The Indispensability of Mistakes

Human progress, whether measured in engineering feats, scientific breakthroughs, or personal development, is inherently linked to a fundamental concept rejected by paternalistic policies: the freedom to fail. As the engineer Henry Petroski noted, the history of engineering is largely one of learning from the occasional failure of structures, ships, or planes, suggesting that the “lessons learned from those disasters can do more to advance engineering knowledge than all the successful machines and structures in the world”. Attempting to eliminate all individual failure—the underlying goal of many soft and hard nudges—may unintentionally deprive individuals of critical life lessons and the ability to build cognitive resilience.

For policymakers, the core challenge is managing risk. Risk involves both the potential for harm and the potential for enormous benefit. The governmental response, however, is often guided by the precautionary principle, which seeks to control innovation or restrict activities until it can be proven they cause no harm, effectively demanding “trial without error”. This approach, which elevates hypothetical worst-case scenarios over all other considerations, risks hindering progress and trapping society in existing hazards that might otherwise be solved through dynamic experimentation. The alternative is acknowledging that dynamic progress requires individuals and institutions to be at liberty to constantly try, and occasionally fail, in order to “zoom in on a solution”.

The Epistemic Blindness of the Planner

The centralized regulatory effort to correct behavioral failures is rooted in “constructivist rationality,” the belief that central authorities possess enough knowledge to design superior outcomes. Yet, even if policymakers are well-intentioned and non-corrupt, they suffer from epistemic ignorance—a hubris concerning the limits of what they can actually know.

This failure is evident when policymakers seek to substitute their own judgment for the evolved wisdom of the market. For example, studies in developmental psychology suggest that individuals improve decision-making skills through a “learning by doing” process. Nudges, however, subvert rational deliberation by relying on cognitive biases to steer choices, often circumventing the necessary feedback loops needed for personal growth and resilience. By seeking to prevent small failures, centralized nudging creates the potential for more serious long-term failures because individuals never develop the necessary coping mechanisms.

The ultimate result of regulatory control is the implementation of policies based on rigid “government guesses” rather than adaptive reality. This rigid approach is exemplified by energy efficiency standards, where regulators impose a singular, uniform valuation of efficiency that ignores the countless, subjective trade-offs (like price, reliability, and size) consumers must make based on their localized knowledge and constraints. As Hayek noted, no central planner can absorb the myriad bits of information spread across millions of individuals needed for such universal planning.

The Engine of Ecological Rationality

In contrast to the static ideal of central planning, the market operates according to ecological rationality—an unguided, evolutionary process that coordinates agents in a way that accommodates, and often corrects for, human biases.

Dynamic Competition and Customer Satisfaction

Markets correct behavioral failures because consumer errors (such as leaving an ATM card behind) are costly for both the customer and the firm. Competition forces firms to internalize the cost of consumer error. Firms that continuously exploit biases—engaging in rent-seeking nudges like excessive fees or confusing cancellation policies—are vulnerable to disruptive competitors who enter the market by designing a superior choice architecture that simplifies the process or removes the friction altogether.

For example, the widespread popularity of debit cards, a product initially dismissed by some behavioral economists as unable to compete with the exploitative nature of credit cards, arose not through government mandate but through competition and consumer choice. Similarly, the fitness industry offers diverse “behavioral technologies” like Jawbone, Weight Watchers, and Stickk.com, all vying to solve the self-control problem. This market test—where products must continuously satisfy and retain paying customers—is a much more effective mechanism for generating and refining nudges than government’s slow, bureaucratic process. The market constantly receives feedback and adapts daily, while government agencies may only revisit a regulation every few years, if at all.

The Future of Customized Correction

The future of effective nudging lies not in universal mandates but in highly customized solutions delivered through private technology. As machine algorithms and individualized apps become more sophisticated, they will be able to diagnose and address individual failures with far greater precision than any government regulation.

  • Customization and Targeting: Private firms already use “big data” to customize nudges and target interventions only to the populations amenable to them, reducing wasted effort and increasing efficacy. Express Scripts, for instance, uses hundreds of variables to identify patients at risk of nonadherence, allowing health insurers to tailor interventions specifically to the root cause of the patient’s nonadherence.
  • Rapid Iteration: Private firms, motivated by profit, engage in constant A/B testing and refinement. This interactive model guarantees that effective behavioral interventions are deployed rapidly, while governments are hampered by the political and legal need for lengthy deliberations and explicit statutory authority.

Progress Through Imperfection

The argument for market-evolved choice architecture is ultimately an argument for progress through imperfection. The goal should not be to eliminate all behavioral failures, but to create an environment—an ecological landscape—where the ability to truck, barter, and exchange flourishes, allowing individuals to correct their decisions over time and develop resilience.

If we embrace the freedom to fail, we allow for “trial and error” that increases wealth, knowledge, and coping mechanisms. Conversely, countries or institutions that overzealously try to avoid small, short-term failures become prone to potentially far more dangerous systemic failures in the long run.

The institutional comparison confirms that the business of nudging should be left primarily to the private sector. By ensuring that policy intervention meets stringent criteria—only intervening where market mechanisms are genuinely lacking and the harm is severe and irreversible—governments can promote chemical safety, public health, and academic understanding without stifling the dynamic, evolutionary progress that is the true engine of human well-being.