Behavioral Cost-Benefit Economics: Toward a New Normative Approach to Policy
GLOBAL BUSINESS & ECONOMICS REVIEW - ANTHOLOGY, pp. 132-141, Kantarelis, D. ed., 2002
10 Pages Posted: 15 Oct 2010
Date Written: 2002
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.
Keywords: Cost-Benefit Analysis, Behavioral Economics, Status-Quo Effect, Loss Aversion, Overconfidence, Hyperbolic Discounting
JEL Classification: D03
Suggested Citation: Suggested Citation
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