04 Sep 2001  Research & Ideas

Is Government Just Stupid?
How Bad Decisions Are Made

Why is it that politicos make such poor decisions? The authors of "You Can't Enlarge the Pie" suggest that government leaders could benefit from basic decision-making skills. Plus: Q&A with HBS professor Max Bazerman.

 

Editor's Note— In "You Can't Enlarge the Pie," the authors argue that barriers to effective government decision making result in poor decisions about critical issues like the environment, organ transplants, and energy policy. Why? Because government leaders have hidden psychological biases that distort decision making. These barriers are:

  • Do no harm.
  • Their gain is our loss.
  • Competition is always good.
  • Support our group.
  • Live for the moment.
  • No pain for us, no gain for them.

The antidote? An approach used in the business schools, whereby students are taught to identify and correct hidden biases. The main goal of any government should be, the authors maintain, to enlarge the pie of resources that society has available to distribute. This is done by identifying wise tradeoffs for society as a whole.

But it's not just politicians who can benefit from this study. Any business leader—virtually everyone—can learn from incorporating a search for wise tradeoffs into their decision making.

Book Cover: You Can't Enlarge the Pie

This excerpt is from the book's introduction.

Imagine that you are listening to a series of campaign announcements, each made by a different politician running for national office. Consider how you would react to each politician's promises:

If elected, I will do everything possible to ensure that all Americans will be treated by the doctor of their choice and receive as much medical attention as they require.

If elected, I will do everything possible to enable every American to attend any university in this country.

If elected, I will do everything possible to ensure that America has the strongest defense forces in the world and that we are prepared to fight two major wars at a time.

If elected, I will do everything possible to protect the right of all Americans to carry the weapon of their choice without government interference.

If elected, I will do everything possible to guarantee that there will be no real reduction in Social Security or Medicare spending.

If elected, I will do everything possible to protect our natural environment and ensure that no additional species of animals or fish become extinct.

If elected, I will do everything possible to enact an across-the-board fifteen percent tax reduction.

Undoubtedly, some of these positions appeal to you more than others. Some you simply do not like. Now consider the ones you like best. What is your opinion of the candidates who hold these positions? Do they strike you as wise?

Near-Pareto improvements include policy changes that create vast benefits for some and comparatively trivial losses for others.
—From "You Can't Enlarge the Pie"

We will argue that all these politicians are lacking in wisdom. Each expresses a view on a single position and promises to do "everything possible" to enact it. None of them mentions the possible tradeoffs or costs related to each new policy. Nor do they discuss how their proposed policy would interact with other policies and issues. The fact is, increased spending on medical care, defense, education and so on guarantees that fewer taxpayer dollars and government resources will be available for other initiatives. It may also mean that the national debt will increase, imposing a heavy burden on future generations. Similarly, politicians who vow to protect the freedom to own all types of firearms are implicitly condoning the death of innocent people through lax gun laws. Candidates who promise to do "everything possible" to enact a specific policy are neglecting the tradeoffs inherent in all political decisions.

When people engage in political discussions, they typically focus on specific issues, such as those mentioned in the campaign promises presented above. They then evaluate politicians based on how well the politicians' positions match their preferences on these key issues. In other words, they focus more on goals than on results. Yet when evaluating business leaders, most people judge them primarily by results: profitability, return to shareholders, innovation and so on. This is the more rational measure of effectiveness. An organization's overall health will generally have a greater effect on an individual employee or citizen than its stance on specific issues. Why do we judge government by one standard and the private sector by another?

In this book, we argue that the way citizens and government currently think about real-world problems is dangerously narrow. We believe that a core objective of any government should be enlarging the pie of resources that society has available to distribute. Yet few citizens judge their leaders according to this key attribute. By focusing on vivid issues covered widely in the media, they ignore one of the most important issues: Valuable resources are often misused, squandered and ignored.

These resources are vast and diverse, ranging from tax dollars and the time of government bureaucrats and officials to national resources such as forests and mineral deposits. All these commodities are finite, and all have been squandered in nations across the globe as a result of inefficient government decisions. This book documents the many realms in which we miss the opportunities to increase the resources available to society. Here are a few examples:

People who die in automobile accidents are often buried with their healthy organs intact. Meanwhile, thousands die because of the lack of organ donors. Most of us would be willing to trade our organs upon our deaths in exchange for access to organs if we needed them. This mutually beneficial trade occurs far too rarely.

Environmentalists want to strengthen legislation to better protect biodiversity. Land developers do not want "Washington" telling them what they can and cannot do with their property. Both sides battle for increased or decreased legislation while ignoring possibilities for wiser regulation through joint problem solving.

When a sports team threatens to move to a new location, a bidding war ensues among different American cities. The winner typically pays more than the team is worth, and the losers often end up with empty stadiums. By focusing on keeping their teams with little or no regard for the long-term costs, taxpayers have spent vast sums of money making wealthy sports team owners even wealthier.

The American government currently subsidizes timber and paper companies for chopping down national forests. A business that operated as the government does would quickly go out of business. The government provides welfare to the timber industry because the public consistently ignores the degree to which special-interest groups have corrupted the legislative process.

The world's great fishing basins are in decline. New England's proportion of the world fishing harvest is down by ninety percent. Although the warning signs were clear fifteen years ago, fishers have successfully fought the regulation of their industry. Their rash behavior will deprive future generations of entire species of nutritious fish. Long-term thinking about intergenerational issues is lacking in this and many other public decision-making arenas.

Free trade prevents war, cuts inflation through price competition, increases efficiency and makes better goods and services available to citizens across the world. Why then do so many people fight free trade? A primary reason is loyalty to the short-sighted interest of a group. Groups that benefit from import restrictions organize to maintain their prerogatives at the expense of others. Another reason is the human tendency to resist any policy change that leads to harm as well as benefit.

These are complex issues. Politicians and activists have been trying to solve some of them for decades; but these same politicians and activists have consistently ignored others. We believe that partial solutions to these problems are surprisingly clear.

The psychology of flawed decisions

We write from the perspective of psychologists who study imperfections in the way people make decisions. Since the early 1980s, it's become clear that many of the errors people make have to do with the difficulties they have in making and understanding tradeoffs. This book will illustrate how this new understanding of tradeoffs can clarify the flaws in existing government policies and lead to better policies.

By identifying wise tradeoffs, we can expand the resources available to society as a whole. This may mean, for example, increasing the average income per citizen; meeting the demand for donated organs; or improving the natural environment. We will present real-world examples in which we can increase two or more social goods at the same time—for example, improving both the economy and the environment through creative trades.

Although other scholars have written about flawed government decisions and the failure of policymakers to discover wise trades, these writers have typically viewed such problems through the common lenses of political science and economics. We seek to expand the discussion by focusing on the limitations of the human mind. Most people recognize tradeoffs as exchanges that result in both a gain and a loss, but the human mind consistently overlooks wise tradeoffs—trades in which gains significantly exceed losses for all parties involved. This tendency is pervasive: It affects the educated and the uneducated, those inflamed by passion for an issue as well as those who pride themselves on their cool-headed rationality. Virtually everyone can benefit from incorporating a search for wise tradeoffs into their decision making.

Wise tradeoffs involve a type of policy change that economists call "Pareto improvements." A Pareto improvement is a change in policy that makes some people better off and no one worse off. Unfortunately, true Pareto improvements are very rare in government policy making; most changes will require sacrifices from some members of society. Thus, in many cases, we will be advocating what economist Joseph Stiglitz calls "near-Pareto improvements." Near-Pareto improvements include policy changes that create vast benefits for some and comparatively trivial losses for others, as well as changes that would hurt only a small, narrowly defined special-interest group—in many cases, a group that has already manipulated the political process to its advantage. We agree with Stiglitz's argument that "if everyone except a narrowly defined special-interest group could be shown to benefit, surely the change should be made."

Social change must occur at two levels: How citizens think, and how the government creates policy. It will not suffice if only those who work in government learn to incorporate these principles. Citizens, too, need to become more familiar with the reasoning decision scientists use when they think about government. As citizens broaden their mindsets, they will influence other voters and special interest groups, and pressure the government to create wiser legislation.

Ideological, moral or religious debates such as struggles over abortion and capital punishment may seem to resist the type of tradeoffs we advocate. Parties who view the opposite side as morally wrong will often refuse to yield the slightest bit from their positions. Although we recognize that our recommendations will sometimes be impossible to apply, these cases are far rarer than most people realize. In certain instances, claims of intractability may be bargaining ploys that will yield to reasonable compromises. Negotiations promoting tradeoffs and compromise have proved effective in some of the most long-standing and bitter feuds—as recent peace accords in Northern Ireland suggest.

Five Questions for Max Bazerman

Max Bazerman, co-author of "You Can't Enlarge the Pie," discussed the flaws in government decision making in an email interview with HBS Working Knowledge Editor Sean Silverthorne. Bazerman is Jesse Isidor Straus Professor of Business Administration at Harvard Business School.

Silverthorne:Obviously, government decisions affect businesses in many ways. What are the implications for business leaders in the U.S. of the government continuing to make decisions based on the mistakes that you discuss in "You Can't Enlarge the Pie?"

Bazerman: The implications are that we will continue to make decisions that miss opportunities to make all parties better off. We will end up with inefficient methods of creating a cleaner environment. We will continue to miss opportunities to provide more services for the poor at lower costs. And we will continue to watch the left and the right wings battle over who gets the biggest piece of the pie, while paying little attention to expanding the pie of social resources for all.

Q: If I recall my political science studies, lawyers and career politicians are disproportionately represented among the ranks of elected officials, at least at the federal level. Would government be better served by having more business leaders in office?

A: I don't think that a business school professor can offer unbiased advice on who should run government. However, it is clear that most elected officials miss the key lessons that are taught in conflict resolution and negotiation classes concerning how to enlarge the pie. I believe that the mindset of exploring wise tradeoffs is more common in business schools than in law or policy schools, where adversarial relations are too commonly accepted as normal. Perhaps the most important goal should be to train students across professional schools to identify and implement opportunities for mutually beneficial tradeoffs.

Q: Wasn't the U.S. government set up by the founding fathers to, in effect, be inefficient—that is, three branches of government serving as checks and balances—to ensure that no one branch dominates? Does this structure preclude us from ever seeing the kind of reform you advocate?

A: We strongly believe in the importance of the checks and balances, particularly as a means of curbing corruption. But inefficiencies are perhaps a natural byproduct of checks and balances. We focus on ways to grow the pie of social resources within the legal and legislative systems of the United States, as well as within the democratic systems of other nations. The constraints that democracies place on power certainly do not preclude reform. In fact, reform is most likely to be blocked by anti-democratic practices, such as the widespread and inefficient practice in this country of special-interest groups currying political favor via soft-money campaign donations. Politicians are tired of hosting fundraisers, and business leaders are sick of being hit up for money. A lot of the inefficiencies and waste we document in our book could be eliminated by the adoption of meaningful campaign-finance reform. Unfortunately, the majority of the public does not press its leaders on this issue.

Q: You discuss a number of high-profile environmental debates, including animal conservation, overfishing, and global warming. Why hasn't the U.S. government been able to hammer out an environmental policy that will appease both environmentalists and industry?

A: Parties in environmental disputes are typically victims of the "myth of the fixed pie," or the assumption that "anything good for our side must be bad for them," and vice versa. This mindset calls off the search for wise tradeoffs that would benefit both sides.

Although it has saved many at-risk species, the 1973 Endangered Species Act (ESA) has fostered a great deal of animosity between environmentalists and industry. The story of forester Ben Cone Jr. is a touchstone for ESA critics. In 1991, the U.S. Fish and Wildlife Service found 29 red-cockaded woodpeckers, an endangered species, living on Cone's North Carolina land. Acting under the authority of the ESA, the Service seized control of 1,500 acres of Cone's property. After the seizure, Cone switched from sustainable forestry to massive clear-cutting on other parts of his land—a disastrous decision from both an economic and environmental perspective.

An alternative to this inefficient solution, from both economic and environmental perspectives, was to create a Habitat Conservation Plans (HCP) within the ESA. HCPs allow private landowners such as Cone "incidental take" of endangered species during lawful development, provided they undertake certain steps to preserve the species. HCPs are a way to grow the pie. Unfortunately, the mythical fixed-pie often prevents parties from even looking for wise solutions.

Q: In doing research for the book, were you surprised by anything you ran across?

A: I was surprised by what I learned about my own political views. I have always had strong opinions about the relative lack of wise decision making within government. And, while I clearly identify with one major party over the other, I was delighted to develop a clearer understanding of why I am often bothered by the positions of both major political parties. I was surprised by the degree to which each party is willing to forego the interests of society to engage in self-serving behaviors, often simply for the sake of winning a high-profile political battle. We hope that our book gives our readers the tools they need to evaluate politicians on the extent to which they make wise, creative decisions that benefit as many people as possible.

From the book, "You Can't Enlarge the Pie." © 2001 by by Max H. Bazerman, Jonathan Baron, and Katherine Shonk. Reprinted with the permission of Basic Books. All rights reserved.

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Jonathan Baron is a professor of psychology at the University of Pennsylvania.

Katherine Shonk is a research associate at Harvard Business School.