• Selected
• Entire List

Abstract:
Behavioral economics and cognitive psychology have demonstrated that people deviate from ideal precepts of rationality in many settings, showing inconsistent judgment in the face of framing and other formal manipulations of the presentation of problems. This article summarizes the finding of original experiments about subjects' perceptions of aspects of tax-law design and argues for the relevance of behavioral perspectives to the understanding and improvement of real-world fiscal systems. We show that in evaluating tax systems, subjects are vulnerable to a wide range of heuristics and biases, leading to inconsistent judgment and evaluation. The prevalence of these biases suggests that there is room for skillful politicians to manipulate public opinion, and that tax-system design can be volatile on account of the possibility of eliciting preference reversals through purely formal rhetorical means. More troubling, the findings suggest a likely and persistent wedge between observed and optimal public finance systems.

Abstract:
The principal findings of behavioral economics and cognitive psychology over the past several decades have been to show that human beings deviate from ideal precepts of rationality in many settings, showing inconsistent judgment in the face of framing and other formal manipulations of the presentation of problems. This paper summarizes the findings of original experiments about subjects' perceptions of various aspects of tax-law design. We show that in evaluating tax systems, subjects are vulnerable to a wide range of heuristics and biases, leading to inconsistent judgment and evaluation. The prevalence of these biases suggests that there is room for skillful politicians or facile political systems to manipulate public opinion, and that tax system design will reflect a certain volatility on account of the possibility of eliciting preference reversals through purely formal rhetorical means. More troubling, the findings suggest the possibility of a persistent wedge between observed and optimal public finance systems.

Abstract:
Based on contemporary research in decision making, negotiation, and cognitive psychology, we offer a cognitive perspective to explain the failure of governments to create what Stiglitz (1998) calls near-Pareto improvements. We examine the role of human judgment in the failure to find wise tradeoffs across diverse applications of government decision-making, including organ donation systems, endangered species protection, interstate competition, overfishing, and free trade. Our tools for analyzing these failures reflect the difficulty people have trading small losses for large gains, and include the omission bias, status-quo bias, the fixed-pie approach to negotiations, unwillingness to solve social dilemmas, ignoring secondary effects, and discounting the future. Collectively, we seek to offer a new approach for understanding suboptimality in government decision making.

Abstract:
Three studies of attitudes toward tax policies were conducted on the World Wide Web. The results show several effects. In penalty aversion, subjects preferred bonuses over penalties, when policies differ only in how they are formally described. In the Schelling effect, subjects prefer both higher bonuses (for children) for the poor than for the rich and higher penalties (for being childless) for the rich than for the poor. In the neutrality bias, subjects preferred separate filing for married couples more when it was presented in a format that emphasized the effect of marriage (where it is neutral) than in one that emphasized the effect of the number of earners in a couple (where one-earner couples pay more). In the status-quo effect, subjects preferred the specified starting point to any change. Finally, in the metric effect, subjects favored more progressiveness in tax burdens when taxes were expressed in percent than when they were expressed in dollars.

The research suggests a general framework. Subjects approach a given decision problem with strong independent norms or ideals, such as, here, "do no harm," "avoid penalties," "treat likes alike," "help children," and "expect the rich to pay more." They then evaluate the problem on the basis of the most salient norms. In a complex area such as tax, independently attractive ideals are often in conflict, and the result is shifting, inconsistent preferences.

Abstract:
Welfare economics suggests that the tax system is the appropriate place to effect redistribution from those with more command over material resources to those with less - that is, in short, to serve "equity." Society should set other mechanisms of private and public law, including public finance systems, to maximize welfare - that is, in short, to serve "efficiency." The populace, however, may not always accept first-best policies. Perspectives from cognitive psychology suggest that ordinary citizens can react to the purely formal means by which social policies are implemented, and thus may reject welfare-improving reforms.

This Article sets out the general background of the problem. We present the results of original experiments that confirm that the means of implementing redistribution affect its acceptability. Effects range from such seemingly trivial matters as whether or not tax burdens are discussed in dollars or in percent terms, to more substantial matters such as how many different individual taxes there are, whether the burden of taxes is transparent or not, and the nature and level of the public provision of goods and services. The findings suggest a deep and problematic tension between the goals of equity and efficiency in public finance.

Abstract:
The strategy of "starving the beast" involves cutting taxes today with the expectation that spending cuts will follow tomorrow. Various heuristics and biases help to explain the likely effects of the strategy. In four experiments conducted on the World Wide Web, subjects chose general levels of taxation and public spending from differing hypothetical starting points. In general, subjects wanted to reduce both taxes and spending, preferring balanced budgets and even surpluses to deficits. When asked about specific spending cuts, subjects showed a reluctance to make cuts, leading to large and persistent deficits. "Starving the beast," by pairing specific tax cuts with the general, abstract idea of spending cuts, can thus succeed in a population preferring fiscal balance. Once the deficit is created, it will likely persist, influencing future policy preferences, due to an anchor and underadjustment bias. Left indeterminate is what happens in any subsequent period of deficits, when a balanced budget constraint is imposed: in such cases, loss aversion vis a vis tax increases is pitted against loss aversion vis a vis spending decreases. Our experiments suggest a role for framing in making policy choices under these conditions.

taxation, budget deficits, heuristics and biases

Abstract:
Most people think that breaking a promise is immoral, and that a breach of contract is a kind of broken promise. However, the law does not explicitly recognize the moral context of breach of contract. Using a series of web-based questionnaires, we asked subjects to read breach of contract cases and answer questions about the legal, financial, and moral implications of each case. Our results suggest that people are quite sensitive to the moral dimensions of a breach of contract, especially the perceived intentions of the breacher. In the first study, we framed the motivation for a contractor's breach as either the chance to make more money or the chance to avoid losing money. Subjects were more punitive when the motivation appeared to be greed (breach to gain) than when the motivation appeared to be fear (breach to avoid loss). In the second study, we manipulated the timing of the negotiation over damages, comparing cases in which the promisor asks to negotiate damages before definitively breaching (as in a liquidated damages clause) with cases in which the breach has already occurred. We predicted that once the contract is breached, the moral violation becomes very salient, and we found that subjects were less punitive when they setting damages ex ante. Finally, results from the third study suggest that subjects seemed to believe that intentionally breaking a contractual promise is a punishable moral harm in itself. When presented with identical losses, one from an intentional breach of contract and the other from a negligent tort, subjects were more punitive toward the breacher than the negligent tortfeasor. They treated willful breach as an intentional harm.

contracts, breach, moral heuristic, moral intuitions

Abstract:
Research has shown that people vary widely in their support or opposition to progressive taxation. We argue here that the perception of progressiveness itself is affected by the nature of the tax system and by the way it is framed, or presented. Experiments conducted over the World-Wide Web and using within-subject design demonstrate that subjects suffer from a range of heuristics and biases in understanding and supporting progressive or redistributive taxation. After reviewing some prior results, we report four new studies. Two of them indicate that people do not sufficiently appreciate the reduction of progressiveness that results from the use of tax deductions to partly reimburse private expenditures. The other two indicate that people do not fully appreciate the reduction in progressiveness that results from cuts in government services.

Abstract:
Three experiments carried out on the World Wide Web assessed the consistency of attitudes toward various tax regimes that differed in their overall levels and degrees of tax rate graduation in the presence of framing manipulations. The regimes had two components: an income and a payroll tax. One frame involved aggregation. Subjects were asked either to design a single, global tax system or to vary one component of a tax system (payroll or income tax) with the other component held constant. The idea was to replicate the effects of income tax reform given a constant payroll tax system. Consistent with the experimental hypothesis - though not with "rational" decision making - subjects focused on the component they were asked to manipulate and did not respond fully to changes in the other part, across conditions, rejecting an underadjustment bias as well as a framing effect. The results are akin to Thaler's "mental account" model for personal financial behavior. A second manipulation involved a "metric" frame: whether putative tax burdens were given in dollars or percent terms. Once again consistent with the experimental hypothesis, subjects preferred higher rates of graduation when matters were stated in percent terms. The results point to the lability of public opinion about important questions of public finance.

Abstract:
In two studies, subjects judged the desirability of distributions of life expectancy or money. Their judgments showed declining marginal utility. That is, they were less sensitive to changes at the high end of each scale. Subjects also made utility ratings of the outcomes of individuals. And they made ratings of the distributions when these were described in terms of utility ratings rather than goods (years or dollars). The judgments of utility ratings showed equivalent declining marginal utility, even though they were based on utilities that themselves declined marginally. People extend their intuition about declining marginal utility to utility itself, as if utility had utility that declined marginally. In one experiment, a similar result was found with gambles: people are risk averse for utility as well as for money. We argue that this is an overextension of a reasonable heuristic and that this heuristic may account for one classic objection to utilitarian distributions.

Abstract:
I discuss several forms of bias, or fallacious thinking, that lead to parochialism, that is, a willingness to sacrifice self-interest for in-group members while neglecting or underweighing negative effects on outsiders, so that an out-group could lose more than the in-group gains from the sacrifice. In the self-interest illusion, people fallaciously think that their contribution to their group comes back to benefit them and make their sacrifice worthwhile. This illusion is larger when an outgroup is affected, and it is specific to group benefits; it is unrelated to the desire to hurt another group out of sheer competition. A second bias is the tendency to de-personalize the individuals involved and think about the groups. This is reduced when people make analogous decisions about individuals. I suggest that approval voting -- at least when both groups vote -- can lead people to take the out-group into account. Omission bias, the preference for harming others through omissions rather than actions, is greater for out-group members. Parochialism can be moralized: people think of it as absolute and objectively moral, they are willing to impose it moralistically on others, and they consider the support of the in-group to be their duty as citizens. I conclude with suggestions for reducing the harmful effects of parochialism.

parochialism, cognitive biases, omission bias, in-group bias, duty

Abstract:
People often sacrifice their self-interest for a group to which
they belong, even when outsiders are harmed so that the
sacrifice has no net benefit. Two experiments (conducted on
the World Wide Web) suggest that people do this, in part,
because they think that cooperation on behalf of the group is
in their narrow self-interest; they show an enhanced
self-interest illusion. One experiment found that the
self-interest illusion is related to the enhanced tendency to
cooperate on behalf of a group when the insiders' gain is the
outsiders' loss. A second experiment found that the illusion
(and the resulting parochial cooperation) was reduced when
subjects were required to calculate all gains and losses.

Cooperation, Parochialism, Self-Interest, Group Conflict

Abstract:
I distinguish four types of goals: self-interested, altruistic, moralistic, and moral. Moralistic goals are those that people attempt to impose on others, regardless of the others' true interests. These may become prominent in political behavior such as voting because such behavior has relatively little effect on self-interested goals. I argue (sometimes with experimental evidence) that common decision biases concerned with allocation, protected values, and parochialism often take the form of moralistic values. Because moralistic values are often bundled together with other values that are based on false beliefs, they can be reduced through various kinds of reflection or "de-biasing."

heuristics and biases, moralistic values, protected values, allocation

Abstract:
In hypothetical scenarios involving two groups (nations or groups of workers), subjects voted on three proposals: one helped group A (their group), one helped B, and one helped both groups, more than the average of the first two but less than their maximum. When subjects voted for one proposal, most voted for the one that helped group A. When they could approve two proposals, they tended to approve the third proposal as well, and it was more likely to win. Approval voting can reduce the effect of parochialism, a bias toward ones own group, on election outcomes.

approval voting, parochialism, cooperation

Abstract:
When people tend toward a political decision, such as voting for the Republican Party, they are often attracted to this decision by one issue, such as the party's stance on abortion, but then they come to see other issues, such as the party's stand on taxes, as supporting their decision, even if they would not have thought so in the absence of the decision. I demonstrate this phenomenon with opinion poll data and with an experiment done on the World Wide Web using hypothetical candidates. For the hypothetical candidates, judgments about whether a candidate's position on issue A favors the candidate or the opponent are correlated with judgments about other positions taken by the candidate (as determined from other hypothetical candidates). Although this effect is small, it is greater in those subjects who rarely make conflicting judgments, in which one issue favors a candidate and another favors the opponent. In a few cases, judgments even reverse, so that a position that is counted as a minus for other candidates becomes a plus for a favored candidate. Reversals in the direction of a candidate's position are more likely when the candidate is otherwise favored. The experiment provides a new kind of demonstration of 'belief overkill,' the tendency to bring all arguments into line with a favored conclusion.

biases, judgment, political psychlogy

Abstract:
Many questions in judgment and decision-making research, and, indeed, in experimental psychology generally, concern the existence of effects, and the explanation of effects shown to exist. These questions do not concern the prevalence of effects in any particular population. It is thus appropriate to look for effects in single subjects. If one person shows the effect, then it exists. This argument implies that it is sometimes appropriate to test effects across cases or rounds, without testing across subjects. It also implies that, in some experiments, effects in opposite directions may exist. I recommend looking for such effects by carrying out statistical tests on individual subjects. I describe a few methods, varying in formality, that can be used to deal with the inevitable problem of doing multiple tests of the same hypothesis: probability-probability plots; tests of the distribution of p-values; and correction for multiple testing with step-down resampling. I also present a few examples, some of which show effects in both directions and some of which do not.

Abstract:
Decision analysis evaluates options in terms of their expected utility, the expected amount of good. Many regulatory decisions require estimates of utility, which is not the same as monetary outcomes or other objectively measurable quantities. I review some of the problems of utility measurement for consequences (hence 'utilitarian'')and suggest possible solutions. Contingent valuation (CV), a widely used method for obtaining money equivalents, is usually insensitive to the quantity of the good being evaluated, but this problem might be avoided by using per-unit pricing and/or by requiring responses on both attributes (money and the good in question). Valuation of consequences can also be distorted by provision of information about how the consequences are achieved. I report a study showing how valuation can also be improved by stripping away information other than the consequences of interest; most subjects did not think that removal of the extra information was unfair. Conjoint analysis, another method in which respondents rate objects that vary in different attributes such as cost and benefit, seems promising because it is often sensitive to quantity. I report a study suggesting that it can suffer from the problem that people limit their attention to a few attributes, possibly even one. I conclude with a discussion of the role of utility measurement in regulation.

contingent valuation, public goods, conjoint analysis, biases, regulation

Abstract:
n five studies, we measured the extent to which subjects weight moral product attributes in different response modes. We found that nonprice judgments such as likelihood of purchase ratings were more reflective of expressed moral attitudes than were pricing responses, and that holistic price evaluations were especially unlikely to reflect moral considerations. Post-task ratings confirmed the preference results, as did an experiment controlling for the influence of task goals. Our results have implications for compatibility theories of preference elicitation, the predictability of respondent ratings of attribute unacceptability, and the measurement of utilities for morally charged attributes.

behavioral economics, decision making, morality, context effects, preference reversals, conjoint measurement

Abstract:
Background

Some members of the general public feel that patients who cause their own organ failure through smoking, alcohol use, or drug use should not receive equal priority for scarce transplantable organs. This may reflect a belief that these patients (1) cause their own illness, (2) have poor transplant prognoses or, (3) are simply unworthy. We explore the role that social acceptability, personal responsibility, and prognosis play in people's judgments about transplant allocation.

Methods

By random allocation, we presented 283 prospective jurors in Philadelphia county with one of five questionnaire versions. In all questionnaires, subjects were asked to distribute transplantable hearts between patients with and without a history of 3 controversial behaviors (eating high fat diets against doctors' advice, cigarette smoking or intravenous drug use). Across the 5 questionnaire versions, we varied the relative prognosis of the transplant candidates and whether their behavior caused their primary organ failure.

Results

Subjects were significantly less willing to distribute organs to intravenous drug users than to cigarette smokers or people eating high fat diets (p < 0.0005), even when intravenous drug users had better transplant outcomes than other patients. Subjects' allocation decisions were influenced by transplant prognosis, but not by whether the behavior in question was causally responsible for the patients' organ failure.

Conclusion

People's unwillingness to give scarce transplantable organs to patients with controversial behaviors cannot be explained totally on the basis of those behaviors either causing their primary organ failure or making them have worse transplant prognoses. Instead, many people believe that such patients are simply less worthy of scarce transplantable organs.

Abstract:
In nine experiments — one a questionnaire given to Israeli judges, the rest on the World Wide Web — we examined the effect of probability of detection of an offense on judgments of punishment. When cases differing in probability were separated, we found almost no evidence for attention to probability (as found previously by others). When cases were presented next to each other, however, a substantial minority of subjects took probability into account. Attention to probability was increased in one study by a probe manipulation concerning deterrent effects. We found inconsistent effects of identifying the perpetrator, or of asking subjects to consider policies versus individuals. Some subjects thought that it was unfair to consider probability, but more subjects thought that probability was relevant because of the need for deterrence. We suggest that the failure to consider probability is to some extent an example of the “isolation effect,” in which people do not think much about secondary effects, rather than entirely a result of ideological commitment to a “just desserts” view of punishment. “To enable the value of the punishment to outweigh that of the profit of the offense, it must be increased, in point of magnitude, in proportion as it falls short in point of certainty.” (Bentham, 1948/1843, Ch. 14, section XVIII).

probability, detection, judgments, punishment, isolation, Baron, Ritov

Abstract:
We demonstrate that citizens perceive a duty to support policies that benefit their nation, even when they themselves judge that the consequences of the policies will be worse on the whole, taking outsiders into account. Hypothetical choices follow this perceived duty and do not violate it for the sake of better consequences. The discrepancy between duty and judged consequences does not seem to result from self-interest alone. When asked for reasons, many subjects felt an obligation to help their fellow citizens before others, and they also thought that they owed something to their nation, in return for what it did for them. In an experiment with Israeli and Palestinian students, group membership affected both perceived overall consequences and duty, although subjects still showed a greater group duty than predicted by perceived consequences.

duty, parochialism, nationalism, biases, utilitarianism

Abstract:
Subjects were less willing to pay for government medical insurance for diseases when the number of people who could not be cured was higher, holding constant the number who could be cured. In a second experiment, willingness to pay (from a hypothetical government windfall) for risk reduction was unaffected by whether the risk was described in terms of percentage or number of lives saved, even though subjects knew that the risks in question differed in prevalence. These results are consistent with the findings of Fetherstonhaugh et al, Jenni and Loewenstein, and others. I suggest that these results can be explained in terms of a general tendency to confuse proportions and differences, a confusion that is analogous to other confusions of quantitative dimensions in children, adults, the news media, and perhaps even the epidemiological literature.

Abstract:
Under contemporary no-fault divorce laws, it is impermissible to factor marital misconduct, a highly salient component of many divorces, into decisions about how to allocate joint property between the parties. We hypothesize that the no-fault law is in conflict with a moral intuition that favors punishment for people who break the marriage contract, and that people will be either unwilling or unable to fully ignore marital fault in the context of divorce settlement negotiations. In four web-based experiments, we asked subjects to read vignettes about divorcing couples, and then to rate proposals by each party about how to divide the marital property. We found that subjects rated wrongdoers¿ proposals lower than victims¿ proposals, even when they were instructed to ignore fault. Some subjects are explicit about their intention to ignore the law, but many subjects take fault into account without awareness that they are doing so. We also asked subjects to take different roles or points of view in assessing the proposals (e.g., the wife, the husband, or an impartial judge) in order to assess the role of self-serving biases in divorce negotiations. When subjects were assessing neutral divorces, scenarios in which the parties had simply grown apart, they showed a clear effect of perspective, rating their own proposals higher than the other party¿s proposals. However, when subjects were assessing unilateral-fault divorces, the effect of perspective was even greater, especially for subjects taking the perspectives of victims. We conclude that under certain conditions of unilateral fault, the no-fault divorce law may actually increase the likelihood of impasse in divorce negotiations.

divorce, negotiation, no-fault, fault, bias, family law, bargaining