Behavioral economists have identified certain biases in decision making that lead people to make decisions that harm themselves, but there is insufficient guidance for estimating benefits in the presence of such behavioral failures. This gap in principles and standards for benefit-cost analysis has led government agencies at times to adopt arbitrary and excessive benefit valuations.
This article describes an approach to incorporating behavioral market failures into benefit estimation, first by advocating a behavioral transfer test to use before applying behavioral findings from narrow contexts to broader populations subject to regulation, and then by comparing the outcomes from the self-harming behavior to a policy reference point in which people are assumed to be fully informed and to act fully rationally in their own self-interest.
This approach, which is grounded on systematic, well-documented, and context-specific findings of behavioral failings, would reduce instances of agencies assuming that behavioral findings in some contexts provide sufficient rationale for overriding consumer preferences in other contexts. It would also establish a consistent approach to government policy by, for example, creating symmetry between advancing policies that seek to discourage consumption of products for which consumers underestimate the health risks and fostering accurate risk beliefs to address erroneous individual choices based on risk overestimation.