Loss Aversion and Rationality in Cutback Management: A Deliberative Democratic Approach to Contingent Valuation

By Moore, William; Baber, Walter F. et al. | Public Finance and Management, July 1, 2012 | Go to article overview

Loss Aversion and Rationality in Cutback Management: A Deliberative Democratic Approach to Contingent Valuation


Moore, William, Baber, Walter F., Bartlett, Robert V., Public Finance and Management


ABSTRACT

Contingent valuation is a widely used and well-understood technique for the valuation of non-market resources. But under conditions of fiscal stress and budget reduction, the phenomenon of loss aversion (the tendency of otherwise rational people to place a higher value on a good they stand to lose than they did before it came into their possession) poses significant challenges to contingent valuation of public goods. This paper proposes inverting the process of contingent valuation and making it more deliberatively democratic in order to determine what citizens are "willing to sacrifice" under conditions of fiscal stress. This re-imagined form of contingent valuation offers advantages in terms of governmental transparency, analytical accuracy, and democratic legitimacy. It also allows practitioners of cutback management to incorporate important elements of political consensus building into early stages of the policy process, and it alerts them to the need and opportunity to ameliorate the impacts of spending reductions.

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

"After a time, you may find that having is not so pleasing a thing, after all, as wanting. It is not logical, but it is often true." Mr. Spock

"Don't it always seem to go that you don't know what you've got till it's gone?" Joni Mitchell

Cutting public spending can be painful. Although it is sometimes true that public programs outlive their genuine usefulness, the idea that most of what governments do could as easily be done without is patently foolish. Every public expenditure has an original constituency, and major programs often gain new supporters as they become entrenched. In fact, many public pro-grams are so highly valued that the mere suggestion that they be cut can cause chaos and end careers. Thus there is a certain folk wisdom in politics that, once they are funded, some programs will be virtually impossible to cut. In the United States, Social Security is reputed to be one of these - the third rail of American politics. It is true, of course, that once a program is in place people begin to rely upon it. People plan their patterns of consumption and schedule their work lives around the availability of mass transit. People plan their sav-ings programs based upon the assumption of old-age pensions and health care programs. Parents plan their entire existence around the school calendar. Much of the politics that make budget cutting difficult have to do with re-sistance to disruptions in the supply of these sorts of public goods-in the ab-sence of which people must work harder, work longer, or work in different ways to achieve their objectives. This much of budgetary politics is both ra-tional and, to a certain extent, predictable.

Yet, our avatars of popular culture suggest that more than this is going on and that it has to do with an inherent irrationality in human behavior. Mr. Spock advances the notion that anticipation may be sweeter than possession. Human emotions, he might say, get the better of us in the pursuit of our de-sires. Then, in the cold light of day, what we possess fails to live up to our ex-pectations. Thus the voters support an initiative to fund a new library and then, after the grand opening excitement dies away, fail to use it. Ms. Mitchell, on the other hand, posits the all too familiar experience of finding out how good we had it only when we don't have it so good anymore. Perhaps familiarity does really breed contempt - at least with respect to public goods. We become so accustomed to the city park down the street that we don't think about it un-til someone paves paradise and puts up a parking lot. Economists and policy analysts are not unfamiliar with irrationality of this sort. It is, however, some-thing with which they often deal poorly.

With respect to the specific problem of cutting public expenditures, it is easy to be blindsided by the irrationality of the public's response.

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Loss Aversion and Rationality in Cutback Management: A Deliberative Democratic Approach to Contingent Valuation
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