt, ECLI EU C 2014, p. 282.
typical clause “the lender is to determine the amount in [national currency of the
borrower] of each of the monthly instalments due by reference to the selling rate of
exchange for the foreign currency applied by the bank on the day before the due
date”.17 Such clauses granted lenders effectively discretion in unilaterally determin-
ing the amount of each of the monthly instalments, as the bank’s right to determine
the selling rate of exchange for the foreign currency did not involve any reference
to official exchanges rates of central banks. Furthermore, frequent were also clauses
allowing lenders to “alter the current rate of interest in the event of significant
changes on the financial markets”. This in fact allowed lenders to change the inter-
est rate in a discretionary manner.18
The complex and intransparent design of foreign-currency indexed mortgage
loans was clearly beneficial for lenders. It justified a proliferation of special fees and
charges, e.g. a risk charge, for making the credit available.19 The review of these
clauses by the Court of Justice of the European Union revealed that lenders did not
provide any service constituting consideration, which would justify these charges.
The rise and subsequent fall of foreign-currency indexed mortgage loans in
Poland, Hungary and other European countries provides justification for an analysis
on how to drive potential borrowers toward choosing safe mortgage loan contracts.
Interestingly, at least in Poland, most consumers concluding foreign-currency
indexed mortgage contracts were people between 35 and 40 years old, quite often
university graduates, with above-average income.20 As a social class, they revealed
little similarity to borrowers who were targeted with subprime lending in the
U.S. Yet they equally got committed to mortgage loans that they would most likely
not have concluded again with the benefit of hindsight. Undoubtedly, foreign-
currency indexed mortgage loans are just one of a number of risky types of mort-
gages which were broadly marketed both in the U.S. and Europe in recent years.
Other examples include interest-only loans, variable interest rate loans, loans allow-
ing negative amortization of the debt or charging pre-payment penalties.21 This
paper undertakes to advocate neutral third-party counselling of prospective borrow-
ers as a strategy toward improving financial decision-making. As a protection
means, neutral counselling is discussed as an approach different to mandated disclo-
sure. By contrast, this paper does not discuss the related issue of liability of banks
17
Para 22 of the Judgment, Kásler vs. OTP Jelzálogbank Zrt.
18
Judgment of the Court of Justice of the European Union of 26 February 2015, Case C-143/13,
Matei vs. SC Volksbank Romania, OJ C 138, 27.4.2015, par. 26.
19
This point is well illustrated in the Matei vs. SC Volksbank Romania case. When borrowers
questioned the fairness of the ‘risk charge’ due under the mortgage credit contract, the lender just
proposed to re-name the ‘risk charge’ to ‘Credit Management Charge’, since charging this com-
mission was expressly authorised by applicable regulations, however, without at the same time
modifying the content of terms defining the charge. Similar features in the U.S. mortgage lending
practice are described by Bar-Gill 2012, pp. 120–123.
20
Rzeczpospolita from 5 February 2015, http://www.ekonomia.rp.pl/artykul/710047,1177051-
Gdzie-mieszkaja-frankowicze.html?referer=redpol.
21
On definitions of predatory loans see Willis 2006, pp. 718–729, Engel and McCoy 2002, p. 1284,
Stark and Choplin 2010, pp. 9–18.
for marketing and selling risky mortgage loans, as this is a question which merits a
separate study.22
10.2 Why Do Borrowers Choose Risky and Intransparent

Loans?
There are a number of heterogeneous reasons why borrowers choose risky or

intransparent mortgage loans. For example, Stark and Choplin listed 14 cognitive
and social psychological phenomena (‘psychological barriers’) that significantly
limit the effectiveness of disclosures as the protection instrument to ensure a prop-
erly functioning market. It appears that their account mentions most of key reasons
for sub-optimal borrower choice. According to Stark and Choplin, the 14 barriers
are: (1) Inability to process user-unfriendly features of disclosure forms; (2) Lack of
contractual schemas or knowledge structures; (3) Inaccurate default assumptions of
how contractual provisions are likely to be structured and if the contract is nego-
tiable; (4) Availability heuristics; (5) Reason-based decision making; (6) Biases in
attribute estimation and evaluation; (7) Positive conformation biases; (8) Accepting
senseless explanations; (9) Argument immunization; (10) Sunk costs effects; (11)
Endowment effects; (12) Temporal and uncertainty discounting; (13) Strong moti-
vation to trust and misplaced trust in mortgage brokers; (14) Social norms and
signals.23
It is impossible to discuss all of the above barriers in the context of foreign-
currency indexed loans, as they were intensely marketed a few years ago in Central
and Eastern Europe. Nevertheless, a number of factors that Stark and Choplin men-
tion, undoubtedly played a role in the decision-making process of borrowers.
10.2.1 Lack of Knowledge Structures and Availability

Heuristics
To begin with, borrowers may not grasp the risk (speculative nature) put into the
clauses of a mortgage contract, be it an adjustable credit rate or denomination of a
loan in a foreign currency. For instance, the U.S. experience shows that the majority
of the borrowers that were presented with a floating rate loan were surprised to find
out from a third-party counsellor that the loan they were about to conclude was an
22
For a comprehensive discussion of lenders liability for violating duties to provide information or
advice see Tereszkiewicz 2015.
23
Stark and Choplin 2010, p. 71, Table 1: Fourteen cognitive and social psychological factors that
cause disclosure forms to be ineffective.
adjustable rate loan.24 Consumers usually assess the risk associated with contract
provisions by the ease with which they can imagine possible consequences of those
provisions.25 However, due to their limited experience consumers are frequently
unable to foresee harmful outcomes that are quite probable. One could legitimately
claim that during the boom of foreign-currency indexed loans around 2006 and
2007 in Poland and other Central European countries, consumers generally failed to
appreciate to what extent such loans could lead to unforeseeable risks. At the same
time, banks did not fulfil their role of professional risk managers, shifting all cur-
rency exchange risks on to borrowers under the contractual framework of mortgage
contracts. At present, following a broad coverage of over-indebtedness in the media,
the risks resulting from foreign-currency indexed loans have become better-known
and available to average consumers.
10.2.2 Reason-Based Decision-Making
Furthermore, it is claimed that people simplify the choice by looking for a reason to
favour one option over another instead of weighing all advantages and disadvan-
tages of an option.26 This decision-making strategy evidently played a role in the
choice of foreign-currency indexed loans. Many borrowers, prompted by intense
marketing, seized on one salient feature such as low initial monthly payment, ignor-
ing the risk of floating currency rate.27 This tendency was aggravated by the framing
of offers that lenders commonly used, as mentioned above – an apparently evident
choice between a ‘cheaper’ foreign-currency indexed loan and a more expensive
mortgage loan in a local currency.
10.2.3 Endowment Effects
Equally relevant are endowment effects, when borrowers form an illusion, begin-
ning to feel as if they already owned the house that they would like to purchase.28
Should the transaction never materialize, consumers will regard this as a loss. It
follows that consumers are willing to accept riskier options to avoid such a ‘loss’
than they would accept to acquire a gain.29 Providing information or warnings at a
late stage is likely to have a weaker effect than if such communications had been
made early on.
24
Housing Action Illinois, Findings from the GB 4050 Predatory Lending Database Pilot Program
2007, quoted after Stark and Choplin 2010, p. 20.
25
Stark and Choplin 2010, p. 22, drawing on Tversky and Kahneman 1980, pp. 207–232.
26
Shafir et al. 1993, pp. 11–36.
27
Willis 2006, pp. 780–781.
28
Stark and Choplin 2010, p. 26.
29
See Kahneman and Tversky 1979, pp. 263–291.
10.2.4 Temporal and Uncertainty Discounting
Perhaps the most important human frailty is the tendency to fail to appreciate the
likelihood of uncertain, but probable costs. As the future seems distant, negative
outcomes are delayed. It is claimed that the degree to which people discount future
expenses usually exceeds the amount that can be rationally justified.30 An example
of Homer Simpson, used by Thaler and Sunstein, provides a very good illustration
of this phenomenon.31 Lenders can take advantage of this psychological inclination
by downplaying the extent of future risks or offering initial teaser rates. This ‘worst-
case’ scenario seems to have materialised in the case of foreign-currency indexed
loans. The currency exchange rates remained relatively attractive for borrowers dur-
ing the two or three first years of mortgage loan duration. Subsequently, however,
currency rates have risen dramatically, fundamentally changing the extent of bor-
rowers’ liabilities. Only then did the full extent of risks resulting from foreign-
currency indexed mortgage loans become apparent to most borrowers.
10.2.5 The Impact of a Confidence Relationship with a Lender

or a Broker
The history of many over-indebted consumers powerfully illustrates the role that
personal trust placed in a lender or a broker has played.32 Lenders and brokers
eagerly assume the image of consumer’s ‘advisors’ and ‘helpers’ to create an
impression that they offer a particularly good, individually tailored deal to a con-
sumer.33 Most mortgage loan contracts are concluded in one-on-one settings, where
consumers place too much trust in salespeople who usually call themselves ‘advi-
sors’. Furthermore, many borrowers mistakenly believe that lenders or brokers have
an obligation to obtain the best loan and interest rate for them. Mortgage selling
practices, which occurred both in the U.S. and in some European states, could prob-
ably be described with ‘direction and deflection’ model.34 The borrower’s attention
was directed, for instance, on the currently favourable indexation rate of Swiss
francs versus Polish zloty, but at the same time deflected from the fact that the
indexation rate may abruptly rise and extend the debt value. Furthermore, common
was creating an impression that the indexed loan proposed was the best and safest
deal for the borrower. The American research claims that many clients believed that
their loan originator (lender) was under an obligation to obtain the best loan for
30
Stark and Choplin 2010, p. 27, drawing on Frederick, Loewenstein and O’Donoghue 2002,
pp. 351–401.
31
32
See Willis 2006, pp. 798–806.
33
Regarding a similar pattern in ‘self-presentation’ of insurers see Feinman 2009, p. 553.
34
them.35 There is no reason to believe that the borrowers’ perception in Europe was
significantly different.
10.3 Possible Legal Measures Against Suboptimal Choices
10.3.1 Financial Education
There is a broad consensus that consumer financial literacy regarding complex and
risky financial contracts, such as mortgages, is inadequate.36 Yet it remains unclear
whether financial education programmes can be an effective means of addressing
this concern. It is submitted here that one should not rely on financial education as
preventive means of improving decision-making regarding complex financial prod-
ucts. As Willis persuasively argues, financial education would have to be extensive,
frequent and personalized to raise the probability of correct consumer decisions.37
Furthermore, given the reality of financial markets, one could be sceptical as to
whether financial education would really enhance the autonomy of consumers.38
The European experience with foreign-currency loans supports the sceptical
approach towards financial education. The data shows that typical lenders were
people with medium or high education.39 Furthermore, whatever educational mea-
sures are applied, they may not manage to keep up with the pace with which risky
financial innovations become accessible to financial consumers in the marketplace.
10.3.2 ‘Smart’ Disclosure of Contract Terms
The most intensely applied legal measure of our times is mandated disclosure.40 The
targeted use of ‘smart’ disclosure is advocated also in the context of mortgage loan
credits as a measure of improving consumer choices. Sunstein and Thaler describe
it as “the timely release of complex information and data in standardized, machine
readable formats in ways that enable consumers to make informed decisions”.41 In
the simplified form, mortgage lenders would be required to report lending costs in
35
36
Lusardi 2008; Meier and Sprenger 2013, pp. 159–174.
37
Willis 2011, pp. 431–432.
38
Willis 2011, pp. 431–432, claims that financial education would have “paradoxical effects on
autonomy”.
39
40
This topic attracted important literature in recent years. A major critique of mandated disclosure
stems from Ben-Shahar and Schneider 2013. For a more positive approach toward disclosure see
A. Schwartz 2015, p. 1374. See also Bar-Gill 2012, pp. 32–43.
41
two categories: fees and interest. The second category would be a machine-readable
detailed RECAP report, incorporating all the fees and interest rate provisions,
including teaser rates, what the variable-rate changes are linked to, caps on the
changes per year, and so forth.42 It is essential that this information could allow
independent third parties to offer much better advice. Sunstein and Thaler even
assume that third-party services would emerge to compare lenders. Undoubtedly,
this proposal goes some way to counter the inability to process user-unfriendly fea-
tures of disclosure forms. But, as it seems, Sunstein and Thaler are not convinced
that even ‘smart disclosures’ will be effective in the case of average, unsophisticated
consumers. It is essential to take into account that the need for simple language
sometimes conflicts with the need for legal precision, while the need for concise-
ness of disclosures may conflict with the need to provide information that may be
relevant for different categories of consumers.43 These considerations appear to
reinforce the case for a neutral third-party advisor who could perform the function
of translating the technical disclosure to the consumer.
Disclosure Regarding Mortgage Contracts Under the European Union

Mortgage Credit Directive
A brief survey of a recent piece of European legislation on mortgage credit reveals

what role disclosure can fulfil with respect to risky mortgage loans. At the European
level the Mortgage Credit Directive44 (abbreviated as MCD) was enacted in 2014
with a view to providing a high level of consumer protection in respect of loan
mortgage credits.45 It introduces a European framework of conduct rules for firms
selling mortgages. The Mortgage Credit Directive obliges lenders and intermediar-
ies to communicate to consumers a broad catalogue of information regarding the
proposed transaction (Art. 13–16 MCD). Pre-contractual information ought to be
provided in a standardised format, using the European Standardised Information
Sheet (ESIS).46 However, in case of more complex mortgage loan, such as foreign-
currency indexed mortgage loans or variable rate mortgage loans, the total amount
payable by the borrower cannot be communicated in advance. Furthermore, the
Mortgage Credit Directive mandates that where there is no provision in the credit
42
Sunstein and Thaler 2009, pp. 146–147.
43
Craswell 2006, p. 576.
44
Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on
credit agreements for consumers relating to residential immovable property and amending
Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010, OJ L 2014, L 60,
p. 34.
45
The academic literature on the Mortgage Credit Directive is still rather limited. An interesting
introduction is provided by the British Financial Conduct Authority in its Consultation Paper
“Implementation of the Mortgage Credit Directive and the new regime for second charge mort-
gages”, CP 14/20, September 2014, available at http://www.fca.org.uk/your-fca/documents/con-
sultation-papers/cp14-20.
46
Consideration 7 of MCD.
agreement to limit the exchange rate risk to which the consumer is exposed to a
fluctuation in the exchange rate of less than 20 %, the ESIS shall include an illustra-
tive example of the impact of a 20 % fluctuation in the exchange rate (Art. 23 (6)
MCD).
It is worthwhile to quote the provisions of the European Standardized Information
Sheet (ESIS) regarding the scope of information in case of foreign-currency loans:
EUROPEAN STANDARDISED INFORMATION SHEET (ESIS)
(…)
3. Main features of the loan:
Amount and currency of the loan to be granted: [value] [currency]
(Where applicable) This loan is not in [national currency of the borrower].
(Where applicable) The value of your loan in [national currency of the borrower] could
change.
(Where applicable) For example, if the value of [national currency of the borrower] fell
by 20 % relative to [credit currency], the value of your loan would increase to [insert
amount in national currency of the borrower]. However, it could be more than this if the
value of [national currency of the borrower] falls by more than 20 %.
(Where applicable) The maximum value of your loan will be [insert amount in national
currency of the borrower]. (Where applicable) You will receive a warning if the credit
amount reaches [insert amount in national currency of the borrower]. (Where applicable)
You will have the opportunity to [insert right to renegotiate foreign-currency loan or right
to convert loan into [relevant currency] and conditions].
(…)
6. Amount of each instalment
(Where applicable) The value of the amount you have to pay in [national currency of the
borrower] each [frequency of instalment] could change. (Where applicable) Your payments
could increase to [insert maximum amount in national currency of the borrower] each
[insert period]. (Where applicable) For example, if the value of [national currency of the
borrower] fell by 20 % relative to [credit currency] you would have to pay an extra [insert
amount in national currency of the borrower] each [insert period]. Your payments could
increase by more than this.
Evaluation
It could be held that the disclosure relating to foreign-currency risks under the
Mortgage Credit Directive, as designed above, is of little use. It does not convey a
precise message on the extent of borrower’s liabilities. Thus it cannot fulfil the
requirements of ‘the smart disclosure’ concept advocated by Sunstein and Thaler.
The amount of the mandatory text to be communicated is large, but the major mes-
sage it conveys is that the precise extent of borrower’s liability may depend on a
number of factors and remains unspecified. The above disclosure is of little use to
an average borrower, if it is not accompanied by further measures, for instance, a
neutral explanation. Furthermore, it even carries the danger of being harmful. As
Willis rightly points out, extensive disclosures give the ‘veneer of legality and
authority’ to the loan process, even if it involves highly risky products.47 Pre-contract
47
Willis 2006, p. 794.
material or even lender’s explanations show a limited potential of overcoming

informational failures of a borrower. Furthermore, the warnings and explanations by
a lender usually do not provide the borrower with a sense of his or her alternatives.48
In this context it is doubtful whether the mandatory information on the potential
impact of exchange rate fluctuation, required by the Mortgage Credit Directive, will
serve as an important consideration for a borrower. There is an imminent risk that
this standardised warning will be crowded out by the extensive catalogue of other
mandatory disclosures.49 Moreover, the pre-contract communications by a lender,
usually focusing on a specific product, are not likely to encourage a critical and
detached reflection on the part of the borrower which could help him or her see the
unusual dangers of a ‘risky’ type of mortgage contract as compared to standard
ones. It follows that pre-contract disclosure and explanation cannot be regarded as
a suitable tool of enhancing the autonomy of borrowers. Besides, lenders as sellers
of mortgage products are typically in a conflict of interest position, for they derive
profits from mortgage contracts concluded with their clients. Therefore they cannot
be expected to provide an impartial assessment of mortgage products they expect to
earn profits from. On the whole, it is justified to assume that disclosures and expla-
nations by lenders have limited efficacy in correcting most important informational
failings.50
10.3.3 Mandatory Neutral Advising
Some of leading scholars of consumer law contend that certain risky types of mort-
gages, which would include foreign-currency indexed mortgage loans, should be
banned.51 Nevertheless, if a legislator does not follow that position, as is the case at
the European Union level under the Mortgage Credit Directive, measures of protec-
tion other than disclosure should be contemplated. Neutral (independent) counsel-
ling can be considered to be one of such measures. In some common law countries,
like England or Australia, independent advice is regarded as a major device the law
uses to correct contract failure in family financial dealings, in particular in non-
professional surety contracts.52 Lenders are obliged to insist that non-professional
sureties (guarantors) be independently advised by lawyers on the transaction that
they intend to conclude with a bank.53 This paper proposes to apply this idea to
mortgage loan contracts.
48
Rightly Trebilcock and Elliot 2001, p. 75.
49
On this danger Craswell 2006, pp. 576–580.
50
Trebilcock and Elliot 2001, p. 75.
51
Willis 2006, p. 823.
52
Trebilcock and Elliot 2001, p. 65; see also Tereszkiewicz 2011, pp. 851–873.
53
Beatson et al. 2010, p. 361.
Apparently, advice as a form of informational behaviour resembles disclosure.54

Nevertheless, it actually offers a different kind of help, aiming to answer the ques-
tion: “How a given measure is likely to meet your objective?”. A neutral advisor is
not an agent for the discloser. Rather, it is someone whose function is to substitute
the disclosure and assist in the decision-making process.
The idea of neutral (independent)55 advice is promising in many respects. It
appears that neutral (independent) advice may contribute to reducing the conse-
quences of both cognitive incapacities and temporary distorting states, avoiding the
shortcomings of protection by means of disclosure. First, a neutral advisor (counsel-
lor) is in a better position to inform and advise a borrower about the risks and costs
of an offered mortgage than a self-interested lender (seller). As a result the borrower
should be better informed about the content and the risks of the transaction to be
concluded and also less susceptible to being misled by a lender. As opposed to
mandated extensive disclosure, neutral counsellor is likely to use simple, non-
technical language to describe complex issues. In contrast to disclosure and expla-
nation by a lender, neutral advice offers a better chance of altering the structure of
a financial choice by a borrower, including re-thinking the decisions about taking a
mortgage. Neutral counsel may also inform the borrower about alternative mort-
gage products that are accessible to him or her in the marketplace, making specific
recommendations that simplify the complex process of comparing often incompa-
rable mortgage products of different lenders in the market place.
Furthermore, neutral advice has the potential of correcting emotional incapaci-
ties which may be temporary, some of which were mentioned before, like emotional
pressure from a lender, endowment effects, strong desire to urgently secure funding
for a specific property.56 Generally, neutral advice is much better suited to enhance
borrower’s internal autonomy, stimulating him or her to reflect on the reasons for
choosing a specific risky mortgage offer and to what extent this mortgage form
would meet her goal. It is common wisdom that a person lacking material informa-
tion or being under a major misapprehension regarding her future options may
make a choice against her actual preferences or needs. As John Stuart Mill wrote,
preventing a person from crossing a bridge that she mistakenly believes to be safe
is not a real interference with her autonomy.57 An intervention in the form of coun-
selling may lead to outcomes that a party would have chosen if he or she had not
been ignorant of material circumstances or unduly pressured to make a decision.58
One should agree with Trebilcock and Elliot, that even if mandatory counselling is
54
I use the term ‘informational behaviour’ drawing on the illuminating analysis of Craswell 2006,
p. 566.
55
Terms ‘neutral’ and ‘independent’ are used here largely as synonyms, as are terms ‘advice’ and
‘counselling’.
56
Trebilcock and Elliot 2001, p. 76, Stark and Choplin 2010, pp. 26–27.
57
Mill 1947, p. 89.
58
regarded as a paternalistic measure, it is in such circumstances respectful of agent’s

true preferences.59
Moreover, recent criticism of disclosure highlights yet another important consid-
eration concerning neutral counselling. Ben-Shahar and Schneider stress that peo-
ple commonly prefer advice to data when faced with making unfamiliar and
complex decisions.60 Choosing a right mortgage loan contract is undoubtedly one of
the most complex financial choices to be made during a lifetime. In light of the solu-
tion advocated here neutral counsellors can be regarded primarily as professional
information intermediaries who largely substitute the disclosure and translate its
content to borrowers.
The Concept of Advising (Counselling) Under the Mortgage Credit

Directive
Regulatory Approach
The above-mentioned Mortgage Credit Directive dates from 2014 and thus could
have been an opportunity to introduce an innovative counselling scheme, as a regu-
latory option for Member States. This is why a brief overview of the Directive’s
approach to regulating borrower advice is justified. In an attempt to improve the
protection allowed by lenders’ mandatory disclosures to borrowers, the Mortgage
Credit Directive introduces provisions regarding advising (counselling) borrowers
with a view to a prospective mortgage loan contract. The Mortgage Credit Directive
adopts the position that providing advice in the form of a personalized recommen-
dation to a consumer is a distinct activity, which may but need not be combined
with granting or intermediating credit.61 Therefore, creditors and intermediaries
should explicitly inform consumers whether advisory services are or can be pro-
vided to the consumer in the context of a given transaction (Art. 22 (1) MCD).
Furthermore, specific rules are designed to make consumers aware of what range of
products lenders and intermediaries take into account in their recommendations.
Lenders and intermediaries are obliged to inform consumers whether the recom-
mendation will be based on considering only their own product range or a wide
range of products from across the market (Art. 22 (2) a MCD).
It is questionable whether this information duty goes far enough toward warning
a consumer that lenders may offer him or her a limited range of products. With
respect to abstract products such as mortgage contracts, most consumers will have
59
60
Ben-Shahar and Schneider 2013, p. 13, p. 190, proposing a broad concept of ‘information inter-
mediaries’, comprising consultants, aggregators, and even savvy shoppers.
61
Consideration 63 of MCD.
difficulties distinguishing between ‘untied’ and ‘tied’ intermediaries.62 In an attempt

to provide for more specific measures of protection at the national level, the
Mortgage Credit Directive provides Member States with two regulatory options.
First, they may prohibit the use of the term ‘advice’ and ‘advisor’ or similar terms
when the advisory services are being provided to consumers by creditors, tied credit
intermediaries or appointed representatives of tied credit intermediaries (Art. 22 (4)
MCD). Alternatively, where Member States do not prohibit the use of the term
‘advice’ and ‘advisor’, they shall impose the following conditions on the use of the
term ‘independent advice’ or ‘independent advisor’ by creditors, credit intermediar-
ies or appointed representatives providing advisory services:
(a) Creditors, credit intermediaries or appointed representatives shall consider a
sufficiently large number of credit agreements available on the market; and
(b) Creditors, credit intermediaries or appointed representatives shall not be remu-
nerated for those advisory services by one or more creditors (Art. 22 (4) MCD).
Furthermore, the Mortgage Credit Directive provides an option clause, whereby
Member States may impose more requirements in relation to the use of the terms
‘independent advice’ or ‘independent advisor’ by creditors, credit intermediaries or
appointed representatives, including a ban on receiving remuneration from a credi-
tor (Art. 22 (5) MCD).
Evaluation
Undoubtedly, the Mortgage Credit Directive provisions on advice go beyond the

model of ‘advised sales’, where a seller (lender) is providing advice, but only on the
basis of his or her own mortgage products.63 Theoretically, the Mortgage Credit
Directive could contribute to creating a market model, where lenders will advise
their clients, taking into account a sufficiently large number of mortgage products
available on the market. Imposing a duty on lenders to take into account a market-
representative catalogue of products while advising on products can also provide
incentives for lenders to optimize their own products from the perspective of con-
sumer needs.
On the other hand, it could be claimed that the Mortgage Credit Directive does
not go far enough toward establishing a model of independent advice for consum-
ers. There remains an imminent risk that self-interest of lenders will play a crucial
role in the recommendations that they provide to consumers. It is thoroughly
62
Cf. Financial Services Authority (UK), Consultation Paper 11/31, Mortgage Market Review:
Proposed package of reforms, par. 1.109: “Most customers believe that if they speak to an interme-
diary, they have been given ‘advice’, no matter how many times they may be told that they are not
being given advice and whatever form of service disclosure they are given confirming this posi-
tion”; available at http://www.fca.org.uk/your-fca/documents/consultation-papers/fsa-cp11-31.
63
On the concept of ‘advice’ under Directive 2004/39/EC on markets in financial instruments
(MiFID I) see Moloney 2010, p. 200.
possible to take into account a sufficiently large number of mortgage agreements

available on the market, but at the same time still present one’s own offer as particu-
larly advantageous and ‘unique’ for a consumer. Given the need to protect unso-
phisticated consumer borrowers, the measures aimed at taming self-interest of
lenders appear insufficient. Advice provision under the concept of the Mortgage
Credit Directive cannot be regarded as genuinely ‘neutral’.
Assessing the model of the Mortgage Credit Directive, it is necessary to bear in
mind the inevitable political constraints of the European legislation. More elabo-
rated mandatory counselling schemes for consumers cannot be realistically intro-
duced at a European level, but their creation could be encouraged. A pan-European
uniform solution in this respect does not currently appear feasible. Introducing and
developing legal rules on counselling schemes for mortgage borrowers remains a
legal competence of, and a political challenge for every single Member State in the
process of providing high level of mortgage borrower protection.
10.4 Neutral Counselling as a Mandatory Institution
It seems that the model of neutral counselling should be mandatory in order to have
any meaningful effect. A softer measure would be to require lenders to recommend
prospective borrowers that they should seek independent advice before concluding
a mortgage transaction.64 A major risk of such a solution, as was showed by Burrows,
is that it might provide an incentive to lenders to make recommendations in a way
that minimises the likelihood of the independent advice being taken.65 This in turn
encourages active persuasion on the part of lenders that borrowers should take up
their offers. A requirement that counselling should be mandatory eliminates that
risk and forces lenders to cooperate with advisors. Undoubtedly, this is a more
paternalistic measure than an optional counselling scheme. Nevertheless, if pre-
contract neutral counselling is supposed to provide a substitute for mandated disclo-
sure, its mandatory character appears justified.
10.4.1 Illinois Predatory Lending Database Pilot Program

as an Illustration
The Scope and Aims of the Illinois Pilot Program
A notable example of a mortgage counselling programme is a pilot programme run

in Cook County, Illinois, between September 2006 and January 2007. Originally,
the sponsors of the bill introducing the pilot programme wanted the law to apply
64
This position was part of English law of private sureties, see Trebilcock and Elliot 2001, p. 75.
65
Burrows 1995, p. 140.
state-wide, but were not able to get it passed by the state legislature.66 Consequently,
the legislation was reduced to a pilot programme, with the target area chosen on the
basis of higher foreclosure rates and subprime lending.67 Essentially, the programme
required ‘high-risk’ mortgage applicants acquiring or refinancing properties in ten
Chicago zip codes to submit loan offers from state-licensed lenders to review by
loan counsellors certified by the Department of Housing and Urban Development
(HUD).68 This requirement also applied to applicants choosing certain mortgage
products deemed risky by legislator. More specifically, the pilot programme man-
dated financial counselling for mortgage credit applicants whose credit scores were
low enough to regard them as high-risk borrowers (the low-FICO borrowers).69 The
mid-FICO borrowers could be subject to counselling in case they chose specific
categories of high risk mortgage products, such as interest-only loans, loans with
interest rate adjustments within 3 years, loans underwritten on the basis of stated
income and repeat re-financings within the last 12 months. Furthermore, counsel-
ling was obligatory regardless of the consumer’s creditworthiness (FICO) score in
case they intended to take out loans with prepayment penalties, loans allowing neg-
ative amortization, or loans with closing costs in excess of 5 % of the loan.70
The programme rules mandated that borrowers falling under its scope attend a
counselling session with a certified loan counselling agency. Technically, brokers
or lenders were obliged to submit information on the prospective loan to the Illinois
Department of Professional and Financial Regulation (IDPFR) within 10 days of
the offer, following which eligible borrowers received notice of the requirement for
counselling from the IDPFR.71 A central database with all mortgage offers was held
by the IDPFR. Borrowers were required to contact the counselling agency of their
choice and attend the 1 h counselling session.72 The aim of such sessions was to
discuss the terms of the specific loan offer for a home purchase or refinancing and
to explain their meaning and consequences to the prospective borrower. The coun-
sellors were essentially supposed to warn borrowers against most frequent risks.
Concluding a session, the counsellor was obliged to record a number of key findings
about the loan, in particular whether the fees or interest rates were excessive,
whether the consumer understood the contract or whether he could afford the loan.
As the report’s authors emphasize, the interview with the borrower and an inde-
pendent collection of data on his or her financial situation enabled counsellors to
66
Bates and Van Zandt 2007, p. 39.
67
“Pilot program area means areas designated as such by Department due to the high rate of fore-
closure on residential home mortgages that is primarily the result of predatory lending practices.
The Department shall designate the pilot program area within 30 days after the effective date of
this amendatory Act of the 94th General Assembly.” See Bates and Van Zandt 2007, p. 18.
68
Agarwal and others 2009, p. 2.
69
70
Bates and Van Zandt 2007, p. 16. This led to the high-FICO borrowers being counselled condi-
tional on their mortgage contract choice.
71
All mortgage loan applications were entered into a central database.
72
Bates and Van Zandt 2007, p. 23.
form an assessment of borrower creditworthiness that exceeded the findings of

lenders. In this manner, the counsellors relied on private information from borrow-
ers which were often not used by lenders in the decisions about granting loans. Such
information also became a matter of public record, as counsellors entered their rec-
ommendations for borrowers in the state-maintained database.73
At the end of the counselling session counsellors made possible recommenda-
tions as to whether the loan should be approved or not and for what reason.
It is worthwhile to list the possible recommendations, as they point to the most
typical – in the legislator’s view – reasons for suboptimal financial decisions:
Possible recommendations included:
1. Loan should not be approved due to indication of fraud;
2. Loan should be approved, no problems noted;
3. Borrower cannot afford loan;
4. Borrower does not understand transaction;
5. Borrower does not understand costs;
6. Borrowers income and expenses have been reviewed;
7. Loan rate is above market;
8. Borrower should seek competitive bid;
9. There are discrepancies between borrower’s understanding and originator’s
submitted form;
10. Borrower is precipitously close to not being able to afford the loan;
11. Borrower understands the true cost of debt consolidation and need for credit
card discipline;
12. Information provided by borrower has been amended by originator.74
The scope of possible recommendations shows that a counsellor assesses a num-
ber of factors which could be generalized as follows: (a) the lender’s offer and
conduct toward the borrower; (b) the borrower’s understanding of transaction’s
legal nature and financial implications; (c) the borrower’s creditworthiness, and (d)
the fairness of loan rates.
Counsellor’s recommendation were not binding on the borrower who could
decide to take up the loan offer obtained despite a recommendation to the contrary.
Furthermore, the Illinois Pilot Programme regulations did not assign liability to
either the lender or the counsellor.
73
74
See Bates and Van Zandt 2007, p. 39, Figure 1, on the basis of 38 Illinois Administrative Code
346.
Major Findings
The major finding from the Illinois Pilot Program is that the counselling scheme
resulted in substantially lower ex post default rates and somewhat better loan
choices among some of the counselled borrowers that remained in the market.75
Specifically, the 18-month default rate among borrowers with low creditworthiness
scores was about 4.5 % lower than that among similar borrowers in the control
group. This decline could be seen as very serious.
Furthermore, stronger evidence for indirect effects of the counselling require-
ment on mortgage origination and mortgage decision making was found. First, the
study documents a spike in rejection rates of mortgage applications by lenders who
are subject to the legislation during the treatment period, with rejection rates return-
ing to their normal level as soon as the Illinois Pilot Program is rescinded.76 A pos-
sible explanation of this change is the temporary exit of lenders with loose screening
practices from the area subject to the Illinois Pilot Program, coupled with tighter
screening by lenders remaining in the market. Secondly, the study finds a fairly
large decline in the amount of low-documentation mortgages.77 This effect can be
attributed to demands by counsellors that prospective borrowers should bring their
income documentation to the counselling session. Both of the results point toward
the oversight effect - the conclusion that third-party counselling, involving a collec-
tion and recording of lender information, results in more thorough screening.78
Thirdly, it is reported that mid and high creditworthiness score borrowers who
could avoid the mandatory counselling programme by choosing less risky mortgage
products, in fact did so.79 A possible reason for this choice was to minimise interac-
tion with counsellors. Fourthly, the study reports that borrowers who had been
counselled rejected fewer mortgage offers.80 Fifthly, it was found that the financial
counselling requirement improved ex post default rates for the low creditworthiness
counselled borrowers relative to similar borrowers outside the Illinois Pilot Program
area -the effect of the Illinois Pilot Program on default is said to be “impressive in
its economic magnitude”.81
Most importantly, the study’s authors emphasise that the threat of oversight of
lending practices and the imposition of transaction and compliance costs of coun-
selling, rather than the information contained in counselling sessions, were the pri-
mary catalyst for improvement in the decision making process of borrowers, leading
to lower default rates.82 It is claimed that the mere presence of the regulator in the
marketplace and the third-party review of mortgage contracts appear to have a large
75
76
77
78
79
80
81
82
Agarwal and others 2009, pp. 4–5.
effect on the quality of mortgage contract. On the other hand, it must be acknowl-
edged that counselling is perceived as a burden by borrowers who either stay away
from the market or choose products that do not trigger counselling.
Evaluation
The findings from the Illinois Predatory Lending Database Pilot Program are inspir-
ing, as they support the proposition that neutral counselling schemes may contribute
to better financial decision-making by consumers. Given a very specific and narrow
spatial scope of the Illinois Pilot Program, these findings cannot be overly general-
ized. Its results may not be applicable to other areas of the state of Illinois itself, not
to mention its relevance to analysing the position in other U.S. states or European
countries.
A possible major critique of the Illinois Pilot Program concerns the focus on
specific classes of individuals who were subject to the programme instead of extend-
ing protections to most or all home loans. The Illinois Pilot Program protections
were triggered by the credit score of the borrower, regardless of whether the mort-
gage loan had unusual terms. This debatable solution, made undoubtedly with good
intent, was precisely the reason why the Illinois Pilot Program was doomed to fail.83
Notwithstanding the questionably narrow scope of the Illinois Pilot Program, the
idea of impartial counselling that it put forward should not be discarded.
10.5 A Possible Design of an Optimal Counselling

Programme
10.5.1 Triggering Mandatory Counselling
As the experience of the Illinois Pilot Program shows, criteria for counselling
should not refer to the borrower’s characteristics. Borrower-related criteria, how-
ever designed they might be, will inevitably be regarded as discriminatory. The
counselling triggers should be product-related. It is of course debatable whether all
types of mortgage contracts should require counselling or only those that are deemed
risky. A conceivable strategy may be to apply a lower protection threshold to all
home mortgage loans, i.e. an interactive computer counselling programme, whilst a
higher protection threshold, personalised counselling, would apply only to ‘expen-
sive’ and ‘risky’ mortgage loans.84
It appears that counselling should be trigged by both the complexity of the mort-
gage contract and the extent of financial liabilities assumed. Under Stark and
83
See Bates and Van Zandt 2007, p. 39.
84
Choplin’s proposal, mandatory counselling would apply only to: (a) a ‘high cost
home loan’; (b) an ‘unaffordable home loan’, or (c) a loan ‘with potentially preda-
tory features’. According to Stark and Choplin, a loan with “potentially predatory
features” should be defined as a loan that has any one of the following features: (i)
a prepayment charge, (ii) a loan that permits the payment of interest only or nega-
tive amortization of the debt; and (iii) a loan that accrues interest at a floating rate.85
Some of these ‘risky’ mortgage contracts are indirectly recognized by the Mortgage
Credit Directive, in that the Directive provides specific rules for certain types of
mortgages: foreign-currency loans, interest-only loans and variable rates credits.
Needless to say, any list of loans with ‘potentially predatory features’ should be
subject to a regular review, as a reaction to new forms of market failure.
Designing a relatively broad catalogue of ‘high-cost’ and ‘risky’ mortgage loans
as trigger for counselling is of particular importance. Two major considerations are
at stake here. First, designations of mortgage contracts as ‘risky’ tend to become
publicly known and may therefore constitute a credible signal for potential borrow-
ers to avoid such mortgage products. The long-term consequences of an adequate
designation may be the decline of choice of risky products by borrowers. Secondly,
as was proven by the Illinois Pilot Program, smart triggers for counselling may
result in mortgage products selection being driven by the desire to avoid counsel-
ling and its associated costs.86
10.5.2 The Requirements Regarding the Person of Counsellors
An underlying assumption behind the idea of counselling programmes is that mort-

gage counsellors should be independent of mortgage lenders and intermediaries
(brokers). Counsellors will only be able to critically review the mortgage loans pro-
posals if they have no links to mortgage originators or brokers, and thus derive no
direct or indirect benefits from a decision of a borrower to take a specific mortgage
offer.87
Furthermore, counselling programmes can have the desired effect if counsellors
are professionally trained: they have to be able to determine whether a loan is too
risky or too expensive for a borrower. The author of this paper has not attempted to
precisely calculate an estimate of the total costs of such training. Sources quoted by
Stark and Choplin indicated that it was estimated it would take approximately 50 h
to train a person to learn mortgage finance concepts, applicable legal regulations
and counselling methods.88 Training for future mortgage advisors should be
85
86
87
Similarly, in the context of family suretyships, Trebilcock and Elliot 2001, p. 80.
88
provided by a specialist public administration office.89 Costs of such training will

undoubtedly vary from country to country and cannot be considered here in more
detail.
10.5.3 The Counselling Process
In order to ensure that the counselling process is as efficacious as possible, certain

standards and procedures have to be met. Borrowers would obtain the draft loan
agreements from lenders and have them reviewed by a counsellor. The objection
against counselling solution that borrowers do not have loan agreements and final
statements in front of them before closing on the transaction would not hold.90
Counsellors should be able to express clear recommendations about the suitability
of the mortgage loan for a borrower on the basis of the complete documentation
made accessible by lenders.
Given the assumption that mortgage counselling should be triggered by offers of
risky types of mortgages, a mortgage counsellor’s inquiry should aim at clarifying
why the applicant is interested in a given risky type of mortgage and what benefits
he or she expects from that the decision. Furthermore, the counsellor should explain
the particular risks of the mortgage contract offered to the applicant as compared
with a simple fixed interest rate mortgage loan as the safest way to reduce the extent
of borrower’s liability. Moreover, safer and less complex alternatives should be
proposed to the applicant. Finally, the mortgage counsellor should be able to offer
assistance to the applicant in obtaining other less risky mortgage loan offers. This
last feature could play a significant role in determining whether a counselling
scheme can have any meaningful effect.91
Having completed a counselling session, prospective borrowers would in prin-
ciple be free to take the financial decisions they prefer. As Trebilcock and Elliot
emphasize, “with the assistance of an advisor people should be free to arbitrate their
own preferences”.92
Given that a counsellor’s recommendation should be unbinding, there is a risk
that some borrowers will choose not to seek a lower priced or less risky loan due to
a relationship of trust that they have developed with the lender or broker. As a
means of countering the reliance on personal trust, Stark and Choplin propose that
the borrower should perform an interactive computer counselling program before
the borrower is allowed to work with the broker or lender. This computer counselling
89
Relating to the U.S., Stark and Choplin 2010, p. 56, recommended that the mortgage counsellors
should be trained by the United States Department of Housing and Urban Development.
90
This concern is raised by Engel and McCoy 2002, p. 1310.
91
Similarly Stark and Choplin 2010, p. 56, who claim that without this assistance many borrowers
may return to the original mortgage lender or broker they were working with due to psychological
factors discussed in the first part of this essay.
92
program would be interactive, educational, and would provide the borrower with:
(i) the APR figure they should be seeking based on his or her credit score, the debt
service ratio, and loan to value ratio based on the loan amount the borrower is seek-
ing, (ii) a calculation of the borrower’s gross monthly income and loan amount that
would yield a prudent debt service ratio, and (iii) a script for what to say to the
mortgage broker or lender.93 Once borrowers become aware that lenders are under
no duty to act in their best interest and may have financial incentives to offer them
risky loans, they may become less prone toward sub-optimal financial decisions.
10.5.4 The Costs of the Counselling Sessions
The central aspect regarding the counselling schemes relates to their funding and
costs. It is sometimes contended that creating a massive mortgage counselling
scheme would be very expensive.94 This argument is undoubtedly relative, for the
financial aspect depends on the design of the counselling schemes, the scope and
intensity of counselling provided to individual consumers. As already emphasized,
neutral mortgage counselling schemes are not meant as a form of general financial
education for consumers. They would not aim at providing long counselling ses-
sions with a view to educating consumers in financial matters, which would gener-
ate considerable costs but rather uncertain returns. Instead, counselling schemes
would provide assistance with regard to assessing specified draft contract (offers)
made to a borrower by a lender.
Under the Illinois Pilot Program a rule was adopted that the $300 cost of the
counselling session was to be borne by the mortgage originator and not the bor-
rower. A similar solution is also advocated by Stark and Choplin.95 Counselling on
issues, which would not trigger mandatory counselling, like the net economic ben-
efit issue, would have to be funded by borrowers themselves.
This solution proves controversial, for the financial sector would regard itself
unduly financially burdened. Nevertheless, there are two major justifications in
favour of lenders or brokers bearing the cost of counselling. First, one could justify
it by claiming that if lenders or brokers bring risky products to the marketplace
which are likely to yield financial gains to them, they should also bear the cost of
counselling consumers who may buy such products and bind themselves for decen-
nia with an obligation to repay. Secondly, one could rightfully claim that the global
costs of mortgage counselling, however high they might prove to be, are still limited
in comparison to the costs incurred in order to correct the market failings due to
misselling of mortgages. Much has been written about the dramatic consequences
93
94
Engel and McCoy 2002, pp. 1309–1311. More generally Trebilcock and Elliot 2001, pp. 82:
“The benefits of procedural protection need to be balanced against the increased cost of finance
that those protections entail”.
95
Stark and Choplin 2010, footnote 141.
of the subprime lending in the U.S. for the society at large.96 Similar consequences
are reported in Europe.97
There is no doubt that imposing the cost of counselling sessions on lenders will
lead to some unintended consequences. As regards the Illinois Pilot Program, it is
reported that brokers attempted to pass the $300 counselling fee to the borrowers in
the form of higher closing costs or administrative charges.98 Undoubtedly, manda-
tory counselling programmes will lead to some increase in costs of credit. However,
if costs of mandatory counselling sessions can be kept at a relatively low level
through regulation, such costs can be regarded as a negligible consequence of intro-
ducing counselling programmes. The expected overall improvement of decision-
making by borrowers would likely offset these costs.
10.5.5 The Limits of the Counselling Solution
The assumption underlying the mortgage counselling scheme is that if a mortgage

counsellor determines that a borrower could obtain the same loan at a better price or
safer terms, and makes such a recommendation to a borrower, that the borrower
should act rationally to decline the loan and seek a better-termed loan, in particular
where a counsellor assists with the process of obtaining a better-priced loan.99
Moreover, if specific types of loans are risky or predatory in nature to some con-
sumers, but not all of them, counselling may help to preserve the ability of consum-
ers to make informed choices in light of their individual circumstances. Certain
types of loans, e.g. with a floating interest rate, might be beneficial for a narrow
class of more sophisticated consumers and the process of counselling may promote
making such welfare-enhancing transactions.
The position of a counsellor merits close attention. The responsibility of counsel-
lors for enabling borrowers to make better choices regarding mortgage products
bears some resemblance to a gatekeeper strategy. A gatekeeper strategy entails
imposing liability on a private party who is not the cause of misconduct nor a ben-
eficiary, but who is in a position to prevent misconduct or wrongdoing by refusing
cooperation or support.100 It is not an objective of this essay to discuss a potential
96
Bar-Gill and Warren 2007, pp. 159–162.
97
For Hungary Balogh and others 2011, for Poland Rzeczpospolita from 2 February 2015, reports
on struggles of borrowers http://www.ekonomia.rp.pl/artykul/710047,1176120-Oferta-sprzedazy-
mieszkan-zadluzonych-we-frankach.html?referer=redpol.
98
Bates and Van Zandt 2007, p. 23 with further references. See also Trebilcock and Elliot 2001,
pp. 69–70, warning that having to bear advice costs could be onerous for lower income
transactors.
99
100
Trebilcock and Elliot 2001, pp. 67–70, discuss the gatekeeper duties of lenders in the context of
family sureties. Generally on a gatekeeper strategy Kraakman 1986, pp. 53–104.
liability of counsellors toward borrowers.101 Rather, this essay underlines the poten-
tial of impartial third parties to detect and correct flawed mortgage choices and
enhance borrowers’ autonomy.
The counselling programmes, as advocated here, aim at improving decisions
about mortgage contracts. They are not meant to provide protection against factors
in loan delinquency which are not predictable or controllable by the parties when
the contract is made. Such factors are job loss by borrowers or health problems,
which are regarded as the main causes of defaults by debtors.102 Risks relating to
default and over-indebtedness resulting from events occurring during the lifecycle
of a long-term mortgage contract should be dealt with applying different legal mea-
sures, such as consumer bankruptcy or various financial aid programmes.
Finally, counselling programmes, as advocated here, should not be regarded as
the exclusive instrument of protection against risky mortgage loans. Mandatory
counselling introduces a measure of paternalism going beyond disclosure protec-
tion, but it should be conceived as a protection measure complemented among oth-
ers by usury laws and unfair contract terms legislation.103
10.6 Conclusions
These considerations relating to counselling programmes for mortgage products

reveal the multi-layered nature of regulatory nudges relating to financial products.
In theory, counselling programmes for mortgage borrowers could provide a useful
function of largely substituting mandated disclosure to consumers, by translating
the offered deals to them.104 From this perspective, introducing counselling pro-
grammes could go some way toward addressing major objections against mandated
disclosure as a regulatory tool in consumer law. Effective counselling programmes
could enable the borrower to find the lowest rate and cost loan available. At the
same time, significant dangers remain. If counselling programmes prove to be
unsuccessful, their mere existence will, paradoxically, benefit lenders from a civil
liability perspective. Lenders would commonly invoke a defence that a consumer
obtained independent professional advice before concluding a mortgage loan con-
tract. In this way civil liability of lenders as a regulatory tool could be seriously
weakened. This should reinforce the argument that the advocated mortgage
101
The principles and scope of such liability would depend among others on the status of counsel-
lors in a given legal order and also on the legal nature of their mandate.
102
See in general Ramsay 2007, pp. 578–580.
103
In a similar vein Ben-Shahar and Schneider 2013, p. 194: “Sometimes the choice between pater-
nalism and libertarianism simply can’t be avoided, and substantive regulation with no opting out is
needed.”
104
Ben-Shahar and Schneider 2013, p. 190, list some of different kinds of information
intermediaries.
counselling programme should not be regarded as the sole protection measure

against risky home lending.
The Illinois Pilot Program shows that a limited ability of borrowers to act on
counselling information has to be acknowledged. Nevertheless, this does not consti-
tute a reason against introducing counselling programmes. It is thinkable that regu-
lators achieve the goal of risk reduction by the mere threat of counselling and not by
the content of counselling sessions. No regulator can foresee all possible conse-
quences of norms that it adopts. When contributing to better mortgage choices is
recognized as a legitimate goal of a specific regulatory intervention, a legislative
instrument cannot be dismissed only because this legitimate goal was achieved
mainly as a result of unintended, but still legitimate consequences of the interven-
tion. Further empirical studies of counselling programmes regarding risky financial
products are necessary to discover the limits of their positive contribution, but there
is enough evidence to acknowledge their potential.
At a more general level, it appears justified to claim that a certain extent of pater-
nalism in designing the protection of mortgage borrowers is necessary. In the after-
math of recent experiences in the U.S. and in Europe, it must be recognised that
choices of borrowers do not always reflect their underlying preferences and contrib-
ute to contract failure in the mortgage market. Drawing on Trebilcock and Elliott,
paternalistic analysis begins by identifying the forms of contract failure that fre-
quently occur in a given transactional setting, and goes on to designing protections
aimed at efficiently responding to these typical patterns of failure.105 The protective
measures advocated here should be regarded as relatively ‘soft’ paternalism, with
the objective of assisting people in becoming better choosers and avoiding contract
failure.106 It is submitted here that neutral counselling constitutes a legal device,
which should be conceived as an alternative to mandated disclosure, avoiding a
number of its drawbacks.
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Chapter 11
The Potential Use of Visual Packaging
Elements as Nudges
An Analysis on the Example of the EU
Health Claims Regime
Kai Purnhagen, Erica van Herpen, and Ellen van Kleef
Abstract Regulators legislate businesses’ use of claims on product packaging by

mostly focusing on textual claims and the extent to which they could potentially
mislead consumers. Interpreting textual claims generally requires consumers to
engage in extensive and deliberate processing (so-called type 2 processing in dual
processing models in social psychology). In real life competitive choice settings,
however, businesses preferably make use of colours and other visual elements to
successfully attract consumers. In case this approach supports consumers in making
healthier food decisions, it can be seen as a form of nudging, as this approach largely
appeals to consumers’ reactive, intuitive modes of decision making (i.e., system 1
processing). Nevertheless, visuals may mislead consumers to a larger extent than
textual claims in that they overpromise health benefits of consuming the product. In
order to effectively regulate health claims in the EU, we claim that regulation has to
devote attention to the regulation of pictorial claims. We will first illustrate such a
mechanism and its potential for effective nudging on the example of health and
nutrition claims in the EU. We will then investigate on the example of the differ-
ences between textual and pictorial claims whether the EU health claims regulation
is effective in making sure that sales techniques of food companies are being regu-
lated as effective nudging instead of misleading marketing tactics.
K. Purnhagen (*)
Law and Governance Group, Wageningen University,
Hollandseweg Leeuwenborch (building 201), 6706 KN Wageningen, The Netherlands
e-mail: Kai.Purnhagen@wur.nl
E. van Herpen • E. van Kleef
Marketing and Consumer Behavior Group, Wageningen University,
Hollandsweg, 6706 Wageningen, The Netherlands
e-mail: erica.vanherpen@wur.nl; ellen.vankleef@wur.nl

198 K. Purnhagen et al.
11.1 The Health and Nutrition Claims Example
Businesses make use of claims in order to gain a comparative advantage over other
companies stimulating consumer choice.1 A good example are health and nutrition
claims, which with reference to Art. 2 1. 4) and 5) Regulation No 1924/2006 on
nutrition and health claims made on foods (hereinafter ‘Regulation’) state, suggest
or imply that a food has a particular beneficial nutritional property or that a relation-
ship exists between a food category, a food or one of its constituents to health.
The Regulation applies to all nutrition and health claims. It aims to protect con-
sumers not only from potentially misleading information but also seeks to assist
them in making healthy informed food choices.2 To do so, EU regulation mostly
focuses on the regulation of potentially misleading textual claims. In European
health claims regulation this has also been recognised by Recital 10 Regulation:
Foods promoted with claims may be perceived by consumers as having a nutritional, physi-
ological or other health advantage over similar or other products to which such nutrients
and other substances are not added. This may encourage consumers to make choices which
directly influence their total intake of individual nutrients or other substances in a way
which would run counter to scientific advice. To address this potential undesirable effect, it
is appropriate to impose certain restrictions as regards the products bearing claims. In this
context, factors such as the presence of certain substances, or the nutrient profile of a prod-
uct, are appropriate criteria for determining whether the product can bear claims.
Interpreting this type of information generally requires consumers to engage in

extensive and deliberate processing (so-called type 2 processing in dual processing
models in social psychology). In real life competitive choice settings, however,
businesses preferably make use of colours and other visual elements to tap into
consumers’ intuitive processing modes (i.e., system 1 processing). These visual ele-
ments generally attract more consumer attention than textual information. While
textual information could, besides being a marketing practice, serve as a classical
form of consumer information to overcome the information asymmetry, businesses
preferably use pictorial claims, which are much closer to nudging techniques, to
enhance market share. One of the reasons why businesses move to pictorial health
claims may be found in Porter’s hypothesis that legal barriers incentivize businesses
to innovate and overcome them.3 In health claims regulation this has an ironic side
effect: Because of regulation which shall enable consumers to make a better choice,
businesses increasingly do not make use of textual claims for the benefit of pictorial
claims. As these tap into type-2-processing they are a better fit to create market
share but also may carry a bigger risk to mislead consumers in terms of the prod-
uct’s health benefit than textual claims. In order to effectively regulate health claims
in the EU, we claim that regulation has to devote attention to the regulation of picto-
rial claims.
1
Bremmers et al. 2013, p. 162.
2
See Sect. 11.2.1 below.
3
Porter 1991. Porter’s hypothesis has been transferred earlier to health claims requirements by
11 The Potential Use of Visual Packaging Elements as Nudges 199
We will hence first confront the highly regulated textual claims regime with
insights on the effects of claim wording, to assess the extent to which existing leg-
islation is effective in reaching the envisioned level of protection for consumers.
Second, we will show on the example of nutritional and health claims that the
approach taken by the EU regulator in practice to focus primarily on textual claims
without sufficiently taking into account the “pictorial, graphic or symbolic
representation”4 attached to the textual claim might not reach the goal envisaged by
the Regulation to ensure a high level of protection for consumers.
11.2 The Regulation of Health and Nutrition Claims

Contrasted to the Findings of Behavioural Sciences
In this section, we will first illustrate how health and nutrition claims are regulated
in the context of internal market regulation (Sect. 11.2.1) before we move on to
contrast these findings with empirical findings based on data from nudging theory
and behavioural sciences. We will discuss insights in behavioural sciences regard-
ing verbal nutrition and health claims (Sect. 11.2.2) as well as the impact of visual
packaging elements in this context (Sect. 11.2.3).
11.2.1 The Regulation of Nutrition and Health Claims

in the Context of Internal Market Regulation
Information regulation traditionally lies at the heart of consumer protection in the

EU. It is a common belief of traditional internal market law that consumers are
adequately protected if the Union provides information of potentially dangerous
products to consumers (information-related regulation) and does not prohibit or
limit the design of consumer products (content-related regulation), the so-called
information paradigm.5 Recently, however, EU internal market regulation is in flux.
The Lisbon-agenda and the newly introduced concept of the internal market,6 the
growing overlap of fundamental rights and fundamental freedoms,7 and the increase
of more intrusive secondary legislation on consumer products, endorsed by the
Court of Justice of the European Union (hereinafter CJEU)8 already advent a trans-
4
Art. 2 (2) 1 of the Regulation.
5
Franck and Purnhagen, ‘Homo Economicus’ 2013, pp. 334–340; Purnhagen, ‘Virtue’ 2014,
pp. 329–332; Steindorff 1996, pp. 195–196; Usher 2001, pp. 152–153.
6
Barends 2009, pp. 123 et seqq.; Riley 2007, pp. 703 et seqq.
7
Trstenjak and Beysen 2013, pp. 293 et seqq.
8
Unberath and Johnston 2007, p. 1238 “(O)n the whole the Court has been at pains to grant the
consumer protection directives a wide scope of application and – crucially- to give its provisions
the most interventionist reading.” See particularly with respect to consumer information in foods
formation of consumer protection in the EU. This development culminates in recent

judgments of the CJEU stipulating that the aim of consumer protection at EU level
is not only the adjustment of the ‘level of knowledge’ (information-regulation) of
the consumer, but also his ‘bargaining power’ (potentially including also content-
related regulation) ‘vis-à-vis the seller or supplier’.9
The health-and-nutrition-claims regime at EU level as laid down in the Regulation
was issued somewhat in the middle of the quarrel between content-related and
information-related regulation, as it regulates the quality of information as such.10
In this sense, it starts and accepts the presumptions of the information paradigm as
being the core of consumer protection at EU level: Recital 1 of the Regulation
makes clear that sovereign consumers shall and should be the ones to decide on the
level of protection of internal market products. These sovereign decisions, however,
need to be made in an environment provided for by the regulator, mainly through
the provision of the protective function of fundamental rights11: The right to physi-
cal integrity as enshrined in Art. 3 (1) Charta of Fundamental Rights may be inter-
preted as obliging the EU legislator to protect individual consumers from making
decisions that are contrary to their well-being. In this sense, particularly in the area
of EU health and nutrition claims regulation, the benchmark of the ‘average con-
sumer’ has changed to incorporate a consumer that is more vulnerable to the pitfalls
from choice architecture. Relevant in this respect is that Art. 5 (2) Regulation12
explicitly states that “the use of nutrition and health claims shall only be permitted
if the average consumer can be expected to understand the beneficial effects as
expressed in the claim”.
Taking all this into account, the Regulation lays “down specific provisions con-
cerning the use of nutrition and health claims concerning foods to be delivered as
such to the consumer.”13 The main regulatory goal behind this very much lies in line
with the information paradigm in internal market law: it may ensure, on the one
hand, “a high level of protection for consumers and to facilitate their choice,”14
particularly the judgment in Karl Berger v Freistaat Bayern (C-636/11), and the respective annota-
tion by Purnhagen 2013, pp. 71 et seqq.
9
C-508/12, Vapenik vs. Thurner, para 26.
10
Purnhagen, ‘precautionary principle’, 2015.
11
The recent judgment of the CJEU in Weintor emphasised the importance of interpreting the
health claim in the light of fundamental rights, see Deutsches Weintor eg v Land Rheinland-Pfalz
(C-544/10), nyr. Weatherill cites this judgment as “a helpful example of the structure and style of
the analysis one may anticipate (and hope for)”, see Weatherill, p. 415.
12
For a general account from the perspective of EU food law see also Recital 41 of Regulation
(EU) No 1169/2011 of the European Parliament and of the Council of 25 October 2011 on the
provision of food information to consumers, amending Regulations (EC) No 1924/2006 and (EC)
No 1925/2006 of the European Parliament and of the Council, and repealing Commission Directive
87/250/EEC, Council Directive 90/496/EEC, Commission Directive 1999/10/EC, Directive
2000/13/EC of the European Parliament and of the Council, Commission Directives 2002/67/EC
and 2008/5/EC and Commission Regulation (EC) No 608/2004, 2011, L 304/18; for a more thor-
ough assessment see Purnhagen and van Herpen 2014.
13
Recital 3 Regulation (EC) No 1924/2006.
14
thereby largely refraining from regulative value judgments on how consumers shall
exercise their choice. On the other hand, the Union regulator acknowledges that
such a consumer choice presupposes a regulatory environment, which acknowl-
edges that “(a) varied and balanced diet is a prerequisite for good health.”15 By this,
the regulator acknowledges that consumers’ free choice can be limited by internal
market regulation when it comes to the composition of the consumers’ diet.
According to this, regulatory intervention into the general provision of free choice
of consumers is exceptionally permitted in order to ensure that consumers choose
for a ‘varied and balanced diet.’ For this matter Art. 5 of the Regulation prohibits
the use of nutritional and health claims, which do not satisfy some ‘general condi-
tions’ substantiated further in EU law.
To cope with the uncertainties accompanied with these requirements,16 the
Regulation stipulates a positive list of textual nutritional claims in the
ANNEX. Although the Regulation itself encompasses non-textual claims (pictorial,
graphic or symbolic representations are explicitly mentioned), no claim on this list
focuses on pictorial claims. Likewise, the health claims that have been authorised
by the Commission so far embrace only textual claims.17 The respective table,
which represents the EU Register on nutrition and health claims is also designed in
a way that it will be hard to incorporate claims which involve pictures. The few
Court decisions available on the subject focus on textual claims only. Just to men-
tion a few: In Weintor the CJEU had to judge on the question whether the label
‘easily digestible’ on a wine bottle of a German wine cooperation would qualify as
a claim in the sense of the Regulation.18 In Monsterbacke, the CJEU was confronted
with the question whether the Slogan “As important as a daily glass of milk!” falls
under the EU health claims regime.19 In Green Swan, it was subject to the CJEU’s
decision whether the phrase “[t]he preparation also contains calcium and vitamin
D3, which help to reduce a risk factor in the development of osteoporosis and frac-
tures” classifies as a health claim.20 The German Supreme Court BGH decided that
the use of the trademarks ‘Praebiotik® + Probiotik®’ as well as the slogan “Praebiotik®
+ Probiotik® with natural lactic acid cultures – Praebiotik® for the support of a
healthy intestinal flora” qualify as health claims.21 In determining whether these
claims are health claims or are misleading, none of these judgments took into
account any non-textual claims and not even the pictorial environment these claims
were embedded in.
If we look into scholarly work on health claims and nutrition, the picture is simi-
lar. A majority of papers in the consumer food science field focuses on consumer
15
16
17
See the EU Register on nutrition and health claims, available at http://ec.europa.eu/nuhclaims/?-
event=search&CFID=1454821&CFTOKEN=1f19aaa15390e104-E84BF6E3-DCE0-4BDA-C45F
181C4D90B0B4&jsessionid=9212c958cba83105db58485a4431625f3b7fTR
18
C-544/10 Deutsches Weintor eg v Land Rheinland-Pfalz, nyr.
19
C-609/12 Ehrmann AG v Zentrale zur Bekämpfung unlauteren Wettbewerbs eV, nyr.
20
C-299/12 Green Swan, nyr.
21
BGH, 26.02.2014 – I ZR 178/12 = NJW-RR 2014, 1129.
response to textual claims.22 This has spurred the distinction between differently
worded claims and their effects,23 but attention for non-textual claims is scarce.
This short analysis illustrates that the main focus of attention of the misleading
potential of health and nutrition claims is on textual claims. With the focus on text,
the EU regulator lies in line with traditional legal scholarship and practice that pays
little attention to non-textual forms of written advocacy.24 It is hence no wonder that
textual claims so far have been the main target for regulators in the EU. This is
despite of the fact that the concept of ‘claim’ according to Art. 2 (2) 1 of the
Regulation explicitly covers also ‘pictorial, graphic or symbolic representation’. In
the next section, we will discuss behavioural insights into textual health and nutri-
tion claims, before moving to insights related to these visual elements.
11.2.2 Textual Claims: The EU’s Regulation in Contrast

to the Insights Gained from Behavioural Sciences
With respect to textual claims, studies examining consumer behaviour and decision
making have focused on consumer understanding of these claims, and the potential
that consumers are misled by such claims, individual differences in how consumers
understand and respond to these claims, and the effect of these claims on consumer
choice. These three topics are pertinent for EU regulation, and we will discuss these
in turn.
Consumer Understanding of Claims
Comprehension of health and nutrition claims is a requirement for correct use of

such claims and a key cognitive process in decision making. One study topic is the
wording of claims and how these may be difficult and confusing to consumers, even
when attention is specifically directed to them.25 For many consumers, there is too
much information present on product packages. Consequently, the use of words
such as ‘may’ (e.g., “a healthy diet low in saturated and trans fat may reduce the risk
of heart disease”) tend to be ignored by consumers when interpreting the meaning
of a claim, even though this word represents an important nuance for policy makers
and scientists.26
Understanding of health claims can be examined using both qualitative and
quantitative methods, and contrasted against objectively correct information. For
22
Grunert and Wills 2007, pp. 385–399, Van Kleef, Dagevos 2015, pp. 291–303; Lähteenmäki
2013, pp. 196–201.
23
Van Trijp and van der Lans 2007, pp. 305–324.
24
Porter 2014, p. 1752.
25
Nocella and Kennedy 2012, pp. 571–580.
26
Harris 1977, pp. 603–608.
instance, Grunert and colleagues27 investigated a yogurt product with a health claim
(‘helps strengthening the body’s natural defences’) by exposing German respon-
dents to the product and corresponding advertisement. Answers to open-ended
questions such as “after seeing this pack and commercial, if you had to tell a friend
what this product is, what would you say?” were content-analyzed and coded as
safe (in line with scientific evidence on claim), risky (inferences beyond scientific
evidence) or other value (irrelevant or vague notions). Results showed that 67 % of
the respondents’ responses could be classified as safe and 21 % of the interpreta-
tions were risky. A positive attitude towards functional foods was the best predictor
of risky answers. This implies that some groups of consumers are particularly vul-
nerable to exaggerated understanding of claims.
A similar approach on understanding how consumers may (over)interpret claims
was carried out by Bilman and colleagues.28 In contrast to the findings of Grunert
and colleagues, they found that the majority of respondents in four European coun-
tries correctly interpret satiety-related claims (e.g., ‘feel full for longer’) in that they
do not expects benefits beyond their literal meaning (e.g., ‘lose weight’). For satiety-
related claims, consumers understand that additional personal efforts are required to
obtain potential weight-control benefits. This suggests that perhaps the extent to
which claims are correctly understood differs across types of claims.
When confronted with a health claim, consumers will make inferences based on
the claim and often these inferences are biased. Inference making occurs because
people typically process health claims with low levels of involvement. Consequently,
they do not cognitively elaborate on the meaning of the claim, but instead make
inferences about what is missing from readily available information. How individu-
als draw inferences in situations of incomplete information or limited knowledge is
often explained by schema-based deduction. Schemas are associative networks of
information items based on prior knowledge. For example, a logo or word (e.g.,
‘low fat’) can trigger beliefs or associations between learned concepts such as ‘low
fat is less tasty’, and ‘low fat equals less calories’.29 These associations fill in the
gaps in knowledge when an individual tries to make sense of a product label. A
wide variety of cues can be used to activate the mental links in the schema. The type
of cues used depends on the accessibility (salience) and diagnosticity (relevance) of
the information.30
Several biased inferences may occur: overgeneralization of the claim to general
health benefits, distorted inferences about other product aspects, and incorrect
inferences about competing products. Regarding the first type of biased inferences,
a serious concern is that consumers over interpret health and nutrition claims in that
they ascribe inappropriate health benefits to them. Consumers may overgeneralize
27
Grunert et al. 2011, pp. 269–277
28
Bilman et al. 2012, pp. 912–920.
29
Chandon 2013, pp. 1–6.
30
Kardes et al. 2004, pp. 230–256.
from specific claims (e.g., ‘no cholesterol’) to general health (e.g., ‘healthy’).31 This
is also referred to as the ‘magic bullet effect’.32
Another type of biased inference occurs when claims about one aspect of a prod-
uct lead to distorted inferences about various other aspects of the product. The gen-
eral ‘halo effect’ is a bias uncovered in social psychological research in which a
person’s positive impression of one aspect of a stimulus extends to other aspects as
well, even though these aspects may be unrelated.33 Health halos for food products
occur when the presence of a health claim has a strong effect on expected and expe-
rienced taste and health perceptions, above and beyond the description of ingredi-
ents/nutrition content.34 In other words, the claim makes consumers perceive them
as generally superior. For example, a low cholesterol claim can lead consumers to
infer a lower fat level than is actually present, and this perception may bias estima-
tions of the calories the food contains.
Moreover, if a product prominently displays an unusual attribute for that cate-
gory, consumers may infer that competitive products do not have the attribute.
People follow basic rules when speaking to each other, called ‘conversational max-
ims’ in Grice’s theoretical accounts of the logic of conversations.35 For example, the
maxim of quantity directs speakers to say things as informative and concise as pos-
sible. Consumers exposed to a nutrition claim may falsely conclude that all infor-
mation needed to draw legitimate inferences has been provided. For example, the
promotion of a lollipop using a ‘fat free’ claim in New Zealand in 2004 was seen by
the Complaints Board as misrepresenting the product category as it may lead to the
inference that candy without fat is unique.36
Besides overgeneralizations, a ‘boomerang effect’ may occur when claims gen-
erate reactance. Similar to the ‘forbidden fruit’ idea, warnings or claims may
threaten consumers’ experienced freedom to eat a certain food. The message “In
this product, 90 % of the calories come from fat. Warning: the US Surgeon General
has determined that eating high fat food increases your risk of heart disease” made
participants in a supposed taste test want to eat the fatty product more.37
The insights regarding biased inferences resulting from health and nutrition
claims can be informative for legislation. Of particular interest is the distinction into
different types of biases, that is, the insight that consumer misunderstanding can
take different forms. Not only can consumers make biased inferences regarding the
product with a health or nutrition claim, but such a claim may also lead to incorrect
inferences about competing products (even when the claim is objectively correct, as
with the ‘fat free’ lollipop). Legislation should take both inferences about the prod-
uct in question as well as inferences about competing products into account.
31
Andrews et al. 1998, pp. 62–75.
32
Roe et al. 1999, pp. 89–105.
33
Nisbett and Wilson 1977, pp. 250–256.
34
Chandon, and Wansink 2012, pp. 571–593.
35
Grice 1975, pp. 41–58 and Hastak and Mazis 2011, pp. 157–167.
36
Hastak and Mazis 2011, pp. 157–167; Parsons and Schumacher 2010, pp. 1539–1558.
37
Bushman 1998, pp. 97–101.
Individual Differences
In addition to studies investigating biases in consumer understanding of claims, a

large stream of literature exists in which individual differences in understanding of
claims and nutrition information has been examined. A consistent finding across
these studies is that older consumers and people with lower levels of education are
more likely to have difficulty understanding the terms used on food labels.38 For
example, older adults (over 65), people with lower levels of education and those
from lower social classes are less likely to be able to accurately interpret front-of-
pack logos. Also minority ethnic groups have difficulty interpreting them.39
Although young people may understand certain labels better, middle-aged and
elderly consumers tend to be more health-oriented and interested in nutrition infor-
mation at food labels. That is because they are more likely to experience health
problems themselves or among people in their near social environment.40
Moreover, substantial differences in how consumers look at health claims exist
across countries.41 For example, understanding of Guidelines Daily Amount (GDA)
labels was high in the UK, Sweden and Germany, and more limited in France,
Poland and Hungary.42 Limited literacy is also an important factor to consider as 75
million Europeans lack basic reading and writing skills.43 Most research on con-
sumer understanding of nutrition- and health-related information at food packages
has been done with literate and often highly educated participants. Low-literate
consumers have difficulty interpreting nutrition summary information such as per-
centage of daily values (%DVs) and have to spend considerable effort on relatively
simple reading tasks.44
The findings that there are large individual differences in understanding of health
and nutrition claims, is of direct relevance for the ongoing debate about the ‘average
consumers’ concept. Traditionally, internal market consumer regulation targeted
the normative ‘average consumer,’ who had to bear the burden of perceiving and
processing information, and also the drawbacks that may follow should they carry
out a market transaction suffering a cognitive deficit.45 Consequently, entrepreneurs
needed to provide all information available to consumers while consumers had to
bear the burden of processing this information on potentially hazardous products
38
Cowburn and Stockley 2005, pp. 21–28.
39
Malam et al. 2009.
40
Nocella and Kennedy 2012, pp. 571–580.
41
Van Trijp and Van der Lans 2007, pp. 305–324.
42
Grunert et al. 2010. pp. 261–277.
43
United Nations Regional Information Centre for Western Europe (UNRIC). EU: 75 millions
adults lack basic reading skills. Accessed at January 21 2015 at http://www.unric.org/en/
literacy/27799-eu-75-million-adults-lack-basic-reading-skills
44
Viswanathan et al. 2009, pp. 135–145.
45
Franck and Purnhagen 2014, p. 337.
and services.46 Such a consumer was, as the Court clarified in ‘Gut Springenheide,’47
a “reasonably well informed and reasonably observant and circumspect.”48 We find
this image of the ‘average consumer’ today in Recital 18 of Directive 2005/29/EC
as someone “who is a reasonably well informed and reasonably informed observant
and circumspect, taking into account social, cultural and linguistic factors.” To be
sure, this notion has been developed as a normative response to the specific require-
ments of internal market regulation at the time when the internal market was still in
its infancy.49 Today, as Recital 18 of Directive 2005/29/EC also clarifies, the classi-
cal concept of the ‘average consumer’ needs to be make sure that it also “contains
provisions aimed at preventing the exploitation of consumers whose characteristics
make them particularly vulnerable to unfair commercial practices.” While the ‘aver-
age consumer’ in the past ‘required’ from consumers to process all kind of informa-
tion, this new formulation opens up a leeway to determine which information
‘vulnerable consumers’ can actually process. This is particularly relevant in the area
of health claims. As stipulated earlier, Art. 5 (2) Regulation50 explicitly emphasizes
this change of the understanding of the ‘average consumer’ as “the use of nutrition
and health claims shall only be permitted if the average consumer can be expected
to understand the beneficial effects as expressed in the claim”. Adding insights from
behavioural research to the notion of the average consumer can form a good means
to do so in a scientifically robust way.51 In order to assess consumer understanding
in a more systematic way, and to better understand what misleading claims look like
and allow monitoring over time, the establishment of a standardized methodology
involving both qualitative and quantitative approaches52 preferably to be used at EU
level,53 would be desirable.
46
Steindorff 1996, p. 195.
47
Gut Springenheide and Tusky (C-210/96) [1998] E.C.R. I-4657.
48
Gut Springenheide and Tusky (C-210/96) [1998] E.C.R. I-4657.
49
Opinion of Advocate General Gulmann of 29 September 1993, Case C-315/92 of 2 February
1994, Verband Sozialer Wettbewerb eV v Clinique Laboratoires SNC and Estée Lauder Cosmetics
GmbH, 1994, ECR I-317, para 25. See Duivenvoorde for a recent summary and assessment of the
judgments on the average consumer models.
50
For a general account from the perspective of EU food law see also Recital 41 of Regulation
(EU) No 1169/2011 of the European Parliament and of the Council of 25 October 2011 on the
provision of food information to consumers, amending Regulations (EC) No 1924/2006 and (EC)
No 1925/2006 of the European Parliament and of the Council, and repealing Commission Directive
87/250/EEC, Council Directive 90/496/EEC, Commission Directive 1999/10/EC, Directive
2000/13/EC of the European Parliament and of the Council, Commission Directives 2002/67/EC
and 2008/5/EC and Commission Regulation (EC) No 608/2004, 2011, L 304/18; for a more thor-
ough assessment see Purnhagen and van Herpen (2014).
51
Sibony 2015, pp. 71–107.; Trzaskowki 2011, pp. 377–392.
52
Leathwood et al. 2007, pp. 474–484.; Grunert et al. 2011, pp. 269–277; On the changing internal
market environment and its impact on the average consumer see Purnhagen and van Herpen 2014.
53
Purnhagen and van Herpen 2014.
Effects of Textual Claims on Product Choice
The strong focus on textual health claims in EU internal market regulation as well
as in studies on consumer understanding of claims seems to be in stark contrast to
research findings from data collected in behavioural sciences on product choice.
When explicitly asked, many consumers see claims as useful.54 Likewise, in con-
trolled experiments where consumers are specifically instructed to pay attention to
nutrition- and health-related claims or are sensitized to health issues, nutrition infor-
mation has been found to affect the perceptions of the healthiness of a product, and
to some extent purchase and consumption behaviour.55 However, nutrition- and
health-related claims may have little or no effect on consumers when their attention
is not specifically directed towards the information. In real life supermarket set-
tings, where consumers are confronted with a multitude of cues and information
under often occurring time pressure, most consumers seem to have little time and
motivation to engage in the processing of nutrition information.56 In a study in
which consumers were asked to think aloud while shopping for foods in a supermar-
ket, actual stated label use was very limited, both when shoppers were shopping
normally and when they were asked to shop more healthily.57 Other studies in which
consumers were unobtrusively observed in stores show similar low levels of use.58
Although some consumers are more likely to look for nutrition information while
shopping (e.g., consumers trying to control their weight59 or having specific health
concerns60), lack of attention is an important obstacle in the use of nutrition labels.61
When it comes to health and nutrition claims, the verbal statement of the claim
and how consumers may interpret this, has received ample attention both in empiri-
cal consumer research and in legislation. However, given that these verbal claims
often do not appear to influence product choice to a large extent in real life, it becomes
pertinent to look beyond the verbal statement itself and examine the packaging con-
text in which the claim is presented, including visual packaging elements.
11.2.3 Visual Packaging Elements: The Missing Piece
In addition to verbal nutrition and health claims, product packaging elements, such
as its colour and certain graphics, can also change consumers’ perceptions of the
healthfulness of products (and thereby purchase behaviours). These visual elements
54
Williams 2005, pp. 256–264.
55
van Herpen et al. 2012, pp. 22–34 et seqq.; Lähteenmäki 2013, pp. 196–201.
56
Grunert et al. 2010, pp. 177–189.
57
Raynor et al. 2001, pp. 24–31.
58
Grunert and Wills 2007, pp. 196–201.
59
Vyth et al. 2010, pp. 1882–1889.
60
Schor et al. 2010, pp. 22–32.
61
Van Trijp 2009, pp. S41–S48; van Herpen and van Trijp 2011, pp. 148–160.
tap into consumers’ system 1 processing and generally attract more attention than
textual information.62 Associations that are spontaneously triggered by certain
colours (e.g., blue = light) or visual images can be used by consumers as a heuristic
to draw inferences about a product. In this section, we will review evidence from
studies on consumer behaviour, which suggests that visual elements of a food pack-
age, drawing on consumers’ automatic system 1 processing, may be more influen-
tial in changing consumers’ perceptions of a food product than textual information
about a food product, which requires more systematic type 2 processing. Such
visual information is potentially misleading when it is inconsistent with the textual
information on a food package. Yet, whereas the textual nutritional information on
food packages is strictly regulated, the use of visual elements such as colours and
graphics is regulated to a much smaller extent in practice. Although the legislation
explicitly includes any “pictorial, graphic or symbolic representation, which states,
suggests or implies that a food has particular characteristics” (Art. 2 (2) 1 of the
Regulation), in practice there has been an almost exclusive focus on textual claims
(see Sect. 11.2.1). This raises the question of whether package colours and other
visual elements of food packages should be (more strictly) regulated.
The Importance of Visual Elements
Pictorial, graphic or symbolic representations on food packaging constitute visual

elements, and these elements are relevant in consumer decision making. In fact,
research in psychology has argued and shown that visual elements in general tend
to have longer lasting effects on memory than textual elements (the picture-
superiority effect63). In addition, visual elements are vivid, and therefore may attract
attention relatively easily.64 Furthermore, when people are under time pressure, they
tend to pay less attention to textual ingredient information and instead rely rela-
tively more on pictorial information.65 Thus, notwithstanding individual differences
in the preference for visual and textual information,66 visual information in general
matters greatly for consumer choice.
Visual elements are included on food packages for various reasons. Visual ele-
ments may provoke feelings and communicate affect. They can also draw attention
to products. Given the crowded and overwhelming display of products in a typical
store, capturing the consumers’ attention within a limited time can be very influen-
tial for product purchase.67 Additionally, visual elements may inform consumers
62
Meyers-levy and Peracchio 1995, pp 121–138; Underwood and Klein 2002, pp. 58–69.
63
Childers, and Houston 1984, pp. 643–654, Stenberg et al. 1995, pp. 425–441; Hockley 2008,
pp. 1351–1359.
64
Underwood and Klein 2002, pp. 58–68.
65
Pieters and Warlop 1999, pp. 1–16.
66
Childers et al. 1985, pp. 125–134.
67
Clement et al. 2013, pp. 234–239; Milosavljevic et al. 2012, pp. 67–74; Ottenbring et al. 2013,
pp. 1211–1225.
about intrinsic characteristics of a product (e.g., taste) that are not directly observ-
able.68 This can be done through the use of uniquely differentiated visual elements
that are not used by competing products, but also through the use of established
symbols and colours.
The use of distinctive images can help people learn and remember quality differ-
ences between products (e.g., that the product in the purple packaging tastes
deliciously).69 Distinctive visual elements can increase the accuracy of memory, and
help consumers remember their experience with the product. Yet, visual differentia-
tion is not always helpful. In particular, the use of established visual elements
(colours, images, symbols) can allow consumers to quickly grasp what a product is
about, and identify unobservable attributes of the product. The consistent use of the
same visual elements across multiple products to communicate about intrinsic prod-
uct attributes ensures that these visual elements are diagnostic and allows consum-
ers to quickly identify important product attributes.70 For instance, in the milk
category, the distinction between whole milk, reduced fat milk, skim milk, etc., is
usually communicated through the colour of the milk bottle top, although the spe-
cific colour codes differ across countries.71 It can be beneficial for manufacturers to
use such established colours that adhere to the colour norms in a category, even
though this may diminish the visual differentiation of the packaging.72 Thus, when
most ‘light’ (low fat) versions of products in a category carry a light blue colour, it
may be advantageous to also use this colour when marketing a light product, so as
to clearly communicate this to consumers. This, in turn, will strengthen the learned
association between the colour ‘light blue’ and the attribute ‘low fat’ in people’s
mind. Over time, due to repeated joint exposures, the colour obtains meaning.
Visual elements do not merely represent reality (e.g., show what is inside the
packaging) but are also capable of sophisticated rhetorical tasks, and can be seen as
a form of information.73 Visual elements such as pictures may have a ‘chunking’
function, in the sense that these can communicate many bits of information at
once.74 Consumers can ‘read’ information about the attributes of products from
these visual elements, and this is made possible because the mass media are teaching
them a large vocabulary of images.75 Thus, symbols stand for complex ideas because
years of communication have layered them with meaning. Consumers can interpret
these symbols and other visual elements, and distract information about the product.
In this way, a heart symbol can communicate heart health.
68
Underwood and Klein 2002, pp. 58–68; van Herpen and Pieters 2007, pp. 77–88.
69
Warlop et al. 2005, pp. 27–44.
70
van Herpen and Pieters 2007, pp. 77–88.
71
see: milk.wikia.com/Milk_Bottle_Top.
72
Labrecque and Milne 2013, pp. 165–176.
73
Scott 1994, pp. 252–273.
74
Gardner and Houston 1986, pp. 64–78.
75
Scott and Vargas 2007, pp. 341–356.
Complicating matters, the meaning of visual elements is contextually situated,

and thus depends on other elements in the direct context,76 implying that the mean-
ing of a visual element depends on other packaging elements. Thus, whereas a heart
symbol in one case can communicate heart health, in another case it may communi-
cate (romantic) love or affection. The type of product on which the symbol occurs,
and the context of other packaging elements, clarifies which meaning is intended.
This implies that it may not be possible to regulate pictorial, graphic or symbolic
representations with general rules that apply to all product packages. After all, the
same symbol may have a very different meaning in various contexts. This potential
complexity clearly indicates that regulation, in order to do so effectively, has to find
a way to incorporate the context in which the pictorial, graphic or symbolic repre-
sentations are used. Given the diversity of potential visual elements and context
factors, traditional regulatory tools for health claims such as black or white lists of
approved visual elements similar to the current list of approved textual health claims
are unlikely to be successful. What one might consider is a regulation in analogy to
how design elements are protected under intellectual property law.
Combining Visual and Verbal Health Claims
The specific relation between visual elements on food packaging and verbal claims
related to nutrition or health has only recently received research attention. Results
of these studies consistently indicate that visual elements influence health percep-
tions and choice of products, even when verbal health claims are present. For
instance, Carrillo, Varela, and Fiszman77 examined ten enriched biscuits with dif-
ferent nutritional or health claims (e.g., with folic B and non-visible fibre: delicious
way to help care for the heart; with omega 3; high fibre content). People could taste
test the product either with or without verbal information about the products, or they
saw the packages with visual design elements. Results showed that perceived
healthiness of the biscuits differed between these conditions, suggesting that the
package as a whole could raise high expectations of healthiness for the biscuits.
Importantly, for several biscuits, perceived healthiness differed between people
who tasted the product and saw the verbal information (the nutritional fact panel
and nutrition and health claims, without design features) and people who saw the
package (containing the same information, but with visual design elements present
as well). This provides a first indication that visual elements may influence how
consumers interpret a health claim.
A more direct test78 has shown that visual elements can serve as a context in
which a verbal health claim is interpreted. The idea was tested that visual elements
directly influence product beliefs even when the verbal health claim of the package
is held constant and provides accurate product attribute information. Specifically,
76
Scott 1994, pp. 252–273.
77
Carillo et al. 2012, pp. 209–216.
78
Bone and France 2001, pp. 467–489.
people evaluated the package of a cola which contained a caffeine claim (“This cola
contains 20 mg of caffeine. Regular colas contain between 43 and 49 mg of caf-
feine”) as well as a pictorial element depicting either a football player with a light-
ning bolt or a man lounging under a palm tree. When asked about caffeine content,
this latter picture affected consumer perceptions of caffeine content in the presence
of the verbal claim, showing that the graphical picture influenced people’s percep-
tions of the product even in the presence of correct verbal information.
Other studies have examined the use of colour on packaging with nutritional
information or claims, and have likewise shown that health perceptions depend on
visual elements in the presence of accurate verbal information. For instance, con-
sumers perceive a candy bar as more healthful when the calorie label is green rather
than red or white.79 Summarizing, the empirical results from consumer psychology
clearly indicate that visual elements on pack are of great influence on consumers,
also in the presence of accurate verbal information, and thus have the potential of
misleading consumers.
11.3 Discussion and Conclusion
We were able to show that the EU health claims regime provides an excellent set-
ting that can be used for nudging. We then investigated whether the current EU
health claim regime is fit for purpose on the example of regulating textual versus
pictorial information. We could show on the example of literature reviews that
visual elements matter in health claims. A reason for this might be found in the
theory of visual rhetoric, which argues that images are capable of communicating
subtle and complex messages.80 Furthermore, visual elements and colours allow for
rapid and automatic processing (system 1 processing), whereas textual information
generally requires more deliberate processing (system 2 processing). Thus, visual
elements can communicate relatively complex messages without necessarily rely-
ing on system 2 processing to a large extent, and can thus be of great influence.
Graphic presentations and symbols are especially beneficiary for consumers who
have difficulty processing and understanding basic verbal information, grossly
referred to as vulnerable consumers in internal market law.81 The new notion of the
‘average consumer’ in internal market law expressly seeks to incorporate such vul-
nerable consumers. However, insecurities exist regarding how to match the classical
notion of the ‘average consumer’ with the ‘vulnerable consumer’. Here, the findings
mentioned above can be of help. If studies from behavioural science show that con-
sumers are particularly sensitive to pictorial claims, a health claims regime which
79
Schuldt 2013, pp. 814–821.
80
Scott and Vargas 2007, pp. 341–356
81
Recital 18 UCPD.
seeks to assist consumers getting to ‘(a) varied and balanced diet’82 should listen to
such insights.
The studies presented herein show that pictorial claims matter and should be
taken care of by jurisprudence ‘in action’. Drawing normative conclusions beyond
this statement should be handled with care. Indeed, the studies presented here show
that claims might not have the same effect on all consumers, as, within the borders
of the methodology of the studies, perception of claims differed according to indi-
vidual consumer features. It is hence tempting to also ask from jurisprudence to
design health claim regulation along the lines of ‘vulnerability categories’ as pre-
sented in these studies. That would, to a certain extent, ease the arbitrariness of
political decision-making from determining vulnerability levels and may also give
businesses more legal certainty in terms of foreseeability when acting on the EU
market.83
Despite of these advantages one shall not forget that a single study only has the
potential to generate insights within the limits of the respective methodology.
Drawing normative conclusions for internal market regulation from studies that
have been designed to satisfy a different purpose and in a different context has to be
taken with care. Also the studies themselves can lead to mixed findings, depending
on the way these were designed. In order to really allow drawing such normative
conclusions from behavioural sciences to regulation, a standardised methodology is
needed, which can be applied across all sectors in jurisprudence.84
The implementation of the insight that pictorial claims matter needs to be han-
dled with care also from a different perspective: Visual elements on pack provide
information, but their meaning is contextually situated.85 This implies that regula-
tions cannot be targeted towards individual visual elements without taking the con-
text in which these appear into account. For instance, a heart symbol on a package
may communicate heart health (when used on a margarine package with a choles-
terol claim) or it may communicate love (when used on a package of chocolates for
Valentine’s day). Black or white lists of ‘health claim’ pictures or images such as
the ones we know from the ANNEX of the Regulation would be of little help. Here,
one might think about the lessons learned from how visual elements are protected
as a trade mark or design.
Concluding we can see from behavioural studies that, although this is not easy to
address, more attention to visual elements is vital for consumer protection in the
health claims regime. Drawing normative conclusions beyond that statement from
the evidence we provided shall be handled with care, as each of the studies did not
follow a standardized methodology. Furthermore, the effect of pictorial claims var-
ies regarding the context it is used it.
82
83
Rott 2015, pp. 163–167; Sibony pp. 71–107.
84
Leathwood, Richardson, Strater, Todd, and Van Trijp, pp. 474–484.; Grunert, Scholderer, and
Rogeaux, pp. 269–277.
85
Scott 1994, pp 252–273.
Acknowledgements We are grateful for the comments we received in the context of the Lucerne
conference. We would also like to thank Harry Bremmers for extensive comments on our paper.
Mistakes are our own.
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Chapter 12
Nudging: Information, Choice Architecture
and Beyond
Theory and Applications in Financial Markets Law
Rainer Baisch
We would sign our lives away without reading,

so people need protection from a lot that is legal.
(Kahneman 2013, p. 1340.)
Abstract The traditional disclosure-paradigm is based on the assumption that

transparent and effectively processed information will enable the investor to make
well-founded investment decisions. Having the type of a «homo oeconomicus» in
mind, financial market laws used to be designed for responsible and knowledgeable
actors. Analysing human flaws regarding the way we process information in the
light of behavioural findings, the provision of data for consumers of financial prod-
ucts should be further optimised. Despite the information overload the provision of
information must not be condemned; this would mean throwing the baby out with
the bath water. Disclosure can be used and function’s also as a nudge; thus the way
information is framed matters a lot. However, inundating customers with too much
information does not help. Valueing the positive outcome of simple rules of thumb
might complement to an optimised cognition and perception of human behaviour as
it should be imputed to individuals when designing regulation. Enhanced preven-
tion based on smarter information requirements will give consumers a better chance
to avoid human flaws. Additionally, education could, at least partially, compensate
negative outcomes of human flaws. However, nudging should avoid weakening the
motivation of individuals to actively inform themselves. Combined with a strict
Code of Conduct at the point of sale, a Suitability Test including the real risk percep-
tions of the consumer leads to an enhanced level of investor protection. Nudging in
combination with some more paternalistic elements can de-bias detrimental human
shortcomings while distending paternalism should be avoided.
R. Baisch (*)
Rechtswissenschaftliche Fakultät, University of Zurich,
Rämistrasse, 8001 Zurich, Switzerland
e-mail: rainer.baisch@rwi.uzh.ch

218 R. Baisch
12.1 Introduction
12.1.1 Point of Departure
Neo-classical economic theory advocates investor protection aside from market

abuse only if market failures – often based on information asymmetries – occur.
However, additionally there are (i) various behavioural biases that influence the
financial decisions of individuals, combined with (ii) individual’s disability to man-
age information properly and (iii) the latent information overload; those facts call
for an appropriate regulatory facet.1 On top of that, (iv) financial intermediaries
might be tempted to use common biases to sell products which are not in the best
interest of the client.2
Financial innovation led to “an ever-widening set of financial options from an
expanding set of firms and accompanied by a sometimes dizzying amount of
information”.3 While the complexity of the supply side confuses the consumer,4
the demand side is more and more becoming a ‘do-it-yourself’ activity.5 Many
consumers are not aware of the fact that their performance regarding investment
decisions is rather poor. Additionally, the supply side capitalises on human limi-
tations by taking advantage of the way we process information.6 The question
why consumers of financial services products often make relatively poor deci-
sions has been analysed by behavioural scientists; they blame cognitive short-
comings based on the use of heuristics or various subconscious biases.7 Accepting
this cognitions as being true and having a negative impact on investment deci-
sions (or at least, that there is a certain, latent and unwished menace for consum-
ers) it should be discussed how that issue can be adequately addressed. Such a
solution could also benefit from the concept of nudging as introduced by Thaler
and Sunstein.8
1
For a (critical) overview of the emergence of behavioural law and economics as a counterpart to
orthodox law and economics with reference to the main literature see Mitchell 2014, pp. 167–168.
See also Langevoort 1992 for a detailed analysis regarding the efficient market hypotheses and the
influence of behavioural research.
2
The paper carries forward and enhances findings that were presented at the 3rd Law and
Economics Conference in Lucerne: Behavioural Law and Economics in April 2014; Baisch and
Weber 2015.
3
Campbell et al. 2011, p. 91.
4
Libertarians prefer to talk about “investors”; the term “consumer” suggests and implies the need
of a certain degree of protection. See Kingsford Smith 2010; Moloney 2012, and Sarra 2013.
5
Ryan et al. 2011, p. 462.
6
Akerlof and Shiller 2015.
7
See also World Bank Group, World Development Report 2015, Mind, Society and Behavior,
December 2015.
8
Thaler and Sunstein 2008; Sunstein 2014a.
12 Nudging: Information, Choice Architecture and Beyond 219
Looking at retail investors the regulator must abandon the idea of decision-
making based only on rational choice assumptions. Therefore, disclosure is neces-
sary but will alone not lead to optimal investment allocation.9 In reality, behaviourally
impairments influencing investment decisions are accompanied by herding, bubble-
building and wrongly incentivised staff at the point-of-sale (POS); therefore, any
kind of information provision as well as rules for a Code of Conduct must accept
findings from behavioural research. Keeping in mind that the professionals from the
financial industry are also aware of these effects, it cannot be ignored that those
biases might be capitalised. By looking at product flyers with attractive recent return
curves or highlighted assurance that the capital is protected, it is not farfetched to
assume that at least some behavioural weaknesses are exploited (framing). Based on
this premise, a closer look at the POS-regulation is inevitable.
12.1.2 Regulatory Activities
In recent years the findings of behavioural finance research10 have influenced the
traditional understanding of the processes and patterns that allow the functioning of
financial markets. In the meantime regulatory perceptions which used to be based
on the assumptions of rational behaviour partially allow for human flaws.11 For
instance, the new PRIIP regulation12 defining the KID13 which is going to “be fur-
ther harmonised through Level 2 instruments that take into account existing and
on-going research on consumer behaviour”.14
9
Ulen 2013 delivers a good overview of behaviourally informed investor protection regulation and
also advocates augmented disclosure obligations.
10
A good collection of early key papers can be found in Kahneman et al. 982; see also Kahneman
and Tversky 2000; legal implications stemming from behavioural findings are described by
Korobkin and Ulen 2000. See also Moloney 2010, 67–74, regarding the irrational and uninformed
investor.
11
Cunningham 2002, p. 836, resumes that behavioural finance is “a marriage of cognitive psychol-
ogy and the financial economics of market inefficiency”. See FCA papers: Kristine Erta et al.,
Applying Behavioural Economics at the Financial Conduct Authority, Financial Conduct Authority,
Occasional Paper No. 1, April 2013, http://www.fca.org.uk/static/documents/occasional-papers/
occasional-paper-1.pdf; Paul Adams/Stefan Hunt, Encouraging Consumers to Claim Redress:
Evidence from a Field Trial, Financial Conduct Authority, Occasional Paper No. 2, April 2013,
http://www.fca.org.uk/your-fca/documents/occasional-papers/occasional-paper-2.
12
Proposal for a Regulation of the European Parliament and of the Council on key information
documents for packaged retail and insurance based investment products, PRI(I)Ps; http://register.
consilium.europa.eu/doc/srv?l=EN&f=ST%208356%202014%20REV%201.
13
Key Investor Document.
14
Discussion Paper of the Joint Committee of European Supervisory Authorities (the ESAs: EBA
European Banking Authority, EIOPA European Insurance and Occupational Pensions Authority,
and ESMA European Securities and Markets Authority), Key Information Documents for Packaged
Retail and Insurance-based Investment Products (PRIIPs), 17 November 2014, p. 17.
220 R. Baisch
The assessment of the prospect, options, scope and effectiveness of a regulatory

approach based on the outcome of behavioural research in the area of financial mar-
ket law through techniques like nudging is a growing field of research.15 The fact
that some actors in the financial industry have shown exploitative activities in their
interaction with customers of financial services products is another reason why
regulators see themselves forced to provide preventive measures based on behav-
ioural research.16 Market behaviour that cannot be subsumed under market abuse or
fraud but which still has to be regarded as cheating the customers because it capital-
ises on human flaws is an issue on the regulative agenda.17
Opponents of this change lament a loss of freedom accusing such kind of policy
and regulation as too paternalistic.18 However, in principle, “nudges are in many
cases not paternalistic at all, but instead largely cases of rational persuasion”.19
Admittedly, already some years ago behavioural economics were rightly considered
as a field that naturally has its limits20:
As policymakers use it to devise programs, it’s becoming clear that behavioural economics
is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases
that behavioural economics is being used as a political expedient, allowing policymakers to
avoid painful but more effective solutions rooted in traditional economics.
In the U.S. the Consumer Financial Protection Bureau is authorized to ensure

that “consumers are provided with timely and understandable information to make
responsible decisions about financial transactions”.21 More precisely, the bureau
may prescribe rules to ensure that the features of any consumer financial product or ser-
vice, both initially and over the term of the product or service, are fully, accurately, and
effectively disclosed to consumers in a manner that permits consumers to understand the
15
A good overview is delivered by Reiss 2013, pp. 278–302. See also Bovens 2009.
16
However, it is also possible that “sometimes firms might not know that their customers are mak-
ing mistakes. What looks like deliberate exploitation may actually just be firms responding to
observed consumer demand without realising that it is driven by biases.” See FCA, Occasional
Paper No.1, Kristine Erta, Stefan Hunt, Zanna Iscenko and Will Brambley, Applying behavioural
economics at the Financial Conduct Authority, April 2013, 7 and 21; http://www.fca.org.uk/your-
fca/documents/occasional-papers/occasional-paper-1.
17
Add-on-insurance sale; see FCFCA, Market Study, General insurance add-ons: Provisional find-
ings of market study and proposed remedies, March 2014; https://www.fca.org.uk/static/docu-
ments/market-studies/ms14-01.pdf.
18
Some authors criticise the approach from Thaler and Sunstein; e.g. White 2013, xiii, states that
policies based on nudges are “ineffective, unethical, and dangerous to individual choice, interests,
and autonomy”. See also Whitman and Rizzo 2007, Rebonato 2012. Sunstein 2005, p. 201 seq.,
already addresses some major lines of criticism: (i) slippery slope (resist the beginnings – nip it in
the bud), (ii) mistrust in the abilities of the planner or choice architect and (iii) enthusiastic pater-
nalists dislike the non-mandatory nature of nudging. See also Conly 2013.
19
Hausman and Welch 2010, p. 136.
20
George Loewenstein and Peter Ubel, Economics Behaving Badly, The New York Times, July 14,
2010, http://www.nytimes.com/2010/07/15/opinion/15loewenstein.html.
21
Dodd-Frank Act, 2010; 12 U.S. Code § 5511 – Purpose, objectives, and functions.
costs, benefits, and risks associated with the product or service, in light of the facts and
circumstances.22
In Europe, the UK installed a similar consulting team and especially the FCA
(see later Sect. 12.4.2) avows oneself to consider behavioural findings; recently
Germany also takes similar steps in this direction.23
12.2 Regulatory Design
Nudges are ways to make it easy for people (…)

compatible with their values and (…) with their desires.24
12.2.1 Paternalism
Paternalism25 is widely accepted to protect lives (mandatory use of seat-belt) or

minors (sale of alcohol). However, a latent phobia can be observed amongst market
liberals being afraid of too much paternalism with respect to the outcomes of behav-
ioural research. According to common understanding, paternalism limits the liberty
or autonomy of individuals but does so for that person’s own good – based on its
Latin origin – in a fatherly manner but restricting individual freedom and responsi-
bilities; however, the addressee is not a child anymore.26 The assumption that a
father is normally acting in the best interest of his child might not be true in the
regulatory world where no family ties come into play; in fact there is no guarantee
that policy makers are acting altruistic and/or in the best interest of consumers –
whether by accident or design, unconsciously or deliberately. In addition, initially
as a precondition the insight and comprehension have to be acquiesced, we as indi-
viduals need such kind of assistance. Polemically phrased an important cognition
based on behavioural research is a widening of the category of idiots requiring
protection. To avoid a proliferation of paternalism, good regulation will impose
minimal restrictions on those who behave rationally, but will guide the others.27
22
Dodd-Frank Act, 2010; 12 U.S. Code § 5532 – Disclosures.
23
Similar to the U.S. (Social and Behavioral Sciences Team) and Great Britain’ Nudge-Unit
(Behavioural Insights Team) also the German Chancellery is setting up an interdisciplinary team
to apply empirical evidence from behavioural economics in public policy making. See Steinbeis,
Maximilian: ‘Nudging’ arrives in Germany, VerfBlog, 27 August 2014, http://www.verfassungs-
blog.de/en/nudging-kommt-nach-deutschland/#.VNsrbWNATbM.
24
Kahneman 2013, p. 1340.
25
See Dworkin 2013.
26
Sunstein 2014c addresses the ethical aspects of nudging and related criticism. Trout 2005, 408,
argues that biases damage peoples autonomy not institutional remedies.
27
Camerer et al. 2003, p. 1218.
222 R. Baisch
Thus, paternalistic regulation will not be in conflict with constitutional limits like
the right to freedom of action and self-determination in a liberal state.28
One of the elementary topics regarding financial market regulation culminates in
the question as to which degree paternalistic emphasis would be inevitable.29 Is
there just the necessity to have criminal law against fraud in place? What kind of
private law design is best suited for settlement and compensation? Are people enti-
tled to make their own choices despite the fact that they err and, thus, might influ-
ence the general welfare in a negative way? Therefore, in some areas, remedies
representing a form of regulatory paternalism to protect customers from their own
mistakes appear to be the better alternative avoiding that households become too
dependent on their own devices and, in consequence, have to learn from their own
mistakes. Anyhow, unfortunately learning effects might come into fruition only
very rarely for many consumers, since financial decisions are undertaken seldom
and their outcomes are delayed, sometimes for decades (endowment insurance).
Regarding long-term investments, consumers might not even realise how the invest-
ment is performing or whether they have been mis-sold a financial product until
many years have been passed. Anyhow, consumers often will not be able to learn
from experience given the infrequency with which they often act as investors.30
Due to other traditions in Europe it might not be necessary to add euphemistic
attributes ending up with Libertarian or Asymmetric Paternalism. Because any kind
of limitation regarding choices or restriction of alternatives interfering with some-
one’s liberty must be regarded as paternalistic, such kind of regulation also should
be named paternalistic31; without any negative undertone however, public and man-
datory pension insurance systems which are common in Europe are clearly pater-
nalistic like all other compulsory insurances. Any kind of tax deduction incentives
or tax concessions are at least a soft paternalistic nudge. According to Thaler and
Sunstein32 paternalism does not always have to involve coercion and could also be
based on coaxing reactions out of individuals. For them, even the sequence in which
food is presented in a cafeteria could be (softly) paternalistic.
28
Van Aaken 2016, explores the legal limits of paternalistic nudging under the German Constitution
and discusses the (typical German) proportionality assessment which consists of a quadrinominal
test: (i) legitimate aim, (ii) suitability, (iii) neccessity (least restrictive means tests) and (iv) propor-
tionality. It is important to distinguish whether a nudge targets preferences and autonomy (end
paternalism) or just cognition (means paternalism); while the first needs to be subjected to greater
scrutiny the latter is true for informational nudges.
29
Libertarians prefer the freedom of choice, while condemning paternalism; see e.g. Boaz 1997; on
the other side, paternalists mistrust freedom of choice and argue against some occurrences of lib-
ertarianism; see e.g. Goodin 1991.
30
See ESA-DP (fn. 15), p. 17.
31
Blumenthal-Barby 2013.
32
Thaler and Sunstein 2008, p. 11
Fig. 12.1 Matrix classifying nudges (Mullane and Sheffrin 2012)
12.2.2 Nudging
Thaler and Sunstein developed their concept of nudging33 which has its roots in
their understanding of Libertarian Paternalism.34 A nudge, as they use the term,
is any aspect of the choice architecture that alters people’s behaviour in a predictable way
without forbidding any options or significantly changing their economic incentives. To
count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not
mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not.35
Following this definition, it is not really convincing (or coercive) to call the con-
cept of nudging paternalistic because such kind of potentially helpful treatment or
interaction is not restricted only within the relationship to a father figure.
However, the right combination of regulative measures from paternalistic to lib-
ertarian is a challenging task. It should not be questioned that nudges may be benefi-
cial in many regulative areas. But there are important challenges regarding the best
way of implementation. Therefore, nudges belong in the “toolkit for regulation, but
with a considered humility. They are not a panacea.”36 Besides disclosure as a
nudge, nudges like default rules (e.g. opting in/out as professional or retail client)
could work well in financial regulation.
Nudging should not happen in secrecy. Figure 12.1 also identifies non-transparent
types of nudging. Such interventions should come with some kind of information;
33
34
35
Thaler and Sunstein 2008, 6. Regarding choice architecture see also Thaler et al. 2013; Johnson
et al. 2012.
36
According to Hansen and Jespersen 2013, pp. 20–23; based on the dual process theory which
underpins Thaler and Sunstein 2008, pp. 19–22, and is also fundamental to Kahneman 2011.
224 R. Baisch
e.g. a rearranged cafeteria could be tagged with a respective indication somewhere

at the entrance.
Looking to other fields of regulation, e.g. food labelling obligations, it must be
conceded that there is not a real effect against obesity. There might be a need to
consider taxes on unhealthy food, but instead of changing the price of junk food, the
focus should be on consumer behaviour. Are there similar facts and implications
regarding financial regulation? Because there are (i) some doubts whether nudging
consumers is the best way to improve their situation, and there is also (ii) a call for
more traditional legal and economic solutions, this topic generates interesting
research questions.
12.2.3 Example: Product Ban vs. Product Warning
To highlight the difference in the regulatory approach based on paternalism from

the point of view of nudging, the following example shall help to clarify the under-
standing as adapted in this paper. In the first use of its new consumer protection
powers, the UK’s Financial Conduct Authority (FCA) restricted firms from distrib-
uting contingent convertible securities (CoCos) to the mass retail market.37 However,
based on the UK regulation professional, high-net-worth and sophisticated investors
as well as individual investors via execution-only dealing platforms are still able to
buy CoCos.38
Given such kind of exceptions, would it not be better just to make assertive warn-
ings compulsory?39 A ban might be too rigid, while product warnings could be suf-
ficient. On the other hand, it is also still permitted to buy shares and plain bonds of
financial institutions. The problem is that with CoCos, investors do not have control
over if and when this type of bond converts to an equity; however, in comparison to
a share, an interest is paid and the share-value will fall similarly in the case of a trig-
ger event. Mandatory suitability tests and restrictions to allow the distribution of
37
FCA Press release, 5 August 2014, http://www.fca.org.uk/news/fca-restricts-distribution-of-
cocos-to-retail-investors. CoCos are hybrid bonds that currently offer attractive yields but their
value can be written down or converted into equity if the issuing bank’s capital drops below a
certain minimum level.
38
CoCos may still be sold to investors for whom they are more likely to be suitable, including
professional investors or retail investors who are high net worth or sophisticated. Sophisticated
investors are defined by the FCA as retail clients with extensive investment experience and knowl-
edge of complex instruments, able to understand and evaluate the risks and potential rewards of
unusual, complex and/or illiquid investments. To be classed as high-net-worth, investors need to
have an annual income of more than £100,000 or have investable net assets of more than £250,000;
see Temporary product intervention rules, Restrictions in relation to the retail distribution of con-
tingent convertible instruments, August 2014, http://www.fca.org.uk/static/documents/temporary-
product-interventions/restrictions-in-relation-to-the-retail-distribution-of-cocos.pdf.
39
FCA started a consultation in October 2014 (CP14/23: Restrictions on the retail distribution of
regulatory capital instruments) and published rules in June 2015 permanent rules are in place since
1 October 2015 when the temporary product intervention rules for CoCos expired (PS15/14).
CoCos only to customers who use advisory or portfolio management services are
the better option. Nudging by means of information and warnings are preferable.
12.3 Behavioural Insights
Disclosure requirements should be designed for homo sapiens,

not homo economicus.40
12.3.1 Information: Capacitance, Processing, and Evaluation
Based on the research from behavioural economics on cognitive failings the artifi-
cial construct of a “reasonable investor” – resulting in a lack of protection for inves-
tors – is at stake. Today, even in countries with a tradition of reliable social systems,
unsophisticated retail investors are forced to invest in the market to save for their
retirement; the long phase and partially ongoing zero interest-rate policy in impor-
tant economic regions led to an additionally reinforcing effect. Consumers have to
care for their retirement despite their cognitive failings and their lack of training for
the task; therefore, regulators have to widen their perspective.41 Obviously, in
Europe similar to the U.S. “disclosure is not the panacea that drafters of federal
securities laws may have thought it to be”.42 Additionally, it is not really question-
able that nudges may be beneficial in many regulative areas. And there are impor-
tant challenges regarding the best way of implementation.
One of the key pillars undergirding the federal securities laws – that investors effectively
process information – is under pressure. An extensive literature shows that investors and
other securities market participants are subject to cognitive biases and, because of bounded
rationality, adopt heuristics in making investment decisions.43
The traditional disclosure-paradigm is based on the assumption that transparent

and effectively processed information will enable the investor to make well-founded
investment decisions. Having the type of a «homo oeconomicus» in mind, financial
market laws used to be designed for responsible and knowledgeable actors. After
the financial crisis culminating in the collapse of Lehman Brothers we should not
condemn information; this would mean throwing the baby out with the bath water.
Failures resulting from consumer biases or suboptimal information lead to similar
regulatory challenges, like shown in the regulatory framework in Fig. 12.2.44
40
41
See Davidoff and Hill 2013.
42
Black 2013, p. 1507.
43
Paredes 2003, p. 484.
44
OECD 2007, Roundtable of Economics for Consumer Policy: Summary Report, 26 July 2007,
p. 13.
226 R. Baisch
Fig. 12.2 OECD 2007, decision tree
Disclosure can function also as a nudge.45 However, customers should not be

inundated in too much information. It can be criticised that the design of legal mea-
sures for transparency does not sufficiently take into consideration whether an
investor is capable and (under the behavioural aspects) willing to assimilate the
information made available to him. Therefore, it must be assumed that the provision
of information alone is not sufficient, since the capacity and willingness to handle
information might be limited. Swamping disclosure requirements used to misjudge
the abilities of retail investors. The new European regulation leads to the mandatory
provision of basic leaflets. It remains to be seen whether such kind of information is
properly processed by the consumers. Behavioural finance exemplifies that many
biases cannot be prevented through disclosure. “Disclosure has considerable attrac-
tions as a retail market tool, but the challenge for regulators is to resist the tempta-
tion to make disclosure the panacea for investor protection.”46 What is the target of
regulation, the empowered investor or the irrational and uninformed investor? The
fact that even experienced investors are prone to irrational decisions should deliver
some food for thought.
45
Sunstein 2014b, p. 727.
46
Opening statement of Steven Maijoor, Chair of ESMA, at the ESMA Investor Day, 12 December
2012, Paris; http://www.esma.europa.eu/system/files/2012-_818.pdf.
12.3.2 Inertia, Overconfidence and Emotions
Not only information but other factors such as inertia, overconfidence and emotions
substantially influence decisions and whole markets.47 Based on emotions, humans
do not like to regret a former decision, overconfidence48 influences the assessment
of probabilities and due to inertia49 decisions are refused. Influenced by reference
biases and the manner how information is framed and anchored, non-rational fac-
tors are having a major impact on the way information is processed. The interrela-
tion of inertia50 and the regret aversion bias51 hinders investors to act. In consequence
goods (or investments) which are already in someone’s possession (Thaler worded
it “included in the individual’s endowment”) are valued higher than those for which
money would have to be spent.52
Sunstein identifies four categories (Fig. 12.3) in which central findings with par-
ticular importance to regulatory policy of recent social science research can be
related to for purposes of regulation.53
1. Default rules, rules that determine the result if people are too lazy or even refuse
to make a choice at all, are quite common to encounter inertia. Especially, in the
domain of retirement savings default rules can be extremely important to over-
come the power of inertia.54 Default rules can balance the lack of self-control.
2. Widely recognised is the finding that people can be influenced by how informa-
tion is presented or framed.55 Emotions instead of rational behaviour come into
play. For any kind of information, salience greatly matters. If key facts like fees
47
The role of psychology in economics was already discussed by Keynes 1936, p. 315, referring to
animal spirits (162) and unrealistic optimism or pessimism as causes for booms and busts.
48
Overconfidence could have many positive effects. Looking at retirement savings the expectation
to live longer than average should motivate individuals to higher savings. Baisch and Weber 2015,
pp. 167–171, with further references.
49
The debate regarding akrasia (the Greek ἀκρασία means a lack of command over oneself) is
quite an old one: Socrates argued in Plato’s Protagoras (Plato, 380 B.C., Platon: Protagoras 345
d9-e4) that akrasia does not exist, because no one acts willingly against one’s better judgment.
Aristotle countered more empirically and acknowledged that individuals behave intuitively
(Aristoteles, The Nicomachean Ethics VII 3, 1145 b22–24).
50
Gal 2006.
51
Regret aversion bias is the tendency to avoid making a decision due to the fear of the later prob-
ability to experience the pain of regret; in consequence, people will avoid taking decisive actions
because they fear that, in hindsight, whatever action they may have selected could prove less than
optimal.
52
Thaler 1980, p. 44.
53
Sunstein 2011, p. 1350.
54
Just one of many: Madrian and Shea 2001. See also EIOPA-report, Good practices on informa-
tion provision for DC schemes, Enabling occupational DC scheme members to plan for retirement,
24 January 2013.
55
Sunstein 2011, p. 1353.
228 R. Baisch
Fig. 12.3 Sunstein’s four categories
or risks are not sufficiently salient to people, this results in limited attention.56
Therefore, vivid displays are more effective than abstract presentations of statis-
tical risks.
3. The third category, social influences, is less relevant for financial market regula-
tion but could be seen as partially interesting in view of compliance to code-of-
conduct-regulations shown by advisors. Social norms can help to create a
phenomenon of ‘compliance without enforcement’ like wearing a helmet while
biking or skiing even if it is not mandatory to do so. A similar phenomenon is
that people are willing to cooperate with one another or to contribute to a solu-
tion, despite the fact that standard economic theory predicts other optimal
results57
4. Finally, the optimism bias or overconfidence based on difficulties assessing
probabilities, combined with the ignorance regarding not known facts and other
influences like the confirmation bias must always kept in mind when it comes to
decision making.58
12.3.3 Intermediate Conclusion: Suitability as a Cornerstone

of Investor Protection
According to IOSCO, suitability requirements aim at ensuring that financial inter-

mediaries only make suitable recommendations and that customers have the neces-
sary expertise, knowledge and financial capacity to trade in the respective financial
56
The problem of shrouded attributes comes into play; Gabaix and Laibson 2006; see also Sunstein
2015, p. 316.
57
Sunstein 2011, p. 1357.
58
Sunstein 2011, pp. 1358 et seq.
instruments and to understand associated risks given their investment objectives;

thereby the risk tolerance including the risk of loss of capital must also be
assessed.59
In Europe the introduction of suitability requirements in 2004 with MiFID60
changed the retail investor protection regime significantly, setting a new “high-
water mark of the extent to which the new regulatory strategy for the retail markets
intervenes paternalistically in the investor’s decision”.61 But obviously the financial
crises tsunami surpassed that high-water mark and the dam is now heightened not
only by strengthening the requirements regarding the investor’s individual risk-
tolerance within the suitability assessment. Today the mandatory assessment regard-
ing the individual appropriateness and suitability of financial investments at the
POS is widely accepted.62 In the U.S. with the standards set by the industry, suit-
ability requirements are established already a long time ago (since 2012, the FINRA
Rule 211163 replaces NASD Suitability Rule 2310).64
It was quite common to accept some of the behavioural findings, however, often
the traditional approach preferring education – often named investor empower-
ment – was followed instead of enhancing investor protection.65
Investor education rather than investor regulation is probably the best way to respond to the
increasing recognition of the substantial role that cognitive biases play in investor behav-
iour. Nevertheless, the insights from behavioural finance do suggest a couple of areas where
existing legal rules should change.66
59
IOSCO report, Suitability Requirements With Respect To the Distribution of Complex Financial
Products, January 2013, p. 6 et seq.
60
Market in Financial Instruments Directives, 2004/19EC of the European Parliament and of the
Council of 21 April 2004 on markets in financial instruments, 30.4.2004, OJ L 145/1-44 MiFID II
2014/65/EU of 15 May 2014 repealing Directive 2004/39/EC, 12.6.2014, OJ L 173/349–496.
61
Moloney 2008 (2nd ed.), 614; Moloney 2014 (3rd ed.) gives a good overview of the discussion
considering issuer-disclosure, the Efficient Market Hypothesis and behavioural insights, pp. 54–59.
62
Already Rapp 1998, p. 189, stated in relation to financial industry standards of conduct that none
is “more frequently cited, and least objectively applied, than the ‘suitability’ requirement”.
63
See http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=9859
&print=1.
64
Rule 2310 is the former (since 1939) Article III, §2 of the NASD Rules of Fair Practice.
65
Trout 2005, p. 433, repudiates this approach: “Anyone who assumes the adequate efficiency of
debiasing through individual training is either ignoring the magnitude of institutional intervention
required for such educational programs, or ignoring the cognitive costs to the individual of cor-
recting such biases. Either way, these strategies of individual training do not take seriously the best
available science.”
66
Cunningham 2002, p. 797. At p. 788: “It also means that such investor education must include
not only tutelage in the principles of finance and insights from behavioral finance, but also expla-
nation of how these axioms may collide.”
230 R. Baisch
This statement reflects this cognition but the need for some rules to be adjusted
was already recognised with reference to NASD 2310.67
With the adoption of MiFID II in Europe, the potential of shortcomings which
ESMA has found regarding the implementation of the MiFID I suitability require-
ments is going to be reduced.68 Based on supervisory experience of the provisions
included in Article 35 of the MiFID Implementing Directive, ESMA suggested
expanding these provisions in a number of key areas reflecting the expectations on
financial intermediaries already communicated in the ESMA suitability guide-
lines.69 The financial intermediary does often evaluate in his own interest whether a
customer is able to bear the risk of an investment. Whether a certain consumer is
really aware of the risk of a particular investment or his portfolio and, in conse-
quence, actually is really willing to tolerate this risk, is much harder to assess. A
specific often missing level of financial literacy might be inevitable to allow for
such kind of evaluation.
For instance, ESMA makes demands on robust processes for assessing the risk a
client is willing and able to take (including their ability to bear the investment risk).
The suitability process should also respect that based on behavioural research
rational-choice-presumptions are to be challenged. The various biases regarding the
perception of information and the validating of facts influencing investment-
decisions must be taken into account: (i) many investors are not focused on maxi-
mising profit but looking for security and conservation of value; (ii) the past
performance orientated marketing instruments are leading to immoderate expecta-
tions. A responsible advisor will take care of these facts and not ignore his client’s
level of risk awareness to make sure that the potential losses will be tolerated.
But how regulation should look like in a clearly non-advised environment?
Should there be regulatory space allowing for a playground attracting gamblers and
speculators? Action against abusive behaviour is by far the better approach. Even in
a paternalistic world there should be scope for a niche of online-brokerage protected
by appropriate warning and caution symbols – instead of prohibitive signs and
bans – to avoid unintended actions of investors.
67
NASD (National Association of Securities Dealers) is the former name of the American self-
regulatory organization for broker-dealers, which is now consolidated with the member regulation,
enforcement and arbitration functions of the New York Stock Exchange FINRA (Financial Industry
Regulatory Authority). Founded and registered with the SEC in 1939 the NASD was based on the
1938 Maloney Act amendments to the Securities Exchange Act of 1934. NASD as the one and only
Registered Securities Association supervised the conduct of its members under the oversight of the
SEC. Section 15A of the Securities Exchange Act of 1934 was enacted in 1938 to extend regula-
tory authority under the federal securities laws to the over-the-counter securities markets. NASD
created a system of cooperative regulation of broker-dealers and was responsible for the adoption
and enforcement of the rules to protect investors and the public interest.
68
ESMA criticised: (i) the failure to ask clients the right questions; (ii) the failure to collect the
necessary and relevant information; (iii) the failure to interpret correctly the information provided
by the client; and (iv) even where the right information is collected, the failure to recommend a
suitable investment; http://www.esma.europa.eu/system/files/2012-387.pdf.
69
ESMA, consultation paper, May 2014, p. 132 et seq.; www.esma.europa.eu/system/files/2014-
549_-_consultation_paper_mifid_ii_-_mifir.pdf.
12.4 Examples of Changes in Financial Market Regulation
This implies that providing all relevant legal and

technical information is not sufficient by itself.70
12.4.1 European Regulation
From the UCITS-KIID to PRIIPS-KID
The latest procreation of Europe’s financial markets policy makers is called PRIIP-
KID71 (Key Information Document) and intends to improve the quality and compa-
rability of information provided to retail investors in the EU.72 A mandatory
disclosure document, the ‘Key Information Document’, has to be supplied to retail
consumers before they take the decision to invest in a financial product. UCITS and
retail AIF73 that are required by national law to provide the UCITS-KIID
(Undertakings for Collective Investment in Transferable Securities, Key Investor
Information Document) are exempt from the new regulation during 5 years. The
intention is that then the PRIIP KID is being used for all types of products.
The rules require the financial services industry to provide basic information
about their investment products, the risk and return that can be expected as well as
the overall aggregate cost that will arise in making the investment. The EU proposal
is a regulation on key information documents for packaged retail and insurance-
based investment products (PRIP). The new regulation follows the introduction of a
standardised disclosure document for investors investing in UCITS funds.
The regulation states: “… retail investors have often made investments without
understanding the associated risks and costs and have, on occasion, suffered
unforeseen losses.”74 For products which are not simple or which are difficult to
understand, the KID must also include a comprehension alert which reads: “You are
about to purchase a product that is not simple and may be difficult to understand.”75
70
EIOPA (fn. 56), p. 7.
71
PRIIP: Packaged retail investment and insurance-based investment products. On 9 December
2014, the Regulation (EU) No 1286/2014 of the Europe an Parliament and of the Council of 26
November 2014 on key information documents for packaged retail and insurance-based invest-
ment products (PRIIPs) has been published in the Official Journal of the European Union.
72
The regulation covers structured deposits, structured products, insurance products with an invest-
ment element (but not pension products) and funds; Regulation (EU) No 1286/2014 of the
European Parliament and of the Council of 26 November 2014 on key information documents for
packaged retail and insurance-based investment products (PRIIPs), OJ L 352/1, 09.12.2014.
73
UCITS: Undertakings for Collective Investment in Transferable Securities; Directive 2001/107/
EC and 2001/108/EC; AIFMD: The Alternative Investment Fund Managers Directive 2011/61/EU.
74
PRIIPs regulation, pn. (1).
75
PRIIPs regulation, pn. (18): “A product should be regarded as not being simple and as being
difficult to understand in particular if it invests in underlying assets in which retail investors do not
commonly invest, if it uses a number of different mechanisms to calculate the final return of the
232 R. Baisch
Risk label
low A A
risk
B
C
D
high
risk E
for a more detailed

explanation of this official
label, please go to wikifin.be
Fig. 12.4 Belgian risk label (Financial products marketed in Belgium to retail clients, as from 12
June 2015, have to be assigned a standardized risk label. The technical requirements for the label
are laid down in a Regulation by the Financial Services and Markets Authority (FSMA). Royal
Decree of 25 April 2014, published in the Belgian Official Gazette (Moniteur belge/Belgisch
Staatsblad) on 12 June 2014)
The KID provides on no more than three pages the nature of the product, the
risks including performance scenarios, all initial, ongoing and exit costs and certain
other information. ESA’s Discussion Paper (ESA-DP)76 highlights many issues that
need to be addressed in order to balance the desire for conciseness and simplicity
facing the complexity of investment product’s risks and costs. An important task is
to allow for comparability. Most of the document is dedicated to the especially
tricky areas of risk and return disclosure and costs disclosure, which become even
more difficult for products that offer multiple options and/or are linked to insurance
contracts. For the presentation of risk and return the ESA-DP discusses general
types or ways of presenting information, considered in abstract rather than specific
terms. Various concrete examples implemented or on its way in different European
countries are shown to illustrate visual elements. Figure 12.4 illustrates the Belgian
style:
The ESA’s address consumer behaviour as one of the issues for retail investors
and “in order for the KID to be easy to use by the retail investor”, they envisage that
“the KID should have a clear behavioural purpose for the retail investor”77:
Given this, a traditional approach to disclosures focused solely on information and with
little regard to its presentation, is in being superseded in policy making by an approach that
is more informed by insights into consumer behaviours. For instance, the framing of infor-
mation can be considered, so as to counter cognitive biases which may distort perceptions
and provide information in a way that is both simple to understand but also salient for the
investment, creating a greater risk of misunderstanding on the part of the retail investor or if the
investment’s pay-off takes advantage of retail investor’s behavioural biases, such as a teaser rate
followed by a much higher floating conditional rate, or an iterative formula.”
76
ESA-DP (fn. 15).
77
ESA-DP (fn. 15), p. 17 et seq.; with reference to Sunstein 2011.
consumer (i.e. capable of drawing the consumers’ attention and appearing important for
the decision to be made). The PRIIPs Regulation reflects these considerations already at
‘level one’.
With the adoption of the MiFID II/MiFIR-package there is additionally regula-

tion in place addressing also aspects of communication with clients.78 While MiFID
II at level 1 (accompanied by level 2 implementing directives and level 3 regulatory
as well as implementing technical standards) focuses on suitability and conflicts of
interests the PRIIP regulation addresses the KID.
Risk Tolerance Assessment within the Scope of Suitability Requirements
Already the European regulatory approach within MiFID provides for such tests;
however, this was not preventing European private investors (not aware and prop-
erly informed about the issuers default risk) from losing money with Lehman cer-
tificates.79 Assessing investment suitability requires the right set of questions to
cope with diverging experience, personal investment objectives as well as with
individual risk-capabilities and risk-tolerances. International politics have picked
up these issues as well.80 The assessment of suitability shall determine, on an indi-
vidual basis, whether a client has not only the necessary expertise to trade in the
specific financial instrument, but also whether he can understand and can take the
associated risks – and all of that in line with the individual financial status and
investment objectives.81
Investors are looking for predictable returns and they hate losses. Therefore, the
downside-potential should be clarified during the conduct with the customer; under
78
According to Art. 24 (4) (b) MiFID II the information to be provided to client shall include guid-
ance on and warnings of the risks associated with investments in financial instruments or in respect
of particular investment strategies. ESMA’s MiFID Consulting Paper from May 2014 (311 pages,
additionally ESMA published in May 2014 a Discussion paper regarding the future technical stan-
dards with 533 pages, meanwhile the consultation paper was published in December 2014, 645
pages) specifies in Section 2.13 that Article 31 (2) MiFID Implementing Directive (2006/73/EC),
relating to the description of risks, should specifically address the risk of financial instruments.
79
Baisch and Weber 2015, pp. 174–180.
80
In the OECD G20 High-Level Principles on Financial Consumer Protection, published in
October 2011, http://www.oecd.org/regreform/liberalisationandcompetitioninterventioninregulat-
edsectors/48892010.pdf,) the principle Disclosure and Transparency is stressed in section 4; the
following formulation exemplifies that this principle is clearly understood in a comprehensive
manner: “Financial services providers and authorised agents should provide consumers with key
information that informs the consumer of the fundamental benefits, risks and terms of the product.
They should also provide information on conflicts of interest associated with the authorised agent
through which the product is sold.” Addressing risks it is stated: “The provision of advice should
be as objective as possible and should in general be based on the consumer’s profile considering
the complexity of the product, the risks associated with it as well as the customer’s financial objec-
tives, knowledge, capabilities and experience. Consumers should be made aware of the importance
of providing financial services providers with relevant, accurate and available information.”
81
According to Rapp 1998, p. 212, “the most common characterization offered is that suitability is
an amorphous concept, with no accepted definition, and bereft of case law guidance”.
234 R. Baisch
the regime of MiFID II and PRIIPS regulation this issues are addressed. Most inves-
tors will be more than happy to surrender part of the up-side potential when this can
be combined with a cap of any potential losses. The customers risk attitude matters;
therefore, the focus should not be on their risk absorbing capacity.82
The draft technical advice in ESMA’s Consulting Paper83 recommends that Art.
35 of the MiFID Implementing Directive is expanded to clarify that the investment
firm should be required to provide for a suitability report to the retail client that must
include how the recommendation provided is suitable for the retail client, including
how it meets the client’s objectives and personal circumstances with reference to
client’s attitude to risk and capacity for loss.
12.4.2 FCA and Behavioural Economics
Since the FSA (Financial Services Authority) split into the PRA (Prudential
Regulation authority) and FCA (Financial Conduct Authority), the idea of
Behavioural Economics gained in importance. The FCA publishes occasional
papers addressing also aspects of behavioural economics and argues that behav-
ioural economics can help the regulator understand the mistakes consumers make
and how firms respond to these mistakes to help FCA consider appropriate interven-
tions. The first of a series of meanwhile ten occasional papers84 is focused on and
applies behavioural economics at the FCA, summarises the main lessons from
behavioural economics for retail financial markets and describes how to use behav-
ioural economics in the regulation of financial conduct.85 Effectively, this paper
opened up the debate around the use of interventions like nudges in financial
services.
Behavioural biases have marked effects on how people make economic decisions. These
effects are particularly pertinent in financial services where products are particularly com-
plex, where consumers may not have much opportunity to learn about products, and where
decisions often involve assessment of risk and uncertainty, trade-offs between the past and
the future and emotions such as anxiety or regret.86
Especially, in the last two years the FCA embedded behavioural economics in its
regulatory practice. This happened because of the perception that, with the help of
sophisticated analysis of consumer behaviour, problems in markets can be identi-
fied and then those findings will help to design policy interventions. Behavioural
experiments are one of the tools regulators can use to support practical behavioural
analysis. This methodology makes it possible to study how consumer behaviour
82
Baisch and Weber 2015, pp. 172–174 and pp. 182–187.
83
CP May 2014 (fn. 71), p. 132 et seq.
84
Available at http://www.fca.org.uk/your-fca/list?ttypes=Occasional+Papers&ssearch=.
85
FCA-OP 1 (fn. 17).
86
FCA-OP 1 (fn. 17), p. 51.
varies across different contexts, and to identify the causes of these variations with
far higher level of confidence than simply observing consumers’ choices in the
market. The FCA chief executive Martin Wheatley clarified the role behavioural
economics is playing in assisting the FCA advance its competition objective by say-
ing “…what we’ve had over the years is a perfect storm of conditions eroding com-
petitive pressure” and mentioning “bounded willpower and rationality” on the buy
side as well as “moral failures on the sell side – knowingly exploiting consumer
biases”. With the help of behavioural economics FCA aims to break the “link
between poor products and high financial reward”.87
Instead of the traditional FSA-style enforcement of conduct rules, the FCA has
developed a new basis for intervention in the name of consumer protection based on
a wider scepticism about the efficiency of markets. Therefore, the means of smart
disclosure accepting the insights of behavioural economics led to a revisiting of
requirements on disclosure and marketing promotions like demonstrated with the
PRIIP regulation.
12.4.3 Good Practices on Information Provision for DC

Schemes
The EIOPA report88 found that substantial improvements can still be made to infor-
mation a provision that is meant to support members in their retirement planning;
the provision of sufficient legally and technically relevant information has proven to
be ineffective. Information requirements are discussed based on the exploration of
good practices in different member states as well as the translation of insights from
behavioural economics and communication science. Because of the tendency of
governments to reduce public pension schemes and the shift from DB (designed
benefit) to DC (designed contribution) employer schemes, increasingly risk and
responsibility for individual retirement planning are passed onto the consumers. In
some countries first pillar pensions (often financed pay-as-you-go) tend to become
less generous due to the age pyramid and demographic change. Simultaneously
second pillar pensions tend to become more risky (bringing less interest). The report
clearly states that the provision of information is not sufficient by itself because
people tend not to cope rationally with risks and, therefore, have great difficulty
planning for retirement.
The report postulates a shift towards the insight that a legal purpose of informa-
tion provision is inadequate because people need first and foremost key information.
The new approach to information provision is neither focusing on the perspective of
87
Making competition king – the rise of behavioural economics at the FCA, Speech by Martin
Wheatley, Chief Executive, the FCA, at the Australian Securities and Investments Commission
(ASIC), March 2014; available at http://www.fca.org.uk/news/making-competition-king.
88
EIOPA (fn. 56).
236 R. Baisch
the market nor just aiming to comply with legal purposes. Legal information is
necessary, and has to be disclosed in an appropriate way, however, information
should support people in making financial decisions. Therefore, less is more and the
format is essential, because many readers
will turn away from information if they do not quickly understand how it is relevant to them
and how they should translate the information into financial decisions.89
The information provider has to realise and accept that the readers lack motiva-
tion and time.90
On the way to IORP II (institutions for occupational retirement provision) it will
have to be seen how much of these insights remain in the final text. In March 2014,
the European Commission published a proposed revision of the IORP Directive,
IORP II.91 Smart information matters regarding the PBS (pension benefit state-
ment). The proposal would introduce a standardised PBS at EU level with simple
and clear information about the individual pension entitlements to support informed
decision-making about pension adequacy (answering the question and investment
strategy. The PBS will contain both personalised and generic information about the
pension scheme according to a standard template of two pages with a view to help-
ing individuals take decisions regarding their retirement planning.
12.5 Practical Applications
Whereas it is assumed that information leads

to understanding, to the willingness to act
and subsequently to appropriate actions,
this appears most often not the case.92
12.5.1 Key Investor Document: Disclosure as a Nudge
The EU regulatory response to the insights how information should be presented to

consumers can be seen within the PRIIPS regulation (Sect. 12.4.1 above). This
development was influenced by the behavioural research. As mentioned in the
beginning nudges may make their appearance in various forms and for financial
products a well-designed leaflet is essential. Sunstein explores
89
EIOPA (fn. 56), p. 9.
90
Helleringer 2015.
91
Available at eur-lex.europa.eu/resource.html?uri=cellar:33cb1b95-b6c8-11e3-86f9-01aa75ed71a1.
0002.01/DOC_1&format=PDF.
92
EIOPA (fn. 56), p. 8.
the uses of disclosure as a behaviourally informed regulatory tool. It is important to distin-

guish between summary disclosure, often provided at the point of purchase, and full disclo-
sure, typically provided on the Internet. A central point is that disclosure policies should be
based on an understanding of how people process information.93
Looking at necessary information for the evaluation of financial product risk and
cost jut out. The regulatory efforts in Europe foster a clear disclosure of any kind of
administrative cost in connection with the purchase of an investment product94 and
present an answer on how to present risk and return.95 Sunstein stresses the impor-
tance of “plain language, clarity, and simplicity”.96 And this is important regarding
not only risk and return, but also the cost structure of a product. However, “accurate
disclosure of information may be ineffective if the information is too abstract, vague,
detailed, complex, poorly framed, or overwhelming to be useful”.97
Whether the three-page A4 standard format KID really helps (i) to understand
and compare PRIIPs, (ii) to estimate the total cost of the investment as well as (iii)
to raise awareness of the risk-reward profile will depend on the consumer’s willing-
ness to process this information. Perhaps the most challenging task will be to find a
solution to the question how the complex structures that may sit behind PRIIPs can
be broken down and explained in order to correctly state their likely return and risks
in a consistent manner. However, this is being left to the Level 2 or 3 measures.
Presumably, the KID will optimise the documentation for financial products sold to
retail investors and, hopefully, this is the way how to regulate disclosure avoiding
information overload but using it as a nudge. However, analyses have revealed that
there is still a large fraction of investors that is not able to understand the informa-
tion presented.98 In the face of information overload and the widespread unwilling-
ness of investors to take note of information, EU-regulators introduced the KID. The
scepticism remains: will a retail investor really process that information? And based
on the behavioural findings: may things go wrong anyway?99
93
94
See Article 33 of the level 2 MiFID-ID (MiFID Implementing Directive, Commission Directive
2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament
and of the Council as regards organisational requirements and operating conditions for investment
firms and defined terms for the purposes of that Directive, 2.9.2006, OJ L 241/26–58) regarding the
obligation to inform clients about costs.
95
ESA-DP (fn. 15), p. 21 et seq.
96
97
98
Walther 2015, p. 145.
99
“Traditional failures are often addressed by information provision or disclosure: to mitigate
asymmetric information, to reduce search costs and limit market power, and to remedy the under-
provision of a public good. But mandated information provision may be an ineffective remedy if
consumers either do not understand the information or believe that it is not relevant to their deci-
sionmaking. For example, if consumers mistakenly believe that they will pay their credit bill on
time every month, clear and transparent disclosure of late fees and interest rates may not change
behavior because consumers deem the information irrelevant at the time they make a purchase.”
See Campbell et al. 2011, p. 95.
238 R. Baisch
12.5.2 Classification of Customers
The EU-regulation distinguishes between professional and retail investors allowing

for opting in and out. This categorisation can be seen as a default rule; default rules
are another good example how nudging can ease choices. Further classifications
based on income, fortune and experience are conceivable. Part of the complexity of
effective retail market regulatory intervention is to identify the typical retail inves-
tor and to look at the approach to investment decisions.
As mentioned (above Sect. 12.2.3) the FCA has introduced additional investor
types, the sophisticated investor and the high net worth investor. Due to the fact that
self-certification is allowed, it is possible to opt out from the tighter investor protec-
tion regime for normal retail investors.100 The introduction of sub-divisions to fur-
ther classify retail investors and then to scrutinise financial products to find out
which product should be made available to which category might not seem to be
preferable because clients are too disparate to be pigeonholed.101 The question is
whether a national financial authority or for instance ESMA in Europe is capable
enough to act against hazardous financial products, which anyhow should not pass
the suitability test.102 Therefore, it could be argued that the regulator should focus
on conflict of interest issues and proper suitability-tests with simultaneous consid-
eration of ways to optimise disclosure and appropriate actions to avoid unfair adver-
tising practices.
12.5.3 Automatic Enrolments and Active Choice
With regard to pension schemes the question arises how much a state shall rely on
individual decisions to avoid poverty among the elderly. Many states know manda-
tory schemes but often such funds hardly cover even basic needs. A lot of research
has been done to find out what helps to motivate individuals to save for their retire-
ment.103 Reduced or downstream taxation is quite common to incentivise saving.
Various combinations of active or passive choices can be found. Subsidies for any
kind of retirement accounts rely on individuals to take action and save on a regu-
larly basis. What might happen is that this only induces individuals to shift assets
from taxable accounts to retirement accounts. Policies that raise retirement contri-
butions if individuals take no action such as automatic employer contributions to
100
Financial Services and Markets Act (Financial Promotion) Order 2005 Art. 48 and 50A.
101
In other areas than investment decisions the so-called choice architecture may help more. In the
U.S. the automatic enrolment in pension schemes is widely discussed. See with further references
Lusardi and Mitchell 2014, 34.
102
However, the grey capital market, closed-end funds and investment companies will remain a
challenge.
103
See references in Benartzi et al. 2013.
retirement accounts increase wealth accumulation substantially.104 In contrast, tax

incentives often are motivating especially those who would anyhow save. Traditional
policy incentives like tax deductions address rational actors maximising their utility.
The behavioural approach adds incentives which are nudging biased individuals.105
Therefore, to increase saving ratio from low and average earners often only
paternalistic rules will ensure the wanted result.106 While defaults may have a posi-
tive influence on consumer decisions, a practical alternative to defaults, requiring
individuals to make mandatory explicit choices might be better in many cases. To
make active decisions mandatory is optimal when consumers have a strong propen-
sity to procrastinate because savings preferences are highly heterogeneous.107 It fits
well in this picture that an analysis of the recognised Swedish pension system
observes that major changes in retirement savings behaviour require clear signals
and relatively intrusive instruments to affect behaviour and suggests strong penal-
ties for non-compliance rather than just nudges.108
12.5.4 Nudging the Advisor
Against the background of independent advice, retrocessions and similar payments

from product produces towards investment advisors or portfolio managers were get-
ting more and more disreputable.109 Slack regulation was common in the problem-
atic field of inducements, which are causing conflicting interests; the effect of utility
maximisation – thereby motivating bankers to create and sell products which are not
in the best interest of their clients – was misjudged. Certainly the consumer needs
clear information about the cost structure of products to compare them. However,
there are other areas, where rational behaviour must be intensively kept in mind:
advisors will always be tempted to sell a product when they can maximise their
compensation.
All kinds of inducements and incentives like trailer fees, retrocessions and other
commissions used to be common as means of sales promotion in the banking and
fund industry. Conflicts of interest are to be monitored to the extent such payments
may influence investment advisory and portfolio management services. Long-term
considerations should actually lead to recommendations triggered by the hope for
satisfied customers, while short-term temptations might result in preferring a good
salary and high bonuses. What is true for an individual advisor himself at the POS
is also true for banks and other financial intermediaries as a whole or for a certain
division. Especially MiFID II strengthens the independence of investment advice
104
Chetty et al. 2013.
105
Cartwright 2014, p. 519.
106
Bronchetti et al. 2013.
107
Carroll et al. 2009, p. 1669.
108
Weaver and Willén 2014.
109
Baisch and Weber 2015, p. 161 and pp. 171–172.
240 R. Baisch
and portfolio management services.110 Gone are the times when undisclosed fees
were helping to line one’s pockets. However, looking at international regulatory
activities, huge differences exist; some regulators aim to eliminate such kind of pay-
ment flows at all for independent advice, others just demand a full disclosure
approach. While for many investment products like shares or bonds an efficient
formation of prices – liquid markets presumed – is at least not impossible based on
Modern Finance Theory, in contrast, many of the structured products do not facili-
tate a clear price evaluation.111 Additionally, the advisor and the advised have both
to cope with human limitations. Shefrin argues112:
Kahneman (2011) might say that the judgments of portfolio managers and analysts reflect
subconscious System 1 (intuitive) thinking, even though the principles they articulate reflect
System 2 (conscious) thinking. Elements of the planning fallacy, also discussed by
Kahneman (2011), strike me as being part of this story. These elements involve under-
weighting or ignoring base rate information (…) when making predictions about future
returns, and overweighting singular (firm specific) information.
What kind of additional nudges at the point of sale are possible? Salience and
simplification embedded in of a Code of Conduct could lead to better investor pro-
tection to establish a fair treatment of customers. The approach towards POS-
regulation for financial intermediaries should be based on the enforcement of a
Code of Conduct, assuming that a biased behaviour is shown by retail investors.
Particularly the mandatory suitability or appropriateness tests113 prior to any
investment advice as well as an on-going assessment of the suitability of the recom-
mended financial instruments embracing also loss-aversion and attitude towards
risk features is an area where the outcomes of behavioural research can be applied.
The need to counteract conflicts of interest is also part of the sales process
regulation.
12.6 Conclusion
One word of caution, however. Human behaviour

and nudges, in particular, are a notoriously complex equation.
Inputs and outputs do not always correlate.
Nor are they predictable.114
110
Art. 24 MiFID II.
111
According to Hens and Rieger 2008, 27 most of the common structured products do not “follow
rational guideline, but instead use behavioral factors, like loss-aversion or probability misjudge-
ment to be attractive in the eyes of potential investors”.
112
Shefrin 2014, p. 19.
113
While suitability contains a link to present as well as future aspects, appropriateness mainly
reflects the past. Based on detailed conduct of business rules for investment firms in combination
with the just discussed transparency requirements these tests are realising the general obligation to
act fairly, honestly and professionally and in accordance with the best interests of the client – previ-
ously known as fiduciary duty.
114
Speech Wheatley (fn. 90).
Regulatory requirements and industry standards establishing an environment

where customers are treated according to their individually assessed risk attitude
constitute the best precaution against negative outcomes of human flaws when mak-
ing financial decisions. However, there is a potential barrier to obtaining acceptance
with this approach to suitability because the widespread rejection of paternalistic
regulation which still has the model of a reasonable investor in mind. Therefore, any
kind of provision should be avoided which too paternalistically overrides people’s
ability to make choices. Recognising human limitations because of the complexity
of financial decision making should not lead to a reduction of choices and invest-
ment opportunities for those customers who can handle the complexity or just like
to gamble.115 Despite the fact that suitability requirements are problematic in terms
of supervision and enforcement,116 it should be possible to protect those deserving
protection without harming the others. To comply with sound governance structures
reputable market participants will behave accurately and in line with the require-
ments like it is stated in the respective IOSCO principles:
Whenever an intermediary recommends the purchase of a particular complex financial
product, including where the intermediary advises or otherwise exercises investment man-
agement discretion, the intermediary should be required to take reasonable steps to ensure
that recommendations, advice or decisions to trade on behalf of such customer are based
upon a reasonable assessment that the structure and risk-reward profile of the financial
product is consistent with such customer’s experience, knowledge, investment objectives,
risk appetite and capacity for loss.117
Given that many consumers struggle to maximize their own welfare, the ques-
tion remains whether regulators can do better. When regulating code of conduct
requirements, the presumed preferences of the majority of consumers should be
reflected. The challenging question is: what would they do were they fully informed
and well advised?118 This is the challenging task for the law. Ulen119 phrased it this
way: “Law – by taking due account of these predictable, routine deviations from
rationality – can better influence behaviour to realize both social goals and to help
individuals better enhance their well-being.”120 (Fig. 12.5)
This is not only true for any kind of choice architecture but also for more pater-
nalistic forms of regulation. Focusing on areas where there is strong evidence of
self-harm (including financial losses) while limiting the influence of political beliefs
and encouraging active and lively discussions will help to improve financial market
115
See Jolls 2006, pp. 39–40.
116
Moloney 2010, p. 243, advocates mystery shopping. For a practical example see FSA, Assessing
the quality of investment advice in the retail banking sector: A mystery shopping review, February
2013, <www.fca.org.uk/static/pubs/other/thematic_assessing_retail_banking.pdf>.
117
IOSCO, Suitability Requirements With Respect To the Distribution of Complex Financial
Products Final Report, January 2013, Principle 5.
118
Campbell et al. 2011, p. 95.
119
Ulen 2014, p. 120.
120
See also Mitchell 2014, pp. 182–184, regarding the interaction of behavioural law and econom-
ics with legal norms.
242 R. Baisch
Fig. 12.5 Geared to

consumer’s needs
regulation.121 Additionally, the potential trade-off should be kept in mind which

might occur undesirably if defaults reduce the incentive to gather information.122
Kahneman’s analysis of human thinking can give the impression that human naivety
and simple-mindedness is overemphasised.123 Therefore, Gigerenzers’s approach to
value the positive outcome of simple rules of thumb or similar mental shortcuts
might complement to an optimised cognition and perception of human behaviour as
it should be imputed to individuals when designing regulation.124 Pushing it a bit,
according to Kahneman individuals are desperate in thrall to all kinds of fallacies,
which fosters the call for paternalism. Nudge theory should not weaken the motiva-
tion of individuals to actively inform them. It must be said that education could, at
least partially, compensate negative outcomes of human flaws. Gigerenzer proposes
that with the teaching of critical thinking about statistical probability and heuristics
individuals can get more risk savvy.125 Based on such an enhanced level of financial
literacy consumer then are better able (i) to comprehend investment risks, (ii) to
accept that a certain level of it is unavoidable in combination with given return
expectations and finally (iii) tolerate potential losses.
Enhanced prevention based on smarter information requirements will give con-
sumers a better chance to avoid human flaws. Combined with a strict Code of
Conduct at the point of sale, a Suitability Test including the real risk perceptions of
121
Glaeser 2006, p. 156.
122
Carlin et al. 2013.
123
Kahneman 2011. Neuroscientist Gazzaniga 2011 tackles the question, why individuals feel so
in control despite the range of automatic and deliberative factors that underlies their choices.
124
Gigerenzer 2014 (2013), p. 30; see also his comment in chapter 2 fn. 14.
125
System 1 (fast, instinctive and emotional), as Kahneman describes it, might lead in some cases
even to better solutions then System 2 (deliberative and logical) because System 2 is susceptible to
the misjudgement of probabilities due to limited working memory and brain power and a wide-
spread simple lack of statistical knowledge and mathematical ignorance.
the consumer leads to an enhanced level of investor protection. Nudging in combi-

nation with some more paternalistic elements can de-bias detrimental human short-
comings while distending paternalism should be avoided.126 In addition, adequate
enforcement strategies are necessary; hereby, the question arises, whether financial
intermediaries need the carrot or the stick to implement processes to cope with the
limitations of biased investors. Regarding enforcement the carrot (nudges) does not
have the required disciplinary effect; therefore, the paternalistic stick (penances) is
inevitable.
Acknowledgement This contribution was written within the University Research Priority
Program Regulation of Financial Markets from the University of Zurich.
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Chapter 13
Nudging and Environmental Law
Perspectives and Examples
Felix Ekardt and Jutta Wieding
Abstract This article analyses nudging in constitutional and environmental law.

On the level of constitutional law, nudging is criticized for being paternalistic. On
second thought, many forms of nudging are in contrast not paternalistic, because
they do not protect an individual from themselves, but others from negative effects
of the actions of an individual. Especially in environmental policies, nudging there-
fore proves to be legitimate. However, nudging might not be as effective as policy
instrument for environmental issues, as many hope. Even though this article shows
interesting possible examples of nudging, it also argues why the effect of nudging
as main policy instrument in solving environmental problems will be limited.
13.1 Problem: Nudging and the Environment
Despite much talk on environmental issues, the ecological situation in Europe and
worldwide gives reason for concern. Climate change as a consequence of using fos-
sil fuels for example will entail dire and existential consequences in the course of
the twenty-first century. This includes food and water scarcity, leading to billions of
deaths due to supply shortages, as well as wars and civil wars over decreasing
resources, migration flows, massive natural disasters, exploding petrol and gasoline
prices – and last, but not least, economic damage, which will exceed costs of effec-
tive climate policies by far. Considering per capita emissions and alleged reduction
measures, Europe and countries like Germany are far from being forerunners. Alone
the shifting of production out of the EU between 1990 and 2008 accounts for more
emissions than the total of 10 % which has been reduced within the EU according
to statistics.1
1
Ekardt et al. 2015.
F. Ekardt (*) • J. Wieding
Forschungsstelle Nachhaltigkeit und Klimapolitik, Leipzig, Germany
e-mail: mail@sustainability-justice-climate.eu; jutta.wieding@posteo.de

248 F. Ekardt and J. Wieding
Originally developed to foster general health and well-being, the concept of

nudging is an attempt to find new instrumental answers to those and other environ-
mental issues. Unlike environmental policies, nudging does not aim at dictating citi-
zens a certain behaviour or putting a cost incentive on them. The aim is rather to
give people a ‘nudge’ into the right direction. Proponents of this concept call it a
gentle form of paternalism, which is not intruding with individual freedom: A ‘lib-
ertarian paternalism’.2 It is not only – and maybe not even foremost – applicable to
protecting the environment, yet, this paper will assess its effectiveness regarding
environmental policy. This is interesting, because looking at an example of applica-
tion in a field outside the centre of debate will broaden the perspective for evaluat-
ing the theory. It might also assess a new approach to changing people’s behaviour,
such as consumption patterns and lifestyle choices, which is an essential element in
solving may environmental issues.
13.2 Sustainability: The Objective of Environmental

Protection and Environmental Law
Protection of the environment and its policy instruments can be measured by the
goal of sustainability which has been shaping international politics for a while.3 It
addresses the question, whether politics has the obligation to foster lifestyle and
economic behaviour that will work over time on a global scale. This concept of
sustainability implies by definition the call for more intertemporal and global jus-
tice. Especially regarding climate change and use of resources, this goal is not even
close to being achieved. Per capita greenhouse gas emissions in Germany e.g.
remain at a multiple of what is permanently and globally feasible. A look at relative
emission reductions since 1990 reveals trick calculations like the shifting of produc-
tion, and through that emissions abroad, while the respective products are still con-
sumed in Germany.
Another view of sustainability however is often a kind of title of judgement on
everything which is desirable in human societies. This would include notions of
justice and public welfare, or could be even broader. In contrast, a three-pillar model
is often cited, which reduces sustainability to the necessary balance between eco-
logic, economic and social issues. This is diverting the main idea of the debate on
sustainability since 1987, which has been a remarkable change in paradigm: More
generational and global justice through making the rich protect resources and pro-
viding opportunities for development of the global poor. Firstly, the talk of ‘three
pillars’ trivializes sustainability by suggesting that political decisions are supposed
to consider the different areas equally, especially if intertemporal and global rele-
vance is left on the side-lines, if seen at all. A second problem is the separation of
2
3
on this chapter, see Ott and Döring 2008; Ekardt 2015.
13 Nudging and Environmental Law 249
economic, social and economic aspects, which is close to impossible in relevant

areas. And what exactly is implied by the thoroughly vague and divers notion of
‘social’? If it were to include everything to do with mankind, sustainability would
be completely trivialized. Thirdly, the three-pillar model could be interpreted to the
effect that protection of livelihood strongly depends on economic growth. This
however is highly controversial.4
These and other aspects are clearly reflected in many parts of the Rio Declaration
of 1992, which is the key international origin of the modern discourse on sustain-
ability. Disregarding the definition of sustainability however, a question remains
regarding constitutional and basic rights, nationally, in Europe and internationally.
It concerns whether politics on all levels has an obligation to act to secure, e.g. in
the field of climate globally stable emission levels, disregarding how the problem is
called. Likewise, the question remains, which might be the right instrument to
achieve that. Exploring answers to both questions brings nudging into play.
13.3 Is Nudging Paternalistic: And Would It Then

Be Despicable in the Context of Liberal Democratic
Constitutional Law?
13.3.1 Nudging and Paternalism
Proponents of nudging call it ‘libertarian paternalism’, stressing that this is not an

oxymoron, because it is questionable, whether a paternalistic policy instrument is in
accordance with constitutions in liberal democracies. If an individual gets nudged
to stop smoking against their original conviction, and this were to happen for the
sole reason of protecting them from themselves, this could be considered paternal-
istic. What are we therefore to think of nudging, and is it generally possible to
imagine paternalistic forms of action?
Even disregarding nudging, one could argue against a global environmental turn,
e.g. in climate matters, on the basis of human-rights guaranteed freedom. Is it gov-
ernment’s concern how I choose to live? And is this is not exactly what is intro-
duced with regulations for a real climate turn? The answer has to be differentiated.5
Everything that concerns the freedom of several individuals and therefore the con-
flict between development opportunities of several citizens is a question of justice.
This might then not only be my personal problem. The next chapter will analyze
how to deal with those conflicts. This is also a question of a good life. If criterion
for legal an ethical justice is freedom, or self-determination, including the various
implications which derive from it, it is possible to limit a freedom for the sakes of
preconditions for freedom of others. It is therefore possible to limit the freedom of
4
Jackson 2009; Paech 2012.
5
On the following, see Ekardt 2015.
driving my car, if this secures another person’s chances of freedom. Freedoms can
also be restricted to improve conditions to exercise freedoms, like the interest of
safe traffic, even though they are not usually associated with human rights. It is not
permissible however – without ethics and law being entirely clear on the matter – to
make the argument that restricted car use is for my personal benefit only. For
instance, because it might supposedly make me happier. Paternalism in and by itself
is therefore forbidden.
However, it is only to be refused on the assumption that the protection from
oneself is not a legitimate cause for an infringements of liberty anchored in basic
rights. This is only the case, if the democracy with division of powers is considered
a means of solving conflicts of liberties, and not as standing ‘alongside’ liberties in
basic rights, which in and by itself is an important instrument. Because otherwise,
paternalism could be possible by appealing the idea of democracy. Paternalism
occurs however only if there is no other person affected by my actions. Solving
conflicts between colliding liberties is not paternalistic, but rather normal subject of
regulation in liberal democracies. Seeing the energy and climate turn as a paternal-
istic act is not justified as it is declaredly aimed at protecting others. It is, by the
way, indeed true that based on the energy and climate problem, many issues which
were so far considered a private matter only, become a question of justice. What I
eat, how I travel or how I get to work has now consequences for other people.
Especially since, unlike in a theocracy, it is not my wishes that are being regulated,
but my external actions.
The fact that weaker ones are protected from the stronger ones by the public
authority does not only occur in sustainability issues, but also in employment law.
However, this is also no indication of protection from oneself, because it is merely
a matter of creating exe level with the employer, instead of forcing something onto
the protected individual which they might not even want. Additionally, it serves to
prevent suggestive pressure on other employees, e.g. regarding global labour stan-
dards. It remains to concede that there are isolated cases in which the distinction
between ‘external force’ and ‘non-force’ might be difficult. In contrast to the argu-
ment above, protection from oneself can also not ethically be justified by recurring
that a person also has ‘obligations towards themselves’. Because these restrictions
of freedom including their rational-dictated undertones have, unlike Kant and Mill,
no ethical grounds. This leaves to establish that, where nudging is paternalistic, it
would be a problem in liberal democracies. Regarding environmental protection
however, there is no paternalistic situation, as it serves to sustaining freedom and a
common interest to preserving basic rights.
Given that autonomy is always influenced somehow, one could even discuss if
‘libertarian paternalistic’ nudging is unconstitutional. Hausman and Welch make
the distinction between fundamental freedoms, which are restricted when alterna-
tives are closed off to an individual which it would otherwise be able to choose
from, and autonomy describing the control of an individual to choose and evaluate
options.6 Nudging, in contrast to mandatory laws or economic incentives, only
6
Hausman and Welch 2010, p. 128.
targets at the autonomy of an individual. It therefore uses findings of behavioural

economics, psychology and marketing. Using this definition, it is impossible not to
nudge, as an individual will by nature be influenced by social environments and
external stimuli.
13.3.2 Is There an Obligation to More Environmental

Protection Anchored in Basic Rights?
Are there really environmental basic rights, as assumed above when talking of con-
flicts of liberties?7 Especially in international law, the concept of environmental
basic rights has been discussed for years.8 In terms of a scholarly debate in interna-
tional law (not so much in the practice of international law), the idea of strong and
even environmental basic rights without any balancing seems to be appealing.
National debates about environmental basic rights on the other hand are considered
impossible to outline substantially, open for weighing and not constructive. The
problem of vagueness is relevant only if there is a general basic right ‘to environ-
ment’; this would indeed be too vague. Of course, once a scope of protection is
effected by such a guaranteed basic right, there will always be the necessity of
weighing between different basic rights, even with a narrower scope of protection;
anyway, this is true for basic rights altogether.
As is generally known, jurisdiction, especially of German constitutional and
administrational courts, is rather reluctant in acknowledging legal positions imply-
ing environmental basic rights. Already the term protective right is avoided, which
would indicate subjective rights (even if there is mandatory weighing with contra-
dicting legal positions within the scope of limiting provisions ‘Schranken’).
Particularly, but not exclusively, in constitutional complaint, a clear distinction
between the review of legitimacy and reasoning is therefore not made. Consequently,
by camouflaging the question of the legal quality of subjective rights, it remains
unclear whether the issue of entitlement for complaint, the scope of protection by
basic rights, or the limiting provisions on basic rights is being addressed. Despite
the different outcome of the case (in contrast to environmental cases), this is essen-
tially even true for jurisdiction on abortion. This is based on the assumption that
protective rights merely define an objective instead an exact scope of protection and
the only issue to assess would be whether the protection measures undertaken were
obviously inadequate. This will always be denied, as some of the legislative efforts
in Germany will always be applicable in any subject matter, providing sufficient
grounds for qualifying the measures as per se ‘not evidently insufficient’. Also, the
ECJ and ECHR are reluctant in matters of protective rights doctrines.
7
8
Schmidt-Radefeldt 2000.
Starting point remains the idea of liberty rights as classic-liberal guarantees of

personal development. The term of liberty, as implied in basic rights, aims tradition-
ally first and foremost at the economic liberties of those living right here and right
now. This requires the additional interpretation that crucial physical preconditions
for liberty are included as well. This means that a person has a claim not only to
social aid, (as has as of recently been recognized by the German constitutional
court) but also to the existence of a somewhat stable resource basis and respective
global climate. This is because without such a subsistence level and without life and
health, liberty cannot be meaningful. This basic right to crucial preconditions of
liberty is explicitly provided for, insofar they concern life and health (Art. 2 II
German constitution, 2, 3 Charter of Fundamental Rights of the European Union, 2,
8 ECHR). Other crucial preconditions of liberty, such as the subsistence level, can
be included as interpretation of the general right of liberty or subsidiary of other
basic rights. Insofar, it is not essential – as is the opinion of the author – that there
is an equivalent to the German Art. 2 I German constitution in Art. 6 Charter of
Fundamental Rights of the European Union and Art. 5, 8 ECHR (if interpreted with
exact wording). This right to life, health and subsistence level repeats furthermore
in global international law, in parts even explicitly as in the right to food in Art. 11
I ICESCR. Human dignity is not the location of such a right, because according to
accurate view, it is the foundation of basic rights and not itself a subjective right,
and maybe not even a norm for deciding individual cases.
On the other hand, there is much reason to assume an additional intertemporal
and global dimension by means of legal interpretation of the basic right to liberty.
This is because at the point of time of their lives, young and future human beings
will obviously be human beings – today these are people in other countries – who
therefore bear human rights. The right to equal liberty has to be applied exactly
where it is endangered. And today, in a world which is increasingly globalized and
engineered, the threat appears increasingly across generations and state borders. For
many basic rights, a spatiotemporal dimension might rarely occur, and for some
particular rights, like those for social minimum provisions, there are good reasons
for a limited interpretation of the global-cross border dimension; hardly however, in
matters of the environment and particularly climate protection.
13.3.3 Weighing of Environmental Basic Rights

with Economic Issues
One expected argument is that coequal protective rights will undermine the power
of democratic parliaments, because they would lead to more complex consider-
ations, which would then be taken over by constitutional courts, as weighing was
relatively arbitrary. Additionally, it were neglected that politics needed much larger
margins in cases of protection than in cases of defence. This is for several reasons
not convincing:9
1. Margins for parliaments in liberal constitutions are never arbitrary. There are
always limits that need to be respected in parliamentary considerations as well as
a system of checks and balances. A democracy with division of power which is
limited by its principles promises a plus in freedoms (especially in terms of inter-
temporal and global dimensions, as those ‘far’ groups are not democratically
represented).
2. Dealing with law, weighing is unavoidable. Behind the conflict between envi-
ronmental protection and opposing issues lies the basic phenomenon of law: to
provide a just balance of colliding issues, disregarding whether they concern
legislation or the law application, and disregarding whether, in case of law appli-
cation, they concern the interpretation of norms or a explicitly as ‘weighing’
identified review of discretion, proportionality assessment, or weighing in plan-
ning processes. Because, in the end, every piece of legislation and application of
law has to aim at meeting colliding interests (be they human rights based or not).
Even those who set an absolute interest, places implicitly other interests in the
background. Looking at the administrative body, where legislators have already
done much of the weighing, it is limited to interpreting norms and using explicit
margins of discretion and consideration. Factual findings and margins are both
created by the legislator as expression of its own (incomplete) weighing.
3. In weighing colliding interests, the respective parliament has certain – however
no absolute – prerogatives in contrast to the judiciary. If considerations of collid-
ing interests lead to different results (or result in different factual findings or
different norm interpretations can be argued), the body with higher democratic
legitimacy dominates, as their finding should be the more liberty-friendly one.
This is equally true for both protective and defence rights. After an impairment
of the scope of protection has been determined, a constitutional court is only to
review formal and substantial weighing rules (e.g. competence hierarchies on
one hand and rules of suitability and necessity on the other) to determine whether
they have been complied with – nothing more.
4. In this regard, cases of protection are not structured differently from defence
cases: A constitutional court is close to never allowed to reduce parliament’s
options to only one, but is mandated to state which actions are illegitimate (deter-
mination of ‘no goes’). This makes equally sense for both kinds of cases. The
German Constitutional Court e.g. is not allowed to tell the German Bundestag:
“Phase out nuclear power within the next four years and three and a half months.”
It is however authorized to say: “The current phase-out has been too slow; decide
the issue anew, taking into account following facts, normative aspects and pro-
cedural and consideration rules by XX-YY-2014.” The other way around, a con-
stitutional court could answer the lawsuit of an energy corporation, saying: “The
legislator is of course allowed to phase-our nuclear energy – but it has to keep
9
See Calliess 2001; Susnjar 2010; Ekardt 2015.
within the framework, which does not include a nuclear phase-out within the
next three hours.” The example shows that there is no difference concerning
clarity between environmental issues and different dimensions of basic rights,
disregarding that at times even the distinction is hard to make (see above). The
legislator is able to comply in several ways e.g. with the rights of energy-supply
corporations, if it wants to phase out nuclear energy (or coal). It can determine
equity compensations, set transition periods etc. Same applies to possible plain-
tiffs for more environmental protection.
5. Reading basic rights as multipolar, there are rules for consideration and propor-
tionality (more on than below) for both defence and protective rights. This how-
ever does by no means imply a broadening of power by constitutional courts (on
national or transnational level), but instead might even limit the evolution of
recognized regulations more precisely than could be done by vague formulas
which are dispensable due to a lack of clarity, such as the referral to judicial self-
restraint. So far, constitutional courts have operated in a manner which suggests
that they are not only providing framework control on the basis of rules, but
instead conduct substantial weighing themselves – drawing the conclusions
desirable to the court.
But, how exactly is environmental protection anchored in basic rights weighed
against the basic rights of businesses and consumers? Weighing is – as has been
shown – inevitable. When decision-makers allow industrial corporations, approve
industrial sites, allow car traffic etc., collateral damage follows statistically more or
less necessarily. Collateral damage refers to impairment of the law with essential
preconditions with freedom, due to emitted air-pollutants etc. This occurs in consid-
eration of the freedom of consumers and corporations. There is no general formula
‘neminem laedere’ – nearly everything in life is disadvantageous for someone. It is
not for nothing that it is possible to restrict basic rights. Rules for weighing are thus
important. They provide margins and a guide to answer the question whether from
a point of view of basic rights e.g. more ambitious environmental policies can be
claimed.
Rules for consideration derive from the liberty itself. One rule is e.g., that it is not
allowed to restrict individual freedom unless it is useful for someone else (the judi-
cial discourse is called rule of necessity). Another rule would be the ‘exceptional
equity’. Distributional equity, in contrast to judicial equity, is not a liberal-
democratic basic right, because it is not possible to determine a detailed guideline
for the legislator, due to the considerable margins of weighing rules. Yet, in the case
of climate change, the idea to equally distribute per capita emissions (more or less
exact) is convincing from a basic rights perspective. This ‘equal subsistence level’
has two implications: Everyone needs permanently a minimum of energy at their
disposal, respectively have minimum access to land-use (at least the latter will prob-
ably never be entirely possible without greenhouse gas emissions) – at the same
time, everyone (this, too, is crucial) has to be protected from climate change, if at
all possible. This requires step by step far-reaching restrictions. Restrictions might
be enforced partially through change of technology, sometimes through behavioural
change. Because (1) greenhouse gas emissions need to decrease massively in the
foreseeable future, otherwise, the system of freedom as a whole is at risk. At the
same time, people necessarily depend on at least a certain amount of greenhouse
gases – it therefore stands to reason to be cautious with distributional inequalities.
Just as important seems (2) a derivation from the polluter-pays principle: climate is
a public good and no one can claim to have contributed to the production of this
good through exercising their freedom.
13.4 Is Nudging an Effective Instrument

in Environmental Policy?
13.4.1 Nudging and Behavioural Science
We will now address the question of the effect nudging is expected to have as a
policy instrument. It has to be considered that nudging is also a manifestation of
certain views in behavioural science, just as regulation options are always based on
assumptions on human behaviour. Generally, anthropology, respectively action
theory (or social theory) tries to analyze purely factual behaviour of mankind and
the purely factual circumstanced in societies. It is therefore to be distinguished from
a normative justice theoretical (moral or judicial) analysis, which addresses favoured
behaviour of people and desired circumstances in societies.
Overall, the real transformation towards sustainability will not be that easy to
enforce, has been shown otherwise.10 A lack of knowledge among politicians, entre-
preneurs and citizens/consumers – often connected in a vicious cycle – does not
seem to be the main obstacle. Important are rather in all those groups equally a
variety of factors: concepts of normality, emotions (convenience, lacking spatio-
temporal orientation, denial, difficulties in imagining highly complex causalities
between small daily actions and consequences such as climate change etc.), self-
interest, traditional values, path dependencies, structure of collective goods essen-
tial to sustainability issues, among others. All those factors become manifest ‘in the
individual’ and at the same time in the ‘structure’ of society as a whole (globally).
A transition towards more climate protection requires therefore all stakeholders to
take action. It is necessary to create an interaction of better policy guidelines and a
process of social change in all of us. This is not restricted to intellectual change (as
shown above, the relevance of knowledge in and by itself is limited), but needs to
include actually lived normality, overthinking emotional restrictions, traditional
values and certain interpretations of self-interest. Only improved decision-making
and the mentioned social change will break the vicious cycle if influencing each
other interchangingly. Individuals are important as consumers, as well as voters, as
10
volunteers in political parties and organizations, as internet activists, as partner in

daily conversation and as protesters.
Many economists follow more or less the anthropology “men are in fact (almost)
entirely acting upon self-interest”, so the often so called doctrine of homo eco-
nomicus which can be traced back to Thomas Hobbes.11 In the light of the argument
above, this proves unable to reflect necessary complexity. However, even within the
field of economics, approaches such as ‘Bounded Rationality’ or ‘Behavioural
Economics’ are gaining ground.12 Moreover, it is to consider that in economics, the
homo oeconomicus is often benefit-oriented in the sense of calculating, but not
necessarily in terms of self-interest. Lastly, benefits can occur on different levels
(e.g. eating my packed lunch now gives me the benefit of not being hungry and tak-
ing a break, sharing it gives me the benefit of my colleague’s gratitude, saving parts
for later might give me the benefit to have something in case I need to work over-
time. If I have prepared it at home with organic ingredients, it might be healthier and
more environmentally friendly than if I go out for lunch, which however would
have more benefits for the economy). Those differentiated ideas lie at the basis of
the nudging approach.13 It specifically refers to behavioural rigidity, procrastination
and loss aversion as motives for behaviour, which need to be taken into account.
Emotions are therefore correctly addressed, yet other behavioural drivers such as
concepts of normality or values remain neglected. This is due to a methodology in
economic research, which is not sufficiently complex in identifying human behav-
iour and its causes:
Behaviour and its motivational causes address the heart of the problem in human
science research. The field of research, even though in one way or another subject
to scientific assessment for more than 2000 years (massively increasing for the past
150 years), suffers from a lack of recognition among different disciplines. This
leads to narrow results which are rather the rule than the exception. Among econo-
mists for example, there is a dominating conviction that effectiveness analysis of
policy instruments need to be quantified per se. E.g. by directly allocating concrete
emission reduction (to stay with the example of climate chance) to a concrete policy
or a concrete change in law. Behavioural research analysis would need to also work
quantifying, e.g. by focusing on experimental research based on game theory, or on
quantified projection based on a supposedly purely self-benefitting behaviour (or
through comparisons with governance experience already made), which would then
create the basis for policy evaluation. Other procedures, especially if they do not
include quantifiable data, are dismissed by economists as supposedly being unsci-
entific. This has ultimately led to the concept of nudging: it is a product of economic
game theory.
Problems of an epistemology, which is purely based on quantified facts – which
is the basis of game theory – as well as general problems of precise (not quasi-
precise) quantifications and the underlying empirical epistemology will in this study
11
For a critical perspective see Spangenberg and Settele 2010.
12
Shafir 2013; Sunstein and Reisch 2013.
13
Sunstein and Reisch 2013.
be shown not so much in terms of instruments, but rather on the example to eco-
nomic evaluation. At this point in the analysis, it suffices to say that behavioural
analysis (!), too, needs to be conducted with a higher degree of complexity, than
game-theoretical experiments will allow for, when certain real situations are simu-
lated under repeatable circumstances in laboratories. At the same time, it becomes
clear how this study attains its behavioural scientific insights. If one aims to predict
the reaction of people to e.g. a certain governance incentive, it is imperative to know
not only the behaviour alone, but also its motives, or – more generally – its causes.
These, however, are not in a strict sense possible to observe, even so they are facts.
It is possible to inquire after motives, but their complexity and possible sub-
consciousness clearly show the limitations, even supposing honest answers of the
interviewee. Other falsifying factors are added, such as the desire to oblige the
interviewer and remain in accordance with social conventions etc. Additionally, the
causality between those hardly observable motives and actual behaviour is also a
matter of facts, but encounters the same obstacles in observation as regarding the
motives itself. It is however possible to observe human behaviour itself, at least
generally. Therefore, we will often draw at conclusions from observed behaviour to
determine motives. This allows, according to philosophy, a conclusion to the best
explanation, leaving the criterion for the ‘best’ explanation equally undefined as the
criterion for ‘correspondence’ in the correspondence theory, which accurately
describes truth, meaning factual truth, as the accordance of reality and the testimony
on reality.
In every dispute over facts (including internal facts, or facts relating to causal-
ity), which is almost impossible to avoid as human being, it is logically enshrined to
recognize those facts as impartial. However, the remarks above show that it is prob-
able to encounter difficulties. It has been shown that interviews or experiments
alone are not sufficient (in this article, they are not even being conducted, using only
findings of other authors secondarily). Inevitable and useful are personal observa-
tions, even though it has to be critically assessed whether they provide findings of a
general nature. Thomas Hobbes already saw that self-observation might also be a
helpful source of insights. Classical ethnologists and sociologists such as Max
Weber and Bronislaw Malinowski have worked with comparing historical and eth-
nographic observations.
General observations of behaviour might often be possible with this method.
However directly transferring e.g. experience with a concrete policy instrument
from one country to another will oftentimes not be as simple, unless the substance
and circumstances are not similar in both countries, which will only rarely be the
case. Game theory experiments are flawed by the lack of complexity, which can be
modelled in relation to reality. Another problem is the moot character, which also
limits the significance of the results. All this is not withstanding the value of game
theory as an additional (!) method. Besides already mentioned problems, econo-
mists should furthermore acknowledge that, even so it is possible to observe the
behaviour of players, the reasons for behaviour remain an act of interpretation.
Whether values, subconscious perceptions of normality or an indirect self-interest
motivates the actors does not become apparent, e.g. in altruistically acting players.
Additionally, interpretations might be helpful which draw conclusions from

human tribal history. Brain research and genetic research are experimenting to fur-
ther explore this knowledge basis, yet so far without much progress, among others
because (a) it is difficult to understand the interplay of different brain areas and
different genes, and (b) the translation of predispositions into actual behaviour is
not sufficiently understood.
In conclusion, it is not sufficient to trick convenience and habits as human
motives. It is also a matter of normality perceptions, values and other emotions,
such as the tendency of denial and the quest for recognition. Furthermore, the find-
ings on current environmental policy, mentioned in the introduction, illustrate the
dimension of the challenge and how remote we are from solving it. Considering the
analysis of motivation in the beginning of this chapter, this is hardly surprising. All
this allows conclusions on the role of nudging in environmental policy.
13.4.2 Nudging as New Instrument in Environmental Policies
International, European and national politics have each produced an impressive col-
lection of legal norms, packages, and target declarations with the purpose of pro-
tecting the environment. This stands in contrast to the small de facto success in
doing so, (also) in states like Germany. Overall, existing governance is flawed in
several ways. Key issues are, among others, rebound effects, shifting effects to
other places or areas of life and weak ambition in defining targets, leading to lax
legislation in relation e.g. to targets such as up to 95 % greenhouse gas reductions
and 100 % renewable energies. But, is nudging capable of changing that consider-
ably? Maybe the challenge is too great and human motivation to reluctant? Maybe
a policy instrument which helps changing people’s behaviour without prohibiting
an action is exactly what is needed to make environmental policies effective.
In order to answer those questions, it is necessary to first look at how nudging
concretely works, based on the concept of nudging as developed by Thaler and
Sunstein (2008). We will do so in imagining examples of implementation for cli-
mate protection. Nudging policies include anything which is supposed to influence
citizen’s behaviour in a predictable manner, without limiting choices for action
either by prohibition or economic incentives.14 Three general types of nudging are
identified however looking at concrete policies they might fit more than one type.
This therefore includes measures aiming at shaping an individual’s choice by
creating a specific setting, e.g. the assortment arrangements in a store.15 Influencing
a choice by shaping occurs necessarily, as – to stay with the example – assortment
has to be arranged in some way, and is already deliberately done by store-owners
and marketing to increase profit. This raises the question of who is nudging, and
who is being nudged. Implementing regulation on assortment arrangements requires
14
Marteau et al. 2011, p. 263.
15
Hausman and Brynn 2010, p. 132; Sunstein and Reisch 2013.
hard legislation towards business introducing a hard standard, which will then need
to be monitored and enforced. In order to introduce environmental nudging, the
focus of nudging would need to be changed in order to make fresh, local and organic
food more appealing than highly processed, packaging intensive, meat and dairy-
based food. Instead of candy at the register, seed to grow on the balcony could be
offered. This example gives an idea of the complexity a codex would need to have
because there are multiple factors which make a product potentially energy inten-
sive. Weighing and evaluating the effects on environment alone (even if social and
health effects are not included) might prove to be an impossible task. Another
example for shaping choices is the default setting in (electric) devices I purchase.
This could be the duplex-option in a new printer, the energy-saving modus in a new
cell phone. Default setting could also include standards in contracts and formulas,
e.g. the renewable energy I purchase, unless I actively tick a box saying I want to
include coal power in my energy contract, or a conference program, which I receive
digitally unless requested otherwise. Besides the possible technical challenges of
implementation, it would need to be further evaluated whether shifting effects are
triggered by the more intensive use of digital appliances and data. Also, it is doubt-
ful whether energy saved by e.g. duplex printing has a notable impact.
Looking at the area of mobility, changing traffic light phases to prioritize bikers
and pedestrians instead of car-drivers could nudge the lesser use of cars in a city.
This however requires changes in infrastructure to match the predicted affects in
terms of decentral parking spaces, better local transport and appropriate biking
lanes and sidewalks.
Another way of nudging includes targeted information or ‘mandated choice’
where an individual is confronted with information at a specific time and in a man-
ner which is assumed to influence a decision.16 This might be the most intuitive and
already used form of nudging, as it includes governmental campaigns, posters,
product labelling and the like. While the classical approach of raising awareness by
information is limited, even if negative consequences are drastically displayed, e.g.
by pictures, colouring etc., there might be some areas, in which targeted informa-
tion might be effective to increase climate friendly action. Labeling of food accord-
ing to its environmental footprint has been discussed, but might be hard to implement
due to the already mentioned complexity of issues connected to it. Labelling of
electric devices such as washing machines and refrigerators has set new standards.17
Especially if energy efficient behaviour is a consequence of information, rebound
effects need to be considered. Possible other areas, where information might influ-
ence behaviour, are before purchases, where environmental awareness is still rela-
tively low. E.g. when buying into an investment funds that included shares in fossil
fuel companies and the like, acknowledging it with a signature. Positive side-effects
of campaigns raising awareness occur, when industry recognizes the increasing
demand of environmentally friendly products, focusing their innovation accord-
ingly. If an emission-intensive action is purchased, there might be an opportunity to
16
Hausman and Brynn 2010, p. 132; Service et al. 2014, p. 16.
17
Probably leading to reduced resource and energy use; see Werland et al. 2014, p. 9.
‘lessen’ the effect with a combined offer. In Germany, e.g. there has been an airline
offer to avoid national flights through free railway tickets to the airport with inter-
national connection. Again, however these measures might result in a raised aware-
ness and maybe even a better conscience; but it is not to expect that it will lead to
significant emissions decreases or complete behavioural change beyond an impulse
of a moment. Whereas nudging might be useful, when impulse decisions have a
great impact on the success of a cause, such as quitting smoking or not driving too
fast, behaviour to reduce emissions has to be implemented in the long-run and for
as many individuals as possible.
A third way to influence people’s choices can well be combined with the passing
of information. Here, individuals are given time to rethink their decisions. This
might be a 30 min ban between putting an item in an online court and completing
the order, or introducing a 30 s waiting time before elevator doors open, which
might prevent people from emission-intensive displacement activities. Time in gen-
eral is a factor, which is worth looking at. Ideas of having cash registers specifically
for organic and low-emissions products are one aspect worth considering, much
rather however facilitating low-emissions actions in general, starting e.g. with mini-
mizing bureaucracy when installing solar panels on a roof, changing to power from
renewable energies, providing solutions for non-car users in rural areas, etc.
So, looking at these examples, what can be said for the effectiveness of nudging?
It certainly leaves room for creative approaches to make a low-emission lifestyle
easier, and sometimes at all possible, and might therefore result in more people act-
ing accordingly. But, there are several problems looking at the implementation,
most of which already became apparent in the examples above. But there are more
fundamental issues, which cannot be addressed by introducing nudging policies.
Even so nudging policies do not necessarily aim at changing consumption patterns,
most of them will. Saving resources and reducing greenhouse gas emissions by
95–100 % is not possible by merely consuming differently and improving techno-
logical options, but needs to ultimately result in consuming less. Therefore, nudging
policies will contribute effectively to climate protection unless incentives of retail-
ers to make as much profit as possible will change, which nudging cannot achieve.
Reaching reduction targets of greenhouse gas emissions will require far-reaching
changes in behaviour patterns and lifestyle. Nudging is based on small, single-issue
changes by influencing people’s choices and is often based on immediate impulses,
which do not address all relevant sources of human motivation. Another issue com-
pletely missing in the debate on nudging is the question of choices available to an
individual as long as there is no massive pressure e.g. by means of pricing fossil
fuels. A person, living in the rural area of an industrialized country might not have
a low-emission option to get to work in the nearby city. And the assortment of an
average supermarket will not allow for an entirely organic and regional diet.
The debate on nudging clearly reminds us of the debate on governance theoreti-
cal opportunities and limitations on soft policy instruments in environmental law.
Overall, for several reasons, nudging remains an overestimated option for protect-
ing the environment:
• At the core, the nudging is based on the idea of breaking habits through changing
the set position. The mass of relevant actions to prevent climate change – flying,
using a car, heating, consumption of animal products, over-consumption of any
kind – is not notably addressed by nudging. The motivation to do these things –
including concepts of normality, emotions, self-interest, path dependencies,
structure of collective goods, etc. – remains too strong to overcome it completely
just with some simple default settings. Nudges can attack the habitual aspect of
emotions, but emotions that make us ignore climate change are much more com-
plex. As we mentioned earlier, emotions include convenience, lacking spatio-
temporal orientation, denial, difficulties in imagining highly complex causalities
between small daily actions and consequences such as climate change.
• Nudges have difficulties in addressing shifting effects to other sectors or
regions – and in addressing sufficiency instead of pure technological options
(such as more energy efficient solutions).
• Nudging is not the only means to fight convenience and habits. Pricing incentives
for instance on fossil fuels will to the same, for example through taxes and fees
or cap-and-trade systems for emissions, and they do it much more effective.18
However, nudging can contribute to the efforts of tackling climate change and
other environmental issues for two reasons. Firstly, it focuses important aspects of
human behaviour, which is not purely rational and can be influenced in a predicable
direction. Before implementing governmental nudging policies for climate protec-
tion, it might be worth looking at those ‘nudges’ coming from industry and market-
ing directly contradicting it. Secondly, nudging policies if implemented soundly
could be at least a useful additional tool besides pricing of natural resources.
Quantity control mechanisms (in a broad sense of the term, including indirect gov-
ernance through pricing) provide a much more effective response to ecological
problems such as climate change, as it directly regulates greenhouse gases and over-
use of resources in general, e.g. fossil fuels. It has long been called for the appropri-
ate pricing of resources through internalization of costs, which are so far dumped on
society by polluter and consumer. This approach includes (if required alongside a
stronger pricing of land-use) all fossil fuels when first distributed and yearly reduced
the allowance or government sets a price that increases each year (indirect quantity
regulation through price regulation). A combination of these approaches is also pos-
sible, as well as a combination with cutting subsidies favouring fossil fuels.
Disregarding all details of the approach: those measures will reach polluters of
greenhouse gas emissions, namely end-users and business as internalization of costs
of fossil fuels in all areas of life, which were as of now paid by society as a whole
(e.g. for damage through climate change). This sets and incentive for renewable
energy, increasing efficiency – and sufficiency, if technology is not enough. Because
all areas of emissions are covered by absolute caps, rebound and shifting effects can
be prevented. And, according to the polluter-pays principle, damage of using fossil
fuels is appropriately allocated.
18
On the following, see Ekardt 2015; Ekardt et al. 2015.
Even where nudging is generally an option, like duplex copies or green power,
the approach is not as free of mandatory elements as suggested. Because the respec-
tive objections have to be legally binding for providing industries.
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insights team, http://www.behaviouralinsights.co.uk/publications/east-four-simple-ways-
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Chapter 14
Behavioural Regulation in International Trade
Georgios Dimitropoulos
Abstract This article proposes to recast a big part of international trade law as
behavioural regulation. The Sanitary and Phytosanitary and Technical Barriers to
Trade Agreements of the World Trade Organisation include provisions on disclo-
sure of better information, on legal default rules and on debiasing through law that
are similar to the ones proposed in the Behavioural Law and Economics literature
to nudge governments towards specific directions. This happens even in the absence
of a (centralised) social planner. The article further aims to use behavioural trade
regulation to draw some general lessons for Behavioural Law and Economics; most
importantly, to show that nudging may have a libertarian rather than a paternalistic
result. Finally, the paper proposes that behavioural regulation should be comple-
mented by learning facilities to debias government institutions and lead to social
and institutional learning.
14.1 Introduction
Behavioural Law and Economics (BLE) identifies cognitive biases that humans are
subject to in order to propose appropriate responses by the regulator.1 The response
is usually a ‘nudge’,2 that is, a light form of regulatory control which purports to
maintain people’s freedom of choice.3 As such, it is opposed, in principle, to
command-and-control regulation. BLE proposes several nudges, the most impor-
tant being disclosure of better, different, smart or more information, warnings, debi-
asing through procedural and substantive law and, above all, altering legal default
1
Jolls, Sunstein and Thaler 1998; Korobkin and Ulen 2000; see also Mathis 2015; Alemanno and
Sibony 2015 (on a European perspective on Behavioural Law and Economics).
2
3
See for a discussion and critique Hacker 2013.
G. Dimitropoulos (*)
Max Planck Institute Luxembourg for Procedural Law,
4, rue Alphonse Weicker, Luxembourg, Luxembourg
e-mail: georgios.dimitropoulos@mpi.lu

264 G. Dimitropoulos
rules.4 Libertarian paternalism, the ‘political philosophy’ behind BLE, is the result
of the marriage of choice preservation and regulation.5
There is surprisingly little literature on the influence of behavioural economics
and cognitive psychology on international law. Two very recent papers by Professors
Anne van Aaken6 and Tomer Broude7 try to bridge this gap by identifying the influ-
ence that the BLE research could have on international law. At the same time, the
vast literature on international regulation and Global Administrative Law shows
that international law has long taken up a regulatory role with a major impact both
on the behaviour of domestic governments and individuals at the international and
the domestic governance level.8 International law pre-shapes several decisions of
domestic governments9 and as a result also the choice architecture of domestic laws
and regulations. Thus, governments are also influenced by international law–some-
times in the form of nudges.
The present paper wants to bring the insights of BLE into international law, and
more specifically international trade law; at the same time, it purports to bring
insights that can be drawn from the study of international law–and more specifically
again international trade law–into BLE research. International trade law and BLE
intersect in at least three ways: first, in the various cognitive biases that may be
identified for the various entities operating in the field; secondly, overall, nudging
policies like labelling, may be favoured over more restrictive policies by the law of
the World Trade Organisation (WTO); thirdly, in the use of the regulatory tools of
behavioural regulation. The paper primarily deals with the third question. It shows
that the international law of trade has long recognized possible biases of states and
governments that are the same as the ones identified by BLE research for domestic
law, and has employed some of the nudging instruments proposed by BLE in order
to ‘correct’ behaviour that commonly deviates from the predictions of rational
choice theory. The Sanitary and Phytosanitary (SPS) Agreement,10 and the Technical
Barriers to Trade (TBT) Agreement11 of the WTO in particular use the instruments
of behavioural regulation to nudge governments towards specific regulatory poli-
cies and this paper deals with behavioural regulation in the domain of these two
4
See, e.g., Jolls and Sunstein 2006; Sunstein 2013.
5
See Sunstein and Thaler 2003; Mitchell 2005.
6
van Aaken 2014.
7
Broude 2015.
8
See Kingsbury et al. 2005; Cassese 2005, 2009; Casini 2006; Battini 2003; see also Schmidt-
Aßmann 2006; Möllers et al. 2007.
9
See Grewal 2008.
10
Agreement on the Application of Sanitary and Phytosanitary Measures (SPS), Apr. 15, 1994,
Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, Multilateral
Agreements on Trade in Goods, 33 I.L.M. 1154 (1994) [hereinafter SPS Agreement].
11
Agreement on Technical Barriers to Trade (TBT), Apr. 15, 1994, 1868 U.N.T.S. 120 [hereinafter
TBT Agreement].
14 Behavioural Regulation in International Trade 265
Agreements.12 The SPS Agreement nudges governments towards the use of science
over politics in decision-making, and towards the use of scientific reasoning over
other types of reasoning, like e.g., discursive reasoning. The TBT Agreement also
nudges governments towards the use of international technical standards as techni-
cal specifications for domestic products and towards the introduction of private
administrative systems in lieu of domestic legislation and domestic administrative
systems.13 This happens primarily with the use of disclosure obligations, and legal
default rules.14
The policy prescription of BLE in the case of identification of cognitive biases is
usually government intervention.15 But, international trade law operates largely
without a regulator. For this reason, new regulatory tools needed to be developed in
order to permanently direct governments towards international trade without ex
ante regulatory intervention.16 As a result, behavioural international trade law has
the opposite effect if compared to domestic behavioural regulation, namely libertar-
ian, not paternalistic. The international trade regime nudges governments towards
free trade. This has created a general dissatisfaction with the international trade
regime by several states and the public. For this reason, the paper proposes the
reform of the Trade Policy Review Mechanism (TPRM) into a de-biasing and con-
tinuous learning facility of the WTO.
The remainder of the paper is organized as follows: Section I presents the transi-
tion of the international trade regime from the political economy of ‘embedded
liberalism’ that was dominant until the 1980s to a technical regime where the ratio-
nality of free trade very often prevails over other rationalities of the domestic legal
orders and of the international legal order. Section II, after a short introduction to
the BLE literature and concepts that are relevant for international law and interna-
tional trade law and to the application of BLE to international law, moves on to
present behavioural regulation in the international trade regime and more specifi-
cally the SPS and the TBT Agreements of the WTO. Finally, Section III discusses
how some of the pitfalls of the current behavioural regulation in international trade
law could be fixed based on the current institutional setup of this regime and con-
cludes with a discussion of the lessons that behavioural international trade law can
teach BLE.
12
They are similar to the ‘constitutional nudges’, Bruno S. Frey and Jana Gallus, in this volume,
mention.
13
Dimitropoulos 2012, pp. 77–91, pp. 224–253.
14
See, e.g., Article 3.2 SPS Agreement; Article 2.5 TBT Agreement.
15
Cf. Rachlinski 2006, p. 224.
16
Ex post interventions in favour of free trade have been systematically granted by the dispute reso-
lution system of the WTO.
14.2 From Domestically Embedded Liberalism

to International Nudges
The concept of ‘embedded liberalism’ expresses the dedication of the post-WWII

international economic order to a political commitment other than orthodox liberal-
ism.17 According to John Gerard Ruggie, the international economic order is deter-
mined by “a fusion of power and legitimate social purpose.”18 Ruggie developed his
theory in response to the dominant theory at this time, the “hegemonic stability
theory” of C. P. Kindleberger.19 The concept has been used widely in political sci-
ence and international relations,20 economics,21 and the law.22 From the middle of
the 1990s there has been a resurgence of interest in Ruggie’s concept.23
The embedded liberalism model of international trade can be understood as
opposed to two other models: efficiency, and collective action.24 Ruggie developed
the concept of embedded liberalism in order to describe a compromise of the post-
WWII international trade regime, namely that international economic liberalisation
goes hand in hand with domestic measures of social protection, and that trade mul-
tilateralism couples with the quest for domestic stability.
Robert Howse describes the situation before embedded liberalism as complex,
multifaceted, messy,25 and was characterized by the absence of global governance,
i.e., a regulator of international commerce. Embedded liberalism appeared to give
some coherence to the system.26 Still, political factors like the ones caused by Cold
War relationships, international security and the East-West conflict led to the ‘del-
egation’ of trade issues to a specialized policy elite, which was insulated from larger
political and social conflicts of the era.27 This elite includes a small number of WTO
officials, and the bulk of domestic and international ‘experts’, like former and cur-
rent governmental trade officials, GATT-friendly academics sitting on GATT/WTO
panels, and international civil servants in other organizations like the World Bank,
17
Ruggie 1982 [reprinted in International Regimes 195 (Krasner 1983); slightly edited in
Constructing the World Polity: Essays on International Institutionalisation (John Gerard Ruggie
1998, 1991, 1998, 2003).
18
Ruggie 1982, p. 382.
19
See Lang 2006.
20
Krasner 1983, p. 17.
21
See Rodrik 1997, 2000; see also Keohane 1984.
22
The major contributions are in the field of international trade law; see, e.g., Howse 2002;
Trachtman 2003; Kalderimis 2004, p. 314; Steinberg 2004; Winickoff et al. 2005, p. 107; Lang
2006. Inspired by the work of Ruggie on the social responsibility of multinational corporations,
three social scientists, Glen Whelan, Jeremy Moon, and Marc Orlitzky, use the concept in the field
of human rights; see Whelan et al. 2009; cf. also Ruggie 2008.
23
Lang 2006, p. 89.
24
Dunoff 1997, 1998, 1999a, b.
25
Howse 2002, p. 96.
26
Id.
27
Howse 2002, p. 98.
the OECD, and the IMF, but also private parties like private attorneys, consultants,
and former politicians. They created an understanding of a scientific regime beyond
politics that was supposed to work better than ‘political’ international organisations
like the UN.28 “At the hands of this trade policy elite, ‘embedded liberalism’ came
to be recast as economics, and economics became ideology, the ideology of free
trade.”29 The new approach transformed the political vision of embedded liberalism
into a rigid economic dogma.
The WTO Dispute Settlement Mechanism also played a role in the transforma-
tion of the old system towards a more technical economic system. Even though it
was created to preserve the co-existence of trade liberalization with regulatory
diversity and the accommodation of non-economic public values, the panels were
thought to be preserving just the liberalization value.30 Economic specialization was
then coupled with a positivistic/legalistic move in the WTO.31
All these trends can be summed up as a recast of free trade as embedded in a
broader liberal economic ideology.32 For the time being, and given the absence of
viable alternatives, the efficiency model as described by Dunoff will largely remain
the dominant model in international trade.33 One of the reasons for the current func-
tioning of the international trade regime is what is identified in this paper as behav-
ioural regulation in international trade law and will be presented in the second part
of the paper.
14.3 Towards Behavioural International Trade Law
The previous section showed how the international trade regime developed into a
largely technical regime operating in favour of the liberalisation of international
trade. This section identifies the reasons for what is described here as behavioural
regulation in international trade law. It shows how the international trade regime
has identified possible biases of the states that are largely created by national sover-
eignty and probably also by the concept of embedded liberalism itself. Behavioural
regulation has been identified as the right response to the absence of a central regu-
lator in international trade since it operates as an ‘autopilot’ towards free trade.
In order to proceed to this recast of international trade as behavioural regulation
the section divides methodologically and presents BLE questions as three separate
issues: first, questions of identification of biases; second, questions of the instrument
28
On the network character of this regime see Weiler 2001, pp. 336–337.
29
Howse 2002, p. 99.
30
Howse 2002, p. 103; see also Dunoff 1999a (for a critique of the panels).
31
Howse 2002, p. 105.
32
Howse 2002, p. 104.
33
Winickoff et al. use the embedded liberalism concept in the frame of the SPS Agreement–which
will be analysed further down–, which they characterize as embodying the idea of the simultaneous
protection of free trade and other goals; see Winickoff et al. 2005, p. 107.
of the regulatory response to the identified biases; third, identification of the direc-
tion of the regulatory response to the biases. It takes up this methodological approach
for BLE generally and then uses it for the presentation of the international trade
regime as a regime of behavioural regulation.
14.3.1 Bringing Behavioural Economics and Psychology

into the Law
Cognitive Biases
Behavioural economics is a combination of economics and psychology that has

produced evidence showing that the behaviour of individuals departs from what is
predicted by neoclassical economics in a number of decision-making situations.
The principal insight of Behavioural Law and Economics is that human behaviour
commonly deviates from the predictions of rational choice theory in various real-
life settings like the marketplace, the election booth, and the courtroom. The depar-
ture from rational choice behaviour is the result of the individual’s heuristics and is
often termed a ‘cognitive bias’. Cognitive biases are systematic failures to act in
one’s own interest because of cognitive particularities in one’s decision-making pro-
cess. The notion of boundedness is usually understood as a limitation to rationali-
ty.34 Human behaviour is bounded in at least three different respects.35 First, people
are only boundedly rational: they make mistakes in judgment and perception
because they cannot process information rationally; second, people have bounded
willpower: they have trouble following through on rational plans given weaknesses
of will, e.g. so as to lose weight or to make savings; thirdly, they are boundedly self-
interested, i.e. they sometimes act out of motives like fairness.
The cognitive biases can be brought down into two broad categories: judgment
errors and departures from expected utility theory.36 Judgment errors include very
importantly hyperbolic discounting and optimism bias. Individuals place much
weight upon immediate gratification, and they tend to make decisions that they will
later regret. Hyperbolic discounting creates the so-called present bias which may
lead to time-inconsistent preferences.37 A further self-control problem is optimism
bias.38 Optimism bias occurs when people think that bad events are less likely to
happen to them than to others.39 This may lead decision-makers to be more risky
34
But see Kelman 2001; Gigerenzer and Engel 2006.
35
The three ‘boundeds’ were established by Thaler 1996; see further Posner 1998 (on the three
‘boundeds’ of BLE and their critique).
36
See, e.g., Jolls and Sunstein 2006, pp. 203–206; see also Wright and Ginsburg 2012, pp. 1041–
1044 (categorising into self-control errors and contextualization effects).
37
Laibson 1997.
38
Weinstein 1980, pp. 806–807.
39
Jolls et al. 1998, pp. 1536–1537.
than they would have if they had known the real probabilities of the occurrence of
an event.
Departures from expected utility theory are theorized by the prospect theory of
Kahneman and Tversky.40 Prospect theory adds to the understanding of decision-
making that decision-makers suffer from ‘loss aversion’, i.e., decision-makers
weigh losses from a reference point more heavily than gains. The endowment effect
or status quo bias is one of the most important findings of experimental research for
behavioural law and economics, and may have significant policy implications.41
Those who receive a legal right value it more than they would if the initial allocation
had given the right to a different person.42 Also related to loss aversion are framing
effects.43 Framing effects are departures from rational choice that arise from the
context of decision-making.44
The Instrument of the Regulatory Response
BLE explores the legal and policy implications of cognitive biases. It identifies
cognitive biases that humans are subject to and proposes relevant responses by the
regulator. Based on the understanding of bounded rationality, BLE makes two cen-
tral claims about government regulation of boundedly rational behaviour: First, the
behavioural regulatory approach, by manipulating the way in which choices are
framed for consumers, will increase welfare as measured by each individual’s own
preferences, and second, a central planner can and will implement the BLE policy
program in a manner that respects liberty and does not limit the choices available to
individuals.45 BLE theory of cognitive errors helps design interventions that will
make each individual better off by aligning her choices more closely with her true
preferences.46
But, what is the appropriate response of the regulator in the case of the identifica-
tion of welfare-reducing biases? The policy prescription of BLE in the case of iden-
tification of cognitive biases is usually government intervention.47 BLE places the
effort of the regulatory response on the debiasing effect that the law can have.48
40
Kahneman and Tversky 1979; Tversky and Kahneman 1992.
41
Korobkin 2003, p. 1229. Recent research doubts the robustness of the endowment; the endow-
ment effect is currently one of the most controversial effects; see Plott and Zeiler 2005, 2011;
Arlen and Tontrup 2013.
42
The main implication of the endowment effect is that the Coase Theorem does not apply; see,
e.g., Sunstein 2002, p. 112.
43
Kühberger 1998.
44
Mitchell 2005, p. 1255.
45
See Wright and Ginsburg 2012.
46
See Jolls et al. 1998, pp. 1536–1537.
47
48
According to some accounts though, “BLE should not consist solely of an effort to identify and
correct mistakes, but instead should consist of an effort to understand how law can best interact
with the cognitive processes that produce judgment and choice;” see Rachlinski 2011, p. 1684.
Debiasing through law, divided into debiasing through procedural and substantive
law,49 command-and-control and no regulatory response come into sight as possible
responses by the regulators. What shall be the exact nature of this response is to
some respect an open question in the BLE literature. The BLE literature has been
accused of invariably promoting regulation,50 to excluding ‘harder’ command-and-
control responses from the toolbox of the regulator.51 According to Bubb and Pildes,
BLE often artificially removes traditional regulatory tools, such as direct mandates,
from its analysis of policy options.52 But, BLE scholars do not exclude that more
traditional ‘harder’ regulatory tools like mandates might be necessary or more
effective than nudges like better disclosure and shifts in default rules.53 Yet, the
standard response is the ‘nudge.’54 A nudge is a light form of regulatory control, in
the sense that it purports to maintain people’s freedom of choice.
As a result, proposals of BLE include mandates requiring the supply of more or
better information in order to debias individual decision-makers, altering legal
default rules, manipulating framing effects through the choice of the right choice
architecture, debiasing through framing,55 imposing cooling-off periods before
important decisions are made,56 and imposing ‘sin’ taxes57 upon or even banning
disfavoured products. The most usual regulatory tool of BLE is the altering of
default rules.58 Under a default rule, people are automatically placed in a certain
situation unless they decide to opt out. Based on the observed biases of people, the
regulator will thus introduce the appropriate regulatory response.
The Direction of the Regulatory Response: Libertarian Paternalism
The previous discussion concerning the ‘instrument’ of the regulatory response

brings us to another central concept in BLE, namely the concept of ‘choice architec-
ture.’ According to BLE, some choice architecture is likely to be put in place by
governments, while no such architecture is entirely neutral.59 Choice architecture
should be understood as the social background against which choices are made.60
49
Jolls and Sunstein 2006.
50
Wright and Ginsburg 2012.
51
Pildes and Bubb 2014.
52
Bubb and Pildes (2014). Bubb and Pildes call this an “artificial truncation problem;” see id. at
pp. 1597–1598; see also King 2015.
53
See, e.g., Jolls and Sunstein 2006; Sunstein 2013, p. 1845.
54
55
56
Camerer et al. 2003, pp. 1238–1247.
57
See O’Donoghue and Rabin 2003, pp. 190–191.
58
Benartzi and Thaler 2004; Madrian and Shea 2001.
59
Thaler and Sunstein 2008, pp. 1–4; Thaler et al. 2013, p. 428, pp. 428–431.
60
Thaler and Sunstein 2008, pp. 81–100.
Choice architecture is pervasive and it greatly influences outcomes,61 and can thus
be used as a very effective regulatory instrument.
The combination of the need for regulation with the preservation of the freedom
of choice has been described in the relevant literature as ‘libertarian paternalism.’62
Libertarian paternalism is “an approach that preserves freedom of choice but that
authorizes both private and public institutions to steer people in directions that will
promote their welfare.”63 Libertarian paternalism justifies legal interventions that
both increase the individual’s economic welfare by freeing her from the limitations
of her cognitive biases, and secondly, change the individual’s behaviour without
limiting her choices.64
This literature assumes that the direction of the regulatory response is always
towards protection of the biased individual, namely towards the solution that the
regulator considers as welfare maximising. In practice, welfare maximisation has
been considered a solution like increasing savings or improving the health of the
individuals. This presupposes that the regulator has taken the decision on the part of
the individual that larger savings and better health are good for any individual, in
the sense that they increase their welfare. But, what happens when decisions are
taken concerning values where it is uncertain whether they always lead to greater
welfare?
As described in the previous section, given some cognitive limitations of indi-
viduals, a social planner may have to intervene to maximize the welfare of the
biased individuals, while preserving their freedom of choice. This presupposes that
the regulator pursues some specific value when mandating disclosure or setting a
default. The question that was posed at the end of the previous section is what hap-
pens when this value is not clearly free of any doubts with regard to its results in
increasing welfare. After a brief analysis of BLE in international law, the next sec-
tions address this question.
There is surprisingly little literature on the influence of behavioural economics
and cognitive psychology on international law.65 International law analyses based
on the assumption of perfect rationality dominate in the US,66 and more legal
approaches to international law are dominant in Europe.67 Two very recent articles,
61
Sunstein 2013, p. 1834.
62
Sunstein and Thaler 2003; Thaler and Sunstein 2003; Mitchell 2005.
63
Thaler and Sunstein 2003, p. 179; see also Thaler and Sunstein 2008, pp. 4–6.
64
Sunstein and Thaler 2003, pp. 1161–1162; Thaler and Sunstein 2008, pp. 4–6.
65
This having been said, it has to be acknowledged that except for the articles of van Aaken 2014;
Broude 2015, the relevant literature is increasing; other literature introducing insights of BLE into
different aspects of international law and international relations includes: Elms 2004 (applying
behavioural analysis to trade disputes); Poulsen and Aisbett 2013; Poulsen 2013 (both studying the
effect of the availability bias in the diffusion of investment treaties); Galbraith 2013 (taking a
behavioural approach to international treaty formation).
66
Dunoff and Trachtman 1999; Goldsmith and Posner 2005; Guzman 2008; Trachtman 2009;
Posner and Sykes 2013; see also the contributions of the ‘Symposium on Rational Choice and
International Law’ 31 J. Leg. Stud. (2002) and in the U. Ill. L. Rev. (2008) and Sykes 2007.
67
See Nolte 2008 (on the contrast between US and European approaches to international law).
by Professor Anne van Aaken and Professor Tomer Broude, try to bridge the gap of
the absence of behavioural and psychological insights in international law by iden-
tifying the influence that the BLE research could have on international law.68 In this
vein, Anne van Aaken identifies three pillars on which ‘Behavioural International
Law and Economics’ could draw: economic analysis of international law; behav-
ioural economics; and political psychology in international relations.69 Behavioural
law and economics can be transposed onto the international level, in the sense that
it can be assumed also for states, individuals and groups that act at the international
level that their behaviour is also bounded, and that biases and heuristics have an
impact upon their choices and decisions.70 Biases, regulatory instruments in
response to biases and direction of the response to biases can be identified also for
international BLE.
Rational choice approaches of both international relations and law and econom-
ics usually assume that states are rational and unitary actors.71 But collective bodies
may suffer from similar biases as individuals.72 Overall, it could be hypothesized
that states are only boundedly rational given that the decisions of governments are
taken by agents and by collectives that suffer from the same biases as the ones iden-
tified at the domestic level for individual decision-makers.73 Additionally, one could
add–and this is taken into account by Professor Broude when he discusses collec-
tive decision-making in international courts and in his analysis on the responses to
possible objections to behavioural analysis in international law–that not all deci-
sions in international law are taken by the states and for the states. There are several
more individual and collective decision-makers in international law like interna-
tional judges and courts, heads of international organisations and international
organisations, NGOs, private governance regimes, intergovernmental networks,
transnational committees, special rapporteurs etc.
There is one basic feature of international law that leads to the possible creation
of cognitive biases like the ones identified by BLE for individuals, namely national
sovereignty. Sovereignty may be considered to create many biases, like for example
endowment effects. The domestic law is the reference point for national govern-
ments, and at the same time the status quo.
Also international trade law seems to be assuming that the rationality of states,
governments and other international actors, or the individuals and groups that deter-
mine state behaviour is bounded and that biases and heuristics have an impact on
their choices and decisions.
68
van Aaken 2014; Broude 2015.
69
van Aaken 2014.
70
See Broude 2015. Context effects need to be taken into account in this respect; see generally
Hacker 2015.
71
See also van Aaken 2014, pp. 521–525.
72
But see Shafir 1992, pp. 313–314 (against the application of prospect theory to decision-making
by states).
73
Broude 2015; see also Poulsen and Aisbett 2013.
14.3.2 Behavioural Regulation in the International Trade

Regime
According to Professor van Aaken, enriching rational choice models with insights
from behavioural economics refines our understanding and explanatory power of
public international law, but may also help in the design of international law as a
“fundamental de-biasing mechanism.”74 Professor Broude also deals with questions
of design of legal institutions, and most importantly, with the design of international
courts.75
The literature on international regulation and Global Administrative Law shows
that international law has long taken up a regulatory role with a major impact both
on the behaviour of domestic governments, and individuals at the international and
the domestic governance level.76 International regulation takes several forms, and
sometimes it may take the form of nudging. The present article proposes the recast
of a major part of international trade law as behavioural regulation.
The architecture of the various WTO Agreements is directed towards addressing
possible market or domestic government failures. But, two WTO Agreements have
a more peculiar architecture than the other ones. The Sanitary and Phytosanitary
Agreement and the Technical Barriers to Trade Agreement use many of the instru-
ments of behavioural regulation in order to nudge governments towards a specific
regulatory policy. The regulatory policy adopted by international trade law is free
trade.
The Instruments of the Response: The SPS and TBT Agreements
Given the different biases that sovereignty creates for states, the drafters of the
WTO have responded, possibly unknowingly or unconsciously, by introducing
behavioural regulation in the WTO toolbox. The SPS and TBT Agreements go
beyond anti-discrimination in international trade and aim at positive integration
through harmonisation.77 The two Agreements show a preference and nudge towards
the use of science and the use of international standards in international trade.78
With the SPS and the TBT Agreements the WTO has introduced a risk-assessment
process and a type of science-informed policy-making that is also favoured in the
74
van Aaken 2014 p. 529. van Aaken provides examples from five different fields, namely choice
architecture of sources of international law, international custom, treaty design and compliance; id.
at pp. 530–60.
75
Broude 2015, pp. 1143–1149.
76
See fn. 8 on the literature on Global and International Administrative Law.
77
See Marceau and Trachtman 2002; Delimatsis 2014, p. 11; see also Howse and Langille 2012,
p. 367.
78
See Dimitropoulos 2012, pp. 77–91.
nudge literature.79 According to Panagiotis Delimatsis, even though the standards

are mainly of voluntary nature, they become the ‘reference point’ and as such “de
facto mandatory technical material in the WTO.”80 BLE shows exactly the psycho-
logical effect and importance of reference points and how they can shape behaviour.
The two Agreements try to switch the reference point from domestic laws to inter-
national standards.
In both Agreements, the states can set their own standard of protection for the
protection of the relevant values. In the SPS Agreement, WTO members may apply
their own “appropriate level of sanitary or phytosanitary protection against risks to
human life of health, or to animal and plant life or health”.81 Also in the TBT
Agreement, the countries are not prevented from taking necessary measures at the
“levels they consider appropriate” and for ‘legitimate objectives’ that they autono-
mously set like national security and protection of human health or safety, or the
environment.82 In both cases, the usual international trade conditions apply, namely
that the measures should not constitute a means of arbitrary or unjustifiable dis-
crimination between countries where the same conditions prevail or a disguised
restriction on international trade.83 Beyond this common international trade law test,
the SPS and the TBT Agreements introduce further scientific and technical tests that
take the form of international nudges.
The proposed regulatory response after the identification of cognitive biases is
usually a nudge. As explained above, a nudge is a light form of regulatory control,
in the sense that it fully maintains people’s freedom of choice; as such, it is opposed
in principle to command-and-control regulation. BLE proposes several nudges,
among which the most important ones are disclosure, warnings, debiasing through
substantive law, and above all, default rules.84 The supply of more or better infor-
mation, and most importantly the setting of default rules are very characteristic
regulatory techniques of the SPS and the TBT Agreements. The text moreover iden-
tifies techniques of debiasing through law.
Supply of More or Better Information
One of the most important nudges is the supply of more or better information as a
way to debias individual decision-makers. Supply of more or better information is
also found in international trade law. According to Article 7 SPS Agreement that is
dedicated to transparency, the WTO members shall notify changes in their SPS
measures and shall provide information on their SPS measures in accordance with
79
Sunstein 2003; Dana 2003; Wexler 2006; see also Epps 2008; Wagner 2011.
80
Delimatsis 2014, p. 17.
81
See Articles 3.3 and 5.2 SPS Agreement.
82
See Preamble and Article 2.2 TBT Agreement.
83
This is also the final test that a domestic measure has to pass in order to be regarded as WTO-
compatible under the Article XX of GATT 1994.
84
See, e.g., Sunstein 2013.
the provisions of Annex B on ‘Transparency of SPS Regulations’ of the SPS

Agreement. An additional procedure is established for SPS measures if there are no
international standards or the content of the SPS measure is not the same in sub-
stance as the content of an international standard, if the regulation may have a sig-
nificant effect on trade. According to Article 5(8) SPS Agreement, if the measures
of a WTO Member are not based on international standards or if such standards do
not exist, when another WTO Member believes that a specific SPS measure intro-
duced or maintained by another Member is constraining or has the potential to con-
strain it’s exports, an explanation of the reasons for such SPS measures may be
requested and shall be provided by the other Member.
Similar provisions can be found in the TBT Agreement. Article 2.11 repeats that
WTO Members shall ensure that all technical regulations adopted are published
promptly or otherwise made available in a manner that enables interested parties in
other Members to become acquainted with them. Moreover, Article 2.12 includes a
similar obligation to WTO Members to allow a reasonable interval between the
publication of a technical regulation and their entry into force in order to allow time
for producers in exporting countries to adapt their products and production methods
to the requirements of the importing states. Article 2.9 TBT Agreement provides for
additional notification requirements in case relevant international standards have
not been used domestically. It foresees that when a domestic technical regulation is
not based on a relevant international standard because such a standard does not exist
or the technical content of the domestic regulation is not in accordance with the
technical content of the relevant international standards, the WTO Member shall
publish a notice in a publication at an early appropriate stage that they propose to
introduce a particular technical regulation and enable interested parties in other
Members to become acquainted with the regulation. They should moreover notify
the other Members through the WTO Secretariat of the products that are to be cov-
ered by the proposed technical regulation together with a brief indication of its
objective and rationale. The purpose of these notifications is to allow for amend-
ments and to take into account comments. The notification shall take place “at an
early appropriate stage.”85
Altering Default Rules
As has been discussed above, altering legal default rules is one of the most impor-
tant debiasing instruments that can be found in the BLE toolkit. For various reasons
including laziness, fear, and distraction, most people will take the options that
85
Similar obligations are imposed for local government bodies and non-governmental bodies
according to Articles 3 and 4, and central government standardizing bodies and regional standard-
izing bodies based on Article 4 and Annex 3 to the TBT Agreement (Code of Good Practice for the
Preparation, Adoption and Application of Standards). Moreover, similar obligations are imposed
for the so-called conformity assessment procedures for the assurance of conformity with technical
regulations or standards as prescribed in Articles 5, 7 and 8.
require the least effort, or the least resistance. Thus, if there is a default option for
the chooser, then we should expect that a large number of people will end up with
that option independent of whether it is good for them or not. The choice of defaults
can of course be very controversial.86
As Anne van Aaken rightly points out,87 in the WTO, a paradigmatic case of
changing defaults has been the change of the decision-making rule in the dispute
settlement process from positive consensus–an opt-in rule–into negative consen-
sus–an opt-out rule–88 that changed completely the nature of the dispute resolution
process. The SPS and the TBT Agreements make use of this regulatory approach
very extensively with the introduction of several presumptions in favour of specific
international regulatory solutions instead of domestic ones. A first presumption in
the SPS is the one concerning the conformity with the obligations of the WTO
members under the provisions of GATT 1994 that may relate to the use of SPS
measures, especially Article XX(b) GATT 1994, if the SPS measures conform to
the relevant provisions of the SPS Agreement, which is included in Article 2(4) SPS
Agreement. A second presumption, which is directly related to the first one, is that
of Article 3(2) SPS Agreement, according to which SPS measures that ‘conform to’
international standards, guidelines or recommendations are presumed to be neces-
sary to protect human, animal or plant life or health, and also presumed to be con-
sistent with the SPS Agreement and GATT 1994.
The TBT Agreement also includes many presumptions. According to Article 2.5
s sentence, when a domestic technical regulation is prepared, adopted or applied for
a legitimate objective and is ‘in accordance with’ relevant international standards, it
shall be refutably presumed not to create an unnecessary obstacle to international
trade. It thus creates a safe harbour for such technical regulations.89 Similar pre-
sumptions in favour of international standardisation can be found in relation to
domestic standards and conformity assessment procedures.
Moreover Article 2.8 TBT Agreement and para. I of the Code of Good Practice
presume that requirements of product design and descriptive characteristics of prod-
ucts are (potentially) more trade restrictive than requirements that relate to the per-
formance of a product.90 For this reason, performance requirements for products are
favoured over design and descriptive characteristics.
The presumptions of both Agreements favour the use of international standards
by domestic regulators and, as such, also international harmonisation.
86
See Thaler et al. 2013, p. 430–431.
87
van Aaken 2014, pp. 531–532.
88
See Article 16:4 (for the adoption of the panel reports by the DSB), and Article 17:14 of the WTO
Dispute Settlement Understanding (for the adoption of the Appellate Body reports by the DSB).
89
See Mathis 2006.
90
Kudryavtsev 2013, p. 69.
Debiasing Through Organisational Law
In a paper that predates Thaler’s and Sunstein’s popular book ‘Nudge’, Jolls and
Sunstein discuss possibilities of “debiasing through law.”91 Their focus is debiasing
through substantive law, as opposed to procedural law,92 which they understand
primarily as the law of court proceedings. The effort of these legal strategies is to
engage in the different approach of debiasing through law by reducing or even elim-
inating people’s boundedly rational behaviour, in contrast to many existing regula-
tory efforts that emphasize the approach of insulating outcomes from the effects of
boundedly rational behaviour.
The SPS and the TBT Agreements include a strategy that is reminiscent of this
regulatory effort. The multiple SPS and TBT obligations for the WTO Members to
take part in various international organizations responsible for international stan-
dardisation could be understood as reactions to endowment effects of the govern-
ments and, as such, as debiasing mechanisms. This could be called ‘debiasing
through organisational law’ and is a very common technique in contemporary inter-
national law that is populated with hundreds of transgovernmental networks.93
The Direction of the Response
Libertarian paternalism, the political philosophy behind BLE, is the result of the
marriage of choice preservation for the decision-maker with a specific kind of regu-
lation. The present article shows that the international law of trade has long recog-
nized possible biases of states and governments that are the same as the ones
identified by BLE research, and has employed many of the nudging instruments
proposed by BLE in order to ‘correct’ behaviour that commonly deviates from the
predictions of rational choice theory.
BLE explores the legal and policy implications of cognitive biases. The policy
prescription of behavioural law and economics in case of identification of cognitive
biases is usually government intervention.94 Yet behavioural international trade law
has exactly the opposite effect, namely the move away from domestic regulation in
favour of free trade. The international trade regime nudges governments towards
free trade. The study of the nudges of international trade law reveals thus an inter-
esting finding with regard to the connection between BLE and paternalism. Nudges
are used in this field not as (libertarian) paternalistic instruments, but rather in order
to promote free trade. Disclosures, default rules and debiasing through law are
established in order to prevent governments from introducing new domestic
regulations in deviation from free trade orthodoxy. The choice of governments, and
individuals have been pre-specified in this case in favour of international trade.
91
92
Jolls and Sunstein 2006, pp. 201–202.
93
See Slaughter 2004; Raustiala 2002; see also Grewal 2008 (on a different account of networks).
94
Interestingly also, both Agreements operate in the relative absence of a central

planner. Behavioural regulation is actually made indispensable because of the
absence of a central planner. The SPS Agreement thus achieves the promotion of
the use of science over purely political decisions, and also over other types of rea-
soning, e.g., discursive reasoning. The TBT Agreement favours the use of interna-
tional standards and international administrative systems in lieu of domestic
legislation, and domestic administrative systems. In this way, both Agreements
nudge domestic governments towards the use of scientific reasoning, technical reg-
ulation and international harmonisation. The ultimate effect is the promotion of free
trade over other interests.95
14.4 Learning Processes
The previous two sections identified the transition of the international trade regime
from a regime that allowed room for domestic political decisions in favour of
domestic interests towards a regime that favours scientific and technical regulation
given possible behavioural market failures of states and governments. The use of
international nudges is one of the major ways in which this favouritism is shown.
The last section deals with an additional variable that this paper wants to introduce
in the study of BLE. The proposed additional variable in the BLE equation is the study
of the learning effects of BLE regulation. The section and the paper conclude with
what BLE can learn from behavioural regulation in international trade law.
14.4.1 Learning in BLE
The question of ‘learning’ is usually not dealt with in BLE literature.96 Cass Sunstein
mentions learning as one of the five possible welfarist objections to libertarian
paternalism.97 Wright and Ginsburg, in their critique of BLE, object to BLE on the
basis that it impedes learning by the involved actors.98
95
This is not necessarily to say that behavioural regulation has a more trade-promoting effect than
more traditional forms of regulation as can be found in the GATT 1994. The less trade-promoting
effect of both Agreements may have been discovered by the adjudication bodies of the WTO and
for this reason favoured the resolution of a recent dispute on the trade of seal products in the
European Union based on the GATT Agreement; see Appellate Body Report, European
Communities – Measures Prohibiting the Importation and Marketing of Seal Products, WT/
DS400/AB/R and WT/DS401/AB/R (May 22, 2014).
96
Slembeck 1999.
97
See Sunstein 2013, pp. 1869–1870; the other four are information, competition, heterogeneity
and public choice; see id. at pp. 1868–1872.
98
See Wright and Ginsburg 2012, pp. 1070–1075.
A very balanced approach is taken by Carlin, Gervais and Manso who develop a
model in order to judge in what cases libertarian paternalism works,99 with a spe-
cific focus on default rules. Default options impact the effectiveness of learning
through social interaction.100 According to Carlin et al., if learning from others and
incentives to acquire information decrease sufficiently when people are guided by a
planner, total welfare may decrease as well.101 According to Madrian and Shea,
default options have information content, which the participants may take into con-
sideration when making key decisions.102 This may affect incentives to gather more
information, which on its side may alter the success of information aggregation
through social learning or information sales on the market.103 Default options are
more likely to improve social welfare under three conditions: when acquiring infor-
mation is costly, when information is not easily shared across individuals, and when
people are more heterogeneous in their attributes or needs.104 On the other side,
default options will be more likely to decrease welfare when the government knows
less about its constituents, when people are heterogeneous, and when the value at
stake in the decision is large.105 Given these findings, the government’s optimal
response is binary, namely either issue a fully informative default option instead of
providing for an imperfect default, or leave individuals to decide on their own.106
As in approaches based on the classical understanding of rationality of human
behaviour, BLE also focuses on ‘social learning.’ Similarly, social learning can
play a very important role also in international law. Barbara Koremenos develops a
model in which the parties to an agreement learn over time about the costs and ben-
efits to them by the agreement.107 Learning reduces the uncertainty of the parties
about the effects of the agreement, which has as a result that the parties may
eventually become sure enough of the effects with the further result that they will be
willing to extend an agreement indefinitely.108
Vis-à-vis the appropriate regulatory response in law and economics, the usual
question is “how regulation can facilitate social learning.”109 This undoubtedly
should be the final aim of any regulatory effort. But, it is equally important that the
regulators themselves improve their learning capabilities. According to the
Hayekian ‘knowledge problem’, governments might introduce a substantively
wrong regulation or mandate simply because they lack sufficient information.110
99
Carlin et al. 2009.
100
Duflot and Saez 2003.
101
Carlin et al. 2009, p. 1.
102
Madrian and Shea 2001.
103
Carlin et al. 2009, p. 17.
104
Id.
105
Id.
106
Id.
107
Koremenos 2001.
108
Id. at p. 291.
109
See Schwartz 2015.
110
Hayek 1945.
Behavioural literature also adds that the regulation may be wrong because of behav-
ioural biases of the governments.
If regulators improve their own learning capabilities, they will then be in a better
position to improve social learning. This form of ‘institutional learning’ is indis-
pensable for every governance regime.111 This could be done by integrating a learn-
ing facility into the design of the relevant institutions. There is a mechanism in the
international trade regime that could develop into such a mechanism and is called
Trade Policy Review Mechanism (TPRM).112 The TPRM includes a review that is
based on a self-assessment of the WTO members and an assessment by the WTO
Secretariat, which is then discussed in the Trade Policy Review Body, in which all
WTO members take part. The TPRM could be reformed into a de-biasing and con-
tinuous learning facility of the WTO by introducing some very simple modifica-
tions in the institutional setup, the explanation of which go beyond the purpose of
this paper.
The bottom-line is that since social planners are not immune from making errors
or having biases,113 the existence of learning institutions may also help them iden-
tify and overcome their possible biases. A debiased social planner may then be in a
better position to debias the regulated individuals.
14.4.2 What Can BLE Learn from Behavioural Regulation

in International Trade?
The major part of the piece was devoted to the recast of international trade regula-
tion and more specifically in the SPS and the TBT Agreements of the WTO as
behavioural regulation. This final sub-section deals with what BLE can learn from
international trade regulation. It draws four main lessons.
First, the tripartite analysis of the identification of biases, the appropriate instru-
ment of the regulatory response and the direction of the response reveals that the
setting of default rules can work either in a paternalistic or in a non-paternalistic
way.114 The result of behavioural regulation within international trade is the favour-
ing of international trade over other values in a relatively sticky way; contrary thus
to the expectations derived from other fields of research, behavioural international
trade regulation has a libertarian rather than paternalistic effect, with defaults rules
that can eventually be very sticky.115
111
Dimitropoulos 2015.
112
Annex 3 of the Marrakesh Agreement.
113
Glaser 2006.
114
Cf. also Sunstein 2013, p. 1894 (“In view of the fact that people do not opt out even when it is
easy to do so, a self-interested or malevolent government could easily use soft paternalism to move
people in its preferred directions”).
115
Cf. Ben-Shahar and Pottow 2006.
Second, behavioural regulation can operate without the existence of an active

social planner. The WTO, and the SPS and TBT Agreements more specifically,
function without a regulator managing their day-to-day work, and still nudge gov-
ernments towards specific directions. The international trade regime can also teach
the related lesson that the courts play a very important role in the interpretation of
behavioural regulation. When a default has been set in favour of one regulatory
response, then the courts may have a tendency to interpret the relevant provisions
with a great deference towards the regulatory decision. This is all the more the case
where there are clear default rules in favour of specific values that should be pro-
moted by a specific regime. Alec Stone Sweet and Thomas Brunell show that many
international courts, including the WTO Appellate Body, that have engaged in
‘majoritarian activism,’ produce case law that reflects standard practices or a high
degree of state consensus that would not have been adopted by states under unanim-
ity decision rules.116 Even though this international court practice has had very good
results in terms of e.g. promoting European integration, human rights and global
welfare and peace through the promotion of free trade, it may create a backlash
against the international courts and eventually the regime as a whole.
Third, BLE should place a greater focus on learning, and move away from the
study of social learning only and deal with institutional learning too. This is very
important given the mixed results that behavioural regulation may have on social
learning.
Fourth, also governments can be nudged! The logo of a future Lucerne confer-
ence on BLE should thus rather look like this:
Source: 4th Law and Economics Conference in Lucerne: Nudging – Theory and Applications
116
Stone Sweet and Brunell 2013.
14.5 Conclusion
The large body of research of behavioural economics has documented that people
behave in a different way than neoclassical economic theory assumes. The ‘political
philosophy’ behind BLE, libertarian paternalism, introduces regulatory intervention
with the preservation of freedom of choice. The major contribution of this piece has
been the recast of international trade as behavioural regulation, and the identifica-
tion of international nudges. International nudges very often operate in the absence
of a central regulator and as a result have a very sustainable effect towards invari-
ably favouring a specific value over all others in the field. This shows the need for
the improvement of the learning capabilities of the behavioural regulator, which
shall spur constant government debiasing that will, eventually, lead to social
learning.
Acknowledgement I had the chance to present the paper and receive valuable comments from
participants at the ‘4th Law and Economics Conference in Lucerne: Nudging – Theory and
Applications’, University of Lucerne and the ‘Adam Smith Seminar’, University of Munich. I
would also like to thank David Singh Grewal, Philipp Hacker and Manfred Holler for very valu-
able comments and discussions on this and similar topics, and Julia Wetzel and Gareth Hunt for
editing assistance.
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Chapter 15
Nudging in Tax Law?
Eyetracking Research on Limits of Efficacy of Legal
Definitions
Mariusz J. Golecki, Marcin Romanowicz, and Jerzy W. Wojciechowski
Abstract The paper concentrates on the experimental verification of the rule based
categorization hypothesis in context of the tax law regulation. We’ve built a simple
experiment in which we asked participants - students of law (N = 15) to categorize
17 objects displayed on the photographs. The subjects were instructed to categorize
objects for the purpose of tax law classification, resulting with the assessment of a
proper tax rate. The results are presented from the perspective of the rule-based
categorization theory. In our study we use an eye-tracker (SensoMotoric Instruments,
model RED 250 Hz) to record the movements of eyeballs, and to check whether the
eye-tracking parameters such as; the number of fixations, regressions from the pic-
ture of the object in determined areas of interest. The experiment revealed differ-
ences in eye movement patterns, reactions times when participants evaluated ‘easy’
and ‘hard’ objects. The purpose of this paper is thus relatively modest. The major
research question is descriptive rather than normative. The study concentrates on
the possibility and cognitive effectiveness of nudging in a very narrow field of leg-
islative design rather than on the debate on the normative implications of this strat-
egy. However we believe that this contribution on descriptive aspects of cognitive
processes presupposes the debate on the legitimacy of nudging from the wider nor-
mative, legal and moral perspective.
M.J. Golecki (*)

Department of Legal Theory and Philosophy of Law, Faculty of Law and Administration,
University of Łódź, Łódź 90-232, Poland
e-mail: mjgolecki76@gmail.com
M. Romanowicz
Faculty of Law and Administraion, University of Warsaw, Warsaw 00-927, Poland
e-mail: m.romanowicz@wp.pl
J.W. Wojciechowski
Faculty of Psychology, University of Warsaw, Warsaw 00-183, Poland
e-mail: j.w.wojciechowski@gmail.com

290 M.J. Golecki et al.
15.1 Linguistic Categorization in Law
Decision-making process seems to be one of the most important issues of any sound
legal theory as well as legislative and adjudicative practices. In day to day opera-
tions of any legal systems it is generally assumed that decision-making process is
deliberative, i.e. it is a conscious, controlled, free, and sequential process. This
model does not however take into account the characteristic features of the cogni-
tive apparatus. It has been observed that crucial influence upon the decision-making
process is being performed by unconscious, automatic processes, of associational
character, that would be intuitive. The so-called dual process theory of cognitive
processes (DPT) takes these aspects into account, as it is based on the assumption
that conscious and unconscious processes actually coexist and influence any real
decision. The concept of bounded rationality has been introduced in cognitive psy-
chology and later on successfully applied in economics and legal theory.1 The the-
ory takes into account the fallibility of human cognitive abilities. Hence as a
response to these cognitive weaknesses the concept of improved, paternalistic regu-
lation has been proposed by C. Sunstein and R. Thaler.2
It seems however the impaired characteristics of cognitive apparatus of human
agents could be overcome by the proposed nudging strategy only if the underlying
cognitive process is well understood and its functional characteristics explained.
Within a context of understating legal text and properly applying legal rules those
characteristics inevitably refer to the linguistic nature of law. If the addressee of
legal text is supposed to take up decisions based on the content of legal rules or at
least instructed by legal rules, the rules have to be properly understood. It seems that
application of rules is thus strongly related with linguistic categorization of legal
objects or decisions. Furthermore, legal categorisation based on artificial definitions
and concepts interacts with a wide set of other cognitive operations and processes
related to different linguistic and cognitive mechanisms. Thus linguistic categoriza-
tion in law seems to be a distinctive process leading to creation of complex struc-
tures. The structures and legal objects could be investigated from the perspective of
cognitive linguistics and cognitive science. Legal categories are created and applied
within an internal legal discourse of law-making and application of law. This kind
of categorization leads to the creation of specific categories pertaining to legal sys-
tematization. Typical examples of such categories include legal concepts and divi-
sions. This attempt to structure legal terms in specific way is present in history
beginning with the creation of relevant legal categories in Roman law and later on
in continental law which adopted general and abstract systematisation based on
general and abstract definitions. On the other hand common law provided with its
specific way of creating legal categories closely connected to the legal process.
In both civil law and common law systems the concentration on a linguistic
aspect of law has been strengthen by the institutional and systemic effect, since the
1
Kahneman et al. 1982; Vermeule 2006, 2009.
2
15 Nudging in Tax Law? 291
commonly accepted practical purpose of legal sciences is the interpretation of legal

texts in different forms; statutory provisions, judicial rulings and last but not least
academic legal writings. The whole legal system can thus be sketched as a discur-
sive system producing the ultimate meanings of legal utterances, the ultimate audi-
torium for setting out the content of law. The legal actors thus communicate and
eventually decide on the ultimate meaning of law which becomes a product of the
discursive activity. All reconstructions based on discursive nature of legal commu-
nication aim at grasping the focal point of law and normativity, adopting the so
called internal point of view3 and explaining law as an output of an institutionalized
discursive process (or even a kind of convention). Against this background the other
methodological paradigm is conceivable. The alternative explains the law’s norma-
tivity as an elusive problem. The linguistic categorization of law does not need
anything in form of the internal point of view. The linguistic practices of lawyers
and other actors could merely be explained on behavioural level, the assumption
being that the practices create the habit without any reference to the concept of rea-
sons for actions. It seems however that both positions: cognitivism and behaviour-
ism could be equally flawed. The linguistic categorization of world in legal language
or the language of law could alternatively be explained in terms of legal functions
and legal institutions. The creation of legal concepts, legal forms and legal institu-
tions could be treated as purely functional and pragmatic. Law serves some pur-
poses and legal language has to reflect this sheer reality. These kinds of explanations
of legal phenomenon have been widely accepted in American legal theory. This
development, and especially the contemporary description of categories as prag-
matically oriented, flexible and open to modifications, leaves open space for a new
approach to legal language and legal concepts. A path breaking works produced
within a field of cognitive linguistics provided with a new point of reference.
G. Lakoff endorsed his theory of metaphor and Idealistic Cognitive Model (ICM).
R. Langacker has formulated the benchmark assumptions for cognitive grammar.4
J. Taylor presented his theory of prototypical categorization, whereas A. Wierzbicka
has identifies a universal structure of categories (natural meta-language semantics).5
Within the context of continental European legal systems, the pioneering works of
K. Kosecki concentrated on the linguistic analysis of some crucial concepts and
definitions applied by the lawgiver in the Polish Penal Code and Polish Civil Code.6
Kosecki has identified many legal structures classified as either radial metaphors
or metonyms, proving that cognitive linguistics may be usefully applied to analysis
of the quality of law-making process, especially the extensive regulation such as the
Code.7 Concurringly it should be observed that cognitive linguistics provides with
a robust analytical too, capable of further development and implementation within
a framework of legal sciences. Its applicability is however restricted to the research
3
Hart 1961.
4
Langacker 1991.
5
Taylor 1989, Wierzbicka 1996.
6
Kosecki 2004a, b.
7
Kosecki 2003.
on linguistics structures rather than the neuronal and psychological foundations of

direct causal links influencing cognitive processes. Thus it is necessary to distin-
guish between primary and secondary cognitive science.8 Whereas in 60-s the pro-
ponents of N. Chomsky and other researchers working on the field of cognitive
science assumed, that language was autonomous, this approach was changed later
on by contemporary cognitive linguistics.9 Additionally some insights of cognitive
linguistics have already been reflected in legal theory and legal science. The most
far reaching project belonging to the first category has been sketched by S. L. Winter
in his monograph on the application of G. Lakoff’s concept of metonym/metaphor
to legal theory and selected branches of law such as constitutional law.10 The other
pioneering works include G. Minda’s work on boycott in American Law, or meth-
odological propositions of A. G. Amsterdam, J. Brunner .11 Those works however
are either very broad in scope, creating a platform for meta-theoretical and method-
ological discussion about legal science or concentrate on a very narrow material
such as some randomly selected provisions of legal texts. This pioneering work
resulted with many comments. Generally the proponents of cognitive linguistics
were enthusiastic. G. Lakoff even suggested, that S. L. Winters proposal could
effectively be developed and created foundations for Cognitive Legal Studies.
Lawyers remained much more sceptical. J. Penner suggested that Lakoff’s theory of
metaphor lacked coherence.12 Moreover, its application in legal analysis led to
vicious circle, because cognitive structures such as metaphor were explained by
reference to another, more complex cognitive structures such as ICM, belonging to
the same category .13 As a result Lakoff’s version of cognitive linguistics was found
to be inadequate since it did not provide with satisfactory distinction between
observable facts and the explanatory theory itself .14 Some critics such as G. Taylor
did not explicitly exclude cognitive linguistics from the jurisprudential methodolog-
ical toolbox. According to Taylor, Winters’ critique of transcendentalism in legal
theory and jurisprudence was inadequate, however the application of cognitive lin-
guistic to legal analysis could generally be fruitful. This is especially important
taking into account the relationship between the legal categories created due to the
law-making process, be it statutory or judge made, and the application of law. It
seems that cognitive linguistics could be very useful in drawing the frontier between
the discourse of law-making and the application of law. Unfortunately despite some
exceptions, cognitive linguistics has not attracted general attention of European
lawyers. There is no monograph comparable to J. Winters’s ‘Clearing in the
Forrest’.15 Moreover, the potential of cognitive theory has not been properly
8
Gallese and Lakoff 2005, pp. 455–457.
9
Chomsky 1965.
10
Winter 2001.
11
Amsterdam and Bruner 2000, Descombes.
12
Penner 1998.
13
Fodor 1981.
14
Pardo and Patterson 2013.
15
Winter 2001.
assessed in European legal science and legal theory. Some critical remarks concern-
ing Lakoff’s version of cognitive linguistics have been indirectly addressed by
Lekoff himself. In 2005 Lekoff proposed a new orientation in cognitive linguistics,
named neurolinguistics.16 This approach seems to be more empirically oriented and
methodologically coherent. The proposed experimental research is intended to
match these needs and to add more sophisticated empirical findings based on exper-
imental cognitive psychology.
Cognitive linguistics as an analytical tool is believed to successfully reveal the
mechanism of linguistic categorization in particular legal areas as well as on the
level of legal theory. Firstly the project aims at reconstruction of the mechanism of
categorization in law. Is legal categorization different from the other types of cate-
gorization? What is so special about legal categories, i.e. the categories shaped by
legal rules rather than by the evolution of natural language? Secondly, it is supposed
to provide with satisfactory analytical tools for the study of dynamic processes on
the field of law-making and application of law. Those processes include cognition
and procession of information as well as the dynamics of the decision making pro-
cess in law.17 The research project is based on the hypothesis according to which the
traditional legal rule-based categorization is being challenged by the categorization
based on similarity between the object and some exemplarities. The problem con-
centrates on the conditions of linguistic categorization and the dynamics of the cre-
ation of new categories in law and the dynamics of categorization in different
branches of law. The project investigates the categories of legal language and lan-
guage of legal texts from a perspective drawing upon recent work in cognitive sci-
ence which provides new insights into the way that individuals sort particulars into
categories and apply concepts. The emergence of cognitive science provided with
empirical evidence that required a new view on the relationship between mind,
thought, and language. The evidence revealed that human conceptualization and
reasoning were grounded in bodily experience. Some authors proposed the hypoth-
esis of embodied mind, concentrating on psychological and neuropsychological
aspects of cognitive constrains.18 Additionally the proponents of cognitive linguis-
tics emphasized the necessary connection between language faculty and cognitive
capabilities of human being. These findings remain in sharp opposition to both clas-
sical philosophical approach on linguistic categorization and generative linguistics
proposed by N. Chomsky.19 According to the later, human language ability is per-
ceived as algorithmic and independent from general human cognitive capabilities.
This assumption named as ‘transcendentalism’ or ‘mentalism’ creates a major tar-
get for the adherents of cognitive linguistics. The proposed research project is an
attempt at creating coherent methodological assumptions of cognitive legal studies
and their application to the survey on the dynamics of linguistic categorization in
different legal systems and different legal branches. It seems however that at least
16
Gardo and Lakoff 2005.
17
Winter 1989.
18
Lakoff 1987.
19
Chomsky 1965.
some of these theories are based on premises referring to the foundations of cogni-
tive processes and the categorization strategy plays crucial role for this processes.
Hence the question arises about the characteristics of the categorization process
within a context of the application of law.
15.2 Theorizing About Categorization: A Cognitive

Approach to the Categorization Strategy
The process of categorisation attracted the attention of many scholars in cognitive

sciences; especially cognitive linguistics, neuropsychology and cognitive psycholo-
gy.20 Two general views on the essential characteristics of this process have been
presented so far. Some scholars claim that categorization has a unified structure and
thus could be embraced in a single model.21 We call this view a cognitive monism
resp. categorization. The other view is based on the opposite assumption, namely
the belief that categorization is not only complex but also hybrid- in different situa-
tions subjects categorize objects according to different patterns explained by differ-
ent categorization strategies.22 We call this view cognitive pluralism resp.
categorization. The difference between the two approaches seems to be relevant for
the understanding of the psychological characteristics of categorization, and it per-
tains to such areas of cognitive psychology as the theory of learning, processing or
deciding. It seems that the distinction between the two approaches (monism vs.
pluralism) is even more important for legal theory, and more precisely for the
descriptive theory of legal interpretation and adjudication.
In our study the categorization is being understood as a kind of decision-making
process on the relationship between a given object (On) and a general category
(Cn). Generally an item could be classified as belonging to the category or not. A
review of the literature on concepts and categorization suggests four different mod-
els of categorization (categorization strategies).23 In deciding whether the object On
belongs to a particular category Cn, the categorization may be based on following
strategies:
1. Determination whether the test object matches with a rule which defines a given
category. The rule on the category A (Cat. A) sets out some conditions for cate-
gory membership such as C1, C2, C3. Those conditions should be confronted
with the characteristic of the objects. The process of identification thus concen-
trates on decoding procedure. Some basic characteristics of an object should be
reviewed and checked for the presence of features F1, F2, F3, corresponding the
conditions encoded in a given rule. Some of these features of the object and
20
Nossofsky and Little 2010.
21
Bruner et al. 1956, Nosofsky 1992.
22
Smith et al. 1998.
23
E. E. Smith et al. 1998, p. 169.
conditions contained in rule may by negative, some other positive. In case of a

given positive condition if positive match is being detected, the correct decision
should reflect the fact that O does belong to Cat. A. In case of a given negative
condition if positive match is being detected, the correct decision should reflect
the fact that O does not belong to Cat A. This strategy is commonly described as
a rule-based strategy.
Accordingly the agent who applies a rule – based categorization strategy in
order to produce a categorization decision should engage in three step process,
namely24:
(a) Selectively apprehending each feature (F1, F2, F3) of the object O (e.g.
dimensions-F1, color-F2, location F3) corresponding with the conditions
embedded in a rule (C1, C2, C3).
(b) Determining whether for each apprehended characteristic (feature) the per-
ceptual information coincides with the value endorsed in rule and contained
within its conditions (e.g. ‘Is this item big enough’)
(c) Blending and confronting the outcomes of the 2-nd stage in order to deter-
mine the type of categorisation involved in decision-making process.
2. Determination of the similarity of the test object O to a memorized exemplars
E1, E2 of a given category Cat. A. In this case the categorization procedure is
based on a serious of automatic computations of similarity between the object
O1 and the exemplary representations of some objects (exemplars) E1, E2, E3
belonging to the category Cat. A. The exemplary based categorization strategy
operates in a following manner, containing two step procedure:
(a) Retrieving stored exemplars similar to the tested object;
(b) Selecting the category whose retrieved exemplars are on some measure most
similar to the test object (Estes 1994).
It is assumed that the exemplars are stored in long term memory (LTM) and
the computations are performed with the engagement of working memory
(WM). The categorization decision is thus based on a process of retrieving
of the most similar exemplars belonging to the category, where it is assumed
that the exemplars had been previously identified as belonging to the cate-
gory. The whole process is thus based on the retrieval of memorized objects,
the comparison of the objects and the identification of the most similar one.25
3. Determination of the similarity between a given object O and the prototype of a
given category (Prot. A). In this case it is assumed that the categorization strat-
egy is based on the comparison between the prototype and the object.26 The cor-
respondence between the prototype or the radial metaphor based on a given
prototype and the object is especially discernible in some theories of categorization
referred to law. Sometimes it is claimed that many legal concepts are just proto-
types and the linguistic categorization in law is strongly connected to the way
24
Cf. Smith and Sloman 1994.
25
Nosofsky 1986.
26
Hampton 1995.
prototypes are shaped by both; language habits and legal discourse. One of the
best examples of this approach is reflected Winter’s theory of metaphors in
law.27 Other studies underline the presence of prototypes in legal language, espe-
cially in legal definitions.28 However it could be said that no adequate and satis-
factory functional model of this categorization strategy has been offered so far.
Many different theories of prototype coexist and compete in cognitive linguis-
tics.29 Since the theory has not produce a clear–cut model of this categorization
strategy it is impossible to design an experiment based approach to its operation-
alisation and verification of the characteristics of the prototype-based categoriza-
tion strategy.
4. Very similar story may be offered in regard to the fourth categorization strategy,
namely the theory based categorization. It has been claimed that the categoriza-
tion strategy may well be based on determination on whether the features of the
test object are best explained by the so called ‘theory’ that underlies the catego-
ry.30 This categorization strategy reminds the rule-based categorization at least in
some respect. However there is an essential difference between the two. Whereas
the content of the rule seems to be observable and determinable, the content of a
given theory is not. The rule is so to speak ‘publically accessible’ whereas the
category-shaping or supporting theory is not, being a merely ‘private’ explana-
tion for the existence of a given category.31 Thus even if the concept of the theory
based strategy of categorization seems intellectually attractive, the underlying
theory seems to be underdeveloped.
Accordingly in our study we concentrated on rule based categorization as
opposed to other potential strategies. Rule based categorisation has been investi-
gated from the perspective of its functional meaning and the connections between
different cognitive processes. According to Smith et al. (1998), the main differences
between rule-based and other categorization strategies include five basic
characteristics32:
(a) Analytic vs. holistic processing: whereas rule application involves selective
attention to and apprehension of the critical attributes (conditions with respect
to the rule and features in respect to the test object), other categorisation strate-
gies do not induce any of these processes, relying exclusively on the retrieval of
the stored exemplars. Concurringly the rule application is always based on
selection belonging to the analytic process, whereas other types of non-rule
based strategies are rather holistic, taking the whole object into account rather
than selecting particular characteristics and discriminating against specific
features-conditions contained within a category- creating rule.
27
Winter 2001.
28
Kosecki 2004b.
29
Cf. Taylor 1989; Winter 2001.
30
Murphy and Medin 1985.
31
Murphy and Medin 1985.
32
Smith et al. 1998.
(b) Differential vs. equal weighting of attributes: the rule application procedure
involves attending to some special attributes indicated by the rule. Additionally
this procedure attaches different weights to different attributes, whereas non-
rule based strategy does not refer to any selective attention during the most
important exemplar-retrieval stage. Thus the non-rule based strategy procedure
may give the same weight to all attributes.
(c) Instantiation of abstract conditions vs. matching concrete information: the con-
ditions endorsed by the rule are more abstract than the representation of the test
object. Hence the rule application strategy is based on the assumption that the
categorizer determines whether the information in the tested object meets the
conditions of the rule. In contrast, in many cases of exemplar similarity the
representations of both exemplar and test objects are assumed to be at the same
level of specificity.
(d) High loads on working memory vs. low loads on working memory: working
memory is usually more actively involved in rule application. This may result
from two apparently different reasons. Firstly, the rule could be a new one or a
complex one. In both cases the agent (the categoriser) needs to refer to the
working memory in order to understand and to apply the rule, especially if the
rule contains numerous conditions, both positive and negative ones. From the
purely functional perspective both situations must lead to a considerable load
on working memory, whereas the retrieval of exemplars from long-term mem-
ory usually induces a relatively small load on working memory.
(e) Serial vs. parallel processing: the distinction between rule-following and non-
rule based strategy concerns the absence or presence of some serial processing.
It seems that serial processing seems linked rather to the rule application than
to retrieval and selecting processes, since the rule contains multiple conditions,
which may require multiple acts of selective attention and serial operations
which finally lead to strategic or controlled processing rather than automatic
processing. According to rule based categorization strategy seems to be based
on conscious and complex information processing, whereas the non-rule based
strategy potentially embraces intuitive and subconscious processing.
15.3 The Eye-Tracking Experiment on Categorization

Strategy in Legal Context
15.3.1 Theoretical Assumptions
The paper concentrates on the experimental verification of the hybrid based catego-
rization hypothesis. We assumed that there were at least two different categoriza-
tion strategies reflected by two different models of categorization. Then we
described and analyzed the functional and qualitative difference between the two
models. Taking the characteristics of the reading process and the processing of
Encode object O1 1
Reading the text:
The rule e.g., If C1 and C2 and C3 then O1
Retrieving (next) feature Fn 2 belongs to the C at A. Otherwise O1
Put checking F1 into WM belongs to C at B
Working Memory:(WM):
e.g., Checking C1 (time1) 3
Selectively attend to F1 4
Short fixation(s) on O1
Long Fixations on text:
checking C1 (time2) 7
C1 is satisfied
If YES
Check for F1 5
Long fixations on the AOI
Update WM with the result from 5.

If NO 6
E.g.. ,,F1 present/not present” and
C1 ,,satisfied/not satisfied”
Try to categorize O1 8
If F1, F2, F3 present Report Category Cat 1 9
Moreover if one feature F

present and no one F’s remain to
Report Category Cat 2 10
be checked or no feature
present and 1 to be checked
otherwise Repeat the whole process 11
Fig. 15.1 The functional model of the rule based categorization process (RBC strategy) with
special reference to the eye-tracking parameters (Based on: Smith 1998)
visual information into account, we propose to carry out an experimental research

based on the eye tracking methodology. This leads us to the reference to the func-
tional model of rule based categorisation strategy as in Fig. 15.1.
The decision on the application of the eye-tracking methodology in order to ana-
lyze the processing of legally relevant information is based on set of methodologi-
cal assumptions. Firstly, the aim of our investigation is to experimentally verify the
hybrid categorization hypothesis. It is believed that the application of the eye-
tracking methodology may shed some additional light on the way in which rule
based and exemplary categorization strategies interact. Secondly, the interaction
between long term memory and working operational memory is less important in
legal context. Thus the object of research will contain a highly complex legal rule
and heavily diversified objects. The effects of memorizing are less interesting in this
respect, since both the rule and the objects may well be accessible to respondents.
Thirdly, the eye-mind theory as presented by M. Just and P. A. Carpenter plays an

important role in this study33. According to this theory, the eye and the mind are
linked in a way that the eye fixates an object as long as it is processing it. At first
glance this assumption seems to be limited by the fact that it refers to the theory on
reading exclusively. Reading is supposed to be an activity that necessarily requires
processing of the visual content. Just and Carpenter state however that their eye-
mind theory is also supported by observations made in spatial problem-solving
tasks. This enables the application of the eye-tracking methodology to both text
processing and visual object processing.34
15.3.2 Methodology
We proposed a simple experiment based on the eye-tracking research. In this exper-

iment we asked 15 subjects (students of law; undergraduates and Ph. D. students) to
categorize 17 objects demonstrated on 17 photographs. We displayed the photos of
different objects together with the definitions in the Polish Building Law: building,
single-family residential building, structure, small architectural objects. The prob-
lem solution task was incentivized in a peculiar way, which put the experiment
within a real legal problem solving context. The subjects were instructed to catego-
rize objects for the purpose of tax law classification, resulting with the assessment
of proper tax rate. The text was complex enough as to force agents to check not only
for the presence/absence of features on the pictures of the investigated objects, but
also to refer to the text if needed. The text and the object were both accessible until
the categorization decision has been taken by the agent.
It was assumed that the data encapsulated in a given definition contained all rel-
evant features of the objects or referred to them. The displayed incentives contained
both the text and the visual objects. The definition (the text) remained unchanged
whereas the 17 different objects were divided into two groups. The first group con-
tained conclusive objects (group I – ‘easy cases’) whereas the second group incon-
clusive ones (group II – ‘hard cases’).
The major parameters relevant for our study included the intensity of cognitive
process in respect of the reading and understanding of text and the classification of
the object. We assumed that the best proxy of the intensity of cognitive process
(especially the WM workload) was fixation duration. In contrast with some other
studies we did not intend to set out a special duration parameter to discriminate
between the characters of the underlying processes (e.g. 500 ms).35 We decided to
compare the average fixation time and to interpret the results within a light of the
33
Just and Carpenter 1980.
34
Cf. Duchowski 2007 p. 11 and p. 47.
35
Velichkovsky 1999.
functional model of the RBC strategy (Fig. 15.1). In general we distinguished three
types of relevant eye-tracking parameters:
(A) The length of fixations within the Area of Interest (AOI) determined in text and
coinciding with the conditions (Cn),
(B) The length of fixations within the AOI determined in the picture and coinciding
with the features (Fn),
(C) The number of transitions (regressions and other saccades) between Cn and Fn
for particular AOI’s and the detailed AOI’s within the text (Def 1,2,3,4) and
the pictures of the whole objects.
Thus not only the result of the process (positive or negative match), but also its
dynamic was to be captured (heat map on Figs. 15.2, 15.3, and 15.4. scan paths on
Fig. 15.5 and on Fig. 15.6).
Fig. 15.2 Heat map of the

castle
Fig. 15.3 Scanpath of the

pavilion
Fig. 15.4 Scan path of the

house on water
Fig. 15.5 Example of a stimulus used in the experiment
Fig. 15.6 The AOIs of transformer (non-conclusive object – gr. II)
15.3.3 Participants
Fifteen research subjects (Master and PhD. law students, Caucasians, 20 % females)
took part in the experiment (age range 19–37; M = 25.1; SD = 5.8). They were not
rewarded for the participation in the experiment. All subjects reported having
normal or corrected to normal vision and they were naïve as to the purpose of the
experiment. Ethic statement: all subjects provided their informed verbal consent to
take part in the research prior to the experiment.
15.3.4 Measures and Stimuli
To measure participants’ performance in legal categorization, special test was

designed. During the test participants’ task was to categorize 18 objects according
to the Polish Building Law. The legal definitions contained specific conditions
referring to four categories (corresponding with those four legal definitions). The
categories were defined according to the rules expressed in art. 3, par. 2–4 of the
Polish Building Law (Act of 7 July 1994 Building Law, Consolidated text: Dziennik
Ustaw 2010, No. 243, item 1623 with subsequent amendments: No. 32, item 159,
No. 45, item 235, No. 94, item 551, No. 135, item 789, No. 142, item 829, No., 185,
item 1092, No. 323, item 1377; 2012 item 472).
In the beginning of the test the participants were instructed to read and familiar-
ise with the four definitions from the Polish Building Law (definitions of: building,
single-family residential building, structure, small architectural objects), which
reads as follows:
Article 3. Whenever the Act refers to the following (…):
2) building – it shall mean such a building object which is permanently connected to the
ground, separated in spatial terms by means of building partitions and has foundations
and a roof; [Definition 1]
2a) single-family residential building – it shall mean a detached building or a semi-detached
building, terraced building or building within a group, which serves to satisfy housing
needs, constitutes an independent constructional unit (…); [Definition 2]
3) structure – it shall mean any building object which is neither a building nor a small
architectural object, such as: linear objects, airports, bridges, railroad bridges, viaducts,
tunnels, culverts, technical facilities networks, free-standing aerial masts, free-standing
advertising structures permanently connected to the ground, earthen structures, defence
structures (fortifications), protection structures, hydraulic engineering structures, reser-
voirs, free-standing industrial installations or technical facilities, sewage-treatment
plants, waste dumping sites, trial installations or technical facilities, sewage-treatment
plants, waste dumping sites, water treatment plants, back-up structures, pedestrian sub-
ways and pedestrian bridges, land technical infrastructure networks, sports structures,
cemeteries, monuments, (…); [Definition 3]
4) small architectural objects – it shall mean objects of small dimensions, in particular the
following:
a) objects for religious worship, such as: shrines, roadside crosses and religious statues,
b) monumental statues, waterworks and other objects of garden architecture,
c) utility objects for the purpose of everyday recreation and maintenance of order, such as:
children’s sand-pits, swings, wall-bars and household rubbish disposal cubicles (…)
[Definition 4]
The main part of the test consisted of pictures of objects (presented next to all the
definitions – e.g. Fig. 15.5), each followed by a question: “According to you, to
which category the presented object belongs?”. Participants were to classify the
object to one of the categories mentioned above.
There were two groups of objects used in the test:

1. Easy – objects which, basing on the polish justice practice, should be easy to
categorize to one of the presented categories (11 objects) – ‘easy case’.
2. Difficult – objects which, basing on the polish justice practice, should be very
difficult to categorize to one of the presented categories (6 objects) – ‘hard case’.
To obtained equal number of objects in each group for further analyses we
decided to draw out 5 objects from the easy group.
The text was complex enough as to force agents to check not only for the pres-
ence/absence of features on the pictures of the investigated objects, but also to refer
to the text if needed. The text and the object were both accessible until the categori-
zation decision has been taken by the agent.
It was assumed that the data encapsulated in a given definition contained all rel-
evant features of the objects or referred to them. The displayed incentives contained
both the text and the visual objects. The definition (the text) remained unchanged
whereas the 17 different objects (from group I and II) were presented in mixed
order, but the same 1 for every each agent.
The major parameters relevant for our study included the intensity of cognitive
process in respect of the reading and understanding of text and the classification of
the object. In order to make the experiment more ecologically valid, participants
(lawyers or future lawyers) were informed that they will categorize some objects for
the purpose of tax law classification. We obtained a score (percentage of correct
answers) for the easy objects and a score (percentage of correct answers) for the
difficult objects for each participant.
During the whole test participants’ eye movements were recorded. SensoMotoric
Instruments RED 250 eye tracking device was used with a sampling rate of 250 Hz.
The pictures of objects were presented on the 22′ screen with a resolution of
1680 × 1050 pixels. Subjects were seated approximately 60 cm from the computer
screen.
The eye-tracking analyses included (as mentioned above) the length of fixations
within the AOI determined in text and coinciding with the conditions (Cn), the
length of fixations within the AOI determined in the picture and coinciding with the
features (Fn) and the number of transitions (regressions and other saccades) between
Cn and Fn for particular AOI’s and the detailed AOI’s within the text (Def 1,2,3,4)
and the pictures of the whole objects.
The major parameters relevant for our study were: number of fixation, dwell
time (total time of fixation and saccades), average time of fixation on the marked
Area of Interest (AOI’s) and revisits to the AOI’s. The AOI’s were selected by the
panel of expert who decided which parts of presented objects were important to
classify each object to a proper category.
15.3.5 The Procedure
Subjects were tested individually. The consecutive order of objects presentation

was fixed. The whole procedure (including the calibration of the eye tracker) lasted
about 20 min per person.
15.4 The Results
15.4.1 Results in the Categorization Test: Manipulation Check
A t-test for dependent samples was conducted to compare scores in the classifica-
tion of easy objects and the difficult one. As expected, participants committed more
mistakes in classification when they categorized difficult objects (M = 47.78 %,
SD = 18.76) than when they categorized easy objects (M = 92.22 %, SD = 18.76), t
(14) = −6.45, p < 0.001.
15.4.2 Time of Object’s Categorization
To compare the time of categorization process (in seconds) in easy and difficult
groups of objects, the t-test for dependent samples has been conducted. As expected,
participants categorized difficult object (‘hard cases’) significantly longer
(M = 10.44, SD = 6.37) than when they categorized easy objects (M = 21.21,
SD = 8.14), t (14) = −5.73, p < 0.001.
15.4.3 The Eye-Fixation Data
The relevant eye-fixation data comprise four different parameters: the number of
fixations in AOIs, the dwell time in AOIs, the average fixation time and the number
of revisits.
Number of Fixations
To compare the number of fixations on the selected AOI’s in easy and difficult
groups of objects, t-test for dependent samples was conducted. There were more
fixations on the selected AOI’s in the easy group of objects (M = 259.39, SD = 55.52)
than in the difficult one (M = 191.86, SD = 29.63), t (14) = 4.88, p < 0.001. In the dif-
ficult group of objects participants made more fixations outside the AOIs (white
space) (M = 73.15, SD = 9.63) than in the easy group of objects (M = 48.72,

SD = 14.42), t (14) = −8.371, p < 0.001.
Dwell Time
Similar results were obtained also for dwell time. A t-test for dependent samples
showed significant differences between dwell time on the AOIs between difficult
and easy groups of objects. The dwell time in the easy group of objects was longer
(M = 1540.64, SD = 310.17) than in difficult group of objects (M = 1129.93,
SD = 172.93), t (14) = 5.05, p < 0.001. In the difficult group of objects the dwell time
was longer outside the AOIs (white space) (M = 447.92, SD = 53.89) than in the easy
group of objects (M = 340.81, SD = 99.4), t (14) = −4.58, p < 0.001.
Time of Average Fixation
A t-test for dependent samples showed that participants had longer time of average
fixation on the selected AOI’s in the easy group of objects (M = 316.69, SD = 80.09)
than in the difficult group of objects (M = 274.39 SD = 48.67): t (14) = 2.23 p = 0.04
Number of Revisits
Participants revisited less to the AOI’s in the easy group of objects (M = 5.6,
SD = 3.56) than to the difficult group of objects (M = 20.67 SD = 12.8).A t-test for
dependent samples: t (14) = −4,76, p < 0.001.
15.5 General Discussion and Tentative Conclusions
The manipulation check showed that the experiment was properly prepared. As it
had been expected, participants had much more problems with categorization of the
objects from difficult group than from the easy group. We observed longer dwell
time, longer average fixation and more fixations on the AOIs in the easy groups of
objects than in the difficult ones. However there were less revisits to AOIs in the
easy group of objects than in difficult one.
This results prove the hypothesis according to which easy objects were con-
fronted with the content of a given rule, hence the longer dwell time and longer time
of fixations. The AOIs generally match the conditions of a given rule, hence it could
be observed that according to the expectation, inspections involved the application
of the rule-based strategy. Concurringly the shorter dwell time and fixations on
objects belonging to the group of ‘difficult’ proves that the cognitive processes were
more intuitive and detached from the content of rule, since there were fewer fixations
on the AOI. However the higher number of revisits and longer time of dwell outside
AOI (white space) proves that the subjects probably retrieved information stored in
the long term memory and based their categorisation strategy on some heuristic
processes rather than on the inspection of legal conditions.
As opposed to the objects belonging to the group I, the inconclusive objects
encapsulated in group II had been intentionally selected in such a way, so that they
generated a conflict between a rule-based category and the exemplary category.
Concurringly the objects whose pictures have been displayed on the eye-tracker’s
monitor were identifiable according to the wording of the legal text (they possessed
distinctive characteristics and met the conditions C1, C2, C3 etc.), however at the
same time they additionally matched some other characteristics (CX) which made
them different form a typical objects matching a corresponding exemplary based
category. Thus the object became queer, eccentric, strange or peculiar rather than
typical.36 As such those objects became incongruent with their potential exemplars,
making the categorization process much more compound, leading to a kind of puz-
zlement or astonishment on the participants’ behalf. As an effect, the tasks in group
II required a more creative and engaged attitude, since the participants had to choose
between the rule following and the exemplar following strategy. Just to demonstrate
this observation briefly one may refer to the garden house. The garden house pos-
sessed all the relevant characteristics of the building according to the legal text of
the definition. However it additionally possessed another interesting features,
namely its size did not coincide with the size of a typical building of this kind (F1)
and the alleged ‘fragility’ of the whole construction combined with its transparent
walls and the particular location within a garden differed from a typical image of the
residential house. The electric transformer constitutes another noteworthy example
of the potentially fuzzy or puzzling object. Appearing as a solid cement based house
of bricks this object at a closer look turned out to be a part of the electric power
network infrastructure and as such it should be classified rather as a construction
than a building, nevertheless in accordance with the legal rule constituting the rule-
based category that object should be categories as building indeed.
Inserting the pictures inconclusive objects to the collection of having been dis-
played photos allowed a kind of manipulation and differentiation between the two
categorization strategies. The presence of those objects enabled us to address the
question concerning the existence of the exemplary based categories and the inter-
ference between the rule based and exemplary based ones. The issue seems to be of
high relevance for both practicing lawyers and legal theoreticians. It tackles the
problem of the sense of normativity and the sense-making function of rules within
the context of the pragmatics of the law-making process.37 To what extend rules
effectively shape human behaviour? Are they able to serve as the guidance for
human agents? These are still one of the most pressing questions in the contempo-
rary jurisprudence. The results of our investigations do also lead to more practical
36
On rules vs. other categorization strategies cf. Smith and Sloman 1994 and Smith and Medin
1981.
37
Cf. Kahneman and Miller 1986.
questions. To what extend law may abstract from the hard-wired exemplary based
categories, especially given the fact that cognitive psychology finds the exemplary
based categorization as the most fundamental, natural and intuitive, needless to say
the primary one and evolutionary former to the other categorization strategies
Moreover, is it possible to effectively shape human decision-making process by
virtue of the much more complex and less cognizable, artificial rule-based catego-
ries, given the fact that those categories are very often just conventional human-
made normative benchmarks as opposed to the exemplar categories deeply grounded
in human cognitive experience.38
The results of our experiment lead us to the following conclusion: Firstly it
seems that at least in regard to the investigated rule-based categories, the rule-based
categorization strategy even in case of the highly complex and cognitively demand-
ing rule (e.g. very detailed in information abundant legal definition) is still able to
supersede the allegedly more natural exemplary categorization strategy. Secondly,
the rule-based strategy may be effectively applied to the decision making process in
a legal context. This finding has been reflected by the relatively longer duration time
for task performance, where the object was to be classified in accordance with an
explicitly stated and relatively clear rule which was however incoherent, incongru-
ent or even contradictory with the overlapping exemplary based category. This only
means that the subjects were able to ‘switch off’ the exemplary based strategy in
case of the interference between the rule-based and the exemplary based categories.
Moreover, the number of correct answers in case of the house on water (33,3 %) or
barbican (73 %) clearly indicates that the participants effectively grounded their
decisions on rule-based categorization strategy. However, the doubts appeared as to
transformer, which was properly classified by no participant (0 % – sic!). Despite
the fact that the object possessed some characteristics of the building (Fn), the par-
ticipants were inclined to identify it as construction rather than building. It seems
that the participants’ decisions were based on the negative match based on the func-
tional characteristics of the object rather than on the legal definition, which did not
refer to any functional considerations. In other words, they probably found an elec-
tric transformer as an atypical building which could not have been accommodated
by anyone and therefore is seemed to be regarded as just a kind of ‘packaging’ or a
special kind of box for technical appliances and devices. This is why the partici-
pants generally complied with the negative match, stating: ‘the object is not a build-
ing’. The only possible category which remained after this negative match was just
that of construction, because the small architectonic object was out of question due
to the sheer size of the object which was relatively big. The analysis of the transi-
tions confirms this interpretation; in case of the transformer there were 15 transi-
tions between the AOI embracing the trunk of the object and the electric wires
connections and the other 10 transition between the wires’ connections and the
trunk of the transformer (cf. Fig. 15.6). Additionally we have recorded another 22
transitions between the trunk of the object and the AOI containing the legal defini-
tion of construction, whereas no transitions between cables and the legal definition
38
Osherson and Smith 1997.
Fig. 15.7 The AOIs of the garden house (non-conclusive object – gr. II)
of building have been recorded. From the number and the location of transitions we
can interfere that the participants identified the function of the object simply linking
the visual data concerning the electric transformer and the connections of the elec-
tric cables and finally identified the function of the whole object relying on the pres-
ence of the considerable number of electric wires connected to the building. Thus
the decision on the function of the object was prior to the decision on categorization
and seemed to determine its content. Concurringly the electric transformer did not
appear as a typical building, alluring the participants to select an improper category
of construction rather than the proper one, namely the building.
The decisions on categorization turned out not to be based on the rule which fol-
lowed the legal definition. The fact that the object was not a typical building did not
mean that it does not belong to the category, because the object complies with all
the relevant conditions of being a building rather than a construction; it was perma-
nently attached to the ground, based on solid foundations and possessed permanent
brick made walls together with the roof. It seems therefore that this difficult case
revealed the sensitivity of the rule-based categorization and the respective influence
of the exemplary based categorization strategy upon it. The uncanny function of the
transformer seemed to effectively supersede the content of legal definition, leading
to the situation where the rule based categorization strategy was eventually ineffec-
tive, and the categorization decision departed from the content of the legal defini-
tion of the building (Def. 1).
Another ‘hard case’ was the garden house (Fig. 15.7), properly classified but the
astonishingly small number of participants −13 %. The qualitative analysis of this
task leads to the conclusion that in case of the serious incongruence between the
content of two conflicting categories, their coexistence apparently leads to the
cognitive competition between them. This kind of competition consists in an attempt

to switch the mind of the decision maker from the exemplary based categorization
strategy to the rule-based one. In our experiment only 2 participants out of 15 were
able to correctly classify the house in garden as building. Eleven subjects classified
the object as a small architectural object, supposedly doing this in accordance with
the exemplary-based categorization strategy. This output of the categorization pro-
cess seems to be suitable to the common sense knowledge (the array of the images
of the objects stored in LTM). Moreover, three subjects having classified the garden
house as a structure followed the exemplary-based category as well, instead of fol-
lowing the explicit rule derived from the legal definition (the object having been
classified as too different from the image of building). However a close investiga-
tion of the specific eye-tracking parameters such as the number of transitions
between the relevant AOI’s corresponding to the text and the proper parts of the
picture of the displayed incentives indicates the attempt of inducing the rule-based
category beginning from the first task. Even in the first task (garden house – object
1 gr. II) the number of inspections to the definition of building is significant. The
highest number of transitions has been observed as for the transitions between the
picture of the garden house and the legal definition of the building (Def.1) – 36
transitions. Later on the cognitive process of participants focused on the correspon-
dence between the picture of the garden house and the definition of the structure
(Def. 3) – 35 transitions – and between the picture of the object and the definition of
the small architectural object (Def. 4) – 30 transitions.. The fewer number of
repeated information inspections has been recorded in case of transitions between
the picture of the object and the definition of single-family residential building (Def.
2) – only six transitions.
Correspondingly it could be observed that the rule-based categories encoded
within a legal text were still within a process of crystallizing in participants minds
at this stage of the experiment. The most intensive cognitive effort has been taken
as to compare the specific features of the object with the legal definition of building
(Def. 1). The participants were involved within a process of comparison between
the elements of the definitions and the corresponding objects’ features. The readers
clearly understood the definition and were able to decode the category constituting
rule. This observation proves that the activation of the cognitive process reflected
the model of the rule-based categorization (cf. Fig. 15.1). However, the vast major-
ity of answers were incorrect. We believe that this unexpected result may be inter-
preted as the unsuccessful attempt to follow the rule-based category. The rule-based
categorization appeared to be less effective. Moreover, the application of the less
time consuming and more natural (intuitive) exemplary based categorization seems
to be more efficient, since this categorization strategy on the one hand activates the
long term memory (LTM), but on the other hand it seems to be less engaging for the
working memory (WM), as compared to the rule-based strategy. The later one is
based on the comparison between the object and the rule-shaped pattern. This pat-
tern, as opposed to the exemplary-based categorization strategy, is not being
retrieved from the LTM. It is rather being constructed or reconstructed, as the rule
is being derived from the legal text, and this operation seems to be seriously
engaging for the WM during the categorization process. That explains the differ-
ence between time of categorization in ‘hard’ and ‘easy’ cases (see: Sect. 4.2).
The confrontation of the above qualitative analysis for the garden house and
transformer with the quantative data concerning all the tasks in group II, a following
tentative conclusion may be put forward: it seems that the efficacy of the rule-based
categorization strategy is strongly connected with learning effect, namely the degree
of assimilation of the rule’s content strongly coincides with the efficacy of this
strategy as opposed to the alternative categorization strategy. The main questions
are:
1. Why participants made so many mistakes while classifying difficult objects
despite the presence of definitions which should indicate the proper answer?
2. What were the differences like between the easy and difficult objects?
Those differences essentially confused the participants. The eye-tracing data
suggest some explanations to these problems. Longer dwell time, longer time of
average fixation and more fixations on the crucial AOI’s showed that in the easy
group of objects participants analysed properly the most important fragments of the
objects, while in the difficult part these fragments attracted less attention. Longer
dwell time and more fixations outside the AOI’s in the difficult group of objects
than in the easy group of objects suggest that participants looked for additional
information, which probably mislead them during classification. More revisits to
the AOI’s in the difficult group of objects probably indicate to attempts of integra-
tion the information gathered from the crucial part of the picture with information
from unnecessary and misleading fragments. That way of analyse of difficult objects
suggest that, apart from the rule-based categorization, another processes were
involved in the decision making process. That additional – and competitive to rule-
based categorization – process caused longer categorization in ‘hard cases’ (see:
Sect. 4.2). If rule-based categorisation was sufficient, potential mistakes should be
committed as a result of wrong conclusion based on the proper information. This
observation finally leads to the applicability of ‘nudging’ strategy in a specific con-
text of tax law. We conducted an empirical research on how objects categorize
buildings for the purpose of tax regulation, concentrating on the process of catego-
rization in legal context. It seems obvious that some decisions are not well informed
and lead to potential severe consequences. Hence the question to what extent and
how tax regulation could potentially be improved, taking the insights of cognitive
psychology into account. The limits of cognitive capacities in our experiment are
limited to the heuristics of representativeness and anchoring processes. Additionally
however, the decisions on categorization interestingly reflect the interplay between
conscious and unconscious processes, since different categorization strategies seem
to coexist and interfere, leading to the sub optimal result and systemic errors. Hence
the question remains how and to what extent it is possible to improve legal defini-
tions of different objects in the real context of tax law. The definitions contained
some conditions for building rule-based categories. The presence of negative
answers (negative matches) indicated the inefficacy whereas the number of positive
matches indicated the operational efficacy of the rule-based categorization. We
observed both types of decisions and strategies in some indecisive cases (peripheral
objects), whereas the rule-based category prevailed in case of typical, regular
objects. The results of the experiment prove the existence of significant differences
between the cognitive processes engaged into two types of categorizing in respect
of the two types of the categorized objects: conclusive (gr. I) and inconclusive (gr.
II). The participants were not aware during experiment which object belongs to
which type: easy or hard one. Our goal was to study whether the categorization is
executed in the same pattern in ‘easy’ and ‘hard cases’ of legal categorization. We
suppose that because of the fact that ‘hard case’ in general is a situation of interpre-
tative confusion caused by ambiguity of legal definition (the normative sentence S
can be interpreted as expressing either the norm N1 or the norm N2) or its vague-
ness (is the individual case C included or excluded from scope of norm N1?) the
process of legal categorization of hard cases will be different than in the easy one.
In our experiment we induced this second variant (vagueness) by showing on the
screen of eye-tracker object inconclusive for legal authorities (hence even more
obscure for students).39
The performed analysis showed the differences in eye movement patterns, reac-
tions times (time of categorization) when participants evaluated ‘easy’ and ‘hard’
objects and edifice. The results were presented from the perspective of the rule-
based categorization theory and their discussion was focused on question whether
in ‘hard cases’ of legal categorization human mind still applies to the rule (legal
definition) or under the conditions of ambiguity it starts to categorize objects using
a different mechanism of categorization (e.g. basic exemplary based categorization
which ignores rules establish form categorization goals). That suggests that there
are two cognitive mechanism of categorization and, furthermore, vagueness of legal
definition is a trigger for non-rule-based categorization. Firstly, if mechanism of
turning off rule-based categorization is swiftly, it should be taken into account for
evaluation of effectiveness of legal construction (provisions and norms). Secondly,
we’ve assumed two different functional models of categorization, however, the
functional models of-rule based and exemplary categorizations have been translated
into eyetracking parameters rather than general cognitive operations. Thus one may
present the relation between the two as in a rule-exception mode. Concurringly only
the result of the process (positive or negative match), but also its dynamic has been
captured. If mechanism of turning off rule-based categorization is taken into
account, the drafting process should be concentrated on production of simple and
commonly understood definitions applied in the context of tax law or it should at
least take the other possible categorization strategies into account. The first strategy
is based on the assumption on the effective application of simple rules even in com-
plex cases. The other one refers to mild form of cognitive manipulation where the
lawmaker consciously applies at least partly unconscious processes indirectly
39
This observation does not refer to Dworkin 1977, 1986, where rules are undetermined and the
case (the hard case) has to be solved by virtue of weighting principles. We use the concept of typi-
cal case (easy case) vs. vague case (hard case) as referred to the typicality and vagueness described
in Osherson and Smith 1997.
affecting decision-making process. The later strategy is thus inevitably related with
the potential advantages and disadvantages of nudging as a kind of paternalistic
attitude to legal subjects.
Acknowledgement The paper has been prepared within the framework of the research
project:2015/17/B/HS5/00495 financed by the National Science Centre, Poland. The research has
been conducted with the equipment sponsored by the Foundation for Polish Science in the frame-
work of the FOCUS program. We would like to thank Paweł Soluch, Neurodevice Ltd. and The
Institute of Sensory Analysis for help and technical assistance in conducting the experiment.
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Chapter 16
Nudging as a Tool of Media Policy
Understanding and Fostering Exposure Diversity
in the Age of Digital Media
Mira Burri
Abstract The chapter argues that although the balance between state intervention
and non-intervention in the media is precarious and individual rights are to be safe-
guarded, there may be subtler ways of intervening and promoting exposure diver-
sity – i.e. the diversity in the content actually consumed by audiences – under the
conditions of digital media. Against the backdrop of changes in the information and
communication environment brought about by the Internet, the chapter explores a
number of ‘nudging’ tools as potentially more efficient as well as effective instru-
ments of media policy aimed at diversity. In this, it seeks to contribute to the discus-
sions on public service media design, as well as be in line with broader changes in
media governance, which denote a move away from conventional command-and-
control type of regulation.
16.1 Introduction
Media policy goals are defined in a dynamic matrix that is intrinsic to the relation-
ship between the media and the state. It is so ultimately “founded on multiple com-
promises between the prevention of harm and the promotion of benefit”.1 In
contemporary media policies, objectives, such as the protection of national security,
public order, or the individuals’ private sphere, need to be balanced against the
benefits of free flowing information. In addition to this, liberal democratic states
have strived in particular to achieve the availability of a diverse range of content as
a means for sustaining democratic and cultural discourse.2
1
Keller 2011, p. 10; also Starr 2005.
2
Keller 2011, pp. 10–11.
M. Burri (*)
World Trade Institute, University of Bern, Bern, Switzerland
e-mail: mira.burri@wti.org

316 M. Burri
In this latter context, in most of the existing media policy toolkits there has been
an underlying presumption for a causal link between source diversity – that is, the
availability of multiple and diverse content providers – and diversity of content.
Following this line of causality, there has also been the common assumption that
diversity of content naturally leads to exposure diversity – that is, that the audience
takes advantage of the greater selection and actually consumes the available diverse
content. In contrast to source and content diversity, however, exposure diversity has
never been explicitly defined as a media policy objective – neither in the US, nor in
Europe, let alone at the international level. Diversity in supply seemed to have
sufficed.3
And there may be good reasons for this. Some relate to the difficulty of actually
defining exposure diversity goals. As Peggy Valcke rightly and provocatively spells
this difficulty out: “What would such a rule entail? The obligation for every citizen
to read at least two newspapers a day, or to watch at least one cultural program
every week?”.4 Other reasons relate to the nature of any action, which would be
targeted to achieve diversity in consumption, as it would strongly interfere with
consumer choice and sovereignty. And yet others relate to the reality of audience
behavioural patterns in which attention is naturally clustered in the middle ground
on few sources/genres/topics, and possibly plainly represents homogenous content
preferences. Indeed, this last argument can be potentially strengthened in the new
media ecology, which has lowered barriers to entry; in which diversity of choices is
arguably significantly increased and where users have access to sophisticated tools
to locate the content that best serves their interests.5
This chapter will disagree with some parts of this common hypothesis. It will
seek to engage some more recent and more nuanced analyses, which show that the
dynamics of new digital media may promote less rather than more diversity of expo-
sure. It will also show that many of the “old” media policy tools simply do not work
in the new environment, and so are important societal objectives not appropriately
catered for.
Against this backdrop, the chapter will argue that although the balance between
state intervention and non-intervention in the media certainly is precarious and indi-
vidual rights are to be safeguarded, there may be subtler ways of intervening and
promoting exposure diversity – for instance, by fostering serendipity or facilitating
exposure. It will explore a number of “nudging” tools as potentially more efficient
as well as effective instruments of media policy aimed at diversity. This will contrib-
ute to the discussions of public service media design, as well as be in line with
broader changes in media governance, which denote a move away from conventional
3
Although the problem has been recognized. So, for instance, the Council of Europe has stressed
that the importance of structural/quantitative and qualitative aspects of media pluralism, but also
noted that, “pluralism is about diversity in the media that is made available to the public, which
does not always coincide with what is actually consumed”. Council of Europe 1999, Explanatory
Memorandum, para. 3.
4
Valcke 2011, p. 302.
5
Napoli 2011a, 2011c.
16 Nudging as a Tool of Media Policy 317
command-and-control type of regulation. As the topic of media policy and its reform
in the Internet age is rather specific, the chapter will also entail, where necessary
brief introductions to the relevant legal and interdisciplinary discussions.
16.2 Media Policy Essentials
Media policy is a complex and multi-faceted domain, made out of diverse policies
of economic, cultural and social nature. It is difficult, if not impossible, to contain
all media relevant policy choices in a single regulatory field; nor is it possible to tie
it down to the national level only, as many of the national decisions are interlinked
with and dependent upon choices made at the regional or the international levels.6
For the purpose of this chapter’s discussion, we try to reduce this complexity and
focus on national media policy and law, as narrowly conceived to address the pro-
duction, distribution and consumption of media content. We use examples of law
and practice in the European Union (EU) and the United States (US).
We also do not intend to entirely question the conventional media policy objec-
tives, although research has shown that there is profound complexity7 and also some
ambiguity as to how these objectives are framed and implemented, and how the
framing itself may impact on the policy discourse and on the actual policy-making.8
We take it instead for granted that the key public interest rationales for media regu-
lation have remained unchanged and are still valid today. For such rationales, Flew
has compiled a helpful list, including:
• Concerns about the impact of media content, particularly on children and other
“vulnerable” individuals;
• The capacity to use media for citizen formation and the development of a national
cultural identity;
• Implied rights of public participation associated with the broadcasting spectrum
being a common resource with competing public and private uses;
• “Public good” aspects of the media commodity, including non-rival and non-
excludable elements of access and consumption;
• Tendencies toward monopoly or oligopoly in media markets, with resulting
entry barriers for new competitors and lack of content diversity; and
• The potential relationship between economic power and political power arising
from concentration of ownership of the means of public communication.9
Reflecting these rationales of public interest intervention in the media space,
Napoli has offered a taxonomy of media regulation. He classifies it as either (i)
structural – directed at the structure of media organizations and markets, or (ii)
6
Braman 2004; also Burri 2015.
7
See e.g. Keller 2011, pp. 37–74.
8
Karppinen 2010.
9
Flew 2011, p. 63; for the evolution of media policy goals, see Braman 2004.
318 M. Burri
behavioural – directed at the behaviour of media outlets. Media ownership regula-

tion is clearly representative of the first type, encompassing rules that limit foreign
ownership, horizontal and vertical integration within media industry sectors, regu-
lations intended to promote ownership by minority or other groups,10 or various
other measures ensuring impartiality of the media as a guarantee to a functioning
‘‘Fourth Estate”.11 Behavioural regulations, on the other hand, are meant to control
the activities of media outlets and are most often directed at media content.
Restrictions on violence, sexuality and adult language come to mind as relevant
here, but such regulations can also include positive prescriptions for certain types of
content, such as minimum amount of nationally produced content or a certain mix-
ture of public affairs, news and educational programming.12 The EU majority quota
for ‘‘European works’’ on all TV channels,13 as provided by the Audio-visual Media
Services Directive (AVMS),14 is a good example in this category of media policy
measures.
As Napoli clarifies, however, there is no single match between a tool and the goal
it is meant to attain. “As should be clear, structural and behavioural regulations
often overlap in terms of the goals they seek to achieve. Both often are directed at
preserving and promoting principles such as diversity and pluralism. They simply
go about pursuing these goals differently”.15
In the remainder of this chapter, and in line with its objectives, it is these two
media policy goals that we too single out. This is not only for purposes of simplifi-
cation but also because these objectives are deeply rooted in national constitutions16
and in the international human rights regime,17 as an essential pre-condition for
10
See e.g. Hitchens 2006, pp. 65–138.
11
Norris 2004, pp. 186–207.
12
Napoli 2011b, 74–75. See comprehensively Keller 2011, in particular pp. 405–448.
13
Article 4 of the AVMS provides that Member States shall ensure, where practicable and by
appropriate means, that broadcasters allocate the majority of airtime on TV channels, to European-
made programmes (the so-called “European works”). For an analysis and critique, see Burri 2007;
Attentional et al. 2011.
14
Directive 2007/65/EC of the European Parliament and of the Council of 11 December 2007
amending Council Directive 89/552/EEC on the coordination of certain provisions laid down by
law, regulation or administrative action in Member States concerning the pursuit of television
broadcasting activities, OJ L 332/27, 18 December 2007.
15
Napoli 2011 b, p. 75.
16
The practice of the German Constitutional Court is particularly well known in this regard
(Herrmann and Lausen 2004).
17
The European Court of Human Rights (ECtHR) has in its practice reaffirmed media pluralism as
essential for the functioning of a democratic society and for the fundamental right to freedom of
expression and information as guaranteed by Article 10 of the European Convention for the
Protection of Human Rights and Fundamental Freedoms (ECHR). See e.g. Handyside v. the United
Kingdom, judgment of 7 December 1976, Publ. Eur. Court H.R., Series A No 24, para. 49; Otto-
Preminger-Institut v. Austria, judgment of 20 September 1994, Publ. Eur. Court H.R., Series A No
295-A, para. 49; Bergens Tidende and others v. Norway, No 26132/95, judgment of 2 May 2000,
Reports 2000-IV, 371, para. 48; Tammer v. Estonia, No 41205/98, judgment of 6 February 2001,
Reports 2001-I, 263, para. 59.
exercising the fundamental right to freedom of expression. This is true for the
European tradition,18 as well as for the US, despite its less interventionist approach.
The US Supreme Court has, for instance, long identified speech diversity19 as a
“basic tenet of national communications policy” and stressed that “the widest pos-
sible dissemination of information from diverse and antagonistic sources is essen-
tial to the welfare of the public”.20
Before addressing possible ways of nudging users to consume more diverse con-
tent, it is essential to understand the reality of the contemporary media space – at
least as such as emerged, evolved (and still evolving) in industrialized countries.
16.3 Diversity in the Digital Media Space: Presumptions

and Reality
16.3.1 Highlighting Some Changes and Some Challenges
The transformations in media space have been driven by the advent and wide spread
of the Internet. They are multi-faceted, multi-directional and have been well docu-
mented by a host of disciplines.21 It is not our purpose here to capture or measure all
the quantitative and qualitative dimensions22 of these transformations but rather to
focus only on those specific developments that are critical for media diversity poli-
cies. In this sense, we are particularly interested in the changed ways content is
produced, distributed, accessed, consumed and reused in the digital space. To
understand these changes, we start with the macro-picture, where transformations
are sketched with a somewhat wider brush. Then we try to present a few more
granular micro-snapshots that better capture the complexity and that may some-
times go against commonly accepted suppositions.
The Macro-picture
As broader lines of change, one can identify the following features of the new media
space:
1. Content abundance. In the digital space, the notion of scarcity has been modi-
fied. Blogs, social networking sites, virtual worlds and many other forms of
18
See e.g. Council of Europe 1999.
19
On diversity as a guiding media principle, see Napoli 1999, 2002, 2007.
20
Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622, 663–664 (1994) (quoting United States v. Midwest
Video Corp., 406 U.S. 649, 668 n. 27 (1072)) (quoting Associated Press v. United States, 326 U.S.
1, 20 (1945)).
21
See e.g. Castells 1996; Benkler 2006; Sunstein 2007; Palfrey and Gasser 2008.
22
See e.g. Cave et al. 2009; OECD 2013; Bilbao-Osorio et al. 2013.
320 M. Burri
information and communication, made available over the Internet have prolifer-
ated. They have turned into viable media outlets that co-exist next to traditional
ones and offer a new way of accessing information and/or entirely new informa-
tion. The sheer amount of information that is available at all times from any
point connected to the Internet is amazing. There is indeed scarcity of attention.
What is also worth noting is the different way information is organized in the
digital space. The fact that any type of data can be expressed in digital format has
completely changed the rules for organizing information.23 Whereas the Dewey
decimal classification was used for organizing libraries, alphabetical order for
name registers and genre categories in CD shops, the digital environment enables
an encompassing, global, extremely miscellaneous, dynamic and interlinked
information archive that can be searched through a single entry point according
to unlimited criteria.
2. New ways of content distribution, access and consumption. Enabled through
multiple devices over the almost ubiquitous Internet, the patterns of handling
information have changed. Instantaneous distribution to millions of people, pull-
ing content instead of passively receiving it, simultaneous consumption from
many sources are but few of the (TV-unlike) features of contemporary online
communication. These naturally have serious repercussions for users, businesses
and for the entire market for information goods and services. They have also
changed the transparency of cultural symbols, and the ways they circulate in
global and local contexts.24
3. New way of content production, where the user becomes an active creator.
Reduced thresholds to participation, as well as the (ever greater) affordances of
digital technologies, have allowed individuals and groups of individuals to cre-
ate new content, to play around and remix existing content.25 This type of cre-
ativity, interactivity and co-operation is unique to digital media and is a radical
departure from the conventional image of massive and passive audiences, only
slightly empowered by their TV remote-controls.
The Micro-picture
While the above broader transformations have been thematized in the academic
literature, as well as in policy papers, they may mask some of the more complex
developments in media access and consumption in the practical reality of contem-
porary new and old media. To offer a more careful look, in the following, we exam-
ine three of the commonly shared narratives about the effects of digital technologies,
namely: (i) the abundance and (ii) diversity of content, as well as (iii) the lack of
intermediaries and low threshold of participation.
23
Weinberger 2007.
24
Benkler 2006.
25
Benkler 2006; Jenkins 2006, 2008.
Abundance
We often talk of abundance of content as a matter of fact in the digital space – and
in many respects this abundance has been one of the key drivers of media policy
reform, as it arguably fuels both consumers’ autonomous choice and diversity. As
earlier noted, if one looks at the numbers, such as the size of the web26 or the avail-
ability of data online, not only is abundance there but it is truly mind-boggling. We
should also be reminded that in a converged world,27 we should not single out online
platforms as a source of information, nor should we single out audio-visual media,
as traditional print media (such as newspapers) or new players (such as digital
games and virtual world providers) have become active in visual content too and
users have come to treat these diverse sources as interchangeable and compatible.28
This ultimately makes the number of content items higher and the variety greater,
as the conventional wisdom would have it.
Despite this astounding abundance of content, it can be that accessing it in prac-
tice is not that easy.29 Indeed, limitations of legal and practical nature abound, espe-
cially as the digital networked environment matures. The barriers can be of a
different nature and range from technical standards and other obstacles to interoper-
ability to intellectual property rights enforced in opaque manner through digital
rights management systems (DRM), or other forms of control through code and
technology in general.30 Filtering is the preeminent example of restricted access to
information but far from being the only one.
As Verhulst points out in this context, new technologies have introduced new
types of scarcity as the control over information changes from old to new interme-
diaries, as we show below, that may control the flow of, and access to, information,
from multiple and increasing points of entry.31
Diversity
As corollary to abundance, the diversity of the content online is also commonly

taken as given. Two widespread theories, both grounded in traits of the new media
environment, underpin such statements. The first, so-called ‘‘long tail’’ theory,
preaches naturally generated diversity, as the reduced barriers to entry allow new
market players to position themselves and make use of niche markets, which are
26
On 30 June 2015, the number of indexed web pages was 4.66 billion http://www.worldwideweb-
size.com/.
27
European Commission 2014.
28
Horlings et al. 2005, 6; Pew Research Internet Project 2014.
29
Burri 2012a, b.
30
Lessig 1999, 2006; Zittrain 2008; Palfrey and Gasser 2012; Brown and Marsden 2013.
31
Verhulst 2007; Burri 2012a, b.
322 M. Burri
economically viable in the digital ecosystem due to the dramatically falling storage
and distribution costs.32
Where inventory storage and distribution costs are insignificant, it becomes economically
viable to sell relatively unpopular products; however, when storage and distribution costs
are high, only the most popular products can be sold. A result is that instead of only ‘‘block-
buster” content being viewed, with choice constrained by the advertising budgets of major
TV networks or film studios, the “Long Tail” of creative content can be selected.33
On the demand side, the costs of searching and finding are crucial for the ‘long
tail’ effect to materialize, especially as variety becomes greater. On the one hand,
this means the time invested in search, on the other, its efficiency.34 The Internet is
a vast complex non-linear network that allows searching through a single point of
entry. Search engines help us however locate content within the huge volume of
dynamic information, turning into “linchpins of the Internet”.35 The increasing
availability of new facilitators, such as tagging, samples, feedback and recommen-
dations, enables users to find the desired products and even to discover new ones.36
Advanced tools, such as Amazon customer reviews or Yahoo! ratings, based upon
collective intelligence,37 have emerged as new orientation institutions creating
effective data filters.
In the digital space, it is also true that content remains accessible and usable long
after its traditional “one-off” viewing at cinemas, on TV, or through DVD rental or
sale. “Pulling” content individually from a virtually unlimited selection of titles
may in effect change the value attached to cultural content. The popularity of docu-
mentaries or original series on Netflix may be a proof in this regard.
In a sense, the “long tail” theory promised corrections to many of the market
failures of traditional media markets defined by scarcity, high entry barriers and
pronounced economies of scale and scope. It suggested a new type of distribution of
content,38 as supply and demand meet not only for “mainstream” products available
in the “head” of the snake, but also for many other products, now available in the
32
As Anderson (2006, 16) argues: “For too long we’ve been suffering the tyranny of lowest-com-
mon-denominator fare, subjected to brain-dead summer blockbusters and manufactured pop.
Why? Economics. Many of our assumptions about popular taste are actually artifacts of poor
supply-and-demand matching – a market response to inefficient distribution”.
33
Marsden et al. 2006, pp. 22–23.
34
Brynjolfsson et al. 2011.
35
Grimmelmann 2007, p. 3; also Weinberger 2007.
36
Brynjolfsson et al. 2006.
37
Surowiecki 2003.
38
Distribution different from the well-known 80/20 rule, which was formulated by the Italian econ-
omist Vilfredo Pareto in 1896 to describe the allocation of wealth among individuals. The 80/20
rule has been observed in many areas, such as physics, biology, geography, economics and linguis-
tics, and depicts a frequent situation of extreme distribution, whereby a relatively small proportion
of elements generates a large proportion of distribution. It has been typical also of media, where 20
% of the produced content (be it a film, a song or a TV show) generates about 80 % of all the sales
in that market. The remaining 80 % of existing content never actually makes it to TV or cinema
screens, the CD or DVD shop shelves, or finds only a marginal public in unpopular outlets.
ever lengthening “tail”.39 Critically for our debate, all of these put in serious doubt
the adequacy of current models of state intervention in media markets.40
Another important challenge to existing regulatory templates comes from the
phenomenon of user created content (UCC). UCC has been conceived as a powerful
tool of democratization of content production and distribution, enabled by the
increased broadband penetration, the falling prices and the almost ubiquitous avail-
ability of connected devices.41 UCC can be said to bear the key media policy com-
ponents of diversity, localism and non-commercialism,42 and in this sense could
readily fulfil the key public interest objectives without additional intervention.
Further, it has been argued that the internet-facilitated communication without
intermediaries or other substantial access barriers has already created the always
aspired to vibrant “marketplace of ideas”,43 which in the European thinking would
correspond to Habermasian notion of an animated public sphere.44
Miel and Farris offer a snapshot of this highly optimistic vision:
… empowered citizens are seizing control of the political agenda from the corporate hand-
maidens of mainstream media, forcing the powers-that-be to listen to the true voice of the
people. Vigorous debate – now open to all – allows unprecedented levels of participation.
Errors and lies by politicians, corporations, and irresponsible media are corrected quickly
by the scrutiny of the crowd. Authentic stories about the lives of real people are part of a
richer, more human information space. Easy and cheap multimedia production and remix-
ing tools bring fresh new voices to light. The Internet connects us to people and ideas from
around the world that we would never have encountered in the past.45
Undoubtedly, the appeal of these transformative theories is great, and only

rightly so mobilized in the debates for reforming media policies. Yet, proof is par-
tial and evidence of current practices is much more nuanced.
As for the long tail, it seems unclear, at least so far, whether a media environ-
ment of unprecedented choice and sophisticated tools for identifying and accessing
relevant content genuinely helps or hurts the prospects for content that has not tra-
ditionally resided in the “head”.46 One of the inherent characteristics of the new
“attention economy” is the granular level of competition for audience, so that as
online platforms offer the possibility to track the popularity of individual pieces of
information and entertainment, editorial decisions may be distorted in favour of
topics and genres that have mass appeal.47 Also, as global legacy media and Internet
corporations merge, both horizontally and vertically, in the pursuit of better
utilization of all available channels and platforms, diversity may in fact be lost.
39
Anderson 2006, p. 26.
40
Burri 2008, 2012a, b.
41
Benkler 2006.
42
Goodman 2004.
43
Lessig 2006, p. 245.
44
Habermas 1962.
45
Miel and Farris 2008, p. 4.
46
Napoli 2012.
47
324 M. Burri
The question of real consumption, that is particularly interesting to us, is also vexed.
It appears that consumption remains limited to a handful of mainstream online
sources that are, as a rule, professionally produced by white, educated men.48
The positivism for user creativity is still strong. However, we have seen so far
few changes in law and in practice that seek to reflect the new creative processes
and effectively accommodate UCC forms. The current copyright regime is author-
centric and often insufficiently flexible.49
Moreover and more relevantly to our discussion, it is still disputed how real this
grassroots content production is and how it impacts on democratic discourse.
Sceptic voices stress the dangers of fragmentation of the public discourse.50 For
instance, while early analyses of the blogosphere have applauded the low threshold
of participation and incredible possibilities of free speech, recent accounts are less
exalting and indeed disquieting.51 Looking at the dynamics of the blogosphere,
Cammaerts identifies “perils” at different levels and of a different nature.52 At the
structural/organizational level, these are: (i) colonization by the market, expressed
in an “ever more increasing commodification of content and by concentration trends
leading to the creation of oligopolies, both within certain existing niches or across
niches”53; (ii) censorship by states, organizations and industries, epitomized above
all by filtering but also by intimidation by states and employers54; and (iii) appro-
priation by political and cultural elites, which are naturally better positioned in
terms of capabilities, finance and other sources of speedy and forceful mobiliza-
tion.55 At the individual level, such negative processes unfold due to social control
by citizens, intimidation by other bloggers and communities,56 as well as due to
concentrated anti-publics and strong antidemocratic voices that question fundamen-
tal societal values.57 These perils are well reflected in the context of intermediaries
too, as we show next.
Intermediaries
Another myth of cyberspace, which demands a closer look and is of particular

importance to our debate, is that intermediaries do not exist and one can freely
choose any content at any time. As contemporary digital media practice shows this
myth does not reflect reality and in fact, intermediaries with different types of
48
Hindman 2009.
49
Gasser and Ernst 2006; Tushnet 2008; Burri 2011.
50
Sunstein 2007; also 2001; Pariser 2011.
51
Cammaerts 2008, p. 359.
52
53
54
Cammaerts 2008, pp. 363–366.
55
Cammaerts 2008, pp. 366–368; also Hoofd 2012; for an extreme position, Morozov 2011.
56
Cammaerts 2008, pp. 368–369.
57
Cammaerts 2008, pp. 369–371.
control on the choices we make and on the possibility for choices we see abound.
We do not discuss here the physical intermediaries, such as network operators or
Internet service suppliers, but focus on those gatekeepers existing at the application
and the content levels – on what Helberger calls “choice intermediaries”58 or Miel
and Farris, the “new editors”.59 Miel and Farris maintain indeed that the changing
role of the editors is perhaps the most profound shift in the online media sphere.60
Conventionally in the offline/analogue world, editorial roles were concentrated
under the roof of a single institution. Editorial choices were based on a certain,
limited, pool of materials, which were in a way “property” of the media institution.
Editorial products were finite, bounded by the limitations inherent of each medium,
such as the pages of a printed newspaper or the length of a broadcast. The targeted
audience was also typically addressed in a certain rhythm, which had an influence
on the breadth and depth of the content – e.g. daily newspapers, a weekly edition or
one-off reportage. The editorial decisions made as to the content and the format
reached the entire audience of any given publication or programme in the same
way – “each newspaper subscriber sees the same front page and each radio listener
hears the same stories in the same order”.61
These were the key editorial functions of legacy media, and these had important
consequences for the production and distribution of knowledge.62 The picture is
decidedly different now, as “[d]igital media forms are removing these [analogue]
limitations and provoking fundamental shifts in the composition and consumption
of media products”.63 The new editors are multiple, disintegrated and distributed
and they seem to be both enhancing and limiting diverse consumption. Miel and
Farris offer a helpful taxonomy of the new editorial institutions.64 Some of them are
truly web-native; others come as an addition to conventional media practices.
1. Aggregation, which is the process of assembling different types of content in a
tailored, personalized fashion and constantly updating it, belongs to the former
group. This sort of personalized editor is offered on different platforms, for dif-
ferent types of content – be it news, entertainment, gossip, etc. It automatically
generates information tailored to a particular user profile and/or previous experi-
ence in a seemingly seamless and incessant manner. The information used is
commonly produced elsewhere. So, as Miel and Farris show, the big three news
aggregators (Yahoo!, AOL and Google) all rely on legacy media, such as the
Associated Press (AP), for the bulk of their content.65 This may disperse some of
58
Helberger 2011a, b.
59
60
61
62
Weinberger 2012.
63
64
Miel and Farris 2008; also Latzer et al. 2015.
65
Aggregators may be somewhat restricted by copyright. A recent judgment held for the first time
that the news aggregator, Meltwater’s scraping of the Internet and sending snippets in a “news
326 M. Burri
the conventional criticism that aggregators amplify the impact of unreliable non-
traditional sources66; on the other hand it becomes evident that content is not
made more abundant but has merely become more distributed. Legacy media
have responded to the technologically enabled aggregation too and offer much
more content online than in their print or broadcast versions.67
2. Search is nowadays absolutely essential.68 It is presently the starting point for
most online experiences and is the most significant driver of traffic to most web-
sites.69 Without being indexed and searchable on the net, content is plainly ren-
dered non-existent.70 The search business is also highly concentrated with very
few providers, and with Google distancing itself clearly from its competitors.71
While generally speaking, it is in the long-term interest of search providers to
meet the needs of their users – both as consumers and as citizens, it should be
acknowledged that search results are generated algorithmically and automati-
cally assign relevance to certain information units. The automated selection is
also prone to manipulation using a range of search engine optimization (SEO)
techniques.
3. Social bookmarking is increasingly important as a mechanism of giving promi-
nence to content. Here the crowd acts like an editor through different ranking
and bookmarking systems, such as Reddit, Technorati or Del.icio.us. As part of
the social media phenomenon, these mechanisms not only tailor media con-
sumption but also succeed in commanding the attention of large groups.72
Naturally, the marketing industry has swiftly learned to incorporate these tools
and utilize them for mobilizing consumer attention.73
Overall, through all these different mechanisms the network functions as a multi-
channel editor. On the positive side, it may be justified to view “the networked
media environment as a virtual social mind that produces something richer, more
representative, and more open to ideas than the top-down mass media model of the
past”.74 On the other hand, this positivism may be deeply flawed. At least so far,
there is a great deal of uncertainty as to “the ability of this self-organizing mecha-
report” were not fair use. The case was settled after Meltwater appealed to the higher court. The
settlement provides that AP and Meltwater will be working together. See Associated Press v.
Meltwater U.S. Holdings, Inc., 931 F. Supp. 2d 537, 537 (S.D.N.Y. 2013).
66
Keen 2007; Meister and Mandl 2014.
67
68
On search engines, see Schulz et al. 2005; Grimmelmann 2014.
69
Ofcom 2008b, para. 5.60.
70
Introna and Nissenbaum 2000, 171. In its most recent draft recommendation on the protection of
human rights with regard to search engines, the Council of Europe (2010) acknowledges the role
that search engines more generally play for the realization of the fundamental right of freedom of
expression, for which media diversity is an important element.
71
Travis 2009.
72
73
74
nism to reliably identify salient information, especially on topics [that] don’t get the
intense scrutiny of popular issues like politics”.75 Often are also the workings of the
system somewhat haphazard – the trajectory from online obscurity to prominence
remains poorly understood, even by people privy to the process, as there are simply
too many variables.76
Thinking about the societal functions of the media in the context of our discus-
sion, it could be that this complex environment presents certain dangers of reduced
exposure diversity, balkanization and fragmentation of the public discourse.77
First, we need to acknowledge the possible interferences with users’ individual
autonomy and freedom of choice. As Latzer et al. argue, while filtering reduces
search and information costs and facilitates social orientation,78 it can be “compro-
mised by the production of social risks, among other things, threats to basic rights
and liberties as well as impacts on the mediation of realities and people’s future
development”.79 In this sense, user autonomy in the new informational space
becomes heavily dependent on media literacy. The EU High Level Group on Media
Freedom and Pluralism had a clear message in this respect:
Information isolation and fragmentation, together with an inability to check and evaluate
sources, can have a damaging impact on democracy. At present, research is still unclear on
the extent to which these new formats will promote greater decentralisation or, actually,
more centralisation on how news are gathered and edited. What is abundantly clear, how-
ever, is that a well-educated public will be more resilient to withstand whatever negative
influences they may encounter. Media literacy and the ability to perform a choice and criti-
cal evaluation of information sources is therefore something that the citizen of tomorrow
will need as much as basic and digital literacy.80
The second worry in this context has to do with the impact of tailored media
production and consumption. In the former sense, there is a recent trend towards
algorithmic content production, where algorithms drive decision-making in media
organizations by predicting audiences’ consumption patterns and preferences.81
While in some areas this may be viewed as beneficial in giving the audiences what
they want, in other areas, such as for news, this may be highly problematic, as local
news and current affairs become tailored to the demographic, social and political
variables of specific communities.82 Napoli thematizes also the so-called “content
farms”, which based on search-engine data (such as popular search terms; ad word
sales and the actual available content) produce content rapidly and cheaply in order
to meet that demand. “The output then represents a prediction of the type of content
75
76
See e.g. “Alex From Target: The Other Side of Fame”, The New York Times, 12 November 2014.
77
Sunstein 2001, 2007, 2009.
78
Latzer et al. 2015.
79
Latzer et al. 2015.
80
High Level Group on Media Freedom and Pluralism 2013, p. 31.
81
Napoli 2014.
82
Napoli 2014, p. 34.
328 M. Burri
for which there is the highest unmet audience and advertiser demand”.83 The cre-
ation of content is completely commodified and possibly harmful to any public
interest function of the media we can think of.
In the second sense, the personalization of the media diet, as based on a distinct
profile or previous experience, “promotes content that is geographically close as
well as socially and conceptually familiar”.84 “This keeps users within familiar
boundaries, feeding their curiosity with more of the same. When they are looking
for new content or information, this reinforces existing opinions, gradually remov-
ing conflicting views”.85 Hoffman et al. argue that social media only exacerbate this
effect by combining two dimensions of “homophily”: similarity of peers and of
content:
In fact, social network site-based discourse is driven and filtered by the communities with
which users choose to associate. Individuals tend to establish bonds with peers they per-
ceive as similar and who share common interests, causing a potential risk that the informa-
tion users receive from their networks could be highly mediated. Each piece of content will
be filtered through what a person’s contacts perceive as important, creating a self-reinforcing
mechanism of homogenized information.86
This may not be particularly conducive for taking well-informed and balanced
decisions – either individually or as a group.87 While these situations have been dif-
ferently labelled – “cyber-ghettos”,88 “filter bubbles”,89 “echo-chambers”90 – they
all point to a fragmentation of the public discourse and possible polarization of
views.
As the High Level Group on Media Freedom and Pluralism puts it:
Such developments undoubtedly have a potentially negative impact on democracy. Thus
we may come to read and hear what we want, and nothing but what we want. It is clearly
not possible to force people to consume media they do not wish to: that would be equivalent
to propaganda, brainwashing or neural programming. The concern is people forgetting that
alternatives do exist and hence becoming encapsulated in rigid positions that may hinder
consensus-building in society.91
83
Napoli 2014, p. 35, referring to Bakker 2012, and Anderson 2011.
84
Hoffman et al. 2015, p. 1365.
85
86
87
Sunstein 2006.
88
Dahlgren 2005.
89
Pariser 2011.
90
Sunstein 2001.
91
High Level Group on Media Freedom and Pluralism 2013, p. 27.
16.3.2 Intermediate Conclusions
The above section sought to underline the breadth and depth of the transformations
that digital technologies have brought about in the last two decades, as well as the
complexity and the related uncertainty as to their societal impact. In particular with
regard to the fundamental media policy objective of diversity and the overall condi-
tions of free speech in the digital media space, there are a number of ambiguities.
On the one hand, the possibilities to create, distribute, access and consume content
seem unprecedented – we can hardly compare with the offline/analogue world of
the television, the newspaper and the magazine. On the other hand, as we showed
with regard to the underlying assumptions of abundance, diversity and communica-
tion without intermediaries, things are not as straightforward. Indeed, we ventured
that in many senses diversity, and in particular exposure diversity, may be reduced.
Although we cannot as yet be definitive in this supposition, since we seem to still
know far too little about how people combine offline and online media sources, how
the changes in the delivery and consumption of the media are actually affecting
their public awareness, opinion building and civic engagement, and how these
changes relate to different generations,92 we can nonetheless acknowledge two
important things.
The first puts in serious doubt the causal link between source and content diver-
sity and the actual consumed diversity. What appeared at least somewhat plausible
under the conditions of analogue media where the sources were few, it is now,
under the conditions of digital media, extremely hard to believe (and beliefs should
not be the basis of any sensible policy in any case). Closely related to this doubt is
the question about the adequacy of the presently applied media policy tools, which,
almost exclusively target source and content diversity. In the following, and as
promised in the beginning of the chapter, we explore alternative instruments, and
see some modes of nudging as particularly fitting.
16.4 Nudging towards Diversity in Consumption
How to react to the above sketched new media environment and design apt state
intervention that ensures diversity, in particular diversity in consumption?
Thinking of those specific situations where access to content may be hindered or
made difficult, one could suggest a number of basic framework conditions that can
improve the chances of diversity of exposure, such as lower and equal threshold for
access to content; increased interoperability between networks, devices, and appli-
cations; non-discrimination between different types of content and applications (as
in the sense of network neutrality); enhanced transparency as to default settings and
terms of service with regard to privacy; more legal certainty with regard to the grey
92
Miel and Farris 2008; also Webster and Ksiazek 2012.
330 M. Burri
zones of copyright law and practice. The list of such conditions may be lengthy and
does demand the attention of policy-makers because even in seemingly technical
decision-making situations, essential rights and values, such as freedom of expres-
sion, fairness, equality of opportunity and justice are affected,93 as the network neu-
trality debate has clearly proven.94
We would like in the following to contemplate tools that more deliberately target
exposure diversity.
16.4.1 Updating Existing Tools
Although in the beginning of the chapter, we noted that exposure diversity was
never explicitly formulated as a media policy objective, there were and still are a
number of ways, often also formulated as a matter of law, that sought to ensure that
the audience has exposure to certain content. Certainly, an important function in
this regard has been given to the Public Service Broadcasters (PSBs), which in the
European tradition, are large media organizations, such as the original model of the
British Broadcasting Corporation (BBC), often funded by the tax payer or through
dual funding schemes including income from advertising. The US model has
evolved quite differently and PSBs play a less prominent rule in media exposure
and have a more distributed public interest function.95
It is fair to note that at least at the outset of public service broadcasting (PSB) as
a media policy institution, when the incumbents enjoyed a state of monopoly, its
paternalistic function was clearly evident – PSBs had to provide the audience with
a well-mixed diet of news, entertainment and educational programmes and cater for
their “enlightenment”. As Ronald Coase, who famously criticized the BBC, accounts
for these earlier debates:
What is certain about the […] [broadcasting] system is that, under the present conditions, it
will spread widely and rapidly among the poorer classes of the population; and this country
[the United Kingdom] will not for long be able to congratulate itself as a broadcasting sys-
tem under which, while broadcasting is controlled with enlightenment and impartiality, by
a responsible public corporation, the listening is controlled by Tom, Dick, and Harry.96
93
See e.g. Zittrain 2008; Chander and Le 2013.
94
The neutrality principle has been intrinsic to the architecture and the functioning of the Internet.
It holds in essence that the network should be neutral to the content being passed and that the intel-
ligence is located at the edges of the network. See Wu 2003; Marsden 2010.
95
Van Cuilenburg and McQuail (2003) have analyzed the US and the European models and showed
the divergence between them after World War II. While the European model placed PSB at the
centre, the US model is almost exclusively built around commercial media. The Public Broadcasting
Service only emerged in the US in the 1960s and involves many stations delivering niche content
and often catering for the underserved, minorities and the poor. The European model tends also to
align media with cultural policy, whereas US media policy has been aligned with telecommunica-
tions policy and focused on ownership and access issues.
96
Coase 1950, p. 95, citing an editorial from The Times.
Next to this large project of PSB, which was supposed to provide the audience
with steady flows of “good” content that is innovative, challenging, original and of
high-quality,97 there have been subtler ways to ensure that the users get more easily
access to such content.
So, for instance, PSBs in Europe have had the privilege to occupy the first slots
in electronic programme guides (EPGs) and have been given so “due prominence”.98
Foster and Broughton show that EPGs have been an important tool for consumers
finding and selecting programmes and there is evidence that channels with slots
near the top of each section of an EPG have had an advantage in viewers’ selection
over those further down.99
This approach [of “nudging” people towards the choices we hope they will make both in
their own and society’s wider interests] has so far worked reasonably well. The main PSB
channels are found at the top of general channel lists, and feature prominently in relevant
genre lists on most platforms. This outcome is consistent with the aim of securing a high
profile for public service content, is in line with reported audience expectations (who want
the convenience of finding their favourite channels near the top of an EPG), and is also
largely in line with the commercial interests of platform operators – who want to offer an
attractive and easy to use EPG to their customers, where the most watched channels are
easy to find.100
Yet, although television is still the primary content medium, this is likely to
change, and is already now doubtful for younger people. The value of EPGs as a
tool of enhancing the prominence of public service content is bound to be reduced,
and there is a need for adjustment.101
We can first think of an updated variation of the EPG as a tool for enhancing
prominence of both the brand of PSBs and of public service content. Foster and
Broughton see this also as an apt two-step process of nudging, whereby viewers are
attracted to the PSB channel or brand and then a range of techniques are used to
“lead audiences to a wider range of content than they might otherwise have chosen
for themselves”.102 The authors have justified the need of a new legislation (in the
UK but also subsequently at the EU level) that will ensure prominence of PSB
brands or individual service brands on online platforms. Prominence requirements
97
For the perceptions of public service content, see e.g. Ofcom 2008b.
98
EPGs have been regulated at the EU level through the Access Directive (Directive 2002/19/EC
of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection
of, electronic communications networks and associated facilities, OJ L 108/7, 24 April 2002, as
amended by Directive 2009/140/EC of the European Parliament and of the Council of 25 November
2009, OJ L 337/37, 18 December 2009). The implementation of the Directive differs – e.g., the
British regulation allows a preferred treatment of PSB channels, while in Germany the regulation
of EPGs is based on the equal treatment of public and commercial channels in EPG listings. See
van der Sloot 2012.
99
Foster and Broughton 2012, p. 12. Other factors that influence selection include having a memo-
rable EPG channel number and being adjacent to another popular channel.
100
Foster and Broughton 2012, pp. 13–14.
101
Foster and Broughton 2012, p. 19.
102
332 M. Burri
should apply to the core elements of any consumer interface, such as a channel grid
or on-demand service menu and each PSB should expect to secure at least one icon/
button on the first page of an on-demand guide or its equivalent.103
Such an arrangement may have its benefits and address future developments in
the digital media space, where access to globally-produced (mostly US) produc-
tions is the core proposition of many new content packagers, and new on-demand
brands focused on specific demographics or genres (such as Netflix) may crowd-out
the mixed genre, general interest PSB brands.104 Foster and Broughton make an
additional strong argument of a somewhat broader nature. They maintain that:
[m]ore intangibly, prominence for public service content on key platforms also sends a very
public signal about the role and relevance which we, as a society, assign to that content and
its providers. It sends the message that we collectively believe in the value and importance
of public service content […]. It also helps send a message about our wider expectations for
standards in the rest of the broadcast media sector. This signalling role may be especially
important for public service news channels (which deliver an impartial and widely trusted
service) and children’s programming, which offers stories, voices and characters grounded
in our own national and regional culture.105
Yet, while this may be true, the fact of the matter is that due prominence rules
shield the incumbent PSBs and would give it an additional competitive advantage
online. Foster and Broughton’s strategy is sensible but it operates under the strong
assumption that the PSB will do the job right. In fact, there is still no guarantee that
public service content will be consumed, or that the consumed content will be
diverse.
16.4.2 New and Newly Targeted Action
Thinking beyond existing models of intervention, policy-makers can explore other

types of action. One cluster of such actions is more defensive and relates to the
activities of PSBs. The other is more proactive and involves other media players
too. In the first category, policy-makers can strive to highlight public service content
by providing “information about information”, which can effectively assist users in
comparing and finding content that is relevant and valuable to them, while delineat-
ing it from other “noise”. As Helberger explains: “[i]nforming consumers about
their choices (in the hope that they will make the right ones) has been repeatedly
103
Foster and Broughton 2012, p. 4. The authors have specified further that where content gateways
choose to provide editorially driven or curated guides to types of content (e.g. in “recommended”
or “featured” lists), the presumption would be that prominence rules would only apply if such
features become primary routes to content; user-driven approaches to finding content such as pure
search tools or recommendations based on the user’s or wider audience “likes” should be excluded
from the framework; and any prominence requirements should apply only to “default” settings on
the relevant guide.
104
Foster and Broughton 2012, pp. 21–22.
105
advanced as a preferable route to the traditional, paternalistic approach in media

regulation – which regulates the offering and pre-defines choices”.106
Labelling is the most obvious and conventional transparency-enhancing tool
known from consumer protection policies that can be employed to meet these ends.
Helberger has proposed the so-called “diversity” label to this effect – which marks
content as being diverse.107 We are rather in favour of simply extending the brand of
the public service broadcaster to more online spaces or of creating an additional
“public service content” label, which can mark also content other than that pro-
duced and distributed by the PSBs. Indeed, such a general-purpose label can spare
us the demanding task of deciding which content is diverse and in comparison to
what (considering that we are unaware of the type of content already consumed).
A similar idea had been explored during the second PSB review in the UK in the
context of the so-called “Public Service Publisher” (PSP).108 Relevantly for our dis-
cussion of labelling, the PSP was not expected to invest significantly in developing
a consumer brand proposition. It was rather supposed to function as “a ‘facilitation
brand’, subordinate to other brands in consumers’ eyes, but having an important
impact in the decision process – providing a potential mark of quality, much like the
‘Intel Inside’ brand for PCs”.109 These labels can not only be visible on the diverse
platforms where the content is offered but can also be designed as a discrete tag or
a suite of tags that can facilitate search processes.
This labelling/branding can be well linked to the question of trust in the media.
As the digital media landscape is profoundly fluid and uncertain, the value attached
to media may be changing. Trust may become absolutely critical. On the one hand,
this refers to the trustworthiness of content, its high quality, independence, accuracy
and authenticity.110 Trust can become critical for making choices not only about
content but also about the platform that provides the content – in the sense of its
commitment to privacy, to high ethical standards,111 to transparency of terms of use
and their subsequent changes, and to overall user friendliness. The governance of
online spaces – be it a social networking site, communication platform or virtual
world – is often opaque and regulated through code and contractual relationships
between the user and the platform provider that are as a rule tilted against the user,
giving her little or no room to negotiate or react.112 Apart from worries about secu-
rity breaches, Turow has shown how the advertisers pressure the media into collect-
ing more personal information about readers and listeners, so as to target and
106
Helberger 2011b, pp. 343–344; also Sunstein and Thaler 2003.
107
Helberger 2011b.
108
Ofcom 2007.
109
Ofcom 2007, p. 8.
110
111
Hendy 2013, p. 118; also Mayer-Schönberger 2011.
112
See e.g. Edwards 2013.
334 M. Burri
personalize advertising.113 Public media platforms can provide for a higher level of
trustfulness that the contemporary audiences need.114
Beyond informing through labelling, there is a separate question of whether
there should be discrete media policy initiatives that effectively aim at ensuring
diversity in consumption. This involves a deeper type of intervention and is some-
what controversial from the viewpoint of policy implications and interference with
other rights, as we noted earlier. Helberger has argued still that there could be
important positive effects of such an intervention, which she aptly refers to as “prin-
cipled consumption” target. Tools aiming to achieve this target entail some sort of
guidance for users to the “relevant” and the “quality” content, making sure that they
then consume the “right mix”.115 In this form, media policy tools will take up dis-
tinct “asymmetric paternalism” functions.116
Two critical questions arise in this context – of awareness and serendipity – i.e.
“do people know about the full range of content opportunities available to them
online, and how often do they stumble across content which they like but which
they did not know existed?”.117 The UK Ofcom has shown that barriers with respect
to awareness and serendipity may be significant.118
While the avenues of raising awareness can well be covered by the above
described tools of informing and attracting audiences, the question of serendipity –
i.e. of introducing viewers to content they would not otherwise look for or challeng-
ing users’ views and expanding their knowledge “by chance”,119 has not been
addressed so far. In this context, a host of scholars have stressed that, “[s]erendipi-
tous encounters might alleviate some concerns about restrictive coping strategies
and a tendency in users to hide in their ‘information cocoons’”,120 and “promote
understanding and open-mindedness, and thereby also advance democratic goals”.121
The digital space and different ways of analyzing data and aggregating content do
allow for the random delivery of different types of content, which can be displayed
next to the chosen by the viewer content or in dedicated “less searched”, “less
viewed” and other type of less popular, not mainstream lists. Also, since it appears
that there is a great difference in the availability and discoverability of discrete
genres of public service content, it can be apt to make cross-genre linkages, so as to
both highlight this type of content and to increase the chances of overall more
diverse consumption.
113
Turow 2012.
114
Lemley (2011) argues even that users will be incentivized to pay for such a trusted service.
115
Helberger 2011b, p. 346.
116
Helberger 2011b, p. 343. Justifying such an approach, see Sunstein 2000; Thaler and Sunstein
2003.
117
Ofcom 2008a, para. 3.95.
118
Ofcom 2008a, para. 3.98.
119
Ofcom 2008a, paras 3.99–3.101.
120
Helberger 2011a, p. 454.
121
Helberger 2011a, p. 454.
However, there should be caution in these random offerings, as they can simply
be ignored or can even disrupt viewer’s experience and reduce the value of the actu-
ally offered content. Research has shown that there must be more to serendipitous
encounters than just chance. Schönbach explains that in order to work and incentiv-
ize users, surprises must be “embedded in the familiar”.122 Helberger expounds fur-
ther that, “[i]n order to be able to make sense out of chance information exposure,
the information must resonate with some prior knowledge, interest, or experience
for the user”.123 Hoffman et al. argue along the same line that we can speak of
“diversity experience” only if users “perceive and digest this content according to
their motivations, awareness, and capabilities”.124 The authors are also convinced
that PSBs have a role to play in this regard and “may support users in overcoming
homophily and the motivation challenge by better illustrating the benefits of hetero-
geneous, unfiltered content and facilitating access to diverse or even random con-
tent rather than personalized selections”.125
Overall, one can argue that in the complex media space of digital media, there is
a need for ‘good aggregators’ of content that can counteract some of negative fea-
tures of digital communications and ensure more actually found and consumed pub-
lic service content.126 In the age of “big data”,127 it can be assumed that designing
such smart editors is doable.
The question of balancing between the virtue of the intervention and its possible
side-effects, which are intrinsic to such paternalistic actions remains. Helberger is
in this sense right to stress that using such ‘technologies of persuasion’128 may affect
not only media consumption but also viewers’ thinking, their social and political
position-shaping and engagement.129 Such “unprecedented powers come with an
entirely new set of responsibilities”.130
Helberger puts forward some guidelines that can contain any harmful effect on
user autonomy and deliberation. She looks particularly at the ethical acceptability
of the intended persuasion, the methods used, as well as the acceptability of the
outcome.131 In a more pragmatic and policy-oriented manner, Foster and Broughton
suggest some principles that should inform any new approach to prominence regu-
lation. These include: (i) consistency with citizen and consumer needs and
122
Schönbach 2007.
123
Helberger 2011a, p. 462; Schraefel et al. 2009.
124
Hoffman et al. 2015, p. 1363 argue that in order to experience diversity online, users must strive
for diversity, be aware of the preconditions of diversity, and be able to ensure access to diversity.
125
126
Goodman and Chen 2010; Burri 2015.
127
Mayer-Schönberger and Cukier 2013.
128
“Persuasive technologies are intentionally designed to change the user’s attitude, behavior or
beliefs often by giving the user feedback of his actions (or omissions) and by trying to ‘suggest’ to
him a desired pattern of behavior”. Spahn 2012, pp. 633–634.
129
Helberger 2015, p. 1330.
130
Helberger 2015, p. 1330.
131
Helberger 2015.
336 M. Burri
expectations; (ii) proportionality; (iii) flexibility; and (iv) value, in the sense that
benefits exceed costs.132 It should be noted that, for PSBs, there is also an assump-
tion that they act in the public interest, according to codes of conduct and internal
regulations, the compliance with which is also monitored.
While the due use of such interventionist tools is important, it should not be
exaggerated, as “nudging” in the media is not something entirely new and has been
in many ways intrinsic to editorial processes. As Foster and Broughton remind us:
Once they had persuaded audiences to tune in, schedulers were able to use a variety of
techniques to introduce them to programmes that they might not otherwise have decided to
watch – “hammocking” more serious or experimental programmes between two old favou-
rites in the schedule, launching new programmes after successful existing programmes,
cross-promoting programmes within and on different channels.133
16.5 Conclusion: New Tools for Contemporary Media

Policies
Despite the far-reaching transformations brought about by digital technologies,

there have been very few changes in the media policy toolboxes of the pre-Internet
age. One plausible explanation stems from the existing path dependences134 in
national media policies, which have prevented real innovation so far. Well-
organized stakeholders and self-interested politicians, profiting in the short- and
mid-term from defending national and cultural values, anti-commercialization and
anti-globalization, have hindered policy overhauls, as public choice theory would
predict.135 Another explanation comes from the complexity of issues involved and
the inherent difficulty to pinpoint policy instruments that work, and efficiently and
effectively contribute to the fundamental media policy goals, such as the sustaining
of a vibrant and diverse public sphere.
The incredible possibilities of creating, distributing and accessing content across
a range of platforms and devices in the digital networked environment do, on the
one hand, signal for less state intervention. Whilst this may be true, we showed, on
the other hand, that the conditions of free speech may often be rendered challeng-
ing, user sovereignty may be impaired and diversity may be seriously reduced –
with potentially grave consequences for individual freedom, political and cultural
discourses. We also showed that the goal of exposure diversity has been insuffi-
ciently thematized in policy discussions and many of the presently applied media
policy instruments may be off the target.
As a relatively young theoretical concept “exposure diversity” allowed us to
explore novel ways of proactive media governance and to think of the different
132
133
134
Page 2006; Liebowitz and Margolis 2000.
135
Shughart 2007.
degrees of intervention that may satisfy that precarious balance between user auton-
omy and the public interest objective of diversity. We put forward in particular
some proposals for raising the awareness about the availability of public service
content, as well as for increasing the level of exposure diversity through serendipity
nudges. While we did not discuss fully the institutional mechanisms that may opera-
tionalize these proposals, it can be ventured that the institution of PSB is well
equipped for this purpose. Indeed, policy-makers contemplating the ongoing reform
of PSB into Public Service Media (PSM) will be well-advised to carefully consider
these opportunities and the use of softer tools to curate the digital media
experience.136
It is fair to note that some of the suggested measures have a paternalistic charac-
ter in that they attempt to bridge the “difference between the public interest and
what interests the public”137; but such policies have been typical for state interven-
tion in the media and clearly fade in their intensity when compared to measures,
such as content quotas that pre-define choices.
Actual exposure to diverse media content is neither straightforward nor self-
evident. Learning to better understand if and how content reaches the user, what
obstacles users encounter, as well as what the overall impact of these is, is not only
an important academic exercise; it is also the route to formulating better, more
effective media diversity policies. More research and experimentation are certainly
needed.
Acknowledgement I would like to kindly thank Klaus Mathis for inviting me to the 4th Law and
Economics Conference at the University of Lucerne. The comments of the participants were very
helpful and much appreciated.
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Press.
Chapter 17
Academic Fraud at Hogwarts
Behavioural Law and Economic Lessons for Muggles
of All Ages
Rute Saraiva
Abstract All over the world, empirical research shows the cultural transversality
of academic fraud, from teachers to students, from elementary school to university.
See, for all, the work of Aurora Teixeira, Donald McCabe, Dan Ariely, Francesca
Gino or Steven Levitt. More than an ethic crises, the explanation could arise not
only of utility-maximization behaviours but also, in a competitive environment,
from perverse incentives associated to bounded rationality and cognitive biases.
Based in Harry Potter’s fiction, mainly spent in a school environment and transver-
sal to most cultural and age strata, and in Behavioural Law and Economics insights,
we will both look for illustrations and explanations for this phenomenon and for
effective and efficient solutions to deal with it without imposing a typical paternal-
istic approach. Firstly, this task implies the identification of the costs and benefits
behind the motivation of cheating and of the risk taken both in an individual and
collective perspective. Secondly, it is necessary to recognize the biases behind the
decision of cheating (after all agents are of flesh and bone, contextualized and with
computational and motivational limitations), including an eventual distortive insti-
tutional framework. Inspired by Hogwarts, we will try to present some proposals for
a correct and preventive architecture of choice and nudging behaviours to decrease
academic fraud. Even though some may doubt its normative inferences, this
approach has positive, normative and prescriptive potential, i.e. prevision, redirec-
tion of conducts and design of a legal framework to contradict systematic biases.
Therefore, as institutions serve as behavioural anchors, the readjustment of a new
choice architecture implies, surely, its re-appreciation (at least in relative terms) and
a re-equation of values, mainly academic integrity.
R. Saraiva (*)
Alamedad de Universidade, University Lisbon Law School, Cidade Universitária,
Lisboa 1649-014, Portugal
e-mail: rutesaraiva@fd.ul.pt

344 R. Saraiva
17.1 Introduction
The title of this piece may seem a little provocative for an audience more prone to
deal with purely scientific analyses than with the adventures of a young and popular
sorcerer. The picturesque aspect of the chosen theme, despite the recent expansion
of technical literature beyond the traditional frontiers of the academic ivory towers,
may cause distrust and perhaps repudiation by the most conservative and will cer-
tainly result in some astonishment. However, this approach is not new. Studies on
literature and law are appearing, though little-centred on the interdisciplinary treat-
ment of fiction.1 Hence, in Anglo-Saxon countries there are already a number of
non-literary works published on the saga of Harry Potter, using the analysis of the
seven volumes to illustrate and explore serious issues from human rights to the
agency theory.2 So, why not academic fraud?
Indeed, much of the narrative created by J. K. Rowling takes place at the
Hogwarts School of Witchcraft and Wizardry, an institution somewhere between
the elementary and university education,3 placing the characters in situations similar
to those experienced in the daily life of muggles’4 academia, including the practice
and temptation of cheating. On the other hand, with children and adolescents as the
main readers of these books at a stage where their morality is constantly building,
the lessons learned may be valuable.5 Moreover, assuming the construction of the
British author of a civilizational superiority of the magical universe (although of
medieval inspiration and with a captured bureaucratic state), it will be interesting to
see what reasons foster deception and how can this be fought in the triple purposes
1
See references in Saraiva 2012.
2
See references in Saraiva 2012.
3
The education system in the magical world is not clear nor seems to reproduce the typically exist-
ing in the muggle world, although it is possible to guess some similarities with the British and
French (Key stage 3/Brevet and General Certificate of Secondary Education/Baccalaureate). On
the one hand, it’s hard to realize what kind of training there is before becoming 11 years old and
entering into Hogwarts. If for muggles (and perhaps half-bloods) who are selected, they very likely
attended the muggle school system, it’s foggy for children who live exclusively in the magical
world (including squibs). As they get to Hogwarts with writing, reading and calculation skills, it
appears that they should have some kind of support, probably home schooled with a private tutor
(similar to what happened in wealthy families and high society or in Book VII to some former
Hogwarts’ students), primary schools only for magic children or (anonymous) integration in the
muggle elementary school network. On the other hand, it seems there is no university system,
especially when considering the path of the great academician Dumbledore described in Book VII
or the information on access to magical professions in Book V before the famous Ordinary
Wizarding Level (O.W.L.). Voldemort himself, when he tries, as Tom Riddle, to get a professor
position at Hogwarts, does not undergo any special course. His huge magical knowledge comes
solely of Hogwarts education and individual research. For Aurors, by Tonks’ explanations, there is
a course which, however, is closer to a professional reality.
4
Non-magical people.
5
Morris, Moral Choice, Wizardry, Law and Liberty: A Classical Liberal Reading of the Role of
Law in the Harry Potter Series, in Thomas and Snyder 2010, p. 51; Law & Teller, Harry Potter and
the development of moral judgement in children, in Thomas and Snyder 2010.
17 Academic Fraud at Hogwarts 345
of prevention, resolution and sanctioning, hence applying lessons learnt to the real
world. However, the overall success of the series, maxime among the youngest,
appears as a unique pedagogical opportunity with its assumed moral dimension
(with the eternal struggle between Good and Evil), and lets readers, within the intro-
spection of reading, cogitate and evaluate their choices when faced with the moral
dilemmas of the books characters. This does not mean, however, that the following
pages are aimed at minors or that the scope of this text is reduced to a purely decora-
tive dimension. After all, part of the success of fiction has either to do with the
identification with the reality of the reader or with his expectations. Finding out
about cheating in an attractive and supposedly more evolved context allows a dog-
matic and critical reflection, especially considering the current hegemony of the
phenomenon of fraud which goes beyond the walls of schools and infiltrates in the
most diverse relations and institutions.
More than an ethical crisis, the explanations may not only lie in utility-maximizing
behaviours, in a typical cost-benefit analysis, but also, in a competitive environ-
ment, in perverse incentives with bounded rationality combined with cognitive-
behavioural biases. Thus, based on Harry Potter’s fiction and on an approach that
emphasizes the freshness of the teachings of Behavioural Economics, illustrations
and clarifications to this phenomenon will be pursued as well as effective and effi-
cient responses to contain it without, however, imposing a paternalistic approach
that annihilates the freedom of choice.
Thereby, after exemplifying different types of fraudulent conduct in an academic
environment, comes the identification not only of the costs and benefits of the risk
and of the motivation for cheating in both an individual and collective perspective
but also the recognition of biases behind the deception decision, including any dis-
torting institutional framework. In the third part, the mechanisms for combating
fraud at Hogwarts are analysed from a preventive perspective in order to draw pro-
posals for a correct architecture of choice and nudges6 that ensure free will, with
implications for the framing of academic integrity.
17.2 Anatomy of Academic Fraud
In historical and socio-cultural terms, academic fraud (understood in a broad sense)

knows different degrees of disapproval, with, for example, the institution of intel-
lectual property being relatively new. Thus, if, in the Renaissance, disciples of
renowned painters were encouraged to faithfully imitate the master’s work who, in
turn, often took the credit, the current understanding condemns these habits with the
increasing criminal typification of repudiated practices. Indeed, the development of
the study of this phenomenon by Academia has led to the identification and classi-
fication of several reprehensible behaviours, whose extent has been enhanced by the
6
It is not the purpose of this text to discuss the nature of nudges or to delimit the concept. Nudge
is therefore understood in a broad sense, meaning a behaviourally informed solution.
346 R. Saraiva
democratization7 and increasing competitiveness of a progressively more bureau-

cratized education and also by the fulminant technological progress, shaping, thus,
their evaluation and definition.
Without going for an exhaustive effort and precise conceptual cut, even because
of the evolving nature of the activities in question, the recurrent classification cho-
sen is used by scholars in order to identify the variety of pathologies observed
within the school community.8
First, remember plagiarism – so much in vogue today due not only to instant
accessibility over the Internet to an endless range of sources but also because of
media cases involving high dignitaries – which results in the misappropriation of
ideas or expressions without the necessary authorial references, ranging from plain
copy to paraphrase without quoting the source, therefore assuming the credit of oth-
ers’ work at the expense of originality and of the importance currently given to
creative effort. In the potterian universe, the use of the half-blood prince‘s glosses
of the Potions handbook by Harry, in order to succeed in Professor Slughorn’s class
and to get a bottle of Felix Felicis9 as a prize in an internal competition, can be con-
sidered plagiarism. In this regard, it is interesting to assess the ambiguity of testimo-
nials: if Hermione strongly condemns for risk and justice reasons (after all Harry,
without effort nor merit, gets better results), Potter and his friend Ron have a higher
moral flexibility in this context. On the one hand, they do not seem to value this
action as totally deplorable as it does not harm anyone directly, and can even save
lives as with the episode of the bezoar.10 On the other, particularly in the case of
Harry, his behaviour (such as the need for self-justification and changing covers of
books or its hiding in the Room of Requirement) simultaneously displays moral
washing and disengagement and an intimate recognition of dishonesty. Incidentally,
this episode helps to illustrate a certain tension and misalignment between the stated
and revealed feelings, as well as a certain subjectivity in ethical assessment of con-
ducts and their consequent delineation, prevention, treatment and punishment
because of the fuzziness in their understanding. In other words, it reveals a moral
dissonance empirically observed by behavioural economists who study ethics, with
a gap between systematically adopted (somewhat) deceptive actions and the high
moral consideration that agents have of themselves.11 In addition, in a normative or
prescriptive understanding of morality, the behaviour would be ethical or unethical
in itself regardless of the ascertainment of the individuals involved or the type of
7
Teixeira 2009b.
8
For all, on the definition of academic integrity, Niels 1996; Eckstein 2003.
9
Felix Felicis, also called ‘Liquid Luck’, is a magical potion that makes the drinker lucky in all
their endeavours for a period of time.
10
A bezoar is a stone taken from the stomach of a goat. In his copy of Advanced Potion-Making,
the Half-Blood Prince wrote “Just shove a bezoar down their throats.” across the list of antidotes.
During his sixth-year at Hogwarts, Harry fetched a bezoar from the cupboard and saved Ron from
accidental poisoning.
11
Ayal and Gino 2011, pp. 3–5; Shu et al. 2011a; Cano Rodriguez and Sams 2009, p. 3.
consequences.12 Put differently, the murder of incognito A or of John Smith, the

neighbour, by B or by his close friend Jane Doe, as well as their mere attempt,
would be as reprehensible. However, in practical terms, as seen in national law,
there is an altered judgment of these situations with a different criminal typification.
Basically, perceived moral judgments follow different valuations depending on the
context. Harry’s moral washing13 on the use of the handbook is therefore easily
understood: he does not harm anyone in particular and it also allows him to help his
friend.
In addition to this ethical relativism, the case also raises an interesting consider-
ation on the value of innovation.
Undeniably, and as Snape so often recalls, success in the Potions course is
accomplished through the scrupulous respect of the information given on the reci-
pes which underline its ‘scientific’ character. Creative change is therefore discour-
aged, fact thoroughly emphasized by Professor Umbridge who embodies the
government education policy. The ideal student is one who, as Hermione14 on dif-
ferent occasions, knows the instructions by heart or uncritically applies and repli-
cates them. This phenomenon can be easily transposed to the muggles’ world in
which not infrequently the academic curricula promote a certain automatism, inhib-
iting any innovative or analytical impulse to ‘think outside the box’, fact that should
be correlated with the distorted perception of the legitimacy of ‘copy-paste’ rou-
tines. Despite the stationary nature of the potterian economy where economic devel-
opment seems stagnant and novelty runs low (see, for example, that the problem of
dirt resulting from the use of the Floo network15 and of fireplaces as a means of
transport is not yet solved or the use of textbooks that have more than 20 years as
Harry’s Potions handbook),16 innovation (and investment in innovation) as predicted
by the theory of endogenous growth, is essential to prosperity. So it may seem para-
doxical that the risk taken by Harry of innovating, by following marginal annota-
tions, is to be reprehensible plagiarism. Another case of plagiarism and very near to
fabrication in J. K. Rowling’s universe relates to the work of Professor Lockhart,
where he takes other wizards’ accomplishments as his own and changes, falsifies
and invents, to his advantage as a means of promotion, data and information.17 This
kind of practice includes imagining quotes and references, to mention not consulted
12
Gino et al. 2010, p. 92, p. 101.
13
Ayal and Gino 2011, p. 8 et seq.
14
Note that Hermione, despite her attachment to bookish knowledge, reveals in certain contexts,
such as in the classes of Professor Umbridge or in the challenges she faces with Harry and Ron, to
think beyond the box.
15
The Floo Network is a mode of transportation in the wizarding world in which a witch or wizard
goes from one place to another by means of Floo powder, a fireplace and speaking very clearly the
desired fireplace they wish to arrive at.
16
In this regard and with the enumeration and critical analysis of the few examples of innovation
in potterian economy, A. Snir e D. Levi, Economic Growth in the Potterian Economy, in Thomas
and Snyder 2010, p. 211 et seq, hence removing macro-economic consequences.
17
On the phenomenon of academic cheating by teachers, for all, Jacob and Levitt 2002a, b, 2003,
and Levitt and Dubner 2006.
348 R. Saraiva
works or the construction of experiences as certifying tools of the results that are
intended to be published and achieved. The consequences of this type of activity can
be devastating, especially when carried out by teachers/researchers because of its
impact on upstream and downstream studies, the credibility of innocent co-authors,
host institutions, publications and the field of science, not to mention, in extreme
cases (such as in health care), by echoes in public policy and social welfare. In this
sense, the sad case of the Dutch researcher of Behavioural Economics and Social
Psychology Diederik Stapel18 should be remembered, with high costs for a branch
of science still in development and for contributing to the suspicion generated
around its findings, chiefly in the study of (perceived) dishonesty. In this regard, it
is also interesting to recall the lessons and the morbid prophecies of Divination
Professor Trelawney. On the one hand, the vague and incomprehensible assump-
tions, mechanisms and purposes of her discipline, possibly as well the specific char-
acteristics of a somewhat emotionally and academically fragile teacher and her
discredited reputation among colleagues (as the team leader of Gryffindor, the rigid
and very serious Professor McGonagall) explain to a large extent the manufacture
of data by Harry and Ron in their homework and oral participation. On the other, it
is still sadly ironic the paradox of a true seer (as shown by the revelations of
Professor Dumbledore, the recording of the first prophecy and the trance witnessed
by Harry in which the Professor predicts the alliance between Voldemort and
Pettigrew) using, because of ignorance, lack of confidence in her abilities or pres-
sure, the fabrication of data, offering doomsday predictions that she considers
impressionable to her audience (some, such as Lavender Brown, believe it) and thus
validating its quality. Put differently, this is not an expedient used only by the less
gifted but a shortcut that even, in certain circumstances, an unsuspicious genius may
employ, with the resultant micro and macro-economic costs.
A third type of fraudulent practice concerns deception, namely with false infor-
mation to the teacher or examiner in the formal making of some sort of evaluation.
See, for example, the mechanism of the scrolls flying into the teachers’ hands at the
end of regulation time of examinations to prevent students to extend the reply dead-
line, gaining them comparative advantages, or the invention of the Skiving Snackbox
(a range of sweets to make the user ill which includes Fainting Fancies, Fever
Fudge, Nosebleed Nougat, and Puking Pastilles) by the Weasley twins in order to
make students appear unable to stay in class and justify their exit of tests or lessons.
The success of Weasleys’ Wizard Wheezes nonetheless reflects a certain tolerance
to this type of conduct, which, by the way, is not always perceived as a scam both
by students and by teachers.
Quite similar is ghost-writing (now in evidence due to the proliferation of virtual
companies that offer complete academic work as a service) which occurs when
18
Diederik Stapel is a Dutch former professor of social psychology at Tilburg University and at the
University of Groningen in the Netherlands, awarded in 2009 with a ‘Career Trajectory Award’
from the Society of Experimental Social Psychology, who was suspended for fabricating and
manipulating data for his research publications. His long scientific misconduct affected more than
50 publications.
someone takes the authorship and credits of a study tailor-made by others with their
knowledge and approval and, eventually, compensation. When Hermione, excep-
tionally for being happy with Ron, rewrites his homework, one is faced with a sub-
type of this practice, with a scrupulous student with a high sense of integrity showing
a certain moral flexibility that highlights some degree of self-justification. After all,
she is the active element and has nothing to gain. Furthermore, in this situation, the
core of the essay is already prepared and drafted, just needing some formal correc-
tions and embellishment. However, even this small help raises issues concerning
comparative justice and costs in terms of moral hazard, i.e. it decreases, especially
for the future, the diligence of the beneficiary in the preparation of tasks for he waits
for third-party support. In addition, it is close to the traditional cheating.
Indeed, another form of academic dishonesty is cheating on the access to infor-
mation for an exam, in particular through the famous cheat sheets, copying a col-
league’s answer, stealing the test before the assessment, improper collaboration
between students or even doping with the intake of products enhancing memory and
attention as the desired Baruffio’s Brain Elixir at Hogwarts. Imagination in this field
is prodigious and has been boosted by technological progress. Thus, in addition to
the more or less reduced traditional piece of paper or to written information in the
hands and arms, there are the use of calculator memories, mobile phones (SMS and
Bluetooth) or other electronic devices. Likewise, pupils take advantage or create
distractions for the examiner or develop a whole new code language to pass
responses. Hogwarts, despite its elitist character, is no exception to this phenome-
non, inter alia, Ron trying to benefit from Harry’s success in Slughorn’s class; or
both asking Hermione for her homework; or Hermione giving information to Neville
in Snape’s classes so he is not humiliated; or collaboration between Potter and
Diggory during the Triwizard Tournament19; or sham screening mechanisms before
the exams with the ban on the use of the Felix Felicis potion, Rowena Ravenclaw’s
Diadem, Time-Turners, Auto-Answer Quills, Remembralls or Self-Correcting Ink.
In a way, the secret lessons of Defence against the Dark Arts during the reign of
Dolores Umbridge,20 paradoxically, fall into this type of cheating for allowing the
development of skills and the necessary preparation towards success in the O.W.L.,
against arbitrary and anti-pedagogical standards promoted by the Ministry of Magic.
Of these examples, apart from the moral relativity empirically revealed, two par-
ticular considerations emerge: creativity and increased complexity of fraud and its
possible altruistic dimension. Indeed, there is, on the one hand, greater sophistica-
tion and dishonesty agility because of the examiners’ larger arsenal available to
fight deception, achieving a real arms race, in a paradoxical exercise of intellectual
stimulation. Think of the students’ effort, especially the Weasley twins, to find ways
19
The Triwizard Tournament is a dangerous magical contest held between the three largest wizard-
ing schools of Europe: Hogwarts, Durmstrang and Beauxbatons, each school being represented by
one Champion. Selected Champions compete in three tasks designed to test their magical ability,
intelligence and courage.
20
See infra note 34.
350 R. Saraiva
to bypass the barriers around the Goblet of Fire.21 Besides, their use can be linked to
a certain perception of the study materials, teaching style, sort of examination,
examiner and fairness of grading standards. Moreover, this type of cheating does
not always aim for self-benefit. In the case of Hermione and Neville, for example,
Harry and Cedric, or Dobby’s valuable information to Harry about gillyweed22 dur-
ing the Triwizard Tournament, the purpose is to help a third person, which reveals a
strange and irrational (from the strictly economic point of view) demonstration of
altruism, which brings, once more, to the discussion of moral relativism on aca-
demic fraud.
In addition to the above phenomenon of ghost-writing, the practice of personifi-
cation may also be considered, i.e. the fact that someone replaces another, assuming
his or her identity, in order to pass an evaluation for the later, sometimes in return
for a payment. In the magical world, this would mean, for example, a despicable use
of Polyjuice potion23 to replace a colleague in an exam. This matter can be illus-
trated by Dumbledore’s warnings before the Triwizard Tournament.24 The failed
attempt by the Weasley twins to cross the age line around the Goblet of Fire with an
aging potion may be interpreted as a lighter manifestation of personification.
In contrast to these examples of more or less altruistic actions (particularly in the
absence of any compensation) sabotage arises, i.e. the action to hinder or even obvi-
ate the academic success of another student taken as a competitor. To hide or dam-
age books, tear pages, prepare false notes are all examples of sabotage, which
frequently happens in very competitive environments with a lower sense of com-
munity. At Hogwarts, with its spirit of unity (except for the constant competition
with the Slytherin), there are rare episodes of this kind, only visible in Quidditch
games or through an intermediary, during the Triwizard Tournament (in the maze,
Victor Krum, under an Imperius enchantment of the false Professor Moody/Barty
Crouch Jr., tries an unforgivable curse against Cedric to get him out of the chal-
lenge). Moreover, the song by the Sorting Hat,25 in Book V, warns against the dan-
gers of unbridled rivalry.
This example, otherwise, shows that academic fraud is not limited to students
and may affect the behaviour of teachers and examiners. After all, they are also
subject to successive choices in an often competitive environment in which they
have to deliver results that determine their future. In addition, as all human beings,
they are vulnerable to irrational choices, prejudice and biases, that is to their
21
The Goblet of Fire is a powerful magical artefact that works as an ‘impartial judge’ for the
Triwizard Tournament who chooses which students will represent their respective schools.
22
Gillyweed is a magical plant that helps swimming and breathing underwater. It was used by
Harry to overcome his second task of the Tournament.
23
Polyjuice Potion is a very challenging potion that allows the drinker to assume someone else’s
for.
24
This is a true academic competition involving different schools and students and even replacing
the finals for those involved.
25
The Sorting Hat is a powerful and sentient Hogwarts artefact which magically determines to
which of the school Houses each new student is to be assigned.
exogenous and endogenous preferences. Who does not remember Snape’s contin-
ued favouritism of Slytherin and the systematic disciplining of Harry Potter and his
closest friends, including Hermione’s right answers, with the removal of points to
the Gryffindor team? Other examples include Slughorn’s prejudicious assessment
system; the strategic shut-eye by the scrupulous Minerva McGonagall in order to
put Harry as a Quidditch26 seeker or, in response to the persecution of Professor
Umbridge, her proposal of explanations to help him attain the level required to take
the exams to become an Auror27; the attempts by the false Professor Moody to assist
Harry during the Tournament, in order to please Voldemort; or the downgrade of the
degree of difficulty of the program of Care of Magical Creatures by Hagrid after the
incident with Malfoy and the interference of the Board of Directors and his assess-
ment by the Ministry of Magic through the High Inquisitor.
In short, these first pages emphasize the complexity of the academic fraud phe-
nomenon but also give clues to understand its causes and the underlying moral
flexibility.
17.3 Causes of a Complex Pathology
Academic fraud presents itself as transversal in terms of educational degree, social

strata or nationality, despite some differences considering the size of the school and
the type of the implemented academic integrity policy. Several studies prove the
universality of the phenomenon,28 although the measurement criteria and method-
ologies applied, in particular the use of surveys and self-reporting, can display some
limitations because of the difference between declared (usually politically and
socially correct) and revealed willingness.29 Furthermore, there should be no irrefut-
able presumption that those who study integrity are virtuous by nature. They, too,
are bounded by their limited capacity, suffer the temptations and vicissitudes of
ordinary mortals in a competitive environment dictated by ‘publish or perish’,30
because of the lack of funds for research attached to their invisibility or absence of
progress in terms of career. There is, however, no room here to discuss this issue,
26
Quidditch is a very popular wizarding sport played on broomsticks and with three different types
of balls.
27
An Auror is a member of an elite unit of officers within the Department of Magical Law
Enforcement of the Ministry of Magic, who are trained to investigate crimes related to the Dark
Arts and catch Dark wizards and witches.
28
Inter alia, Almeida et al. 2010; Braun et al. 2005; Brimble and Stevenson-Clarke (s.d.a, b);
Diekhoff et al. 1996, 1999; Diptyana and Spica Almilia 2008; Ferreira 2010; Grimes 2003; Johns
and Kulwin 2009; Jurdi et al. 2012; Lambert 2004; Lambert et al. 2003; McCabe 2005a; McCabe
et al. 2001, 2008; Morris and McCarty Kilian 2006; Teixeira 2011a; Teixeira and Rocha 2006,
2008, 2010a, b; Teixeira and Davey 2010.
29
Bernardi and LaCross (s.d.).
30
Teixeira 2010b.
352 R. Saraiva
accepting therefore the collected, processed and provided (although not always
compatible) data by a growing number of researchers.
Scholars are also proposing several explanations for academic fraud, focusing, in
general terms, around three major sets of reasons: demographic, personal and con-
textual characteristics.31
In the first case, at issue are population factors such as age, gender, nationality,
mother tongue, religion, race, intelligence quotient, school average or the existence
of extra-curricular activities. In fact, if some of these variables do not seem to influ-
ence the results obtained in comparative terms such as nationality, race, social class,
intelligence quotient or religion (although the Nordic countries, on average richer
and more developed, and the Jews present lower levels of declared dishonesty),
other elements apparently impact, such as age, gender, first language or the number
of commitments, and may, as such, like contextual factors explored infra (such as
the efficiency of integrity policy), explain some of the inconsistencies pointed out
above. In other words, none of the factors presented is by itself deterministic or
cause of misconduct, and should be understood in a wider plan in association with
other elements and for that reason relativized. After all, some of the demographic
elements may even generate inner contradictions, compensating or, rather, increas-
ing dishonesty more than proportionally.
Thus, in terms of age, it appears that deception crosses all age groups, including,
unlike often idealized, younger children, although with a lower incidence between
older kids. Nevertheless, there is a direct correlation between age and academic
integrity, which may result in a higher moral development connected to greater life
experience and exposure to ethical considerations as pointed out by Piaget and
Kohlberg. The emotional cost to overcome ethical barriers will thereby be more
pronounced and hence discouraging, in an exercise of weighted utility by more
mature individuals. Moreover, the marginal utility of cheating will be lower for the
older levels, since the gains in terms of career and reputation will be smaller.
Besides, being caught will cost more because of their position and achieved higher
status. That is, a perception and/or an effective competitiveness (less demanding up
from a certain age) can reduce the fraudulent momentum, explaining a lower degree
of dishonesty as evidenced by working pupils, generally older than the average
student population. This inference can, however, be challenged mainly by two other
demographic factors (excluding interactions with contextual and personal vari-
ables): the weight of extra-curricular activities and the mother tongue.
Is easily seen that, with scarce resources, maxime time, inevitably, the more
activities (such as work, joining associations or doing sports), the less the chance to
devote more hours to preparation as it will be necessary to relocate study time in
line with the equimarginal principle. Accordingly, shortcuts such as copy, plagiarism
31
For all, Bichler-Robertson et al. 2003; Cao 2010; Carrell et al. 2005; Day et al. 2011; Kremmer
et al. (s.d.); Levitt et al. 2011; McCabe and Klebe Treviño 1997; McCabe et al. 2002, 2003, 2008;
Murdock et al. 2007; Niels 1996; Lok Yan Nora and Chen Zhang 2010; Passow et al. 2006; Pulvers
and Diekhoff 1999; Rettinger and Kramer 2009; Rhyne 2008; Sauthier et al. 2011; Schwieren and
Weichselbaumer 2008; Teodorescu and Andrei 2009; Tibbetts 1999; Tibbetts and Myers 1999.
or imposture are tempting to ensure academic success by allowing to reduce the

marginal cost of undertaking other tasks. Consequently, working students, as well
as association leaders or athletes, are, ceteris paribus, more vulnerable to the charms
of cheating.
On the other hand, the mastery of the language of assessment is relevant in terms
of academic integrity. As a rule, foreign students (e.g. Erasmus students or immi-
grants, often hard workers who seek to increase their educational qualifications in
host countries institutions) or those who do not express themselves in an ongoing
basis in the chosen language (for example, by turning to dialect or tongue of the
parents), have a higher propensity for deception. This is due not to nationality con-
siderations but more to the perceived fragility of expression as a conditioner of their
results. This is a confidence problem, with fraud serving as a cane. Incidentally, this
can lead to a depreciation of deception understood as a means to equalize students
in a sort of compensation or positive discrimination, eroding, thus the understanding
of morality. Again, herein comes the moral washing factor fundamental for main-
taining a good self-perception and comfort.
In terms of gender, although the phenomenon of fraud is found in both sexes, in
fact, studies indicate a greater male propensity.32 As an example, Hermione, Harry
and Ron have a distinct behaviour and attitude toward academic integrity. Part of the
explanation may lie in the risk perception and assessment, particularly in terms of
framing as a gain or loss. Indeed, Behavioural and Experimental Economics has
been highlighting a different reaction to risk according to its framing and gender,
with women accusing greater risk aversion, often facing a situation as a potential
loss and not so much as a probable gain. However, given the likelihood of experi-
encing fraud as a practice in which they can be caught in a dishonourable activity
and, therefore, suffer the proper consequences, like shame (rather than see it as a
chance to benefit from an unfair advantage unlikely to be detected), it is expected
that female behaviour reveals greater restraint. Still, some experiments indicate that
when exposed to conditions favourable to deception, female tend to increase the
practice of cheating more strongly than their counterparts. However, the observed
behaviours relate mainly with tasks in which women have handicaps with fraud
serving as a levelling element. See, for instance, Hermione’s initiative in forming
the Dumbledore’s Army33 despite the contrary instructions from the Ministry of
Magic in order to overcome her limitations in a course that does not depend solely
on bookish knowledge. Although this example concerns a more physical endow-
ment, normally absent in the academic environment where the disadvantages based
on gender are not present, this phenomenon should not flourish here attending to the
nature of the required and assessed skills.
32
For all, Tibbetts 1999.
33
Dumbledore’s Army was a secret organisation initiated Hermione with the help of Harry to teach
their fellow Hogwarts students proper Defence against the Dark Arts. This solution was made
necessary by the refusal of Dolores Umbridge, the subject’s professor during Harry’s fifth school
year, to teach anything other than textbook theory.
354 R. Saraiva
Finally, and somewhat in contradiction with the current statement, there is a

trend towards a lack of correlation between the intelligence quotient and academic
dishonesty. One would, nevertheless, assume that the fragility of the less gifted
would lead to deception as a means of compensating for their difficulties. Instead, it
would be expected to see the smartest develop unfair conducts as they face a chal-
lenging arms race and an increasing capacity to deceive the examiners. This, how-
ever, does not occur. It appears, although the data can sometimes be ambiguous, that
there is a lower propensity of fraud among students with higher averages, perhaps
because of its lower marginal utility. Two connections seem undisputable: on the
one hand, the absence of correlation between fraud and academic success; on the
other, the correlation between creativity and dishonesty.
Empirically and in the laboratory, the scam does not increase the susceptibility
of academic achievement. Plagiarism, for instance, comes, as a rule, as an inferior
version of the original work. At Hogwarts, Harry’s and Ron’s grades do not vary
much with their fraudulent routines. In the finals of Potions and Divination their
grades reflect their usual level, the same being true when Hermione provides them
some help with their homework. The explanation may lie, at least partly, in the fact
that deception and study work as complementary and not substitute goods, i.e. the
result turns out to acknowledge the lack of understanding and mastery of the sur-
veyed area. For students like Hermione, the use of fraudulent instruments brings a
very small marginal utility from previous careful preparation, serving more as a
mental placebo that boosts trust rather than the true response instrument. Also
Hermione in her O.W.L. scores her customary Exceeds Expectations in Defence
against the Dark Arts. In terms of teachers, Gilderoy Lockhart flaws are succes-
sively exposed and affect his credibility in public and between peers despite holding
the Order of Merlin, Third Class, and being Honorary member of the Dark Force
Defence League, and five times winner of Witch Weekly’s Most Charming Smile
Award. Just remember the duel with Snape, the episode with the Cornwall pixies or
on Harry’s arm repair. The same is true, albeit to a lesser extent (due to Dumbledore’s
protection and the authenticity of her gift), with Professor Trelawney, discredited by
students like Hermione, by colleagues like Firenze and Professor McGonagall and
evaluators, like Dolores Umbridge, the High Inquisitor, that gets her fired.
Creativity is more of a personal, and not merely demographic, issue connected
with academic fraud. Truly, not all individuals are equal or react in the same way to
the possibility to use dishonest resources in their own or someone else’s advantage.
After all, each has genetic and environmental characteristics natural, inherited or
acquired that enhance certain type of behaviour. For example, there are people with
a pathological propensity for dishonesty, including intellectual, or less moral sensi-
tivity, as well as others with a higher risk tolerance, which considerably increases
the likelihood of infringement of ethical norms.34 Experiments carried out by behav-
ioural economists also identified a direct correlation between creativity and aca-
demic fraud, with the explanation residing in greater moral malleability of the most
creative individuals who can get evasive justifications for their action with the
34
Gino and Margolis 2011.
consequent relativization and mitigation of any feelings of guilt or shame. As a

result they more easily manage to preserve their positive moral self-image.35 The
Weasley twins are a paradigmatic case.
In this regard and, in a way, already getting into contextual considerations by
taking in account the current moral framing around potential offenders (that they
perceive and absorb), note that, in the real world, magical or muggle, individuals do
not take decisions based merely on maximizing benefit analyses.
Indeed, certain social sciences, in their mainstream version, such as the neo-
classical model of Economics or Law with its omniscient and intangible legislator
and rational beneficiaries, assume, in their constructions, the existence of cyborg
agents with a computational capacity, unlimited will and personal interest, an
immunity to exogenous distractions and the ability to decide mathematically in
order to optimize their well-being. Accordingly, they ponder the opportunity cost
and opt for the alternative with the larger net benefit. In other words, they weigh the
costs and benefits connected with academic fraud (e.g. time spent, academic suc-
cess, family and peers reaction, chances of getting caught, possible sanctions), and
make the efficient choice maximizing their individual utility.
Then the quiet revolution related to Behavioural and Experimental Economics
and to a growing interdisciplinarity reminds researchers in their ivory towers what
was already known: agents are of flesh and blood, contextualized with intellectual
and motivational limitations. Consequently the choices made, although usually log-
ical, are not always rational.36 Decision makers are human beings, with virtues and
defects, and not machines. They are vulnerable to errors, distortions, rushing, pre-
judgments, prejudices and emotions. Thus, considering the plurality of decisions
that have to be taken in a daily basis, in varying circumstances and variables, it’s
impossible (or at least too burdensome) to stop to think and consider in detail all the
choices. Decision makers are at that time forced to use the automatic brain system
and heuristic shortcuts that will likely enhance fraud.
In simple terms, from lab and empirical analysis, three main limitations and
biases that distort decisions, including the purpose of academic integrity, are identi-
fiable: a bounded rationality, a bounded willpower and limited personal interest37;
and anchoring, availability and representativeness.38 The first covers information
restrictions, errors and alterations in understanding. Consider, for example, Harry’s
systematic underestimation of the risk of being caught. The second relates to pro-
crastination and to the inability to achieve and maintain the desired behaviour. Who
does not recognize the frequent postponement of homework so often experienced
by Potter and Ron or the near-fatal deferral of solving the Egg clue during the
Triwizard Tournament39? The third problem, as already discussed and exemplified
35
Gino and Ariely 2012.
36
See Saraiva 2011 and the cited references.
37
Jolls 2007, pp. 10–18 and Sunstein 1999, p. 121.
38
Thaler and Sunstein 2009, pp. 42–53; Sunstein 1997, p. 14.
39
After the first task, the champions were told that the Golden Egg they retrieved from the dragons
contained a clue on how to pass the second task. Without it, they had little chance of succeeding.
356 R. Saraiva
supra, involves not always acting on behalf of self- interest, showing altruism and
concern for justice in the treatment of oneself and of others. Incidentally, altruism
can even arise as a compensation of a dishonest act just like the help Harry provides
to Cedric concerning the dragons. As to the biases, especially in terms of contextual
reasons, there is, on the one hand, a phenomenon of constructing a reasoning by
adjusting from a reference point deemed appropriate (e.g., estimating the number of
students who use plagiarism); on the other hand, the assessment of the probability
of achieving threats based on available, visible and recent examples, crucial in risk
analysis (see the weighting of the chance of being caught for copying) and the
understanding of social interactions and the role of information and reciprocity in
the behaviour and decisions of human beings (for example, knowing that others are
cheating, influence the decision to be dishonest); and, finally, an argument based on
stereotypes and the identification of patterns in certain random sequences, with
inevitable repercussions on the estimated risk, considering the associated framing
effect (the decision to commit an academic fraud can depend on being perceived as
a gain or a potential loss).
These elements therefore enable to recognize that the decision to cheat can be an
irrational choice due to internal mechanisms which fall outside the traditional neo-
classical understanding.
Firstly, and without much development, myopia can be connected to academic
fraud. Indeed, the preference for present gratification at the expense of a longer time
perspective depreciates the long-term effects of that behaviour, for instance over-
stating the short-term advantages such as the delivery of the paper, grade, certificate,
publication or less time spent and despising the expected future costs. But these may
be, over all, much more significant than those, displaying a price too high for the
(irrational) choice taken. Indeed, there is a discount of upcoming micro and macro-
economic consequences of the choices made. At the individual level some things
are disregarded, like the risk and consequences of being unmasked, the effects on
the erosion of morality and greater acceptability and repetition of dishonest acts, in
a phenomenon of oblivion and moral disengagement, with potential costs in terms
of memory,40 self-esteem, social networking and being caught and sanctioned for
more serious actions than academic fraud, in an upward spiral. Furthermore, intel-
lectual dishonesty is not followed by academic success or effective learning, and
one is unable, outside the school walls, to properly exercise the chosen profession.
This has, on an aggregate scale, high costs. It is no accident that a direct correlation
between academic dishonesty and corruption inside and outside the school environ-
ment has been pointed out, due to a massive climate of crumbled confidence and
sense of community with a poor judgment of one’s own and the actions of others. In
addition, the multiplier effect of fraud affects economic competitiveness. After all,
Harry continuously postponed the resolution of the problem and on the morning of the second task
he had no strategy to accomplish it.
40
Moral washing has been proven to have effects on memory, verifiable in the neurological level.
Shu et al. 2011a, pp. 16–17, 2011b; Shu and Gino 2012.
today’s cheaters will be tomorrow’s leaders, CEO, teachers or judges.41 Incidentally,

economic development is also affected by the disability caused by a truncated learn-
ing which generates errors, inefficiencies and addictions, recalling herein the old
Peter Principle that states that “managers rise to the level of their incompetence”.
With diplomas, titles and ratings serving as a signal for merit, there is a risk of
adverse selection ending with ‘lemons’ due to pre-existing contractual asymmetry
(e.g. Professor Lockhart). As a result, it is difficult to grow, capture investment or
generate wealth. On the other hand, the foundation and improvement of knowledge
are shaken: the upstream and downstream networks, i.e. institutions, journals, col-
laborators, students, inter alia, are discredited and infected by the identification and
arrest of the cheater. Outside the potterian universe, the profile cases involving
Portuguese rulers (with the University behind one of the diplomas closing doors)42
makes the point. Finally, due to the difficulty of measuring what students actually
seize and learn, education policy and, in particular, the definition of school curricula
suffer, perpetuating errors and distortions.
Secondly, a fraudulent decision can be deformed, positively or negatively, by
inner factors, a kind of endogenous moral compass (although influenced by contex-
tual external elements) that reminds the mechanism of Cartesian passions. So for
example, the desire to succeed combined with the use of fraud opposes, in an inti-
mate struggle, to shame or guilt, in a game of evolutionary and functional forces that
determine the choices to make. In other words, internal limits to dishonesty exist
and do not allow, through a simple cost-benefit analysis, to enjoy any opportunity to
profit the most from deception. In fact, decision makers only slightly cross the
line.43 The introduction of what Ariely calls the ‘fudge factor’44 (i.e. ultimately, the
endogenous need of individuals to establish trade-offs between the benefits of a bit
of cheating and live well with oneself) as well as the phenomenon of slippery slope
(namely the gradual erosion of moral standards associated with adaptation to lower
moral standards)45 tend to stress the urgency of a renewed conception of (bounded)
morality and, more specifically, academic integrity, considering the biases that
shape ethical behaviour.
The empirical approach draws attention to the flexibility and dynamism of eth-
ics, which, ultimately, is situational.46 In other words, more than black and white
definitions, its understanding and internalization take on many shades of grey as
41
Teixeira 2011b.
42
The former Portuguese Prime-Minister José Sócrates was accused of illegally obtaining his
degree in engineering at the Universidade Moderna. Some irregularities such as having a high
number of courses with the same teacher or passing exams on Sundays where confirmed. The
University didn’t survived the scandal. On the other hand, the degree of the former Portuguese
Minister Miguel Relvas at the Universidade Lusófona was also contested because he only took
four courses to obtain his diploma. The other credits were granted by equivalence for his profes-
sional experience.
43
Ayal and Gino 2011, p. 3.
44
Ariely 2009.
45
Gino and Bazerman 2009, p. 708, p. 710, p. 717; Gino et al. 2009a.
46
Gino and Bazerman 2009, p. 708, p. 710, p. 717; Gino et al. 2009a, b.
358 R. Saraiva
they are influenced by the rationalization of immoral conducts. Indeed, there is an

internal use of moral relief mechanisms with the construction of justifications and
apologies, forgetting phenomena, neutralization and moral disengagement that help
reducing, relativizing or even making disappear the sense of guilt. In this case, there
is the influence, on one hand, of the saliency and the internalization of social norms,
i.e. ultimately the degree of self-efficacy, and the other hand, the perception of rela-
tive justice, that is the weighting factor of alterity. On this last point, the laboratory
experiments show a different judgment of the same dishonest behaviour according
to the context and, in particular, to the presence, position, attitude and degree of
connection to third-party. Thus, in certain circumstances, one tends to more vehe-
mently disapprove the action of foreign elements and, in others, to feel more promi-
nently the misconduct of a member of the group. In short, the viewing angle, that is
the (cognitive) perception of behaviour, remains decisive. As an example, and look-
ing at J. K. Rowling’s saga, call to mind the self-justifications that Harry uses to
neutralize, or at least to relativize the guilt he feels for using the Half-Blood Prince’s
textbook,47 such as not harming anyone or even saving Ron from poisoning.
Remember, too, how the rivalry with the Slytherin and in particular with Malfoy
emphasizes the perception of unfair conduct and, instead, how the esprit de corps
increases, in a certain context, the sense of guilt within the Gryffindor with Neville,
in particular, to face his colleagues (and being immobilized by them) in a moral
compensation effort within the adventure of the Philosopher’s Stone.
The presence of others is for that reason an essential contextual factor to consider
in cases of dishonest conduct.
The alterity manifests itself in different ways. In the academic world, mostly in
pre-university education, family pressure to obtain good results can trigger dishon-
esty concerns, although functioning also as a brake by the greater degree of shame
associated. Basically, the prevalence of the first factor is linked to a highly competi-
tive environment in which the objective focuses more on results than on learning.
See, for example, the ambiguity of Ron’s feelings: he is the Weasley’s last born boy
with the strain of having older brothers who were, proudly, Head Boys and Prefects
and he fears maternal censorship, materialized at some point by a sent Howler.48.
If an overly competitive atmosphere can pervert moral behaviour, stimulating
academic dishonesty and alienation, it is important to assess the type of environ-
mental and social framing of students and teachers both at home and at school, in
order to identify possible triggers. The existence of tournaments or competitions,
the type of exams, the valuation model with ordinal or cardinal ratings,49 the
47
Harry had not bought his own textbook prior to his sixth year Potions course, as he believed that
he failed to qualify for advancement. As such, the new teacher, Professor Slughorn, loaned one of
the older books left behind by previous students. Harry received Snape’s former textbook filled
with precious advice on how to prepare more effective potions and antidotes.
48
A Howler is a magical letter which enchants the written message into the writer’s voice in order
to deliver a message expressing anger or displeasure.
49
Think of the curve method with the elimination of the lower percentile students regardless of the
absolute result: if inhibits selfless actions of fraud, it increases other forms of cheating.
existence of a numerus clausus, professional access or progress, inter alia, may

foster the perception of competitiveness and bring pupils and teachers to overcome
the ethical wall. This competitive environment is also present at Hogwarts. After all
there is a system of rivalry between four teams and even with other schools, tests
with grades (the competitive Hermione tries to know the scores of her colleagues),
exams and results that give access to certain professions (Gringotts Bank or Auror),
or a system of differentiation of students with the appointment of Head Students and
Prefects. Finally, Potter cheats precisely in the Triwizard Tournament (accepting,
for example, the help of Dobby) and also tries to win the bottle of Felix Felicis in
Slughorn’s class. Interestingly the pressure does not always work in the sense of
wishing to be the winner. Often, the important thing is not to have the loser status,
for example, for Ron and Harry not getting a failing T (that stands for Troll) or being
harassed by Slytherin. The perception of their relative position is then critical. In
other words, the awareness of the pressure on the student to obtain absolute and
comparative results appears crucial in (dis)honest behaviours.50
On the other hand, in the construction of a competitive environment, it matters to
uncover and evaluate the weight of the introduction of a policy of values and moral
integrity, even as compensation mechanism of a fierce competitiveness. The imple-
mentation of codes or declarations of honour, signing the name on the exams or the
concern with the pedagogical transmission of ethical principles and explanation of
reprehensible practices, for example by establishing clinics and centres as in some
Anglo-Saxon universities,51 are possible solutions to build and instil a moral spine
in the education system. The operating counterweights, in addition to competitive
balancing mechanisms such as whistle blowing, linked to the perception of self-
categorization, may well explain the fact that typically capitalist economies and
individualistic structures do not present dissimilar academic fraud rates from col-
lectivist countries. Moreover, if the competitiveness for competitiveness caused by
itself fraud then these would be moral havens, which the history and experience
belie.
From another point of view, the alterity and the competitive spirit also come into
play attending to the role and even personal qualities of the teacher. Indeed, his
protagonism within the school, actions and characteristics serve as beacon for the
conduct of students. Hardly, because of the integrity, scrupulous and demanding
character of Professor McGonagall or the intimidating appearance of Snape, it’s
hard to imagine students to cheat in their classes, although in the latter case, it par-
tiality incites Hermione to help Neville. Instead, the weakness and vagueness of
Professor Trelawney or the arbitrariness and evilness of Dolores Umbridge stimu-
late alienation. Moreover, the perception of unfair treatment has been identified as a
cause of academic dishonesty, opening the door to moral neutralization exercises
with the development of self-justifications and behavioural excuses. In this line, if a
50
Malgwi and Rakovski 2009, p. 208, estimate at 70 % the relevance of perceived pressure for a
cheating decision.
51
E.g., http://clt.lse.ac.uk/plagiarism/index.php; http://students.ucsd.edu/academics/academic-
integrity/index.html; http://provost.yale.edu/academic-integrity.
360 R. Saraiva
teacher declares his disapproval of cheating and signals the opposite by his actions
(e.g. lax conduct or an absence or distorted sense of – especially comparative – jus-
tice) then the message doesn’t pass.
Still on the subject of teachers, their pedagogical skills, the type of lectures and
the curriculum influence the level of academic integrity. Monotonous and purely
theoretical classes as Professor Binns’ (who does not realize he died during classes
keeping then his academic ritual as a ghost) in which students are overloaded with
facts, unlike Charms, Transfiguration, Potions or Herbology, more likely provoke
deception, particularly if the examination is based on a mere repetition process. The
phenomenon is evident in the discipline of Defence against the Dark Arts, specifi-
cally due to the constant rotation of teachers, with dishonesty emerging with
Umbridge and disappearing with Professors Moody/Barty Crouch Jr. and Lupin.
This data should be pondered by ministers and pedagogical offices in the construc-
tion and definition of curricula, academic examinations, and the ranking of educa-
tors. In the latter case, it would be interesting to wonder about the merits of the
Portuguese legal option for exclusivity among professors. The simple presence and
evaluation of peer produces, in turn, complex dynamics with an impact on integrity,
thanks to functional mechanisms created by the intersection between internal and
external structures. Several experiments reveal that behaviours are not always ratio-
nal, coherent nor homogeneous.52 For example, certain framings produce contagion
phenomena, other the compensation of honest and dishonest conducts. Thus, in
laboratory tests, choice between contamination and redemption in the event of dis-
honest actions seems to depend on the existence of foreign elements watching.53 In
this case, a sense of the culpability of oneself and respective teammates seems to
emerge and helps to correct the procedures because of its unpleasant reflex and the
consequent need to restore the self-image but also because of the overstatement,
within the guild, of the bad behaviour of one of its members compared to its appre-
ciation by a third party (which implies an effort of categorization of what is meant
by a social group and identification54). Instead, the absence of an outside spectator
feeds dishonesty, suggesting the importance of social norms and how they are inter-
nalized (descriptive or injunctive, depending on the framing55) and simultaneously
the related moral relativity. However, there is still much investigation to do on the
relevance of the identity of the perpetrator and of his role and status within the com-
munity. Will the perception and consequent assimilation of misconduct be identical
if the action is carried out by a nuclear element such as Harry or Dumbledore or an
accessory character as Sean for both Gryffindor and any other team? Intuition and
52
Amir et al. 2008; Anderman and Murdock 2007; Ariely 2012; Ariely et al. 2009; Ayal and Gino
2011; Bazerman and Gino 2012; Bucciol and Piovesan 2008; Cano Rodriguez and Sams 2009;
Caruso and Gino 2011; Gino and Ariely 2012; Gino and Margolis 2011; Gino and Bazerman 2009;
Gino et al. 2009a, b, 2010a, b, 2011; Mazar and Ariely 2006; Shu and Gino 2012; Shu et al. 2011a,
2011b, and 2011c.
53
Ariely et al. 2009; Carrell et al. 2005; Gino et al. 2009.
54
Ariely et al. 2009, p. 393.
55
Ayal and Gino 2011, p. 17; Ariely et al. 2009, p. 394.
interpretation of the saga seem to indicate a negative response but this is an issue
that needs more research and empirical validation to allow for a greater understand-
ing of behavioural ethics and of the architecture of the virtuous choice that will, in
the future, prevent and minimize fraud.
17.4 Prophylaxis of Academic Fraud
The complexity of the causes and of dynamics of academic dishonesty hinder a

linear balm, because some of the identified factors, that could eventually be con-
toured, and which aren’t fully studied and understood, interact generating forces
either of incentive or of counterpoise.
Before suggesting, however, some remedies, it is important to raise the question
of who should have or be given prophylactic power. The state? The Academies?
Examiners? The assessed? Or their peers? The age-old question concerning the
extent of state intervention emerges once again with regard to the observed detected
fault (i.e. experiencing academic fraud) and the assumption of education as a funda-
mental task of the state.56 The complete answer falls beyond the scope of this work.
Nevertheless, in the next pages some possible paths are investigated. In the potterian
universe, the solutions appear to vary depending on the greater or lesser capture of
the system. Thus, in books V and VII, respectively Umbridge and the Death Eaters
make Hogwarts an advanced post of the Ministry undermining the school autonomy
and imposing themselves on students and teachers, including in terms of curricular
and disciplinary action. In the other volumes, thanks possibly to the pre-eminence
of Dumbledore, the resolution of any school problems, including fraud, belongs to
the school as a whole, from Head Students to the Headmaster, through the Heads of
the different houses and Professors (in the books there is no Department of Education
within the Ministry of Magic, only a rambling Board of Governors with 12 wizards
captured by Lucius Malfoy in the Chamber of Secrets). After all, academic fraud is
primarily an institutional problem of the Academy.
Some simple measures, however, can be anticipated, even if they only end up
working as a band aid that addresses, temporarily and ineffectively, the problem
with possible perverse moral hazard costs to those in charge of education. Think of
all the traditional surveillance methods with the ‘policing’ of the exams’ and of the
means employed and made available to students. After all, as observed from the
empirical evaluation of behavioural economists studying honesty/morality, oppor-
tunity makes a thief even among the most morally sensitive individuals. If some
estimate that the perception of cheating opportunities contributes 20 % for fraudu-
lent behaviour,57 others emphasize the tension between the desire to benefit from
the dishonesty and the perception and preservation of their moral self-image.
56
For instance, paragraph (f) of Article 9 of the Portuguese Constitution and paragraph (d) com-
bined with Articles 73–77 for the right to education.
57
Malgwi and Rakovski 2009, p. 208.
362 R. Saraiva
In addition, past experiences of oneself or of others successful breach of moral

standards distort the perception of the probability of being caught (decreasing it)
and feed a lower risk aversion in the deception, promoting immoral behaviour.
Thus, one must therefore not wake up the ‘sleeping dragon’.58
In this context of reduction of the window of opportunity and of the increase of
the distortion of probabilities, at Hogwarts, examples can be found such as the type
of quill or papyrus used, the expedient of illicit substances or the monitoring of
students by examiners. Before the O.W.L. an explanation is given on improper
means and conducts, a clarifying practice that helps to boost moral saliency and
simultaneously allows a more closed, and therefore less flexible, categorization of
misconduct. In the muggle universe an institutional clearing of what is meant by
plagiarism or academic fraud, not only in the beginning of the school year but also
before and after examinations, would be appropriate as already successfully done
by several academic institutions.
From the School of Witchcraft and Wizardry come other very simple and practi-
cal suggestions. For example, some of the final tests are done in a specially prepared
room (a transformed Great Hall), removing the pupils from their comfort zone;
students are subjected to different types of exams: theoretical in History of Magic,
practical in Defence Against the Dark Arts or Astronomy, written and oral, forcing
the alternate use of various skills against a certain moral hazard. During the
Tournament, the rules allow the overcoming of the tasks in an open book assessment
logic, with free access to sources of knowledge and time, relieving the pressure.
Moreover, the choice of lecturers by Dumbledore and the curriculum and approach
of many disciplines, in most cases, with a theoretical and practical component,
helps to focus on learning more than on the results. In fact, when Dumbledore, in
the saga of the Philosopher’s Stone, gives points to Neville or Harry for their cour-
age and not just to Hermione because of her knowledge, he signals in front of the
whole school that there are values and objectives beyond the academic outcomes,
releasing some of the perceived pressure which normally enhances cheating.
Still, the repeated descriptions of Gryffindor’s room and of stressful environment
before exams, with students stuck in books (including the Weasley twins),
Hermione’s study timetables and schedules and even some fainting and hysterics,
reveal a certain pressure despite initiatives and teachings of Dumbledore and
McGonagall’s trust on her pupils’ ability.59
The Hogwarts Headmaster indeed plays a fundamental role in the explanation of
the low level of academic fraud at the school, evidenced a contrario by the insubor-
dination scenario lived either with Umbridge or with the Carrow brothers.60 Much
58
Adapted reference of Hogwarts motto: Draco Dormiens Nunquam Titilandus (Never Tickle a
Sleeping Dragon).
59
In Order of the Phoenix, Professor McGonagall, although drawing attention to the need of hard
work to succeed in the N.E.W.T, informs her students, in a very constructive speech, that she trusts
everyone, including Neville, will be successful.
60
Dickerson (2008); Dickerson, Professor Dumbledore’s Wisdom and Advice, in Thomas and
Snyder 2010.
of Dumbledore’s success relies on his teaching and example (with the embodiment
of the struggle against evil, first with Grindelwald and then Voldemort). Among
other things, in the matter of academic fraud, the promotion of respect, tolerance
and sense of justice, balance, the appreciation of the learning process, particularly
beyond the strictly academic (translated into the Hogwarts Hymn61 and the songs of
the Sorting Hat) and hence his ability to sustainably inspire an ethical
environment.
Undeniably, several examples illustrate the first aspect: consideration towards all
individuals, regardless of race or species (e.g. hiring teachers with different back-
grounds and origin, acceptance of muggles at Hogwarts, sending a delegation to the
giants or hiring and paying Dobby); the confidence placed on people, for example,
on Hagrid or Snape despite all evidence to the contrary. These capabilities, coupled
with a sharp sense of justice (remember, among others, the intervention at the
Wizengamot62 during Harry’s trial), nurture a peaceful and reflective environment,
in the double sense of meditation and reflex, which situationally discourages the
cheating.
On the other hand, Dumbledore encourages cogitation and self-questioning.
Being portrayed as elderly as opposed to the youth and impetuosity of Harry and his
companions strengthens him because of the traditional association to ancestral wis-
dom. Remember the use of the Pensieve,63 the possibility offered to Harry to access
the Mirror of Erised64 (and the concomitant guided lesson) or hardening Potter’s
(and his friends’) tasks in the last book (requiring them in particular to decide
whether to search for the Horcruxes65 or the Deathly Hallows66) so that they learn by
themselves by confronting themselves and each other. The emphasis is therefore
placed more on the process of (self)-discovery than on the result thanks to a tech-
nique of creating a certain distance and reflection. This strategy, in fact, concurs to
the observations in some cognitive-behavioural experiments. For example, trials
concerning integrity indicate that immoral behaviours are less likely when the deci-
sion is made with eyes closed (as opposed to open eyes).67 The judgments of ethical
and unethical conducts are respectively more benevolent and critical, suggesting
61
Hogwarts, Hogwarts, Hoggy Warty Hogwarts, Teach us something please, Whether we be old
and bald, Or young with scabby knees, Our heads could do with filling, With some interesting stuff,
For now they’re bare and full of air, Dead flies and bits of fluff, So teach us things worth knowing,
Bring back what we’ve forgot, Just do your best, we’ll do the rest, And learn until our brains all
rot.
62
The Wizengamot is wizarding high court of law.
63
The Pensieve is a magical object used to review memories.
64
The Mirror of Erised (desire spelled backwards, as if reflected in a mirror) is an ancient magic
mirror which shows the most desperate desire of a person’s heart.
65
A Horcrux is a dark magic object in which a wizard or witch has hidden a fragment of his or her
soul for the purpose of attaining immortality.
66
The Deathly Hallows are three highly powerful magical objects (the Elder Wand, the Resurrection
Stone, and the Cloak of Invisibility) supposedly created by Death, which allow he who possesses
them to become the Master of Death.
67
Caruso and Gino 2011.
364 R. Saraiva
distraction of external interference and noise and greater emotional control and bal-
ance. In fact, in terms of neurology, it is common to distinguish between a primary
cognitive system, old, fast and intuitive, which uses heuristic shortcuts, and there-
fore more susceptible to errors, and a slower, rational, weighted and least fallible
system. In short, forcing a break to think and (internally) evaluate the options con-
sidering the internalized ethical social norms is a simple and respectful of individual
choice way to curb dishonest behaviour. Basically, a solution lies in the use of a kind
of (moral) Remembralls68 such as those used by Neville or behavioural mirrors.69 As
nudges in the muggle world, one could deliver or sign70 a sworn statement71 of not
having copied or plagiarized the paper or thesis submitted for evaluation or, more
radically, to read, before or after the exam, the code of honour of institution or the
Ten Commandments, as already tested.72
Of the examples produced above, as well as the already mentioned distribution
of points between Harry, Ron, Hermione and Neville at the end of the first book, it
becomes clear that Dumbledore’s teaching is not limited to the strictly academic
and grades, with a particular emphasis on universal moral values. In fact, ultimately,
his irreverent personality, almost childlike and humorous (e.g. the words of access
to his office or J. K. Rowling’s choice of the character’s name), remembers that the
school must also stay as a socializing site. His first speeches at the opening of the
school year or at Christmas are good examples. After all, humour, as well as reflec-
tion, helps to relativize.73
Dumbledore, however, is not a saint. Rita Skeeter’s (exaggerated) revelations
somehow humanize Hogwarts Headmaster, who recognizes his lifelong mistakes,
especially with his family and Harry, even by an overestimation of his self-image.
This matters profoundly, bearing in mind his role as a moral beacon.
Studies of Behavioural Economics and Social and Cognitive Psychology show
that the average person is somewhat averse and afraid of saints because, through a
harsher judgement, they echo and underline their weaknesses, then affecting their
noble self-image and consideration.74 The comparative disappointment can even
lead to a moral degradation. Moreover, the process of ‘dessaintification’, like the
one Dumbledore suffers in the last book, raises doubts on how weighting values for
his followers, such as Harry, with negative feelings of bewilderment, disbelief, sad-
ness, anger and disappointment, which augment dishonest conducts.
On the other hand, the Headmaster, throughout the saga, breaks the rules. For
example, he encourages Harry and Hermione to use the Time-Turner to save
68
Amir et al. 2008, p. 14. A Remembrall is magic device with the form of a tennis ball-sized glass
ball that contains smoke that turns red when its owner has forgotten something.
69
Ariely 2009.
70
Shu et al. 2011c.
71
E.g. London School of Economics and Political Science https://www.lse.ac.uk/collections/law/
programmes/llm/llm-current.htm
72
Amir et al. 2008, p. 11 seq.
73
Dickerson, in Thomas and Snyder 2010, p. 376.
74
Bazerman and Gino 2012, p. 19.
Buckbeak and Sirius and flees just before his imprisonment in Azkaban. This high-
lights that the regulatory failure is not exclusive of sociopaths and psychopaths and,
once again, a certain moral relativism and flexibility.
Yet it is undeniable that Dumbledore’s choices give Hogwarts an odd moral
framing, where command and control measures, like harsh disciplinary punish-
ments as desired by Filch and only implemented by Umbridge and Carrow brothers,
are scarce.75 The focus is on the moral and pedagogical saliency and on the unity of
the School. As stated by Dumbledore in Book IV, the academic community will
only be strong when united and weak when divided. Remember Harry’s score for
his moral fibre after the second task in the Tournament or McGonagall’s speeches to
the Gryffindor before the O.W.L. and of the Sorting Hat after Voldemort’s resur-
gence. In short, there has been a concern about the moral framing, mainly with
prevention of dishonesty. This option corroborates the conclusions drawn by labora-
tory experiments carried out under the study of behavioural ethics.76 A lower pro-
pensity to cheat is found in contexts in which the prevention of being dishonest is
emphasized as opposed to the promotion of being honest with repercussions in
terms of risk preferences.
Finally, one of the biggest Hogwarts lessons for muggles concerns the teaming
and Prefecture system with a mixed mechanism for ensuring academic integrity
shared between the institution, teachers and students. Since its foundation, and
despite the untimely desertion of Salazar Slytherin, the school structure relies on the
creation of four students’ teams competing with each other during the school year
and chosen by the Sorting Hat on the base of their individualities and options and
led by a teacher. This enables a certain team spirit and self-categorization, supported
by distinctive symbols and colours (ex. Lion, badger, snake and eagle, red, yellow,
green and blue) and separate living quarters with secret passwords. On the other
hand, the system promotes the phenomenon of alterity and to stand before the judg-
ment of others, in a delicate balance between the effect of contagion and of deter-
ring dishonest behaviour. Nevertheless, the idea of unity is not overlooked (after all
they are all Hogwarts students) especially during the Tournament and meals (albeit
in separate tables) and some mixed classes. Hogwarts appears to fully internalize
the current knowledge of Behavioural Economics about the dynamics of the alterity
binomial and of moral self-perception.
The School adds to this system a mechanism close to the adapted codes of hon-
our defended by McCabe, which apparently prove to be successful (even if fallible
75
Most punishments involve administrative support tasks or housekeeping and cleaning of the
premises. This, however, seems to be a policy implemented by Dumbledore as Filch whines he can
no longer use physical torture; McGonagall criticizes the inapposite transfiguration of Malfoy by
Moody/Barty Crouch Jr.; and Arthur Weasley recalls the marks inflicted by Apollyon Pringle,
Filch’s predecessor. Moreover, the use of the truth serum (Verisatum) is also restricted (see Snape’s
reaction to Umbridge’s demands). Expulsion, in turn, is absolutely exceptional despite Ron’s and
Harry’s fears in the second book after the use of the flying car. Hagrid is the only case known.
76
Gino and Margolis 2011.
366 R. Saraiva
as traditional codes)77 with an integrity policy shared between the different stake-
holders of the educational system. The Academy encourages a moral framework, in
particular through the example of its Headmaster and has a representative for the
disciplinary policy, Filch, although with reduced powers; Professors supervise and
sensitize their students; and these, through a Prefecture system, participate in the
overall moralizing effort. Indeed, at least two students from each team are chosen
from the fifth to seventh grades respectively as Head Students and Prefects. The
criteria focus beyond their academic success and ponder their values and internal
balances (e.g. Ron). In addition to helping younger pupils, these students, to whom
certain privileges are given (e.g. separate railway carriage and bathroom) to the
extent of their assigned responsibilities, represent one of the arms of the disciplinary
system, although with restricted powers (remember the limitations of taking points)
in order to avoid abuses and injustices, portrayed with the creation and operation of
the hated Umbridge’s Inquisitorial Squad that hardly guarantees due process rights.78
A recent study79 has, in fact, disclosed in this respect a certain reluctance of stu-
dents to accept self-monitoring through ‘traditional’ codes of honour, preferring a
uniform institutional policy and even the participation of parents. The informers,
unless upheld by an anonymity mechanism, are equally unappreciated and target of
retaliation.80 The expressive bubbles in Marietta’s face after denouncing the Army
of Dumbledore or the hatred that Harry, Ron and Hermione feel against Malfoy
portray this phenomenon. This does not mean, however, that students want or should
stay out of the academic integrity framework and policy, even for self-accountability
reasons that help getting away of temptations.81
17.5 Closing Remarks
At Hogwarts, the system found is not perfect with some episodes of academic fraud
or injustice generated by the individual application of evaluation criteria of teachers
who do not always know how to handle cheating.82 Like in the muggle world, there
are few truly bad apples, i.e. individuals without moral standards and with patho-
logical behaviours, or saints, with very high ethical standards. On the contrary, most
people, magic or not, systematically cheat a little bit and have a certain moral plas-
ticity influenced by both exogenous and endogenous factors. In short, it turns out,
77
McCabe 1993; McCabe and Klebe Treviño 2002; McCabe et al. 2002, 2003; Melgoza and Smith
2008; Malgwi and Rakovski 2009, p. 209.
78
Berenson 2005.
79
Malgwi and Rakovski 2009.
80
Yan Nora and Zhang 2010; Gino and Bazerman 2009, p. 709; Berentsen et al. 2003; Armstrong
1983.
81
Gino and Bazerman 2009, p. 718.
82
Niels 1996; McCabe 2005a.
empirically, that it is not so much a real crisis of values but a common phenomenon
of limited morality, very similar to the already established with rationality.
This bounded morality discovers ethical dissonance,83 namely the discrepancy
between internalized social norms that should be (but not always are) complied
with, with or without intent and knowledge, and the positive moral self-perception.
After all, the attraction to take advantage of cheating and the use of disengagement
mechanisms and moral cleanliness (with justifications, compensations, compari-
sons, forgetfulness and expiation) in order to rationalize a fraudulent behaviour and
maintain a good and self-inflated (and hypocritical) image84 denounce the gap
between what is done and what should be done. In other words, instead of static and
intrinsic, moral assumes an important situational dimension and dynamics of con-
stant redefinition and creativity.85 Instead of black and white, morality comes in
shades of grey. This specific ambiguity and flexibility in the reinterpretation of
behaviours, for example with asymmetric moral judgments86 on the basis of the
author (identified or not, oneself, group members or others), time (past or future), or
the consequences (good or bad), advise a change of the ethical paradigm in the pur-
suit of moral conducts and, in particular, academic integrity.
Thus, rather than the traditional normative or prescriptive approaches, it would
be reasonable to move towards a descriptive behavioural perspective soaked with
the teachings of Cognitive and Social Psychology that would meet the criteria of the
empirically observed conducts and evaluations of their own and others’ behaviour.
This means that instead of a guiding ideal, the starting premise stands that even
good people do, systematically, bad things, in a process of internal and exogenous
trade-off involving the explicit and implicit advantages and costs (including emo-
tional and moral) of the actions taken.87
Given this bounded morality, with biases connected namely to alterity, categori-
zation, slippery slope or boiling frog syndrome, or the type of effects and (in)deter-
mination of the subjects involved (the so-called psychophysical numbing and
singularity effect),88 we propose along with Thaler and Sunstein,89 in order to cor-
rect behaviours and promote integrity, a new architecture of choice and of institu-
tions, as at Hogwarts, to continuously90 salience91 the ethical dimension, especially
with the help of nudges (operating as moral mirrors – see the aforementioned meta-
phor of the Mirror of Erised in Book I) and the establishment of a time for reflection,92
83
Bazerman and Gino 2012, pp. 21 seq; Shu et al. 2011a, b, p. 5.
84
Bazerman and Gino 2012, pp. 19–20.
85
Bazerman and Gino 2012, pp. 4 seq.
86
Shu et al. 2011a, b, p. 10.
87
Bazerman and Gino 2012, pp. 11–14.
88
Gino et al. 2010, p. 94.
89
90
Cano Rodriguez and Sams 2009.
91
Shu et al. 2011a, pp. 14 seq.
92
Even for a relative and comparative evaluation of behaviour, reducing the emotional and cogni-
tive biases (joint-evaluation). Shu et al. 2011a, p. 18.
368 R. Saraiva
without restricting the freedom of decision.93 This option, imbued with an asym-
metric and libertarian paternalism, looks for a cheap institutional design that pre-
vents and corrects, at no cost to the ‘saints’, deviations in moral behaviour,
particularly in academia. With these institutions and behaviours serving as anchor,
their new adjustment echoes in a rereading (including comparative) and readjust-
ment of the ethics in question and in an healthy attempt to realign individual and
institutional perception.94
Basically, to achieve greater success, we propose to welcome, as a reference, a
behavioural rather than deontological, utilitarian, injunctive or prescriptive moral
and a flexible framing that suits mostly rational choices. Instead of an absolute,
categorical and imperative understanding of academic integrity, we prefer a more
plastic understanding that meets a recurring redefinition of perceived moral values
(through the decisions and judgments taken) framed by a new architecture of choice.
That is, the concern is focused mainly on the source of cheating and not on the fraud
itself. In the end, as Dumbledore points out, the main lesson is that “it is our choices
that show what we truly are, far more than our abilities.”
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Teodorescu, Daniel, and Tudorel Andrei. 2009. Faculty and peer influences on academic integrity:
College cheating in Romania. Higher Education 57(3): 267–282.
Thaler, Richard H., and Cass R. Sunstein. 2009. Nudge. Academia do Livro.
Thomas, Jeffrey E., and Franklin G. Snyder. 2010. The law and Harry Potter. Durham: Carolina
Academic Press.
Tibbetts, Stephen G. 1999. Differences between women and men regarding decisions to commit
test cheating. Research in Higher Education 40(3): 323–342.
Tibbetts, Stephen G., and David L. Myers. 1999. Low self-control, rational choice, and student test
cheating. American Journal of Criminal Justice 23(2): 179–200.
von Dran, Gisela M., Elletta Sangrey Callahan, and Heather Victoria Taylor. 2001. Can students’
academic integrity be improved? Attitudes and behaviors before and after implementation of an
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Williams, Jeremy B. 2005. The place of the closed book, invigilated final examination in a knowl-
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About the Authors
Rainer Baisch, Zurich. MLaw et Dipl.-Kfm. Univ, University of Zurich. CH-8001

Zurich, Raemistr. 74/38, Tel. + 41 (0) 44 634 48 85. rainer.baisch@rwi.uzh.ch.
Fields of Interest: Financial Market Law, Business Law, Commercial and Corporate
law, Insolvency and Reorganization Law.
Mira Burri, Bern. Senior Fellow and Lecturer in Law at the World Trade
Institute at the University of Bern. CH-3012 Bern, Hallerstrasse 6, Tel. + 41 (0)31
631 54 92. mira.burri@wti.org. Fields of Interest: International Economic Law,
Internet Law, Media and Communications Law, Copyright Law, Globalization and
Law.
Philipp Anton Burri, Lucerne, BLaw, University of Lucerne. CH-6002 Lucerne,
Frohburgstrasse 3, P.O. Box 4466. philipp.burri@stud.unilu.ch. Fields of Interest:
Economic Analysis of Law, Behavioural Economics, Economic Regulation.
Georgios Dimitropoulos, Luxembourg. Senior Research Fellow at the Max
Planck Institute Luxembourg for International, European and Regulatory Procedural
Law. L-2721 Luxembourg, 4, rue Alphonse Weicker, Tel. +352 269488230.
georgios.dimitropoulos@mpi.lu. Fields of Interest: Public Law (Global, EU, and
Comparative Administrative Law), International Law (International Economic Law
and International Dispute Resolution), Behavioural Law and Economics.
Malte Frederic Dold, Freiburg. PhD candidate, Wilfried Guth Endowed Chair
of Constitutional Political Economy and Competition Policy at Albert-Ludwigs-
Universität Freiburg. D-79085 Freiburg i. Br., Wilhelmstrasse 1b, Tel. + 49 (0)761
203 676 52; Fax + 49 (0)761 203 676 49. malte.dold@vwl.uni-freiburg.de. Fields of
Interest: Economic Analysis of Law and Public Policy, Normative and
Methodological Implications of Behavioural Economics, Institutional Economics,
Philosophy of Economics.
Felix Ekardt, Leipzig/Berlin. Director of the Forschungsstelle Nachhaltigkeit
und Klimapolitik (Research Unit Sustainability and Climate Policy) in Leipzig/
Berlin and Professor of Public Law and Legal Philosophy at the University of
Rostock. D-04229 Leipzig, Könneritzstraße 41, Tel. + 49 (0)341 492 77 866; Fax +

Legal Scholarship 3, DOI 10.1007/978-3-319-29562-6
376 About the Authors
49 (0)341 246 59 876. mail@sustainability-justice-climate.eu. Fields of Interest:

Environmental Law and Policy, Theory of Justice, Human Rights, Governance,
Sustainability Issues.
Bruno S. Frey, Professor (em.) University of Zurich and University of Basle;
Research Director CREMA – Center for Research in Economics, Management and
the Arts, Switzerland. CH-8008 Zurich, Südstrasse 11, Tel. +41 (0) 44 380 00 78.
bruno.frey@econ.uzh.ch. Fields of interest: Political Economy, Law and Economics,
Psychological Economics, and Happiness Research.
Jana Gallus, Postdoctoral Fellow, Harvard Kennedy School, Harvard University;
Fellow, CREMA – Center for Research in Economics, Management and the Arts,
Switzerland. jana_gallus@hks.harvard.edu. Fields of interest: Political Economy,
Psychological Economics/Behavioural Economics, Non-financial incentives,
Public good provision.
Mariusz J. Golecki, Łódź and Warsaw. Professor at the University of Lodz,
Department of Legal Theory and Philosophy of Law, Director of the Laboratory for
Cognitive Research in Law, University of Lodz, Faculty of Law and Administration,
ul. Kopcinskiego 8/12, 90-232 Łódź, Poland and Lecturer within the framework of
the European Master in Law and Economics, Erasmus Mundus Master Programme,
Warsaw School of Economics, Department of International Comparative Studies,
Al. Niepodleglosci 162 02-554 Warsaw, Poland. mjgolecki76@gmail.com. Fields
of Interest: Economic Analysis of Law, Behavioural Law and Economics, Legal
Philosophy and Legal Theory, Theory of the EU law, Comparative Law.
Geneviève Helleringer, Paris/Oxford. Associate Professor at Essec Business
School. CS 50105 Cergy, 95021 Cergy-Pontoise, France. Fellow of the Institute of
European and Comparative Law at Oxford University. Law Faculty, OX1 3UL,
United Kingdom. Tel. + 33 6 82 56 72 13. helleringer@gmail.com. Fields of
Interest: Private Law (Contract, Commercial and Financial Law), Law and
Behavioural Sciences, Comparative and Global Law.
Peter G. Kirchschlaeger, Lucerne. Senior Research Fellow at the Faculty of
Theology at the University of Lucerne, Visiting Fellow at Yale University, Private
Lecturer in Theological Ethics at the Faculty of Theology of the University of
Fribourg, Fellow at the Raoul Wallenberg Institute of Human Rights and
Humanitarian Law. CH-6002 Lucerne, Frohburgstrasse 3, P.O. Box 4466, Tel. + 41
(0)41 229 52 92. peter.kirchschlaeger@unilu.ch. Fields of interest: Ethics of Human
Rights, Foundations of Theological Ethics, Ethics and Bible, Ethics of Finance,
Business-Ethics, Digitalization and Robotization of the Society from an Ethical
Perspective, Relation between Ethics and Law.
Klaus Mathis, Lucerne. Professor of Public Law and Law of the Sustainable
Economy at the University of Lucerne. CH-6002 Lucerne, Frohburgstrasse 3,
P.O. Box 4466, Tel. + 41 (0)41 229 53 80; Fax + 41 (0)41 229 53 97. klaus.mathis@
unilu.ch. Fields of Interest: Public Law (Law of Sustainable Development,
Economic Constitutional Law), Economic Analysis of Law, Legal Philosophy and
Legal Theory.
About the Authors 377
Kai Purnhagen, Wageningen and Rotterdam. Assistant Professor of Law and

Governance at Wageningen University, Law and Governance Group and
Distinguished International Visitor at the Erasmus University of Rotterdam Law
School. NL-6706 KN Wageningen, Hollandseweg 1. Kai.purnhagen@wur.nl. Fields
of Interest: Trade Law, European Union Law, European and International Economic
Law and Regulation, Policy Analysis, Legal Theory (esp. Behavioural Law and
Economics, Phenomenology).
Marcin Romanowicz, Ph.D candidate, Faculty of Law and Administration,
Warsaw University, Krakowskie Przedmieście 26/28, Street 00-927 Warsaw, Poland.
m.romanowicz@wp.pl. Fields of Interest: Legal Philosophy and Legal Theory,
Cognitive Psychology, Administrative Law, Tax Law.
Rute Saraiva, Lisbon. Professor of Economics, Environmental Economics and
Financial Markets Regulation at the University of Lisbon. Faculdade de Direito,
Alameda da Universidade, Cidade Universitária, 1649-014 Lisboa, Tel. + 351 21
798 4 600. rutesaraiva@fd.ul.pt. Fields of Interest: (Behavioural) Law and
Economics, Psychology and Law, Sustainable Development and Environmental
Law, International Law, Behavioural Finance, Financial Regulation, Legal
Education.
Mark Schweizer, Zurich. Lecturer (Privatdozent) for legal theory, legal sociol-
ogy and civil procedure at University of St. Gallen, attorney at law, Zurich, and
part-time judge at the Federal Patent Court, St. Gallen. CH-8023 Zurich, Forchstrasse
452, PO Box 1432, + 41 (0) 44 396 91 91, mark.schweizer@decisions.ch. Fields of
Interest: behavioural law and economics, evidence law, intellectual property law,
civil procedure, legal theory and legal sociology.
Ariel David Steffen, Lucerne. Lic. phil., University of Basel. PhD Candidate
(SNSF) in Behavioural Law and Economics at the University of Lucerne. CH-6002
Lucerne, Frohburgstrasse 3, P.O. Box 4466, ariel.steffen@unilu.ch. Research
Scholar at University of Notre Dame Law School and University of California Los
Angeles School of Law. Fields of interest: Behavioural Law and Economics,
Political Philosophy, Philosophy of Law, Philosophy of Mind, Classical and English
Philology.
Piotr Tereszkiewicz, Kraków. Assistant Professor of Private Law at the
Jagiellonian University of Cracow. PL-31-007 Kraków, Olszewskiego 2, Tel. + 48
(0)12 663 13 85; Fax + 48 (0)12 422 98 12. piotr.tereszkiewicz@uj.edu.pl. Fields of
Interest: Private and Commercial Law (Law of Obligations, Consumer Law,
Financial Services), Comparative Law, Economic Analysis of Law, Legal
Philosophy and Legal Theory.
Avishalom Tor, Notre Dame, United States. Professor of Law and Director of
the Notre Dame Research Program on Law and Market Behavior (ND LAMB),
Notre Dame Law School, IN 46614. ator@nd.edu. Global Professor of Law,
University of Haifa Faculty of Law. Fields of Interest: Behavioral and Experimental
Law and Economics, Competition Law, Corporate Governance, Judgment and
Decision Making.
378 About the Authors
Erica van Herpen, Wageningen. Associate Professor, Marketing and Consumer

Behaviour Group, Wageningen University. 6706 KN Wageningen, Hollandseweg
1. erica.vanherpen@wur.nl. Fields of Interest: In-store Consumer Behaviour,
Product Packaging, Shelf Display, Health Claims, Healthful and Sustainable Food
Products.
Ellen van Kleef, Wageningen. Associate Professor, Marketing and Consumer
Behaviour Group, Wageningen University. 6706 KN Wageningen, Hollandseweg
1. ellen.vankleef@wur.nl. Fields of Interest: Eating behaviour, Environmental
Interventions to help consumers eat healthier, Nudging, Nutrition Labelling,
Overweight Prevention.
Mark D. White, New York. Professor and Chair, Department of Philosophy,
College of Staten Island/CUNY, 2800 Victory Blvd, Staten Island, NY 10314
USA. Tel. +1 (718) 982-2900; Fax +1 (718) 982-2888. profmdwhite@hotmail.com.
Fields of interest: Ethics and Economics, Immanuel Kant, Economic Analysis of
Law, Legal Philosophy and Legal Theory.
Jutta Wieding, Dresden/Leipzig. Research Assistant at the Research Unit
Sustainability and Climate Policy. D-04229 Leipzig, Könneritzstraße 41, Tel. + 49
(0)341 49277867. jutta.wieding@posteo.de. Fields of Interest: Governance and
Law of Sustainability, International Climate Policy, Land-Use Issues.
Jerzy W. Wojciechowski, Ph.D., Faculty of Psychology, University of Warsaw,
Faculty of Psychology, University of Warsawul. Stawki 5/7, 00-183 Warsaw, Poland.
j.w.wojciechowski@gmail.com Fields of Interest: Psychology, Cognitive
Psychology, Eye-tracking, Forensic Psychology.
Index
A C
Academic fraud, 345–351, 361–366 Cheating, 220, 344, 345, 347, 349, 350, 352,
Academic integrity, 345, 346, 351–353, 355, 353, 356–363, 366–368
357, 360, 365–368 Choplin, J.M., 173–177, 181, 188–192
Advice, 14, 154–164, 174, 178, 180–184, 192, Climate change, 247
193, 198, 233, 234, 239–241, 358 Code of Conduct, 219, 240, 242
Advisor, 154–161, 163, 178, 181, 183, 190, Community, 60, 62, 127, 346, 350,
230, 239, 240 356, 360, 365
Alexy, R., 63, 110–112 Condorcet, 41, 43–47, 50, 53, 54
Anchor effect, 139 Condorcet Jury Theorem (CJT), 43
Architecture of choice, 345, 367, 368 Conflict of interest, 154, 157, 158, 161–163,
Attitudes, 35, 55, 66, 84, 163 180, 238
Audiovisual media service directive, 318 Conly, S., 12, 22, 26, 27, 29–36, 220
Autonomy, 4, 14, 35, 36, 60, 63–66, 71, 72, Constitutional law, 94, 96, 292
79, 80, 82, 83, 85, 87, 98–103, 105, Consumer behaviour, 202, 208, 219,
108, 114, 121–127, 130, 131, 140, 224, 232, 234
147, 148, 162, 177, 180, 181, 193, Contract clauses, 172
220–222, 250, 327, 335, 337, 361 Counselling, 173, 180–182, 184–194
Availability heuristics, 134–136, 174
Awards, 16, 17
D
Debiasing, 141, 229, 263, 269, 270, 274,
B 275, 277, 282
Behavioural change, 113, 254–255, 260 Decision biases, 13, 39, 40, 47, 50,
Behavioural cconomics, 21, 22, 25, 26, 41, 51, 54, 55
42, 71, 80, 84, 124, 140–144, Decision making, 14, 16, 18, 22, 24, 25, 27,
220, 221, 225, 234, 235, 251, 264, 28, 31, 35, 36, 40, 42, 64–66, 70,
271–273, 282 82–84, 95, 128, 140, 154, 155, 162,
Behavioural law and economics, 218, 263, 268 173–175, 177, 181, 187, 188, 192,
Behavioural regulation, 264, 265, 267, 268, 202, 208, 212, 219, 228, 236, 241,
273, 278, 280–282 255, 265, 268, 269, 272, 276, 290,
Ben-Shahar, O., 154, 161, 163, 177, 293–295, 307, 310, 312, 327, 330
182, 193, 280 Democracy, 64–66, 82, 250, 253, 327, 328
Bounded morality, 367 Dichotomy, 73–76, 79, 80, 85
Bounded rationality, 256 Digital media, 319–329

Legal Scholarship 3, DOI 10.1007/978-3-319-29562-6
380 Index
Disclosure, 153, 156–157, 177–180, 225, 226, Global Administrative Law, 264, 273
233, 236–237 Governance, 241, 256–258, 260,
Disclosure-paradigm, 225 261, 264, 266, 272, 273,
Dishonesty, 346, 348, 349, 352, 354, 280, 316, 333, 336
356–361, 365 Government, 12–16, 27, 28, 36, 64,
Diversity, 25, 210, 267, 316–321, 323, 326, 70, 85, 94–96, 99, 107–109,
327, 329, 330, 333–337 113–115, 170, 171, 249, 261,
Dworkin, R., 103, 221, 311 265, 269, 273, 275, 277, 279,
280, 282, 347
E
Education, 50, 66, 102, 177, 191, 205, 229, H
242, 344, 346, 347, 357–359, 361 Harry Potter, 344, 345, 351
Educative nudges, 41, 49, 50, 54, 55 Hayek, F.A., 42, 279
Elliott, S.B., 194 Health claim, 197, 200, 201, 203,
Embedded liberalism, 265–267 204, 210–212
Empirical studies, 71, 134, 194 Human rights, 60–66, 97, 318
Endowment effects, 137–138, 174 Hyperbolic discounting, 12, 134,
Ends paternalism, 22, 26, 28, 30, 36 136, 144, 268
Environmental law, 248–249
ESMA, 219, 226, 230, 233, 234, 238
Ethical dissonance, 367 I
Ethical frame of reference, 65 Illinois Predatory Lending Database Pilot
Ethics, 22, 70, 75, 86, 87, 94, 250, 346, 357, Program, 184–188
361, 365, 368 Information, 6, 7, 11, 12, 14, 23, 27, 28,
Evaluation, 77, 174, 230, 237, 240, 256, 257, 31, 33–35, 37, 39, 42, 46, 48–50,
311, 327, 346, 348, 350, 360, 361, 52, 53, 55, 66, 70, 72, 77, 79, 85,
364, 366, 367 99, 100, 102, 107, 108, 115, 127,
Experiment, 101, 137, 155, 157, 158, 129, 131–134, 139, 144, 153–156,
160–163, 296, 299, 301–303, 158, 159, 161–163, 174, 175,
305, 307, 309–312 177–182, 185–187, 193, 194,
Eye-tracking, 297–304 198–200, 202–212, 218–220,
223, 225–227, 230–233, 235–237,
239, 240, 242, 259, 260, 263, 268,
F 270, 274, 278, 279, 293, 295, 297,
Finance, 155, 170, 171, 189, 191, 219, 298, 306, 307, 309, 310, 315,
226, 229, 324 318–323, 325–328, 332–335, 344,
Financial Conduct Authority (FCA), 178, 183, 347–350, 355, 356
219, 220, 224 International nudge, 266–267, 274, 278, 282
Financial decision, 155, 173, 188, 241 Internet, 237, 317, 319–323, 325,
Financial products, 162, 177, 193, 330, 336, 346
194, 236–238 Investor protection, 218, 219, 226, 229, 238,
Food law, 200, 206 240, 243
Foreign-currency indexed loans, 171,
172, 174–176
Freedom of choice, 12, 36, 40, 43, 55, 73, J
98, 109, 222, 263, 270, 271, Joas, H., 61
274, 282, 327, 345 Judge-advisor, 154, 163
Judgement, 154, 157, 159, 160, 163,
248, 344, 364
G Juries, 46, 47, 49, 54, 55
German Constitution, 97, 98, 111, Justice, 25, 65, 87, 124, 140, 144, 147,
114, 115, 222 248–250, 255, 303, 330, 346,
Gigerenzer, G., 12, 50, 242, 243, 268 349, 356, 358, 360, 363
Index 381
K O
Kahneman, D., 11, 12, 21, 39, 51, 70, 71, 95, Omission bias, 138
136–139, 154, 175, 217, 219, 221,
223, 240, 242, 269, 306
Key investor document, 219, 236–237 P
Knowledge problem, 40, 41, 43, 54, 279 Packaged retail and insurance based
investment products, 219
Perfectionism, 22, 32
L Pictorial claims, 198, 201, 211, 212
Labour law, 124, 141–143 Policymakers, 21–24, 26–28, 30–32, 34, 35,
Least restrictive means, 222 42, 47, 220
Legal interpretation, 252, 294 Political economy, 265
Liberal paternalism, 15–18 Political opinion-forming and decision-making
Libertarian paternalism, 26, 29, 31, 40–43, 52, process, 64
53, 59, 71, 72, 109, 140, 148, 248, Politicians, 12, 15, 85, 110, 255, 267, 323, 336
249, 264, 271, 277–279, 282, 368 Pragmatic ethics, 86–87
Liberty, 5, 40, 103, 221, 222, 250, Preferences, 7, 15, 24, 30–32, 40–44, 50–53,
252–254, 269 71, 72, 79, 80, 84, 85, 99–101, 136,
Logical positivism, 73, 75, 80 137, 181, 182, 190, 194, 222, 239,
Lohmann, G., 61 241, 268, 269, 316, 327, 351, 365
Principle of indivisibility, 65
Principle of vulnerability, 63
M Procedural law, 277
Markets in Financial Instruments Directive Proportionality, 94, 96–97, 102, 106–110,
(MiFID), 183, 229, 230, 233, 234, 112–115, 222, 253, 254, 336
237, 239, 240 Protection, 161, 220, 228–230, 233, 248–249,
Means paternalism, 22, 26, 28, 30, 222 251–252, 318
Media policy, 316–318, 321, 323, 329, 330, Psychology, 11, 268–272, 348, 364, 367
334, 336 Public service media (PSM), 337
Medin, D.L., 296, 306 Putnam, H., 73–76, 80, 82, 86, 87
Meta-preferences, 41, 51–54
Mill, J.S., 27, 250
Mortgage loans, 170–174, 176, 178, 180, R
188, 189, 193 Rational choice, 31, 34, 70–73, 79–85, 141,
Motivation, 5, 24, 143–144, 174, 207, 236, 219, 264, 268, 269, 271, 273, 277
242, 258, 260, 261, 335, 345 Rationality, 4–6, 8, 9, 11, 12, 21, 24, 70–72,
79, 80, 82, 84–87, 100, 134, 225,
235, 241, 265, 268, 269, 271, 272,
N 279, 290, 345, 355, 367
Non-mandatory contract, 123, 126, 133–147 Retail finance, 155
Norm compliance, 139 Risk tolerance, 229, 354
Normative judgments, 31, 86 Ruggie, J.G., 266
Nudges, 4, 5, 7, 8, 12, 13, 16, 17, 22–24, Rule based categorization, 296–298, 308
26–28, 32, 40, 43, 48, 52, 53, 71,
96, 97, 99–103, 105–109, 112, 114,
115, 140, 142, 193, 220, 222, 223, S
225, 234, 236, 239, 240, 243, 261, Sanitary and Phytosanitary Agreement, 273
263–265, 270, 274, 277, 282, 337, Schneider, C.E., 15, 154, 161, 163, 177, 182,
345, 364, 367 193
Nudging, 4–6, 11–18, 55, 65, 83–86, 95–96, Self-image, 355, 360, 361, 364
98–114, 142–143, 148, 221, Shrouded attributes, 50, 228
223–225, 239–240, 243, 247–262, Social norms, 7, 99, 102, 358, 360, 364, 367
281, 282, 329–336 Sovereignty, 43, 53, 60, 267, 272,
Nutrition claims, 198–200, 202–205, 207 273, 316, 336
382 Index
Stark, Debra Pogrund, 173–177, 181, 188–192 Trade Policy Review Mechanism (TPRM),
Status quo bias, 39, 134, 137, 141, 142, 269 265, 280
Suitability test, 242 Transparency, 99, 226, 240, 274,
Sunk costs effects, 174 320, 329, 333
Sunstein, C.R., 3–8, 12, 13, 17, 22–24, Trebilcock, M.J., 180–182, 184, 189–192, 194
26–29, 31–33, 35, 36, 40–43,
49, 50, 52–54, 59, 71, 83, 84,
94–96, 99–101, 108, 128, U
135–137, 139–143, 153, 176–179, Uncertainty discounting, 174
218, 220–223, 225–228, 232, 236, Universality, 60, 61, 351
237, 248, 256, 258, 263, 264,
268–271, 274, 276–278, 280, 290,
319, 324, 327, 328, 333, 334, 337, V
355, 367 Van Aaken, A., 99, 101, 107, 222
Surety, 124, 141–147, 180 Visual packaging elements, 207–211
Voters, 15, 16, 18, 54, 255
T
Technical Barriers to Trade Agreement, 273 W
Thaler, R., 3–8, 12, 13, 22–24, 31, 32, 39–42, Warning, 61, 99, 102, 107, 156, 159, 179, 180,
50, 51, 53, 54, 59, 71, 72, 83, 84, 182, 192, 230
94–96, 100, 101, 108, 128, Well-being, 4–9, 22, 24–26, 29, 31, 32, 34–36,
135–137, 139–141, 143, 153, 200, 241, 248, 355
176–179, 218, 220, 222, 223, 227, White, 34
248, 258, 263, 264, 268–271, 276, World Trade Organisation (WTO), 264
277, 290, 333, 334, 355, 367 Written advocacy, 202

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Economic Analysis of Law in European Legal Scholarship 3

More information about this series at http://www.springer.com/series/11927

Economic Analysis of Law in European Legal Scholarship

Library of Congress Control Number: 2016936892

© Springer International Publishing Switzerland 2016

Printed on acid-free paper

This Springer imprint is published by Springer Nature

Faculty of Law Sebastian Heselhaus

This anthology, ‘Nudging – Possibilities, Limitations and Applications in European

Lucerne, Switzerland Klaus Mathis

10 Neutral Third-Party Counselling as Nudge Toward

About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375

Rainer Baisch Rechtswissenschaftliche Fakultät, University of Zurich, Zurich,

Rute Saraiva Alamedad de Universidade, University Lisbon Law School, Cidade

population’s welfare we should be concerned about their unwillingness to do so. As

Faculty of Law Klaus Mathis

The publication of Thaler and Sunstein’s “Nudge: Improving Decisions About

© Springer International Publishing Switzerland 2016 3

1.2 The Tools and Goals That Define Nudging

1.3 Non-nudge Tools and Extra-nudge Goals

Baldwin, Robert. 2015. Nudge: Three degrees of concern. Working paper.

Bruno S. Frey and Jana Gallus

2.1 Nudging as a Concept

Nudging is an attractive idea. With low or even zero-cost interventions paternalists

© Springer International Publishing Switzerland 2016 11

2.2 Critiques of the Nudging Concept

2.3 Nudges from a Political Economy Perspective

The proponents of Liberal Paternalism seem to assume, as a matter of course, that

2.4 An Application of Nudging: Awards

2.5 Making Nudges Beneficial

Abstract There has been a resurgence of late in support of paternalism, due

© Springer International Publishing Switzerland 2016 21

3.2 Problems with Nudges

decisions, choices, and actions – in other words, everything he or she is interested

To reiterate, the complexity of interests stands in stark contrast to the typical

3.4 Interests and Paternalism

3.4.1 Means Paternalism and Ends Paternalism

To clarify the non-judgmental nature of their brands of paternalism, both Sunstein

recent books by recounting the findings of behavioural researchers regarding cogni-

3.4.2 Perfectionist or Objective Theories of Well-Being

Thaler and Shefrin 1981, p. 39.

M.F. Dold, M.A. (*)

© Springer International Publishing Switzerland 2016 39

4.2 Libertarian Paternalism and the Knowledge Problem

4.3 The Condorcet Jury as a Wise Social Planner

democratic institutions.31 However, as already indicated in the illustration of the

4.4 The Optimal Jury Size and Educative Nudges

to see that this would be an impractical suggestion. Self-evidently, experts cause

Θ (n; α ; β ) = Φ (n; α ) +Ψ (n; β ).

Depending on the choice context, individuals depict different, contradictory

Consumers might express their meta-preferences in reflective situations that acti-

4.6 Concluding Remarks

Holler, Manfred J. 2015. Paternalism, gamification, or art: An introductory note. Homo

Abstract Nudging could seem to be attractive from a human rights perspective if

Cass R. Sunstein and Richard Thaler suggest in “Nudge – Improving Decisions

© Springer International Publishing Switzerland 2016 59

5.2 The Realization of Human Rights

A positive change in favour of human rights lies especially in the hands of

5.3 Human Rights Protecting the Individual as Part

5.4 Autonomy: The Nucleus of Human Rights

realization”.13 During the awareness-building-process of one’s own vulnerability

violating human rights regarding the access to democratic opinion-forming- and

From a human rights perspective, scepticism towards the approach of nudging

Alexy, Robert. 1998. Die Institutionalisierung der Menschenrechte im demokratischen

4.2 Libertarian Paternalism and the Knowledge Problem

4.3 The Condorcet Jury as a Wise Social Planner

4.4 The Optimal Jury Size and Educative Nudges

4.6 Concluding Remarks

7.2 ‘Choice Architecture’ and ‘Nudging’

7.3 The Principle of Proportionality

7.4 Does Nudging Interfere with Fundamental Rights?

7.4.1 A Constitutional Right Protecting Personal Autonomy

7.4.2 Nudging and Personal Autonomy

7.5 Applying the Principle of Proportionality to Nudging

7.5.1 Legitimate Public Interest and Nudging

7.5.2 Suitability and Nudging

7.5.3 Nudging as the Least Restrictive Alternative?

7.5.4 Balancing and Nudging

7.5.5 Consistency and Nudging