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Most Downloaded Articles
- The choice of the social discount rate and the opportunity cost of public funds by Moore, Mark A./ Boardman, Anthony E. and Vining, Aidan R.
- A Benefit-Cost Analysis of Private and Semi-Private Hospital Rooms by Boardman, Anthony E and Forbes, Diane
- Appropriate Discounting for Benefit-Cost Analysis by Burgess, David F and Zerbe, Richard O
- Indirect Effects in Cost-Benefit Analysis by Rouwendal, Jan
Behavioral Economics and the Conduct of Benefit-Cost Analysis: Towards Principles and Standards
2Harvard University and Toulouse School of Economics
Citation Information: Journal of Benefit-Cost Analysis. Volume 2, Issue 2, ISSN (Online) 2152-2812, DOI: 10.2202/2152-2812.1059, April 2011
- Published Online:
As traditionally conducted, benefit-cost analysis is rooted in neoclassical welfare economics, which, in its most simplified form, assumes that individuals act rationally and are primarily motivated by self-interest, making decisions that maximize their welfare. Its conduct is evolving to reflect recent work in behavioral economics, which explores the psychological aspects of decisionmaking. We consider several implications for analyses of social programs, focusing largely on economic valuation. First, benefit-cost analysis often involves valuing nonmarket outcomes such as reductions in health and environmental risks. Behavioral research emphasizes the need to recognize that these values are affected by psychological as well as physical attributes. Second, benefit-cost analysis traditionally uses exponential discounting to reflect time preferences, while behavioral research suggests that individuals discounting may be hyperbolic. While the appropriate rates and functional form are uncertain, market rates best represent the opportunity costs associated with diverting funds to support a particular social policy or program. Such rates reflect the intersection between technological progress and individual preferences, regardless of whether these preferences fit the standard economic model or a behavioral alternative. Third, behavioral research emphasizes the need to consider the influence of other-regarding preferences on valuation. In addition to acting altruistically, individuals may act reciprocally to reward or punish others, or use the status of others as the baseline against which to assess their own well-being. Fourth, behavioral economics identifies factors that can help researchers develop valuation studies that provide well-informed, thoughtful preferences. Finally, while behavioral research has led some to argue for a more paternalistic approach to policy analysis, an alternative is to continue to focus on describing the preferences of those affected by the policy options while working to ensure that these preferences are based on knowledge and careful reflection. Benefit-cost analysis can be best viewed as a pragmatic framework for collecting, organizing, and evaluating relevant information.