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Regulating Ambiguous Risks: The Less Than Rational Regulation of Pharmaceuticals

Author

Listed:
  • Viscusi, W. Kip

    (Vanderbilt University)

  • Zeckhauser, Richard

    (Harvard University)

Abstract

The U.S. Food and Drug Administration (FDA) balances risks and benefits before approving pharmaceuticals, as rationality would require. But powerful behavioral biases that lead to the mishandling of uncertainty also influence its approval process. The FDA places inordinate emphasis on errors of commission versus those of omission, a bias that is compounded by the FDA's desire to avoid blame should risks eventuate. Despite extensive testing, uncertainties inevitably remain. We often learn about the risks of drugs after they are on the market. And there are off-label uses of drugs, which are not part of the initial testing. The FDA shows a strong aversion to ambiguous risks. This is the opposite of what is desirable. For any given initial expected risk level, optimal risk-taking decisions involving uncertainty in a multi-period world should prefer ambiguous risks, and the potential for learning, relative to well-established risks of the same magnitude.

Suggested Citation

  • Viscusi, W. Kip & Zeckhauser, Richard, 2014. "Regulating Ambiguous Risks: The Less Than Rational Regulation of Pharmaceuticals," Working Paper Series rwp14-005, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:rwp14-005
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    2. Goeschl, Timo & Heyen, Daniel, 2016. "Precision requirements in pesticide risk assessments: Contrasting value-of-information recommendations with the regulatory practice in the EU," Working Papers 0607, University of Heidelberg, Department of Economics.
    3. Bognar, Katalin & Romley, John A. & Bae, Jay P. & Murray, James & Chou, Jacquelyn W. & Lakdawalla, Darius N., 2017. "The role of imperfect surrogate endpoint information in drug approval and reimbursement decisions," Journal of Health Economics, Elsevier, vol. 51(C), pages 1-12.
    4. Cédric Gutierrez & Emmanuel Kemel, 2024. "Measuring natural source dependence," Experimental Economics, Springer;Economic Science Association, vol. 27(2), pages 379-416, April.
    5. Han Bleichrodt & Christophe Courbage & Béatrice Rey, 2019. "The value of a statistical life under changes in ambiguity," Journal of Risk and Uncertainty, Springer, vol. 58(1), pages 1-15, February.
    6. Charles Sabel & Gary Herrigel & Peer Hull Kristensen, 2018. "Regulation under uncertainty: The coevolution of industry and regulation," Regulation & Governance, John Wiley & Sons, vol. 12(3), pages 371-394, September.
    7. Cédric Gutierrez & Emmanuel Kemel, 2024. "Measuring natural source dependence," Post-Print hal-04866878, HAL.
    8. Arthur E. Attema & Han Bleichrodt & Olivier L'Haridon, 2018. "Ambiguity preferences for health," Health Economics, John Wiley & Sons, Ltd., vol. 27(11), pages 1699-1716, November.
    9. Kocher, Martin G. & Lahno, Amrei Marie & Trautmann, Stefan T., 2018. "Ambiguity aversion is not universal," European Economic Review, Elsevier, vol. 101(C), pages 268-283.
    10. Jeroen van der Heijden, 2021. "Risk as an Approach to Regulatory Governance: An Evidence Synthesis and Research Agenda," SAGE Open, , vol. 11(3), pages 21582440211, July.

    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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