1. Introduction

Both Austrian economics and behavioral economics purport to offer deep critiques of mainstream neoclassical economics. This simple observation suggests the possibility of synergy between the two schools of thought. At the same time, Austrian and behavioral economics often seem at odds, especially when it comes to policy recommendations. Behavioral economics has often been deployed to justify paternalist interventions on behalf of less-than-fully-rational individuals (Camerer et al., Reference Camerer, Issacharoff, Loewenstein, O'Donoghue and Rabin2003; Gruber and Köszegi, Reference Gruber and Köszegi2001; O'Donoghue and Rabin, Reference O'Donoghue and Rabin2003, Reference O'Donoghue and Rabin2006; Sunstein, Reference Sunstein2014; Sunstein and Thaler, Reference Sunstein and Thaler2003; Thaler and Sunstein, Reference Thaler and Sunstein2003; Reference Thaler and Sunstein2008) – and some Austrian economists have pushed back strongly against such arguments (Devereaux, Reference Devereaux2019; Padilla, Reference Padilla2009; Rizzo and Whitman, Reference Rizzo and Whitman2009a, Reference Rizzo and Whitman2009b, Reference Rizzo and Whitman2020; Whitman and Rizzo, Reference Whitman and Rizzo2015). However, this policy-level disagreement may obscure gains from trade between the two schools.

In this paper, I will explore these potential gains from trade, with a focus on how the two schools can constructively critique each other. Among other things, the Austrian critique of behavioral economics would urge it to jettison its restrictive and axiomatic definition of rationality, and to treat humans as active agents rather than passive recipients of environmental and cognitive influences. Meanwhile, the behavioral critique of Austrian economics would push it to take more seriously the fundamental question of how individuals arrive at choices and to analyze how such choices interact with ‘micro-institutional’ choice environments.

My focus is on the ‘new’ behavioral economics that has dominated the field since the 1990s, and which is associated with the work of Richard Thaler, Daniel Kahneman, Amos Tversky, and Dan Ariely, among many others. This is distinct from the ‘old’ behavioral economics that arose in the 1950s with such scholars as Herbert Simon, Harvey Leibenstein, and George Katona. As Sent (Reference Sent2004) has documented, the new behavioral approach began to eclipse the old one during a transitionary period in the 1970s and 1980s. The new school's greater success has derived in part from its attempt to augment rather than replace the neoclassical paradigm, particularly its use of axiomatic rationality as a normative benchmark (Sent, Reference Sent2004: 747). In focusing on the new behavioral economics, my purpose is not to sideline the older school, but to concentrate on the field as now typically practiced and how it may be improved. Indeed, the older behavioral school had numerous affinities with the Austrian school (Frantz, Reference Frantz, Frantz and Leeson2013, Reference Frantz, Frantz, Chen, Dopfer, Heukelom and Mousavi2017), and many insights from the old behavioral economics will prove helpful in bridging the gap between Austrian economics and the new behavioral economics. (For simplicity, when I refer to ‘behavioral economics’ without modification, I mean the newer variety.)

As a framing device, I will rely on a list of foundational principles of Austrian economics, explaining how each principle might improve behavioral work – but also how its full application would require Austrians to internalize behavioral insights. Several lists of Austrian principles have been written (Boettke, Reference Boettke and Boettke2010a; Boettke and Coyne, Reference Boettke, Coyne, Boettke and Coyne2015; Kirzner, Reference Kirzner, Eatwell, Milgate and Newman1987; Machlup, Reference Machlup and Greenwald1982). I will not rely on any single list, but instead consider those principles that appear across multiple lists and that seem most relevant in this context. (This will mean, for the most part, ignoring Austrian macroeconomics, inasmuch as behavioral economics remains a largely microeconomic endeavor.) Also, I do not intend to offer a comprehensive justification for any of these Austrian principles. To the extent I offer justifications, it is only to advance the broader argument for Austrian-behavioral gains from trade.

2. Subjectivism

To Austrians, subjectivism (sometimes called methodological subjectivism) refers to the idea that ‘social scientific explanations must start with the subjective mental states of the actors being studied’ (Horwitz, Reference Horwitz and Boettke1994: 17). Subjectivism may be contrasted with approaches that purport to derive social scientific explanations and predictions from objective facts about the world, such as resources, the money supply, technology, and so on. The error in the objectivist approach is that the facts of the social sciences are fundamentally subjective in character. A resource only becomes a resource when people recognize it as such; money isn't money unless people treat it as money; technologies do not become relevant until people understand how to use them; and so on. At a deeper level, if we seek to understand a social phenomenon, any explanation that doesn't rely on ‘what people think and feel, their assessments and valuations, [and] the way they see the world and their place within it’ (Storr, Reference Storr and Boettke2010: 30) will ultimately be incomplete and unsatisfying.

In the Austrian subjectivist perspective, analysts have privileged access to the building blocks of economic theory simply by virtue of being human. Intelligibility of human action is possible because ‘we are what we study’ (Boettke, Reference Boettke and Boettke2010a: xiii). This means intuition and introspection play a key role in generating theories. Our understanding of economic activity begins with ‘knowledge from within’ that we gain ‘not through observation, but through intuition – the intuition we possess as economic actors’ (Evans, Reference Evans and Boettke2010: 8).

Here we find our first opening for a behavioral critique of Austrian economics. Our intuitions about how we make choices can be misleading. Although Austrians frequently criticize the neoclassical notion of constrained optimization, on first consideration constrained optimization can seem quite intuitive: ‘I always try to do the best I can with the means available to me’, or ‘I'm satisfying my preferences in the best way possible’. Even Austrians sometimes rely on the idea that a choosing person simply selects ‘the option they most prefer’ from the options available (e.g. Holcombe Reference Holcombe2009: 302). By contrast, reasonably strong evidence supports cognitive processes that lack immediate intuitive appeal, such as loss aversion (Kahneman and Tversky, Reference Kahneman and Tversky1979) and responsiveness to framing (Tversky and Kahneman, Reference Tversky and Kahneman1981). Although these concepts may become intuitive once explained, they do not necessarily spring to mind from mere introspection. If the reader disagrees with these judgments of intuitive appeal, that only serves to underline the unreliability of introspection: it does not lead researchers to the same conclusions.

We should therefore be skeptical of extreme versions of aprioristic methodology that shield certain aspects of introspection from empirical testing. Austrian lodestar Ludwig von Mises, for instance, stated that:

There has been much debate about the best interpretation of Mises's apriorism (e.g. Koppl and Whitman, Reference Koppl and Whitman2004; Oprea and Powell, Reference Oprea, Powell, Koppl, Horwitz and Desrochers2010; Scheall, Reference Scheall2017; Zanotti and Cachanosky, Reference Zanotti and Cachanosky2019), a debate I will not resolve here. Mises likely intended to make a statement of great generality that could accommodate more specific (and testable) hypotheses. Nevertheless, the specific quotation above at least seems to shield many mental processes (such as preferring and economizing) from empirical scrutiny. Although Austrian economists have exhibited a range of perspectives on this issue, resistance to the intrusion of psychology into economic theory is common in the Austrian school and can be found among some of its leading thinkers (Vihanto, Reference Vihanto2004: 327). The unreliability of introspection, and the resulting need to discriminate among competing intuitions, should induce Austrians to be more accepting of psychological insights, which can help to generate more specific and testable claims about human behavior.

But behavioral economics has a similar blind spot when it comes to introspection. Some of behavioral economics' leading concepts do have intuitive appeal, which helps to explain their sticking power in public debates. The endowment effect, status quo bias, and hyperbolic discounting, among others, may seem quite familiar and natural: ‘Of course, I do that all the time!’ Yet subsequent research often reveals how little we understand the actual operation of these mechanisms. For instance, hyperbolic discounting – the tendency of near-term discount rates to exceed far-term discount rates – is typically presented as resulting from impatience or procrastination, which are familiar experiences. Yet it turns out the underlying cause may have less to do with impatience than with time compression, the tendency to perceive a duration in the distant future as subjectively shorter than the same duration closer to the present (Zauberman et al., Reference Zauberman, Kim, Malkoc and Bettman2009). Or the underlying cause may be related to subadditivity, the tendency of the discount rate for an undivided period of time to be lower than the compounded discount rate for the same period of time divided into small units (Read, Reference Read2001). Or the underlying cause might involve similarity judgments, which result in a tendency to see periods in the distant future as more similar to each other than time periods in the near future (Rubinstein, Reference Rubinstein2003). A behavioral concept's intuitive appeal does not imply its truth. Behavioral economics needs to be more open to refutation or weakening of its most celebrated contributions.

Despite these concerns about the trustworthiness of intuition, it remains true that good social science requires reference to the subjective understandings of the people whose behavior is to be explained. Superficially, behavioral economics seems to satisfy this principle. Yet behavioral scholars sometimes smuggle in a spurious objectivity via their conception of rationality – a conception borrowed directly from neoclassical economics. Consider the notion of framing invariance, a supposed requirement of rational behavior. In Tversky and Kahneman's formulation, ‘Different representations of the same choice problem should yield the same preference. That is, the preference between options should be independent of their description’ (Reference Tversky and Kahneman1986: S253). When real subjects violate this rule, behavioral economists deem them irrational. But what does it mean for the choice situation to be ‘the same’ despite different descriptions? The problem can be ‘the same’ to the analyst without being ‘the same’ to the subject. Two logically equivalent descriptions – pointing to the same object in the world – may not have the same significance to the individual chooser. In positing framing invariance as a requirement of rationality, behavioralists are clinging to the idea of objectively described choice situations, which misses the subjective character of how individuals interpret those situations. There is no reason to assume that agents do or should have ‘deep preferences’ defined over objects independent of their descriptions (Rizzo and Whitman, Reference Rizzo and Whitman2020: 73). What matters is the meaning the agent attaches to such objects, which can legitimately depend in part on description.

This isn't some exotic notion of choice under peculiar circumstances. All human choices proceed from interpretation and meaning in the mind of the chooser. For example, it is well known in the marketing literature that a product's ‘psychological meaning’ to consumers affects their experience of the item. Friedmann (Reference Friedmann1986) explains that the psychological meaning of a product may include ‘a person's … direct and/or his vicarious experiences, images, feelings, and associated behavioral responses that have been accumulated over time’ (5).

To take a simple example, a reader might avoid buying Kahneman's book Thinking, Fast and Slow presented as ‘an enlightening tour of the field of behavioral economics’, while buying the same book presented as a ‘a tour de force that will change how you think’. And her expectation of the book may then affect how she reads and experiences it. But it's the same book, right? What differs is how the potential buyer thinks about it, even if she already knows the subject matter. The latter description might tap into her desire for self-improvement in a way the former description doesn't. To make sense of the difference, we need to get inside the chooser's head to understand her interpretation of the situation – and thus a supposedly objective description of the situation won't do. The agent's attitude toward the object of choice matters. The same goes for other kinds of framing effect where the reason for the divergent choices is less obvious.

A behavioral economist might object to the book example on grounds that the two descriptions don't convey the same information. Perhaps one description implies the book has content that the reader finds more valuable. But the same can be true of many other descriptions that the analyst considers informationally equivalent, even though the subject may not. For instance, a patient might be more likely to agree to a surgery described as having a p success rate than the same surgery described as having a (1 − p) failure rate. To the analyst, these seem to be informationally equivalent descriptions. But the patient might infer from the former description a greater optimism or an implicit recommendation on the part of the surgeon – and he might be right. Information ‘leakage’ can result from the selection of the frame (Sher and McKenzie, Reference Sher and McKenzie2006). Logically equivalent statements can carry different semantic content (O'Driscoll and Rizzo, Reference O'Driscoll and Rizzo2015: 13). This means the analyst cannot simply stipulate the informational equivalence of different frames. What the agent infers from the frame depends on the subjective preconceptions she brings to the situation.

Although subjectivism has been part of the Austrian approach since its inception, Friedrich Hayek laid a deeper foundation for it in The Sensory Order (Reference Hayek1952), wherein he explained that a person does not – indeed cannot – directly apprehend the facts of the world around him. Each new experience must go through a process of mental interpretation, which necessarily is shaped by the individual's prior experiences and memories (Frantz, Reference Frantz, Frantz and Leeson2013: 11–12). This is as true of the analyst as the people studied, which hobbles attempts to define choice situations ‘objectively’ in a manner independent of interpretation by the agents (or subjects) involved.

3. Methodological individualism

Methodological individualism (MI) means that social scientific explanations should be expressed in terms of ‘the actions (or inaction) of individuals; groups or collectives cannot act except through the actions of individual members’ (Machlup, Reference Machlup and Greenwald1982: 39–40). MI often comes first in lists of Austrian principles (Boettke, Reference Boettke and Boettke2010a; Machlup, Reference Machlup and Greenwald1982), but I find it useful to discuss it after dealing with the closely related topic of subjectivism. (MI naturally leads to subjectivism, insofar as the next question, after saying social explanations must turn on individual choices, is to ask how such choices are made.)

MI is a live concern in the Austrian critique of macroeconomics, but it doesn't seem to be a point of difference from either neoclassical microeconomics or behavioral economics. Both of the latter clearly work within the individualist tradition. However, there is still some question as to the role that institutions should play within MI. Evans (Reference Evans and Boettke2010: 7) explains that the methodological debate is really among three positions: holism, atomism, and institutionalism. The last of these is the proper position for Austrians (Boettke, et al., Reference Boettke, Coyne and Leeson2013: 289n), despite the Austrian approach sometimes inaccurately being identified with atomism. Agassi (Reference Agassi1975) persuasively defends the merger of individualism and institutionalism. In this approach, individual choices are made within and shaped by institutions, which in turn have emerged from prior individual choices (Dequech, Reference Dequech2013). Institutional MI ‘incorporates social constructs as both the products of, and shapers of individual choice’ (Evans, Reference Evans and Boettke2010: 9). What makes a social scientific explanation consistent with MI, even as it allows a critical role for institutions, is that the explanation must go through the individual (Whitman, Reference Whitman and Koppl2004).

Nominally, behavioral economics comports with institutional MI and is thus consistent with the Austrian approach. After all, behavioral choices do issue from individuals. In practice, however, behavioral explanations tend to have a mechanistic tone, wherein the interaction between individuals and institutions seems largely one-directional: the individual reacts to an exogenously imposed context. Individuals are manipulated by how problems are framed. They cannot help indulging their biases. They are effectively controlled by their choice environment. The Austrian approach, by contrast, emphasizes the two-way interaction between individuals and institutions. People need not be passive; they can actively engage with their choice environment, often changing it in the process.

If the individual is shaped by social context, how is it possible that he could resist its control? Why doesn't social context lead to social determinism? The Austrian insistence on the power of individual choice might sound like an echo of mind–body dualism or belief in the soul. But no such metaphysical leaps are required. The key insight is that individual choice is not determined only by present context, but by the cumulative effect of a lifetime of interpreting the social world, which provides the individual with a degree of independence from any specific present context. This form of independence is called cognitive autonomy, and it means that ‘the cause of human behavior is more inside the individual than outside it. What matters is not the context, but precisely the way we interpret it’ (Di Iorio, Reference Di Iorio, Frantz and Leeson2013: 153). Consequently, although individuals do react to their environments, and they are to an extent shaped by those environments, they also exert influence over their environments – and they do so in ways that depend on their subjective interpretations of the world. (Which, of course, leads back to subjectivism.) As Heiner (Reference Heiner1983) observes, the fact that individuals often cope with the world's complexity and uncertainty by following relatively simple rules makes their behavior more predictable by others, thereby contributing to the emergence of reliable institutions.

The Austrian lesson for behavioral economists is to treat people as active participants in choice situations, not passive recipients of contextual influence. The challenge for Austrians, on the other hand, is to consider that individuals will not always be so active. Much as it would be cognitively burdensome to rationalize all of one's preferences and beliefs, it would be even more burdensome to challenge and interrogate the framing and context for all of one's choices. We rationally and reasonably rely on ‘autopilot’ for many of our choices, even as we reframe and reconceptualize others. The implications of these lessons for behavioral and Austrian economists will become more clear in the discussion of process, discovery, and entrepreneurship below, and even more so in the later section on spontaneous order.

4. Process, discovery, and entrepreneurship

Austrian critiques of neoclassical economics often focus on its reliance on equilibrium analysis; indeed, this concern has been called ‘the main intellectual difference between [the Austrian and neoclassical schools]’ (Rosen, Reference Rosen1997: 139). An equilibrium denotes a point of rest, wherein all relevant forces exist in a state of balance such that no further change is expected (without exogenous shocks). Mathematically, an equilibrium point occurs when all the defining equations of a system are satisfied at once; the classic example is the intersection of supply and demand curves in the standard competitive model of a market.

The Austrian concern with equilibrium modeling is that it does not adequately explain the process by which such an equilibrium is reached from an initial state of disequilibrium. For instance, in the standard model of competitive equilibrium in which all agents are price-takers, how is it possible that prices could ever change as necessary to reach the ultimate equilibrium? Economists will sometimes tell stories about buyers and sellers ‘bidding’ with different prices, but those stories are strictly speaking not part of the model itself; they are hand-waving in the vicinity of the model. Even ostensibly ‘dynamic’ neoclassical models typically involve a moving or intertemporal equilibrium rather than a process of change from a state of disequilibrium.

The Austrian alternative is to describe a process of market discovery, typically involving the alert and creative activity of entrepreneurs in moving markets toward equilibrium – or, possibly, away from it (Kirzner, Reference Kirzner1997; Sautet, Reference Sautet and Boettke2010; Yu, Reference Yu2001). In essence, disequilibrium situations necessarily correspond to opportunities for pure gain, and there is a tendency for people to find and exploit such opportunities – and in the process close them. By contrast, ‘Entrepreneurs are not to be found in neoclassical economics’ (Rosen, Reference Rosen1997: 148). In the neoclassical equilibrium-always approach, there is no role for entrepreneurial activity because all opportunities for gain have already been exploited.

Although this critique mostly pertains to equilibrium among individuals, it also applies to equilibrium within the individual (Rizzo and Whitman, Reference Rizzo and Whitman2018: 204–205). As discussed earlier, there is no reason to think agents have preferences and beliefs that are pre-reconciled and fully consistent before they make any actual choices. Yet neoclassical models typically proceed on the assumption of well-defined and well-behaved preferences and beliefs. There is no room for trial-and-error, self-discovery, and self-correction because all the work ‘has already been done, instantaneously and costlessly, by assumption’ (Rizzo and Whitman, Reference Rizzo and Whitman2020: 401). Behavioral economists, again, tend to adopt this neoclassical approach as a normative standard.

The behavioral approach might seem superior because it shows how people do not, in fact, fit the equilibrium-always neoclassical model. Yet when behavioral economists construct models of choice, those models typically have a static character. For instance, they model ‘present-biased’ agents as having a quasi-hyperbolic discount function for intertemporal decision-making (e.g. Gruber and Köszegi, Reference Gruber and Köszegi2001; O'Donoghue and Rabin, Reference O'Donoghue and Rabin2003, Reference O'Donoghue and Rabin2006). This model includes an inconsistency in the discount rate, but the formula itself does not allow for the possibility of change. There is no process by which the individual might confront the inconsistency and, perhaps, find a way to resolve it or cope with it. The neoclassical model builds in a static optimality, while the behavioral model builds in a static source of error.

As Earl (Reference Earl, Frantz, Chen, Dopfer, Heukelom and Mousavi2017) puts it, modern behavioral economics operates by incorporating anomalies into ‘a twisted version of the rational choice model’ (14). And like most rational-choice models, the new behavioral models offer scant room for people whose strategies evolve over time.

An Austrian-behavioral model of individual choice would allow the possibility of ‘rationality as a process’ (Rizzo and Whitman, Reference Rizzo and Whitman2018), wherein individuals discover their own inconsistencies and biases over time. Some (not all) of these discoveries might constitute opportunities for pure gain from their rationalization or correction, in which case the agents who find them would seek potential solutions. A vast array of common behaviors can be understood as examples of such ‘intrapersonal entrepreneurship’: making resolutions and commitments; joining clubs and enlisting the support of others; adopting personal reward and punishment schemes; using mental budgets to control spending; structuring one's home or work environment to minimize temptation or maximize productivity; avoiding places and situations that might trigger undesired behaviors; and more (Rizzo and Whitman, Reference Rizzo and Whitman2020: 218–220). People discover and implement these strategies in real time, modifying and refining them as they go along.

To broaden the point, we can think of entrepreneurship as encompassing any act of conceiving (or reconceiving) a problem situation, as distinct from calculating an optimal solution within a given problem situation. Various psychological processes can be understood in this way – as processes that essentially change the parameters of a decision problem. For instance, so-called impact bias (the tendency to overestimate the impact of future events on one's happiness) has the salutary effect of temporarily amplifying the significance of an event to focus one's attention on the decision at hand (Damasio, Reference Damasio1994: 198; Rizzo and Whitman, Reference Rizzo and Whitman2020: 114–115). Exposure to strong temptations can trigger a process of counteractive self-control that takes the form of increasing or decreasing the value placed on certain goals (Myrseth et al., Reference Myrseth, Fishbach and Trope2009; Rizzo and Whitman, Reference Rizzo and Whitman2020: 222). In both cases, the psychological process involves a (partially unconscious) element of reframing or reconceptualization.

Neglecting self-regulation is a persistent blind spot of behavioral economics. Behavioral economists have tended to see self-regulation as evidence of the problem rather than the solution. In discussing policy solutions for supposed self-control issues, behavioral economists rarely consider how interventions could interact with and potentially unravel self-control strategies. The lesson for behavioral economists is clear: Do not focus on the snapshot. Look at the moving picture. What appear to be errors from a static perspective may constitute solutions from a dynamic perspective.

But what is there for the Austrian to learn here? A key question is the reliability of self-regulatory solutions. In the interpersonal market context, it is not necessary for everyone to be an entrepreneur; the social equilibration process only requires that a sufficient number of people be entrepreneurial. If one person seizes an opportunity for gain, their doing so helps to bring plans into alignment via the price mechanism and profit-and-loss mechanism, and others benefit from the process. But is there any analogous mechanism within the individual mind? Alternatively, are there social mechanisms that will tend to spur the individual toward the discovery and management of their own internal opportunities for gain?

A process view of rationality need not imply that people's strategies will evolve inexorably toward perfection. There could be psychological traps or dead ends that prove difficult to escape. However, given the idiosyncratic character of strategies within the subjectivist framework, it seems unlikely that we'll find ‘inherited heuristics that make all humans “predictably irrational” (Ariely, Reference Ariely2009) in the same way’; we are more likely to discover ‘how individuals’ personally constructed systems of rules for coping with life could in some cases prove dysfunctional’ (Earl, Reference Earl, Frantz, Chen, Dopfer, Heukelom and Mousavi2017: 11–12). Either way, these are questions that Austrians should explore.

5. Knowledge problem

Since Hayek's (Reference Hayek1945) seminal paper on ‘The Use of Knowledge in Society’, Austrian economists have emphasized the importance of diffuse and tacit knowledge (Oguz, Reference Oguz2010). Up to that point, mainstream economists had relied on market models in which all relevant information about preferences, technologies, and resource supplies was treated as given. But given for modeling purposes is not the same as given to a central planner – a distinction that became clear in the famous debate on socialist calculation. The socialists argued that a central planning board equipped with all relevant information could rationally plan an economy. Hayek argued that the socialists were assuming away the problem, because a key virtue of the market economy is its ability to mobilize information that by its nature is dispersed among thousands of market participants.

A similar knowledge problem afflicts those who would use behavioral research as a basis for paternalistic interventions (Devereaux, Reference Devereaux2019; Rizzo and Whitman, Reference Rizzo and Whitman2020: 237ff). Even if we take as given that individuals are afflicted with cognitive biases that generate poor decisions, an insurmountably large amount of knowledge would be required for paternalist planners to craft effective policies for their correction. The taxonomy of knowledge requirements includes knowledge of true preferences; knowledge of the extent of biases; knowledge of self-debiasing and small-group debiasing; knowledge of how interventions will affect self-regulation in a dynamic fashion; knowledge of counteracting behaviors; knowledge of bias interactions; and knowledge of the distribution of all these variables across a heterogeneous population (Rizzo and Whitman, Reference Rizzo and Whitman2020: 239–270).Footnote ⁶

Although this critique of behavioral economics – or rather, its facile application to policy – has been made before (Rizzo and Whitman, Reference Rizzo and Whitman2009b), behavioral economists have not yet fully absorbed it. The discipline continues to generate greater scientific knowledge of how context affects decision-making, but the policy-level assumption seems to be either that such contextual knowledge is not necessary or that the body of knowledge will eventually be great enough to proceed. What this belief misses is the distinction between scientific knowledge and local knowledge (Hayek, Reference Hayek1945). The idiosyncratic nature of the relevant knowledge means that individuals will always have a privileged position: ‘They have access to their inner selves and circumstances in a way that outsiders typically do not’ (Rizzo and Whitman, Reference Rizzo and Whitman2020: 236).

Policy questions aside, behavioral economists would benefit analytically from taking the Austrian-identified knowledge problem seriously. Behavioral research strongly supports the idea that behavioral effects are highly context-specific (Rizzo and Whitman, Reference Rizzo and Whitman2020: 192–196). Self-regulatory behaviors, in particular, tend to be highly heterogeneous, depending on the type of choice, cues from the environment, and other individualized factors (Rizzo and Whitman, Reference Rizzo and Whitman2020: 192–196). Some research has already been carried out in this area, but it has taken a back seat to research designed and packaged to deliver general and abstract conclusions (which also seem more policy-ready). Freed from that goal, behavioral economists can challenge themselves to explore more deeply how people discover, access, and respond to knowledge of themselves, especially in the realm of self-regulation. Much of this research would likely be field rather than laboratory research, inasmuch as laboratory experiments are typically rarefied contexts unlike those encountered in everyday life.

The challenge for Austrians is closely related to that stated in the section on process, discovery, and entrepreneurship. Although individuals do have privileged access to their own minds, that does not imply they know everything about themselves worth knowing. The question is whether there are psychological or social processes that will necessarily push them along the path of self-discovery. In other words, is there an intrapersonal solution to the intrapersonal knowledge problem? What is the intrapersonal analog to the price system?

Altman (Reference Altman, Frantz and Leeson2013: 254) states the challenge directly: ‘In production, firms must survive based on price and quality. In consumption, individuals need not pass any particular survival test. A vast array of quite different choices can persist over time, based on the preferences of individuals and their capacity to realize these preferences… These choices can be error-prone and still be sustainable. Evolutionary processes need not eliminate them’. Altman notes that such processes may be ecologically rational (in Gigerenzer's sense of that term) but nevertheless suboptimal, in the sense that potential improvements might never be realized. When individuals fail to discover such potential improvements, the unrealized gains might be characterized as a form of intrapersonal X-inefficiency, to slightly repurpose Leibenstein's (Reference Leibenstein1966) terminology.Footnote ⁷

When and how will individuals tend to acquire and use relevant knowledge about self-management? One possible answer is that living in society exposes individuals to a variety of tools they can adopt if they wish: learning from each other, participating in groups that improve decision-making (such as support groups), and employing market-provided devices (self-help books, limited portions, diet products, and so on). The individual can thus observe and choose from a wider range of self-regulatory strategies, which correspond to new knowledge and new mental models. Furthermore, social pressure from family and community – while assuredly having downsides – can steer individuals toward successful strategies of self-management and away from those with a proven record of failure. In that sense, social norms about personal behavior may convey accumulated knowledge, albeit not always knowledge tailored to the specific person.

Another possible answer: the intrapersonal analog for the price system is the price system. Prices and other market signals provide the individual with useful knowledge about trade-offs imposed by the world, and at the same time they give him an incentive to discover and use whatever knowledge he possesses privately. The market induces him to curb his biases when and if doing so is genuinely helpful, or failure to do so is genuinely costly. This phenomenon has been dubbed rational irrationality (Caplan, Reference Caplan2000; expanded in meaning by Rizzo and Whitman, Reference Rizzo and Whitman2020: 207). Interestingly, rationality irrationality was anticipated by Leibenstein's notion of selective rationality, which posits that strong enough ‘pressure’ can induce agents to engage in more calculated decision-making (Frantz, Reference Frantz, Frantz and Leeson2013; Leibenstein, Reference Leibenstein1974, Reference Leibenstein1975, Reference Leibenstein and Rizzo1979).

That people can seemingly alternate between calculating and rule-driven modes of decision-making suggests the usefulness of a ‘pluralistic’ model of choice such as that proposed by Earl (Reference Earl and Butos2010). Earl draws on Hayek's Sensory Order to explain how the individual's mental classification system enables him to choose among different ways of choosing, depending on the type of situation. Later, Earl (Reference Earl, Frantz and Leeson2013) shows how the same theory may provide a model for how individuals cope – or fail to cope – with novelty by trying to match new challenges to stored cognitive patterns or categories. Hodgson (Reference Hodgson1997) provides a useful typology of characteristics that encourage rule-driven choice, including uncertainty, complexity, and extensiveness – while also noting that even optimization can involve some reliance on rules (667). Loasby (Reference Loasby and Koppl2004) discusses how the mental classification system that generates choice can evolve in response to changing environments, incongruous experiences, and imaginative creation of new mental categories. Taken together, these insights suggest a theory of intrapersonal entrepreneurship. Moreover, they could provide the foundation for a broader subjectivist-behavioral model of decision-making.

6. Spontaneous order

Austrian economists have long been interested in the notion of spontaneous order, defined loosely as the emergence of social institutions that are ‘the result of human action, but not the execution of any human design’ (Ferguson, Reference Ferguson2019 [1782]). The market order is the most frequent example, but the notion of spontaneous order has also been applied to language, morals, manners, and the common law. In all of these areas, we observe the emergence of order – including institutions and rules of behavior – without the existence of an overarching or system-wide plan.

Any spontaneous order necessarily influences the choice behavior of individuals operating within it. Given how much behavioral research examines the impact of context on choice, the study of spontaneous order seems a natural next step. However, as discussed earlier, behavioral economics has been hobbled by an essentially passive view of the individual agent: she is only the recipient of context, not an active interpreter and shaper of context. Incongruously, behavioral economists (particularly those of the paternalist stripe) have also tended to assume, at least implicitly, that the social context itself is deliberately chosen by someone such as a government or firm.Footnote ⁸ Both of these presumptions have likely been reinforced by the discipline's frequent use of laboratory experiments whose focus is typically small-scale choices of individuals as opposed to broader social institutions, and whose setup is seemingly under the total control of the experimenter.

Richard Thaler and Cass Sunstein have coined the term ‘choice architecture’ to refer to the totality of background features that influence choices, including the framing of a situation, the presence of a default, the menu of options available, the geographic placement of options, and so on (Thaler and Sunstein, Reference Thaler and Sunstein2008: 3). The term ‘choice architecture’ immediately suggests the existence of an architect, someone who deliberately designs the choice situation. Indeed, Thaler and Sunstein explicitly define a ‘choice architect’ as someone who ‘has the responsibility for organizing the context in which people make decisions’ (ibid.).

Of course, both designers and designed contexts do exist. The problem is the subtle implication that such contexts are more common or more important than undesigned contexts. In later work, Sunstein admits that choice architecture might or might not be ‘intentional or the product of any kind of conscious design’ (Sunstein, Reference Sunstein2014: 21). Nevertheless, the terminology continues to be misleading. As an alternative, I would suggest ‘choice environment’, a term that does not imply any design or the lack thereof. Choice environments encompass a wide range of institutional settings, including relatively narrow ‘micro-institutional’ features such as default rules. Choice environments may be deliberately created, but they may also result from spontaneous order (Ruttan, Reference Ruttan2006: 252).

It is easy to think of designed choice environments as typical, and spontaneous ones rare, if we focus our attention on highly specific contexts such as the arrangement of products on the shelves of a particular grocery store. Such an arrangement is very likely to have been chosen deliberately. But as Hayek (Reference Hayek1945) emphasized, spontaneous order does not mean the absence of planning, but the absence of system-level planning. Individual plans can exist within a broader spontaneous order. And although a planner such as the manager of a firm can design a narrowly defined choice context, she cannot control the broader choice environment.

To take one example, suppose an electronics store wishes to sell more expensive personal computers. By offering three options – a low-end PC with minimal features, a high-end PC with all the frills, and a third PC somewhere in between – the store can ostensibly take advantage of extremeness aversion (Simonson and Tversky, Reference Simonson and Tversky1992) to create a decoy effect (Ariely, Reference Ariely2009: 10), which induces consumers to buy more of the mid-range PCs than they would if the high-end computer weren't on the menu. However, one store cannot control the total choice environment. There are other electronics stores in the world, including both online and brick-and-mortar outlets. The actual menu available to the consumer is much larger than one store's selection. Moreover, the actual menu is not chosen by any one supplier, but by the joint actions of many suppliers interacting with consumers over time. The choice environment encompasses not only options on a fixed menu, but also the opportunity to choose among many different menus.

The lesson for behavioral economics is to explore how choice environments emerge spontaneously from the joint actions of the people who take part in them. This means moving beyond narrow experiments in which the choice environment is specified by the researcher. It means studying the evolution of choice environments in rich contexts where consumers and others can respond in creative ways rather than simply choosing from a narrow choice set.Footnote ⁹ Also recall the earlier point that even an environment seemingly constructed by a single person is seen through the subjective filter of people exposed to a broader environment.

What Austrians can gain from behavioral economics is a greater appreciation of the many features of choice environments that are worthy of study. The market for menus, as discussed above, is one example. Default rules are another. Although behavioral economists have tended to treat defaults as either deliberately or arbitrarily chosen, Austrian economists have tended not to discuss them at all. Yet default rules do have an impact on behavior; this much the behavioral literature makes clear, although the reasons are not fully understood. Therefore, the challenge is to study the emergence of market-provided default rules. One example is the widespread default rule that allows refunds and exchanges when customers request them in a reasonable time frame, despite the absence of any general rule in the United States requiring sellers to offer them (Ben-Shahar and Posner, Reference Ben-Shahar and Posner2011: 115–116; Rizzo and Whitman, Reference Rizzo and Whitman2020: 423–424). How did this default come to be? Another example is the evolution of boilerplate language in business contracts, which of course include numerous default rules; how do these boilerplate terms evolve over time?

Austrians have already paid a great deal of attention to the emergence and role of institutions, including norms, traditions, and customs (Coyne, Reference Coyne and Boettke2010: 20). However, the institutional questions examined by Austrians tend to be broad and abstract: markets versus central planning (Hayek, Reference Hayek1945, among many others), state governance versus private governance (Leeson and Williamson, Reference Leeson and Williamson2009), private property versus commons property (Boettke, Reference Boettke2010b), common law versus statutory law (Hayek, Reference Hayek1973; Zywicki and Stringham, Reference Zywicki, Stringham, Zywicki and Boettke2017), the potential conflict between formal and informal institutions (Boettke et al., Reference Boettke, Coyne and Leeson2008; Williamson, Reference Williamson2009), and so forth. Behavioral economics points to the significance of micro-institutional features that evolve within a given institutional umbrella such as markets and private property. Such features constitute worthy objects of study for Austrian economists.