On Balance: Review of The Cost-Benefit Revolution by Cass R. Sunstein

January 9, 2019

By: Lisa A. Robinson

Fomenting revolution brings to mind crowds storming the barricades, not analysts struggling to debug a spreadsheet or craft a clear sentence. Yet in his book, The Cost-Benefit Revolution, Cass Sunstein (Robert Walmsley University Professor, Harvard Law School) argues that benefit-cost analysts are doing exactly that. The barricades we surmount are decision-making errors resulting from overreliance on intuition and emotion, our weapons are science and economics, and our achievements are better policies.

As a previous Administrator of the Office of Information and Regulatory Affairs in the U.S. Office of Management and Budget, which oversees the U.S. regulatory program, it is not surprising that Sunstein focuses on the use of benefit-cost analysis in the regulatory realm. However, his insights and conclusions are broadly applicable to wherever benefit-cost analysis is practiced.

Those of you who are familiar with Sunstein’s scholarship will recognize familiar themes. He integrates and builds on previous work, including articles initially published in the Journal of Benefit Cost Analysis: “The Value of a Statistical Life: Some Clarifications and Puzzles” and “Cost-Benefit Analysis, Who’s Your Daddy?.” Among these themes, the most central are the findings from behavioral science which indicate that our intuition often leads us astray. Sunstein argues that benefit-cost analysis is an important corrective, promoting more rational decisions. He reminds us that we can agree or disagree on the underlying theory while still agreeing that the results provide useful and important information about the consequences of alternative policy choices.

In the first part of the book, Sunstein surveys the current landscape. He begins with an instructive history of the development and scope of longstanding U.S. requirements for regulatory analysis. He then discusses benefit-cost analysis’ power as a “foreign language.” Behavioral researchers find that when people use a second language, the change in terminology blunts their emotional responses and leads them to make more rational decisions. Benefit-cost analysis similarly reduces people’s tendency to rely on potentially erroneous intuitive judgments by replacing normal discourse with more technical language from economics and science.

An important example of this foreignness is the concept of the value per statistical life or VSL. Although not well-understood by the general public, VSL represents individual willingness to pay for a small change in one’s own likelihood of dying in a defined time period. By relying on this approach for valuation, analysts respect individuals’ preferences for exchanging income for improvements in their own well-being. Typically, however, regulatory analysts use population-average values, in part to address distributional concerns. Otherwise, benefits that accrue to the wealthy would be more highly valued than benefits that accrue to the poor; the wealthy have more money available to expend on risk reductions as well as other things.

One question Sunstein addresses is the extent to which individual willingness to pay is an appropriate measure of individual well-being. He cites Paul Dolan’s definition of well-being as including both feelings of pleasure and feelings of purpose. Sunstein argues that measuring this subjective well-being directly would be preferable to using monetary estimates, given that improving welfare is the ultimate goal. Researchers are making substantial progress in this area, as discussed in the Journal of Benefit-Cost Analysis special issue on “[Ir]rationality, Happiness, and Benefit-Cost Analysis.” However, more work is needed to map subjective well-being measures to policy consequences. Sunstein argues that willingness to pay provides the most practical approach currently.

More generally, a lack of knowledge can pose significant challenges to the use of benefit-cost analysis, which is driven by evidence, facts, and figures. Sunstein notes that this problem can be addressed in part by soliciting public comment, as is required for U.S. regulatory proposals. Sunstein also emphasizes the importance of retrospective review of regulatory costs and benefits to increase our understanding of policy impacts.

In the second part of the book, Sunstein discusses five diverse areas where more work is needed to improve the use of benefit-cost analysis and clarify its role. First, he argues that we need to better understand how much individuals are willing to pay for moral commitments, such as knowing that tuna is “dolphin safe,” regardless of whether the impact is physical or psychological. Second, he suggests we need to further explore the positive and negative impacts of mandatory labeling. Third is the role of benefit-cost analysis in protecting agencies against charges of acting arbitrarily when regulatory decisions are litigated. The fourth issue is how to protect ourselves from taking overly aggressive precautions against perceived risks, particularly in national security and privacy policies. The fifth is free speech; the question is whether it should be subject to the same type of benefit-cost balancing as other policy concerns or should be treated differently.

In each of these five areas, Sunstein identifies research needs and recognizes that a fully quantified benefit-cost analysis is not always feasible. Yet analysis of the positive and negative consequences of policy choices is still useful. Where full quantification is not possible, he indicates that agencies should provide quantitative information to the extent possible, conduct breakeven analysis to identify how large the unquantified effects would need to be to lead to positive net benefits, and discuss the impacts qualitatively.

While Sunstein clearly understands the challenges analysts and decision-makers face and argues thoughtfully and persuasively, in a few cases he may be too sanguine about the current state of the art. One such case relates to distributional impacts, an issue with which Sunstein is deeply concerned.  He argues that, in his experience, regulations with positive net benefits rarely have undesirable distributional effects. While this seems reasonable on the surface, it is also a strong claim. My work with James K. Hammitt and Richard J. Zeckhauser suggests that agencies rarely assess regulations’ distributional effects and focus overly much on benefits – without also considering the distribution of costs. More work is needed to demonstrate the extent to which distributional concerns arise when the aggregate net impact of the policy is positive.

Another area where Sunstein may be overly sanguine relates to retrospective analysis. As he indicates, such analysis is incredibly important in deciding whether to alter current regulations and in designing future regulations, as well as in improving the practice of benefit-cost analysis. However, it is also incredibly difficult. Separating out the impacts of the regulation from the impacts of other historical trends and events is challenging; continued work on refining the methods used in these assessments is essential.

As always, Professor Sunstein thinks deeply, writes engagingly, and is often provocative. It is no wonder that he is one of the most cited legal scholars in the U.S. He has inspired innumerable researchers and policymakers to consider how human psychology influences decisions and ultimately welfare. This research has in turn led to much interesting discussion of how these issues affect the conduct of benefit-cost analysis, such as our initial work on developing principles and standards and a more recent comprehensive text by former SBCA President David Weimer. While readers may disagree with Sunstein’s arguments from a normative or a practical perspective, anyone who works in this area will find this book intriguing; it both celebrates our successes and poses important challenges. It is likely to lead to much interesting debate as well as to new developments in the field.

Lisa A. Robinson is a Senior Research Scientist at the Harvard T.H. Chan School of Public Health, where she is affiliated with the Center for Health Decision Science and the Center for Risk Analysis. A previous Society for Benefit-Cost Analysis President, Ms. Robinson has been active in the Society and the Journal of Benefit-Cost Analysis since their inception.

Note from the President: We are pleased to welcome Professor Sunstein as the keynote speaker at the upcoming SBCA 2019 conference.