Free Market Fueled Evils

Free Market Fueled Evils

The free market is praised as the best way to organize human activities and the best way to ensure that progress is made in important fields. If we want to solve climate change, then we need the free market to fuel new technological innovations for clean energy. If we want to reduce poverty, then we need the free market to run at full power to ensure everyone can find employment. If we want better justice around the globe, then we need the free market to operate without borders so that everyone everywhere is competing in the same economic system which values good governance.
But the reality is that the free market doesn’t really care about all these good outcomes. The free market is indifferent. It is happy to exist and fuel great advances as well as great evils. Yuval Noah Harari uses the slave trade in his book Sapiens as an example of the indifference of the free market to human morals and values. He writes, “the slave trade was not controlled by any state or government. It was a purely economic enterprise, organized and financed by the free market according to the laws of supply and demand.”
A free market is great, and we can benefit from the efficiencies and effectiveness of the free market, but we have to realize that it doesn’t come with a pre-defined set of values, except for maybe supply and demand plus efficiency. The free market doesn’t care about biodiversity. It doesn’t care about climate change. It doesn’t care about slave labor and exploitation. It simply cares about supplying product to meet the demand in the most efficient way possible. This means that free markets can be subject to abuse, inequality, fraud, and worse. Harari continues, “this is the fly in the ointment of free market capitalism. It cannot ensure that profits are gained in a fair way, or distributed in a fair manner.”
For human societies, morals, equity, fairness, and other ideas and concepts are very important. We certainly could have a world with subjugated humans dominated by a few who are able to wrangle free market capitalism for their own benefit, but few would say that our species would truly be flourishing in that system. We could have a planet where all resources were available to the engine of free market capitalism, but when we have killed off almost all plant and animal species besides the select few we have decided are valuable to us, then we might not like the climate consequences or the consequences of not having new plants and animals to study for medicines and science. “Capitalism has killed millions out of cold indifference coupled with greed,” writes Harari. This has been our reality, and could continue to be our reality.
However, human societies have decided there are things that are more important than pure free market capitalism. For humans to survive and flourish, it is important that we continue to recognize concepts like liberty, equality, and global security in the face of free market capitalism. We can strive for efficiency, but we have to recognize that is not the only thing that matters for us. We cannot allow the world to be burned by free market capitalism, or we won’t like where we end up. The free market has fueled many evils, and it is up to humans as a collective to decide how we will continue to have a functioning market economy and prevent such evils from continuing in our lifetimes.
Markets & Political Bias

Markets & Political Bias

The United States loves free market capitalism. Almost any political action that would raise taxes, introduce tariffs on foreign goods, or regulate an industry is met with incredible pushback and extreme rhetoric. Most people don’t have a great sense of what communism or socialism really are, but those terms are used extensively whenever the government proposes a new regulation or program that might interfere with a market. Free market capitalism is the heart of the United States, at least in rhetoric.
However, as Yuval Noah Harari writes in his book Sapiens, “there is simply no such thing as a market free of all political bias.” Markets on their own are not perfect. Clickbait headlines and designed obsolescence of smartphones are two frustrating examples of imperfect markets. In both instances, unequal information and misaligned financial incentives provide motivation for the producer to provide sub-par products. These examples are relatively harmless, but they do contribute to a larger problem within markets – a lack of trust between consumers and producers.
Harari continues, “the most important economic resource is trust in the future, and this resource is constantly threatened by thieves and charlatans. Markets by themselves offer no protection against fraud, theft, and violence.” Clickbait headlines have made me distrust internet links and headlines that sound juicy. I make it a point to never click on a Yahoo! article after being burned too many times by clickbait headlines when I was younger. I simply don’t trust what appears to be valuable information on the internet – a problem that has larger spillover effects as our population comes to distrust any information. In terms of smartphones, government regulation actually did play a role in changing the problem of designed obsolescence. Apple was deliberately slowing down older devices in an attempt to force users to buy newer devices – Apple claimed they had to slow phones down to prevent battery degradation and damage to the devices (eye roll). The result has been better performance of older smartphones for a longer lifetime.
“It is the job of political systems to ensure trust by legislating sanctions against cheats and to establish and support … the law.” We make investments and purchase goods when we can trust the market actors and that our investment will payoff in the future. I continue to purchase Apple products because I have seen an improvement in the problems of designed obsolescence and devices failing to function after just a year. Market intervention from the government helped stabilize the market and ensure that consumers had access to better products. However, I still don’t click on many articles, especially if the headline sounds like clickbait. I still don’t have trust in internet information, a space that the government has done little to regulate. The market on its own hasn’t established that trust, and as a result I make deliberate attempts to avoid the market. Free market capitalism, in these two examples, actually seems to work a bit better when there is some regulation and intervention, something that seems to contradict the general idea surrounding markets in the United States.
Money & Trust

Money & Trust

Currencies are not always intuitive. At a basic level, human trade is more straightforward when we can trade item for item, service for service, or knowledge for knowledge without the use of a different medium of exchange. After a natural disaster, on the playground with playing cards, or in the neighborhood, exchanges of similar things without a currency can be common and straightforward. If you have a lot of extra water but need fuel for a generator after a hurricane, you can probably come to agreement with someone close by who has extra fuel and is need of water. A limitation, however, of exchanging like goods, as can be seen in all three examples, is that such exchanges often require proximity and trust with the individual. Young kids on the playground probably wouldn’t make a lot of trades with random kids they don’t know from other schools (I did as a kid and got burned by a fake card). And neighbors will help each other out, but few of us would ask someone from several blocks away to check on our house while we are on vacation and few of us would shovel snow from the driveway of a house that wasn’t immediately next to ours (no matter how generous we feel during the holidays).
Currencies are able to overcome these barriers. “Money is the most universal and most efficient system of mutual trust ever devised,” writes Yuval Noah Harari in his book Sapiens. Money allows us to make exchanges with people who are not in our immediate proximity and who we don’t know. I wouldn’t shovel the driveway for someone I didn’t know who lived a few blocks away from me, but I would certainly give them a few pieces of paper or coin in exchange for a lamp if I saw one I was interested in at a garage sale. I don’t need to know the person, know anything about the lamp, or demonstrate that what I was trying to trade them was of equivalent value to the lamp. We could both trust the currency I was using in the exchange and smile and move on without ever seeing each other again.
Money expands the scope of who we can interact with and facilitates markets by providing a medium through which we can compare different goods, services, and information. It is hard to trade information about an approaching winter storm for a gemstone, but if enough people are willing to give someone money if they can relatively accurately predict the weather, then that forecaster can go purchase a gemstone. If we couldn’t trust the forecaster, if we only had goods and services to exchange for their information, the market couldn’t exist and trades could only rarely take place. Instead we trade currencies, or numbers from digital bank accounts, for information, goods, and services. The money, or digits on the computer screen, are not in themselves valuable, but through our system of trust they become valuable. Currency enables trust and is further enhanced by trust, allowing us to cooperate with more people than just our neighbors or the other kids on the playground.
Can Markets Work Without Human Sacrifices?

Can Markets Work Without Human Sacrifices?

In Tell Them Who I Am Elliot Liebow writes, “Unemployment, underemployment, and substandard wages are system failures only when viewed from the bottom. Looking from the top down, they are seen as natural processes essential to the healthy functioning of a self-correcting market system. From that perspective, it is as if the market system requires human sacrifice for its good health.” Liebow argues that markets can and should function without such failures. He argues that we have deliberately crafted a system that allows and accepts these market failures at the expense of greater marginal profits and returns on investments. The costs of the failures become spread over society, while the marginal gains are concentrated in the few market leaders.
Liebow encourages us to see homelessness as a system failure. He encourages us to see the support of the homeless as a responsibility of everyone within society and as a responsibility of the system as a whole. His book argues that we cannot rely on the few shelters, the minimal government assistance, and family members of those in need if we want to reduce homelessness. We all have to recognize the costs of homelessness, the way that social and market forces can drive people to homelessness, and the actors who are not helping to solve the problem. In particular, Liebow argues that businesses are not doing enough to solve homelessness:
“As if by magic, the onus of welfare and dependency is lifted from the system of work and the employers and placed on the workers and the unemployed right in front of our very eyes, and no one is any the wiser.”
I don’t think markets need to operate in a way that sacrifices the poorest people. There are statistics about the numbers of employees at companies like Walmart who receive food stamps or Medicaid benefits. Companies are able to pay minimum wage to their employees, and Liebow argues the companies themselves are subsidized for their low wages by our system that provides free healthcare and food to those individuals who cannot earn enough through their job. This shifts the burden of supporting the workforce from the companies that require the workforce in order to be profitable to the workers themselves. This accepts that we will have human sacrifices in order for profits to stay high and for the price of cheap goods to remain low. Liebow thought this was a problem and believed that it was possible for effective markets to exist without such human sacrifices.
I would also argue that there are many jobs that are not being done because we focus so highly on private markets. Companies want to be as efficient as possible, meaning they focus on where they can generate the highest profit. As a result, we don’t build enough affordable housing, our parks and greenspaces are littered with trash that no one is incentivized to clean, and lots of recycling goes to landfills instead of being sorted and reused. These are not all wonderful jobs and it would be hard to get homeless people to do these types of jobs, but the point is that our system which sacrifices the poor also sacrifices those jobs that don’t make the marginal cost benefit analysis worthwhile for corporations. There is work that can be done if we can find a way to allow public institutions to do it. Shifting from a sense of sacrificing the poor may encourage them to actually participate in society by doing these jobs, especially if we can make them suck a little less. Such a system would be a big departure from our current approach to markets, but it is probably necessary if we want greater social cohesion and less poverty and homelessness.
Who Wants Market Regulation?

Who Wants Market Regulation?

“Those who profit from the current situation – and those indifferent to it – will say that the housing market should be left alone to regulate itself. They don’t really mean that,” writes Matthew Desmond in his book Evicted.  In the world that Desmond investigated, the world of low-income housing, the ones who don’t think any government action needs to be taken to regulate or stabilize the market are the landlords and people able to make money from slum housing. The people exploiting market failures and extracting rents say they don’t want any changes in housing policy because they favor a free market, but what Desmond’s quote hints at is that they don’t really exist within a free-market, and they currently profit from existing government action (not just inaction) on housing policy.
The quote from Desmond reminds me of senior citizens who protest changes to Medicare with signs that say “Keep your government hands off my Medicare,” seemingly unaware that Medicare is a government run health program. The line between government and markets is not always clear to people, and what people actually want in terms of government market regulation doesn’t always line up with people’s stated political beliefs or stated beliefs about government intervention. We can have high minded opinions about the proper role of government relative to markets, and we sound better and more impressive when we do, but the bottom line is that we are all likely driven more by our own self-interest than our high minded opinions of governments and markets.
I am currently listening to Ron Chernow’s Hamilton biography on audiobook. I am struck by how our nation’s founding fathers quickly broke down into self-interested policy quarrels that were couched in high minded political rhetoric, but seemed to perfectly back the self-interest of the given founding father. Jefferson in particular seemed to be a master of this kind of deception, arguing that America should have a minimal government and reflect a populist standpoint. However, Jefferson owned slaves and had a vast agrarian plantation and his policies seemed to clearly favor his own lifestyle. His actions can be well understood when viewed through the lens of The Elephant in the Brain by Kevin Simler and Robin Hanson who suggest that most of our behavior is signaling and that we generally (and deceptively) act on self-interest more than we would ever admit.
All of this is to suggest that most people don’t really have any independent and objective views of government regulations of markets. Desmond’s quote about housing markets shows that people are driven by self-interest, that they discount regulations that favor their financial interests, and that they misrepresent government policies that make them better off. When our own self-interest, our own bottom line, and our social status are on the line, we are willing to compromise our high minded positions to adopt the view that is expedient to our own interests. This was true of Jefferson and Hamilton in the first Presidential Administration after the adoption of the Constitution, and it is true today in housing, Medicare, and other government and market areas. Landlords, real-estate agents, and others who currently profit in the housing market are in favor of government tax breaks on mortgage interest, of housing vouchers, and other policies that help ensure people can afford high rents. They view the market as being free without fully acknowledging these interventions and how they benefit from them.
Housing Markets, Rent, and Workers

Housing Markets, Rents, and Workers

I don’t necessarily think that heavy handed government control of the provision of goods or services is the best way to organize our society and our resources, but I do think government intervention has a place. I think markets are great mechanisms for providing goods and services efficiently, but I think it is also clear that markets leave out some individuals and even well functioning markets have their points of failure. I also don’t believe there is some sort of dichotomy between government provided services and markets that cannot be breached. I think there is a need for government action when markets break or where markets fail to address people’s needs. Housing in particular seems to be one of those spaces.
There is not much incentive for landlords to provide low rent housing options to low-income renters. In his book Evicted Matthew Desmond shows how this leads to a limited supply of low rent housing options and how that low supply artificially inflates the cost of those options. Low rent, poor quality housing often isn’t actually that much cheaper than more expensive, nicer units which makes life for those in poverty unbearable. The standard advice to middle income renters or homeowners is to avoid spending more than 30% of your monthly income on rent or a mortgage. For the lowest income people in our society, that idea can be laughable.
Desmond also shows that simply raising wages for low-income individuals is not enough to avoid the high cost of rent. The limited supply of affordable housing options doesn’t exist in isolation. It exists within larger markets and forces, and will respond to other factors in the economy. Desmond writes, “when the American labor movement rose up in the 1830s to demand higher wages, landed capital did not lock arms with industrial capital. Instead landlords rooted for the workers because higher wages would allow them to collect higher rents. History repeated itself 100 years later, when wage gains that workers had made through labor strikes were quickly absorbed by rising rents.”
This dynamic between landlords and the wages of renters demonstrates a market failure. Rents can soar to absorb an increase to a worker’s income. People need a place to live, and even if the conditions are terrible, they cannot pass up housing. But as rents take larger and larger shares of their income, they have less to spend on groceries, utilities, and other necessities or enjoyments of life. The government does help people with food and some utilities, but people can hardly engage in our capitalistic society if an overwhelming amount of income is directed toward rent. Government provided low-income housing seems to be a necessity to correct for these market failures. Clearly large, densely crowded housing projects were not the right solution, but when we look at housing across the country we see a lot of different approaches to housing. Dense housing structures are not the only option, and other alternatives for reasonable and affordable government provided housing need to be attempted to help make the housing market work for more people and avoid eating any increase in wages that people earn as they try to escape dilapidated housing.
Housing Vouchers - Joe Abittan - Matthew Desmond - Evicted

Housing Vouchers

Housing vouchers have been a major political win for landlords and realtors. Matthew Desmond’s book Evicted is about the real negative consequences of America’s high cost of housing, and he addresses housing vouchers which have been one of the main forms of public assistance for low-income renters. Our country likes market, or near-market, mechanisms to provide aid and assistance. Housing vouchers represent that preferred market mechanism, especially when compared to government provided, low cost housing. However, housing vouchers are not necessarily the most efficient way to provide assistance to those who cannot afford a place to live.
Desmond writes, “In Milwaukee, renters with housing vouchers were charged an average of $55 more each month, compared to unassisted renters who lived in similar apartments in similar neighborhoods. Overcharging voucher holders cost taxpayers an additional $3.6 million each year in Milwaukee alone – the equivalent of supplying 588 more needy families with housing assistance.”
Housing vouchers are taken advantage of and abused by landlords and the companies managing apartment complexes. If an individual with a voucher is not facing the full cost of the housing unit, then they don’t have the same market pressures to find alternative housing options. The result is that higher rent can be charged, with that higher rent absorbed by the voucher. Money and aid is ultimately wasted, and families who could receive help do not receive it.
The extra money that can be made by overcharging voucher holders is a windfall for landlords and realtors, and unsurprisingly, both groups lobbied for voucher systems rather than government provided housing. Desmond writes, “Landlords and realtors saw government-built and -managed buildings offered at cut-rate rents as a direct threat to their legitimacy and bottom line.” If the government could provide housing at reasonable rates, then renters wouldn’t have to put up with high rent and lousy living conditions in slums. Contrasting a voucher program that encourage rent seeking behavior, those who profit from vouchers would lose money under a system bolstered by public housing and would have to lower rents or improve property to compete against government housing that didn’t have a profit motive.
It is easy to say that government-built and -managed housing has failed in the United States and that vouchers are clearly the superior way to provide housing assistance, even if they are inefficient. But I don’t think that is a truly valid argument, and I don’t think Desmond would find it a compelling argument either. Massive housing projects in the United States were built in a way that clustered poverty, creating dense units of low-income individuals. Research from Raj Chetty has shown that economic integration and mixing is important for social and economic success, and the experience of those living in dense housing projects supports Chetty’s research. Housing projects were also constructed at a time when cities and local governments were disinvesting in inner cities, before lead abatement programs had taken hold, and when the nation had not yet begun to reckon with its racist past. In some ways it seems as if these approaches to government housing projects were intentionally designed to fail.
I don’t see any reason why government-built and -managed housing could not be successful today if built in a more dispersed manner, if designed to integrate poor, and constructed to be responsive to the racists history of housing, drug, and incarceration policy of our nation. Of course this would require real investment from the government, contrasting the disinvestment that mass housing projects once witnessed. Political considerations are the real barrier, as realtors and landlords would surely seize upon the history of failed housing projects, and stoke fear of crime and dereliction that many American’s likely harbor around public housing. Unfortunately, our unwillingness to imagine a new form of government housing means that we are stuck with inefficient housing vouchers, lobbied by (and potentially doing more to benefit) landlords and realtors than the people who are the intended recipients.
Incentives for Environmentally Responsible Markets

Incentives for Environmentally Responsible Markets

When it comes to environmental issues, no single actor is completely to blame, and that means no single actor can make the necessary changes to prevent catastrophic climate change. This means we can’t put all the weight on governments to take actions to change the course of our climate future, and we can’t blame individual actors either. We have to think about economies, polities, and incentive structures.


In their book Nudge, economists Cass Sunstein and Richard Thaler look at what this means for markets and regulation as we try to find sustainable paths. They write, “markets are a big part of this system, and for all their virtues, they face two problems that contribute to environmental problems. First, incentives are not properly aligned. If you engage in environmentally costly behavior next year, through consumption choices, you will probably pay nothing for the environmental harms that you inflict. This is what is often called a tragedy of the commons.”


One reason markets bear some of the blame and responsibility for the climate change crisis is because market incentives can produce externalities that are hard to correct. Climate change mitigation strategies, such as research and development of more fuel efficient vehicles and technologies, are expensive, and the costs of climate change are far off. Market actors, both consumers and producers, don’t have proper incentives to make the costly changes today that would reduce the future costs of continued climate change.


A heavy handed approach to our climate change crisis would be for governments to step in with dramatic regulation – eliminating fossil fuel vehicles, setting almost unattainably high energy efficiency standards for furnaces and dishwashers, and limiting air travel. Such an approach, however, might anger the population and ruin any support for climate mitigation measures, making the crisis even more dire. I don’t think many credible people really support heavy handed government action, even if they do favor regulation which comes close to being as extreme as the examples I mentioned. Sunstein and Thaler’s suggestion of improved incentives to address failures in markets and change behaviors has advantages over heavy handed regulation. The authors write, “incentive-based approaches are more efficient and more effective, and they also increase freedom of choice.”


To some extent, regulation looks at a problem and asks what the most effective way to stop the problem is if everyone is acting rational. An incentives-based approach asks what behaviors need to be changed, and what existing forces encourage the negative behaviors and discourage changes toward better behaviors. Taxes, independent certifications, and public shaming can be useful incentives to get individuals, groups, and companies to make changes. I predict that in 10-15 years people who are not yet driving electric cars will start to be shamed for continuing to drive inefficient gas guzzlers (unfortunately this probably means people with low incomes will be shamed for not being able to afford a new car). In the US, we have tried to introduce taxes on carbon output, but have not been successful. Taxing energy consumption in terms of carbon output changes the incentives companies have with regard to negative environmental externalities form energy and resource consumption. And independent certification boards, like the one behind the EnergyStar label, can continue to play an important role in encouraging technological development of more efficient appliances. The incentives approach might seem less direct, slower, and less certain to work, but in many areas, not just climate change, we need broad public support to make changes, especially when the costs are high up front. This requires that we understand incentives and think about ways to change incentive structures. Nudges such as the ones I mentioned may work better than full government intervention if people are not acting fully rational, which is usually the case for most of us. Nudges can get us to change behaviors while believing that we are making choices for ourselves, rather than having choices forced on us by an outside authority.
Markets and Environmentalism - A Call for Better Incentives

Markets and Environmentalism – A Call for Better Incentives

Earlier I wrote that climate change and environmental concerns seemed to be too large of a problem to be left to nudges. Toward the end of Nudge, Cass Sunstein and Richard Thaler acknowledge the reality that nudges alone cannot tackle climate change, but they still encourage actions that follow the spirit of nudges, or at least learn from the psychology that makes nudges effective. Incentives play a huge role in behavior, and  need to be considered when governments approach businesses in an effort to redress the harms of climate change. Markets and environmentalism cannot be separated if we are to have a sustainable climate. Better incentives need to be implemented within markets to adjust for environmental needs.


The authors acknowledge market failures related to climate change by writing, “when the air or the water is too dirty, the standard analysis says that it is because polluters impose externalities (that is, harms) on those who breath or drink. Even libertarians tend to agree that when externalities are present, markets alone do not achieve the best outcome.” Pollutants are common externalities, as are traffic congestion and decimated wildlife populations. The cost of negative externalities is squarely on the shoulders of the individuals in the market, either the consumer or the producer. Governments are necessary to deal with these externalities and prevent them from harming innocent bystanders.


Additionally, regarding market failures and climate change, the authors continue, “When people are not in a position to make voluntary agreements, most libertarians tend to agree that government might have to intervene.” Most libertarians agree that labor contracts should be voluntary, with an employer reserving the right to hire anyone, and laborers reserving the right to walk away if their wages or working conditions are unfair. In reality, many people would starve if they walked away from a job, or at least face serious challenges, so voluntary agreements are not always possible. Within the climate change arena, many people cannot simply chose to travel to work by more fuel efficient methods, many people cannot afford the switch to solar power, and many other potential solutions are similarly unavailable, meaning people and businesses are often stuck, involuntarily, with polluting norms for travel, work, and heating or cooling their homes and offices. Markets alone don’t provide the impetus to change the status quo to reflect the reality of climate change.


The next post will dive deeper into the incentives and solutions to these problems, but it is clear that markets alone will not direct society toward a climate change solution. The danger of climate change is a long-term danger, where the costs are not experienced in the immediate moment but are instead experienced years and decades later. However, the costs of making adjustments to limit climate change are experienced up front. Upgrading infrastructure, investing in electric and solar technology, and living in more economically friendly ways present immediate costs that nudges cannot overcome. Nevertheless, we can consider the ways in which nudges work and build on those principles to begin to make changes. We can start to better align incentives to limit externalities, and we can preserve choice structures as we move forward with investments and innovation to help us meet the needs of the climate crisis. Government will play a big role and can learns a lot from the psychology of nudges to help address the challenges we face.
Irrational Market Cycles - Joe Abittan

Irrational Market Cycles

I think about markets a lot, often focusing more on market failures than on market successes. I think our country generally views markets as infallible, and that drives me (in a somewhat contrarian strain) to look at spaces where markets don’t work. I also started my career in healthcare and have some relatively expensive healthcare concerns of my own, which also drives me to look at market failures with more energy than market successes. While there are many positive aspects of markets (they certainly do create a good level of efficiency and innovation and may also be generally pacifying across the globe), I think it is important to continue to highlight irrational market cycles, tragedy of the commons type situations, and areas where a market simply can’t be established because goods are nonrivalrous and nonexcludable. This post will specifically highlight an irrational market cycle, by which I mean a cycle of irrationality supported by market forces.


One of the strongest points of markets is that they help to weed out poor performers and eliminate waste. Someone selling a product that doesn’t provide value shouldn’t be able to find any customers. They might dupe a few people into buying their product, but overtime, we expect the market to marginalize the seller and for his business to eventually go bust. But this market efficiency mechanism only works if people are rational, and irrationality can be manipulated and exploited in a market, creating irrational market cycles. Cass Sunstein and Richard Thaler use extended warranties (not the spam ones you get calls about for your car but real ones offered when you buy a fridge) in their book Nudge to describe irrational market cycles. They write:


“If consumers have a less than fully rational belief, firms often have more incentive to cater to that belief than to eradicate it.”


There are products that don’t make sense. Sometimes they pop up as a fad, sometimes they are deliberate scams, and sometimes they are a new gadget that is attached to a new technology as an additional aid, but are in reality effectively useless. People can get sucked into purchasing these items, and they can be marketed as effective and must-have items, only to be irrational junk. The people selling the junk don’t have an incentive to help us think clearly about the product, they have an incentive to hide the truth and make their product appear more attractive by playing into and reinforcing irrational behaviors.


Using the extended warranty example Sunstein and Thaler continue, “If Humans realized that they were paying twenty dollars for two dollars’ worth of insurance, they would not buy the insurance. But if they do not realize this, markets cannot and will not unravel the situation. Competition will not drive the price down.”


An irrational market cycle can arise when incentives exist to encourage people to participate in irrational markets. People’s fear, lack of information, and cognitive biases can be leveraged by market actors to further irrational spending. A market on its own cannot correct this issue as Sunstein and Thaler show. Nudges can be helpful in diverting people out of the market, but it is worth recognizing that there is a role for outside forces to shape markets that fall into these irrational cycles.