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Behavioral cost-benefit economics: Toward a new normative approach to policy

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  • Berg, Nathan

Abstract

This paper addresses the question of whether the findings of behavioral economics imply that techniques used in cost-benefit analysis should be modified. The findings of behavioral economics considered include the status-quo effect, loss-aversion, overconfidence and hyperbolic discounting. These behavioral phenomena do indeed imply that concepts from cost-benefit analysis such as consumer surplus, the Kaldor-Hicks criterion, shadow-price valuation, and time discounting, need to be modified. The most important modifications follow from the status-quo effect, which provides a new reason to reject policy proposals that yield only small percentage benefits relative to costs.

Suggested Citation

  • Berg, Nathan, 2002. "Behavioral cost-benefit economics: Toward a new normative approach to policy," MPRA Paper 26370, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:26370
    as

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    File URL: https://mpra.ub.uni-muenchen.de/26370/1/MPRA_paper_26370.pdf
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    References listed on IDEAS

    as
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    3. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cost-Benefit Analysis; Behavioral Economics; Status-Quo Effect; Loss Aversion; Overconfidence; Hyperbolic Discounting;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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