Cognition and Cost-Benefit Analysis

Abstract

Cost-benefit analysis is often justified conventional economic grounds, as a way of preventing inefficiency. But it is most plausibly justified 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 cost-benefit analysis -- an agreement that does not depend 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.