Edited by Per-Olov Johansson and Bengt Kriström
Chapter 9: Does Behavioral Economics Have a Role in Cost–Benefit Analysis?
V. Kerry Smith and Eric M. Moore* INTRODUCTION 1 Consumer sovereignty has been the mainstay of conventional economic analysis of resource allocations. It has been over 30 years (1980) since Milton and Rose Friedman’s book and PBS (Public Broadcasting Service) television series Free to Choose described the merits of allowing people to select what they want in their private choices and in as many of the public decisions as practical. Today finding folly in consumer decisions sells books. Whether claiming people are predictably irrational or proposing they need nudges, it is hard to escape the pronouncements of behavioral economists calling for some form of intervention in choices.1 It should not be surprising then to find the same advocates claiming it is time to align the methods of cost–benefit analysis (CBA) with their new theories. This chapter does three things. First, after a brief review of the theory and practice of cost–benefit analysis, we consider the proposals by Bernheim and Rangel (2007b, 2009) and Sugden (2009) for transforming applied welfare economics so that it can provide a basis for defining public trade-offs in the presence of individual choices that appear to imply incoherent private preferences. The structures proposed in both studies reorient the logic of revealed preference analysis. Recognizing that all behavioral economics is motivated by ‘stories’ about people’s bad decisions from the perspective of the storytellers involved, the second part of the chapter uses Buchanan’s (1987) characterization of how to describe people’s choices in different problem settings to...
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