Behavioral Economics and Regulation

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Dynamic Benefit-Cost Analysis for Uncertain Futures

September 17, 2019

By: Susan E. Dudley, Daniel R. Pérez, Brian F. Mannix, & Christopher Carrigan
Policymakers face demands to act today to protect against a wide range of future risks, and to do so without impeding economic growth. Yet traditional analytical tools may not be adequate to frame the relevant uncertainties and tradeoffs. Challenges such as climate change, nuclear war, and widespread natural disasters don't lend themselves to decision rules designed for discrete policy questions and marginal analyses. We refer to such issues as "uncertain futures."

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Muddling-Through and Deep Learning for Managing Large-Scale Uncertain Risks

September 17, 2019

By: Tony Cox
Building on Charles Lindblom's research on the limits of rational-comprehensive decisionmaking, Tony Cox provides insights on how machine learning can help individuals and institutions make better informed decisions - improving society's experience of 'muddling through' policymaking under uncertainty.

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From Football to Oil Rigs: Risk Assessment for Combined Cyber and Physical Attacks

September 17, 2019

By: Fred S. Roberts
Reviewing risk assessment to scenarios of terrorist attacks on critical infrastructure including U.S. sporting venues and the international maritime transportation system. Fred Roberts notes that these assessments traditionally treat physical and cyber attacks separately and are inappropriate for considering the risk of combined attacks that include both a physical and cyber component. He proposes a framework informed by expert judgement to determine whether an attacker would likely prefer executing a combined or traditional physical attack on a given target.

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Nuclear War as a Global Catastrophic Risk

September 17, 2019

By: James Scouras
James Scouras identifies nuclear war as a global catastrophic risk and suggests that multidisciplinary studies that combine insights from "historical case studies, expert elicitation, probabilistic risk assessment, complex systems theory, and other disciplines" can address many of the shortcomings of single analytic approaches. He suggests that experts can address current gaps in their assessments of the consequences of nuclear weapons by further investigating understudied phenomena (e.g., the effects of electromagnetic pulses, nuclear winter, the prolonged effects of radiation).

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Responsible Precautions for Uncertain Environmental Risks

September 17, 2019

By: W. Kip Viscusi, Joel Huber, & Jason Bell
Elaborating on best practices for decisionmakers facing low probability, high consequence hazards. Viscusi, Huber, and Bell point out that these uncertain risks create incentives to pursue suboptimal policy approaches that potentially over commit public resources to less consequential hazards.

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Bounded Rationality in the Rulemaking Process

July 23, 2019

7/23/19 -- Regulators are humans, not robots. This simple truth reminds us that individual decision-makers responsible for developing and implementing regulations face the same cognitive limitations that consumers face in the marketplace. Institutional reforms to regulators’ choice architecture may help mitigate these biases.

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Nudging the Nudger: Toward a Choice Architecture for Regulators

July 16, 2019

By: Susan E. Dudley & Zhoudan Xie
Recognizing that “bounded rationality” also occurs in the regulatory process and building on public choice insights that focus on how institutional incentives affect behavior, this article explores the interaction between the institutions in which regulators operate and their cognitive biases. It attempts to understand the extent to which the “choice architecture” regulators face reinforces or counteracts predictable biases. Just as behavioral insights can help design a choice architecture that frames individual decisions in ways that encourage welfare-enhancing choices, designing the institutions that counter regulators’ cognitive errors could lead to more public-welfare-enhancing policies.

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Book Review of Andrew W. Lo's "Review of Adaptive Markets: Financial Evolution at the Speed of Thought"

February 08, 2018

By Susan E. Dudley
What drives our responses to risk and uncertainty, and how can we improve them? In his 2017 book, Adaptive Markets: Financial Evolution at the Speed of Thought, MIT Sloan finance professor Andrew Lo answers that question using evolutionary concepts and insights, including competition, innovation, reproduction, and adaptation.

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Utilizing Behavioral Insights (without Romance): An Inquiry into the Choice Architecture of Public Decision-Making

October 19, 2016

By Adam C. Smith
To justify regulations that reduce consumer choice, policymakers are increasingly relying on observations from behavioral economics suggesting that people don’t always make rational decisions. However, behavioral economists generally neglect a complementary examination of public decision-makers. Through a public choice lens, Smith compares two public agencies influenced by behavioral economics, the U.S. CFPB and U.K Behavioral Insights Team, and finds that their different institutional structures lead to divergent policy outcomes. He concludes that for policies to be welfare-improving, they must be based on an understanding of public choice architecture as well as private choice architecture.

Nudge Theory

One Standard to Rule Them All: The Disparate Impact of Energy Efficiency Regulations

October 12, 2016

Chapter by Sofie E. Miller and Brian F. Mannix
Federal regulations restrict the energy that everyday products can use, for everything from cars to microwaves. While these rules impose significant costs on consumers, the benefits are harder to identify. Agencies claim that restricting consumers’ choices provides consumers with large benefits, but this reasoning is hard to reconcile with the fact that consumers have many legitimate reasons to prefer the appliances they buy and the cars they drive. This chapter explores the reasoning behind energy efficiency regulations and why these reasons are insufficient to support the large costs they impose on consumers, especially low-income consumers.

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Public Interest Comment on EPA and NHTSA's Proposed Rule: Greenhouse Gas Emissions and Fuel Efficiency Standards for Medium and Heavy-Duty Engines and Vehicles – Phase 2

October 02, 2015

by Brian Mannix, Research Professor
Contrary to claims, EPA and NHTSA’s proposed standards to regulate greenhouse gas emissions and fuel efficiency for medium and heavy-duty engines and vehicles is not “a win-win-win.” The agencies’ RIA forecasts large benefits, mostly in the form of private fuel savings but, fails to recognize that competitive markets are far better informed, and far better motivated, to pursue these fuel savings efficiently. The net effect will be higher costs, not savings. Other external benefits might be used to justify the standards, but an honest RIA would acknowledge that these come at a price.

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Whose Benefits Are They, Anyway? Examining the Benefits of Energy Efficiency Rules 2007 - 2014

September 02, 2015

By Sofie E. Miller
Over the past decade, regulations setting energy efficiency standards have proliferated. These rules account billions of dollars in annual regulatory benefits, but the Department of Energy relies on private benefits and benefits to residents of other countries to justify the standards, contrary to typical benefit-cost analyses. This paper examines the composition of benefits resulting from DOE’s energy efficiency rules 2007 – 2014, and finds that these rules don’t pass a traditional cost-benefit test when relying on traditional analytical assumptions.

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Point/Counterpoint: Valuing Internalities in Regulatory Impact Analysis

May 13, 2015

By Brian Mannix & Susan Dudley
In this Point/Counterpoint article series with Cass Sunstein & Hunt Allcott, Mannix & Dudley argue that allowing regulators to control consumers 'for their own good' – based on some deficiency in the consumers themselves rather than any failure in the marketplace – is to abandon any serious attempt to keep regulatory policy grounded in any objective notion of the public good.

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(Mis)Applications of Behavioral Economics to Regulation: The Importance of Public Choice Architecture

August 01, 2011

By Adam Smith
In this paper, I evaluate the recent promotion of libertarian paternalism as a viable means of coordinating market activities. In doing so, I challenge the notion that “anti-antipaternalism” logically follows from the findings in behavioral economics. For behavioral economic policy to be effective, advocates must show how policy will be rendered effectively through public institutions. I argue that the central dilemma of the field of behavioral law and economics is that it lacks analysis of the public choice architecture within which the improvement of private choice architecture would take place. Without an accompanying theory of the public institutions by which behavioral economic policy will be implemented, the
promotion of these types of policy prescriptions is premature.