Cognition and Cost-Benefit Analysis

Abstract:     
Cost-benefit analysis is often justified on conventional economic grounds, as a way of preventing inefficiency. But it is most plausibly justified on cognitive grounds -- as a way of counteracting predictable problems in individual and social cognition. Poor judgments, by individuals and societies, can result from certain heuristics; from informational and reputational "cascades"; from thinking processes in which benefits are "on screen" but costs are not; from ignoring systemic effects of one-shot interventions; from seeing cases in isolation; and from intense emotional reactions. Cost-benefit analysis serves as a corrective to these cognitive problems. In addition, it is possible to arrive at an "incompletely theorized agreement" on cost-benefit analysis -- an agreement that does not depend on controversial arguments (e.g., the view that "willingness to pay" should be the basis for all social outcomes) and that can attract support from a variety of reasonable views. There is discussion as well of the role of "distributional weights" and other equitable factors in cost-benefit analysis. The conclusion is that the best argument for cost-benefit analysis is rooted in cognitive psychology and behavioral economics.

JEL Classifications: D61

Working Paper Series