15 Jul 2009  Working Papers

Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative Outcomes

Executive Summary — Citizens hope their elected representatives will pass legislation that creates net gains that outweigh net harms—in other words, legislation that has positive expected value for society. However, economist Joseph Stiglitz has noted that legislators often fail to pass such legislation, even when its net positive expected value is highly significant. The psychology and economics literature suggests that legislators face an uphill battle when proposing legislation that has both costs and benefits due to the power of loss aversion, a cognitive bias that has been found to cause individuals to dramatically overweight losses relative to gains. Here the authors propose and test a new type of policy bundling technique in which related bills that have both costs and benefits are combined in a way that reduces the harmful effects of loss aversion. Key concepts include:

  • Because losses loom larger than gains psychologically, policies that would create net benefits for society but that would also involve costs may frequently be defeated.
  • This policy bundling technique has the potential to help citizens and legislators who are struggling to pass legislation with salient costs that are outweighed by important benefits.
  • While the behavioral decision research literature has shown it is difficult to fully de-bias human judgment, recent research suggests it is possible to design decision-making contexts in ways that lead to wiser choices.

 

Author Abstract

Policies that would create net benefits for society but would also involve costs frequently lack the necessary support to be enacted because losses loom larger than gains psychologically. To reduce this harmful consequence of loss aversion, we propose a new type of policy bundling technique in which related bills that have both costs and benefits are combined. Using a laboratory study, we confirm across a set of four legislative domains that this bundling technique increases support for bills that have both costs and benefits. We also demonstrate that this effect is due to changes in the psychology of decision making, rather than voters' willingness to compromise and support a bill they weakly oppose when that bill is bundled with one they strongly support. 22 pages.

Paper Information