Behavioral Economics and the Conduct of Benefit-Cost Analysis: Towards Principles and Standards

International audienceAs traditionally conducted, benefit-cost analysis is rooted in neoclassical welfare economics, which assumes that individuals act rationally and are primarily motivated by self-interest, making decisions that maximize their own well-being. Its conduct is now evolving to reflect recent work in behavioral economics, which integrates psychological aspects of decisionmaking. We consider several implications for analyses of social programs. First, benefit-cost analysis often involves valuing nonmarket outcomes such as reductions in health and environmental risks. Behavioral research emphasizes the need to recognize that these values are affected by psychological as well as physical attributes. Second, benefit-cost analysis traditionally uses exponential discounting to reflect time preferences, while behavioral research suggests that individuals’ discounting may be hyperbolic. However, steep near-term rates may largely reflect impulsive behavior and self-control problems. Third, behavioral research emphasizes the influence of social preferences on valuation. In addition to acting altruistically, individuals may act reciprocally to reward or punish others, or use the status of others as the baseline against which to assess their own well-being. Fourth, behavioral economics identifies factors that can help develop valuation studies that provide well-informed, thoughtful preferences. Finally, while behavioral research has led some to argue for a more paternalistic approach to policy analysis, an alternative is to continue to focus on describing the preferences of those affected by the policy options while working to ensure that these preferences are based on knowledge and careful reflection. Benefit-cost analysis can be best viewed as a pragmatic framework for collecting, organizing, and evaluating relevant information