Enlarging the Societal Pie – A Cognitive Perspective
Max H. Bazerman
Harvard Business School
Harvard University
Jonathan Baron
Psychology Department
University of Pennsylvania
Katherine Shonk
Harvard Business School
Harvard University
11/13/02
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Enlarging the Societal Pie – A Cognitive Perspective
Abstract
Based on contemporary research in decision making, negotiation, and cognitive
psychology, we offer a cognitive perspective to explain the failure of governments to create what
Stiglitz (1998) calls near-Pareto improvements. We examine the role of human judgment in the
failure to find wise tradeoffs across diverse applications of government decision-making,
including organ donation systems, endangered species protection, interstate competition,
overfishing, and free trade. Our tools for analyzing these failures reflect the difficulty people
have trading small losses for large gains, and include the omission bias, status-quo bias, the
fixed-pie approach to negotiations, unwillingness to solve social dilemmas, ignoring secondary
effects, and discounting the future. Collectively, we seek to offer a new approach for
understanding suboptimality in government decision making.
Key words: government decision making, biases, Pareto optimality
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Between 1956 and 1980, as power providers began to turn from coal to cheaper and
cleaner energy sources such as imported oil, employment in German coalmines plummeted. To
restore reliance on a domestic industry and domestic labor, the German government persuaded
the country’s electricity suppliers to cut off imports of oil and instead rely exclusively on
German coal. To prop up the ailing industry, the government subsidized the mining of coal, and
covered these costs with an electricity tax.
By 1986, the mines were so heavily subsidized that German coal sold at three times the
world market rate. By 1992, the average German miner earned the U.S. equivalent of $36,000
per year—yet if the subsidy had been funneled directly to workers, they would have been earning
$92,000. The government could have saved money by switching to a cheaper energy source and
paying the miners $36,000 to do nothing. The coal subsidies not only made poor economic
sense; they were environmentally harmful. The process of burning coal releases carbon into the
atmosphere; because artificially low prices reduced consumers’ incentive to conserve energy,
carbon emissions increased. Carbon emissions contribute to the greenhouse effect and
ultimately, most experts agree, to global warming (Ding and Houghton, 2001).
During the early 1990s, facing pressure from other European countries to create a fairer
energy policy, the German government began to explore means of reducing coal subsidies. If
subsidies were eliminated completely, the government could expect coal production to fall by 75
percent (Radetzki, 1995); only 25 percent of production would compete efficiently with other
energy sources. However, it was estimated that the number of coal workers would plummet
from 250,000 to 31,000.
Once the electricity tax was declared unconstitutional in 1994, the coal subsidy was
supported primarily by the country’s general funds. At this point, Chancellor Helmut Kohl
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proposed funding reductions that would cut mining jobs to 35,000 by the year 2005. In March
1997, the miners’ union, IG Bergbau, called on its members to demonstrate against Kohl's plan.
The union was willing to reduce jobs, but refused to go lower than 45,000.
For the three days that Chancellor Kohl negotiated with the head of the union, up to
15,000 miners protested in Bonn and about twice as many took part in demonstrations in the
Saarland, the heart of the mining region. Miners took part in road blockades, then waited out the
negotiations in a Cologne stadium. In the end, they returned home victorious. The government
agreed to increase its original offer of a total federal mining subsidy through 2005 of 56.6 billion
marks (about $34 billion) by 1.65 billion marks; the state government of North Rhine/Westphalia
pledged an additional 1.75 billion marks (Deutsche Presse-Agentur, 1997). By 2005, annual
subsidies would be fixed at 5.5 billion marks. The miners failed to achieve all of their goals,
however: By 2005, the number of mining jobs was expected to range between 35,000 and
45,000.
At first glance, it appears that each miner benefited from the actions of the group of
miners as a whole. A conservative estimate is that the demonstrations cost each miner one lost
day of wages. Although the miners sought to save about 11 percent of the 85,000 existing jobs,
they only preserved an estimated six percent of the jobs over an eight-year period. Because
some of the miners would have retired or quit working for other reasons during this time, the
savings might have been closer to ten years saved for five percent of the currently employed
miners. Thus, each miner saved about half-a-year of work, or as much as 200 days. Certainly
200 days was worth a day of lost wages to attend the demonstration (Bazerman, Baron, and
Shonk, 2001).
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This analysis considers the impact of the entire group of protestors on each miner. What
effect did each individual miner have on the agreement? Did each miner reap significant
benefits from his own participation in the protests, or would he have been better off staying at
home and letting his comrades demonstrate on his behalf? If only 10,000 miners took part in the
Bonn protest (the actual number was higher), then each protestor contributed one ten-thousandth
of the group’s total gains. Thus, keeping in mind that each miner gained about 200 days of
work, each contributed one ten-thousandth of this amount. Each miner therefore gained two
percent of one day for himself, or about 10 minutes.
How to explain the difference between 200 days versus 10 minutes gained? From the
group’s perspective, each miner's contribution was worthwhile; their combined effort generated
200 days per miner. But each individual only contributed 10 minutes for each miner, including
himself. If a miner were completely self-interested, then his day of protest was a personal loss.
He could have let the 9,999 other miners fight for his 199+ days while sacrificing the ten minutes
he would have earned for himself.
A positive view of the situation is that the miners were cooperating in a social dilemma to
help their group (Dawes, 1980; Messick and Brewer, 1983; Yamagishi, 1986). However, this
view limits the extension of concern to the union, therefore overlooking the fact that the union is
part of a broader society. Lobbying for the continuation of inefficient jobs that harm the
environment is a defection on this broader interest group. While lobbying creates value to the
union, it comes at cost to the union member and to the broader society.
The case of German coal demonstrates that when members of a small special-interest
group choose to look out only for the group, the group may achieve noteworthy short-term gains.
But the larger group – in this case, society as a whole – will generally benefit only when
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individuals choose to cooperate rather than defect in the more global social dilemma. This
phenomenon illuminates a correlation between the narrow self-interest of the individual and the
largest interest of society. All German citizens, and indeed all of humankind, would have been
better off if every miner had chosen “selfishly” not to protest. Unmoved by demonstrations, the
government might have reduced its coalmining subsidies even further, enabling it to spend more
on projects that would benefit society, such as research into cleaner energy sources or investment
in the former East Germany (Bazerman et al., 2001). When we consider the environmental and
economic costs of a continued reliance on coal, it becomes clear that all Germans, and all
citizens of the Earth, are hurt by the small group’s behavior. The scope of the problem extends
beyond Germany: France, Spain, and Japan all subsidize coal in various ways (Light, 1999).
Why do citizens allow their governments to continue to subsidize coalmining despite its
known economic inefficiency and environmental hazards? More broadly, we might ask: Why do
citizens tolerate inefficient government policies? This question has generated significant insights
from economists and political scientists. We hope to bring a psychological perspective to this
question, with the goal of understanding the inefficient behavior of politicians and the acceptance
of these inefficiencies by their constituents.
Most citizens would agree that a fundamental goal of any government should be
enlarging the pie of resources that society has at its disposal. Yet few citizens judge their leaders
according to this key attribute. Instead, voters too often focus on the narrow interests of a
smaller group to which they belong (coalminers, lawyers, stockholders, soccer moms, anti-trade
activists, etc.). But when government decisions are tailored to benefit small groups of
constituents, valuable public resources – from tax dollars to national forests – are often misused,
squandered, and ignored.
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Decision research has identified judgment biases that underlie these failings. The most
common of these cognitive errors concern the difficulties people have making and understanding
tradeoffs. Indeed, we will argue that most failed government decisions can be traced to the
widespread human failure to identify and make wise tradeoffs by accepting small losses in
exchange for larger gains. While most people know tradeoffs to be exchanges that result in both
a gain and a loss, the human mind often overlooks wise tradeoffs – those in which gains
significantly exceed losses for all parties.
Wise tradeoffs can be viewed in terms of a type of policy change that economists call
“Pareto improvements.” A Pareto improvement is a policy shift that helps some people and
harms no one. True Pareto improvements are rare; most changes will require sacrifices from
some members of society. Thus, a more realistic goal for policy-makers are the types of
tradeoffs that economist Joseph Stiglitz calls “near-Pareto improvements” (Stiglitz, 1998).
These are policy changes that will greatly benefit some people while imposing comparatively
trivial losses upon others, such as a special-interest group that may have already manipulated the
political system to its advantage. According to Stiglitz, “if everyone except a narrowly defined
special interest group could be shown to benefit, surely the change should be made” (Stiglitz,
1998).
In this article, we examine a number of failed policy decisions and describe the cognitive
biases that contribute to them. We argue that the pursuit of wise tradeoffs can be expected to
lead to better government policy that expands the amount of societal resources available to us all.
The U.S. Organ Shortage: A Harm of Omission
Which would you prefer:
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a. If you die in an auto accident, your heart will be used to save another person’s life. In
addition, if you are ever in need of a heart transplant, there will be a 90 percent
chance that you will get the heart.
b. If you die in an auto accident, you will be buried with your heart in your body. In
addition, if you are ever in need of a heart transplant, there will be a 45 percent
chance that you will get the heart.
If you are like most people, you chose Option A (Bazerman et al., 2001). Why, then, do
the United States and most other countries maintain an organ donation policy that resembles
Option B? In 2000, more than 60,000 Americans were waiting for an organ transplant (Gibbons,
Meltzer and Duan, 2000). We can expect that at least one third of them will die waiting
(Smirnoff, Arnold, Caplan, Virnig, and Seltzer, 1995).
In the United States, consent for donation must be obtained from the potential donor or a
close family member before an organ is harvested. This system favors deceased donors over still
breathing recipients – despite the fact that the potential future pool of donors and recipients is
nearly the same. After all, few of us can predict whether we will be put in either role someday.
Within the U.S., discussion of organ donation has focused on how to divide a small pie, such as
whether the available organs should be allocated on a regional or national basis. While experts
debate who should receive available organs, little attention is paid to expanding the number of
organs in the system.
In countries such as Belgium, Austria, and Brazil, organ shortages have been alleviated
and in some cases eliminated by a simple switch in policy from “required request” to “presumed
consent.” Under presumed consent, organ donation, rather than burial with all of one’s organs
intact, becomes the default. Instead of handing out donor cards to those who consent to
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donation, the government gives objector cards to those who refuse. Citizens who do not object
are automatically assumed to be potential donors. This simple change in mindset has saved
thousands of lives. In Belgium, donations leaped by 140 percent after a presumed consent law
was introduced. After a similar law was passed in Austria in 1983, the waiting list for organs fell
to a small fraction of its previous size by 1990 (Gnant, Wamser, Goetzinger, Sautner, Steininger,
and Muehlbacher, 1991). Such laws may be particularly effective because they presume the
consent not only of donors, but of their families, who also must act to deny a donation.
Presumed consent laws can be expected to save thousands of American lives each year.
So, why hasn’t the United States enacted these reforms? Our faulty reactions to risk underlie the
most popular objections to presumed consent. Most government policy changes carry some
degree of risk. Ideally, reforms reduce one risk more than they increase another, resulting in
overall benefit for each individual. Yet citizens often resist reforms, believing that they will
suffer from the increased risk.
Suppose you learn that you have a ten percent chance of catching a new strain of flu
virus. The vaccine available for this virus will completely prevent it, but has a five percent
chance of causing symptoms identical to those it is supposed to prevent, and with the same
severity. Would you get the vaccine? Many people would refuse it (Ritov and Baron, 1990).
They would worry more about the risk of harm from action – the five percent risk of an adverse
reaction to the vaccine – than about the risk of harm from inaction, or the ten percent risk of
catching the flu without the vaccine. This is the case despite the fact that the vaccine is a better
bet, reducing the chance of flu symptoms by five percent. Although this example is hypothetical,
it has been observed in people's real-life decisions about vaccination (Ritov and Baron, 1990).
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The irrational preference for harms of omission over harms of action is known as the
omission bias (Ritov and Baron, 1990). When contemplating risky choices, many people follow
the popular rule of thumb, “Do no harm.” This principle embodies the notion that it is wrong to
harm one person to benefit another, even if the benefit outweighs the harm. An admonition
against harmful actions, “Do no harm” is silent on the question of harms of omission.
In most cases, harmful omissions are not as blameworthy as harmful actions because
actions involve greater cost, hence greater intention. Yet people apply the distinction between
intended versus accidental harm even when it is unjustified (Baron, 1996). For example, when
we are evaluating public policy options in which the costs are equal – such as required request
versus presumed consent for organ donation – a bias toward harmful omissions cannot be
excused away due to lack of intended harm. The omission bias is the cognitive error that most
pervades our risk decisions in both the laboratory and the real world (Ritov and Baron, 1999),
and helps to explain why many more people catch the flu than need to each year (Baron, 1998).
Current U.S. law defines organ donation as an act and the withholding of donation as an
omission. Thus, the relative lack of concern about failure to donate can result from the common
intuition that harms arising from omissions are less blameworthy than those caused by acts.
However, this distinction between acts and omissions is arbitrary, created entirely by the law.
Presumed consent reverses this situation: By requiring an act to refuse donation, the do-no-harm
rule works against refusal. In return for the small risk that an individual’s desire not to donate
will be ignored – because of pressure to consent, for example – many lives are saved. When
consent is presumed, potential donors are forced to view refusal as a harmful act.
The omission bias is usually correlated with another bias, the bias toward the status quo
(Samuelson and Zeckhauser, 1988; Ritov and Baron, 1992). Risky decisions, such as changes to
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government policy, usually require action. Thus, when contemplating a change, people are more
likely to be concerned about the risk of change than about the risk of failing to change, and will
be motivated to preserve current systems and beliefs. Occurring independently of the omission
bias (Schweitzer, 1994), the status-quo bias is a general source of opposition to reform even
when people regard the consequences of reform as an improvement (Baron and Jurney, 1993).
The status-quo bias makes us reluctant to change to an organ donation system that presumes
donor consent – although, as discussed, the risks of change are much smaller than the potential
benefits. Those who oppose presumed consent laws and other beneficial changes to government
policy must accept that their irrational approach to risk causes real harm.
Environmental Negotiations and the Fixed-Pie Pitfall
For decades, forester Benjamin Cone, followed by his son, Ben Cone, Jr., managed their
7,200 acres in North Carolina’s Pender County for wildlife by planting fodder, conducting
controlled burns, and keeping timber sales low. The land was a profitable forest where
songbirds, wild turkey, quail and deer thrived. This all changed in 1991, when a wildlife
biologist hired by Cone, Jr., determined that approximately 29 red-cockaded woodpeckers,
members of an endangered species, were living on the property. Acting on the authority of the
1973 Endangered Species Act (ESA), the U.S. Fish and Wildlife Service seized control of the
woodpecker’s habitat – 1,560 acres, or about fifteen percent of Cone’s land (Baden, 1995).
In the aftermath of the seizure, Cone abandoned the moderate, sustainable practices he
learned from his father. Instead of clearcutting fifty acres of land every five to ten years, he
began clearcutting up to five hundred acres of forest each year. Why did Cone turn to such
destructive practices? He explained: “I cannot afford to let those woodpeckers take over the rest
of the property” (Stroup, 1995). By harvesting the oldest trees on the land still within his
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control, Cone prevented the woodpeckers from expanding their habitat. In the process, he also
destroyed vast swaths of his forest, perhaps forever.
The Endangered Species Act (ESA) was designed to protect endangered or threatened
species and restore them to a secure status in the wild. Clearly, Cone's actions were not what the
authors of the ESA had in mind. Indeed, the ESA offers its own solution to dilemmas such as
Cone’s: Habitat Conservation Plans (HCPs). In simple terms, HCPs allow private landowners
"incidental take" of listed species in the course of lawful development activities, provided the
landowner also takes certain steps to preserve the species. HCPs attempt to serve both the
interests of the endangered species and the economic interests of landowners; they have resulted
in many innovative agreements.
The Fish and Wildlife Service repeatedly approached Cone with proposals for HCPs, but
he rejected these offers, choosing to stick with his slash-and-burn strategy. Why? Cone
apparently assumed that if a plan was desirable to environmentalists, it must be bad for his
business. A common negotiation pitfall, the assumption that “anything good for them must be
bad for us” eliminates the search for solutions that could bring benefits to both sides. The
mythical fixed-pie mentality – the belief that the pie of resources is fixed in size – is antithetical
to the cooperative discovery of the types of wise tradeoffs that can improve the overall quality of
negotiated outcomes. Because the ESA appears to pit economic development against
environmental protection, it has often led parties to approach negotiations with a win-lose
attitude such as Cone’s. Negotiators influenced by the fixed-pie bias can be expected to
“reactively devalue” – interpret as negative – any proposal offered by the opponent (Ross and
Stillinger, 1991).
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Agreements in diplomatic situations are frequently blocked by the assumption that the
parties’ interests are diametrically opposed. Creative agreements occur when participants
discover tradeoffs across issues – but individuals will not search for these trades if they assume
the size of the pie is fixed (Neale and Bazerman, 1991). The assumption of a fixed pie is rooted
in social norms that lead us to interpret most competitive situations as win–lose (Bazerman,
2002). Humans tend to generalize from these objective win–lose situations to situations that are
not necessarily win–lose (Bazerman, Magliozzi, and Neale, 1985). Thompson (2001) has found
that even when two sides want the exact same outcome – such as ending the Cold War –
negotiators often settle on a different outcome, or reach an impasse.
The fixed-pie assumption leads parties to assume their interests are incompatible. In fact,
this is rarely the case, as parties will discover once they become willing to accept a small loss in
return for a larger gain. If one side cares about X much more than Y, and the other side cares
about Y more than X, the best outcome is for the first side to get X and the second side to get Y.
For both sides to achieve maximum benefit, each should make a small tradeoff in exchange for
something it values much more. Unfortunately, when inefficient regulations, laws, and policies
are already in place, the omission and status quo biases combine to focus attention on losses
rather than on the benefits of any change. Thus, unwillingness to accept small losses in return
for larger gains prevents negotiators from achieving the best outcome for both sides.
The integrative complexity of your thought processes – the degree to which you consider
a problem from multiple perspectives – may be one factor that predicts whether you will move
beyond the fixed-pie mentality (Chaiken, Gruenfeld, and Judd, in press). At the lowest levels of
integrative complexity, people view negotiations in black and white: They recognize all of the
advantages of the option they favor and none of its drawbacks. At higher levels, they begin to
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identify the pros and cons of various options, and view the decision as a quest for the best overall
balance. Negotiators who have adopted integratively complex thinking are likely to consider the
advantages of the other side’s proposals; when these advantages are substantial, and the
disadvantages to themselves are small, they are likely to accept the proposal. This mindset
reflects the ability to identify and accept wise tradeoffs. In independent work, Gruenfeld and
Tetlock have argued that the wisest government policies often result from “integratively
complex” thinking rather than from the intransigent positions found in most political, economic,
or environmental negotiations (Gruenfeld, 1995; Tetlock, Peterson, and Lerner, 1996).
Flexibility and creativity are the keys to satisfying economic and environmental
agreements. The Unocal Corporation and the Environmental Protection Agency demonstrated
such ingenuity in reducing its costs for complying with the hydrocarbon and nitrogen oxide
standards in the Los Angeles basin (Bazerman and Hoffman, 1999). In 1990, rather than
undertaking costly and inefficient refinery renovations, Unocal launched a program aimed at
clearing the air more cheaply: The company began buying up pre-1971 high-polluting vehicles
from the L.A. area for $600 apiece and scrapping them. Estimating the number of miles the
vehicle would have been driven had it not been scrapped, Unocal determined that it had
prevented nearly 13 million pounds of air pollution per year from the L.A. basin. The same
reductions would have cost ten times as much and taken ten times as long had they been made at
the company's L.A. refinery (Stegemeier, 1995). A creative perspective could lead parties away
from the fixed-pie mindset, toward a rational search for outcomes that maximize both
environmental and economic gains.
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Dysfunctional Competition in the Sports Arena
In recent decades, state and local officials across America have spent billions of tax
dollars on new sports facilities in the hope of luring or retaining a professional sports franchise in
their region. Team owners have fueled this building boom, pitting city against city in the
scramble for new sports venues with profit-generating restaurants, luxury suites, and seat
licenses. At least thirteen communities now provide or have proposed providing at least $250
million in subsidies for professional sports franchises: Baltimore (and Maryland), Cincinnati,
Cleveland, Denver, Detroit (and Michigan), Hartford, Milwaukee, Nashville, Pittsburgh, San
Diego, Seattle, Scottsdale, and St. Louis. These giveaways add up to one of the most
extravagant corporate welfare systems in the United States today.
Team owners faced with losses or low profits have a strong incentive to demand public
assistance to build or improve their stadiums. New or renovated stadiums generally increase the
profits of team owners, at least temporarily (Quirk and Fort, 1997); the team’s resale value soars
when it moves into a new home. Because team owners band together in leagues to limit the
number of teams available, more cities and states desire major league franchises than there are
franchises to go around. Although teams move infrequently, the excess demand provides team
owners with strong bargaining power. Their threats of relocation drive cities into expensive
bidding wars that local politicians rarely can resist.
This is true despite the fact that, according to a Media Research and Communications
poll, 80 percent of Americans oppose having their tax dollars spent on sports stadiums and
arenas (Rosentraub, 1997). In some cases, politicians have blocked or ignored referendum
elections held to resolve these matters. Voters in Milwaukee overwhelmingly rejected a sports
lottery to fund a new stadium, yet the Wisconsin state legislature went ahead and granted $160
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million in subsidies for the facility. And it's not just locals who must foot the bill: A change to
the Tax Reform Act of 1986 facilitated the use of federally tax-exempt bonds in arena
construction, diffusing the costs of building a stadium throughout the country.
When a team threatens to leave a city, some residents will pressure their local
government to enter a bidding war with other communities. Public officials must ask themselves
whether the public benefits of retaining the team justify the associated public costs. One study
found that of fifteen new or renovated stadiums, only the Dodger stadium in Los Angeles
generated enough tax revenue to pay for the original public assistance plus interest cost (Baim,
1990). New jobs generated by new sports facilities tend to be low-wage (janitors, concession
workers, and parking lot attendants); meanwhile, the high salaries paid to players and managers
typically flow out of the local economy (Rosentraub, 1997). As for non-monetary “public
goods” such as civic pride, these should be factored alongside other intangibles such as traffic
congestion and air pollution (Hartley and Hooper, 1992). At the very least, taxpayer financing of
sports stadiums must be considered in relation to other potential civic investments. Because
public resources are finite, stadium deals reduce the amount of funding available for far more
critical community needs, such as education or community policing. Typically, the community
that acquires the team savors a momentary victory, and the politicians behind the deal may
secure their re-election, but all parties will generally lose far more than they gain.
Bad stadium deals are the product of dysfunctional competition between governments.
Private-sector competition generally improves the local or national economy, creating better and
more affordable goods and services. Competition can become dysfunctional, however, when
organizations invest resources simply to achieve the satisfaction of winning or to hurt a
competitor. Government competition can be far more destructive than private-sector competition
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because, unlike corporations, governments must provide public services such as highways to
libraries. When competitive practices backfire, citizens suffer the consequences in the form of
service cutbacks or tax increases. In private industry, competition fuels creativity and
innovation; between governments, competition fuels the flow of taxpayer funds to selected
private interests. Valuable, finite resources such as tax dollars and government land are
squandered in destructive competition between cities, states and regions.
Dysfunctional competition between communities and regions for professional sports
teams, manufacturing plants, and corporate headquarters can be explained by a psychological
mechanism known as the winner’s curse. When a bidder wins an auction in which parties have
made varying estimates of the prize’s worth, the highest bidder is likely to have overvalued the
prize commodity in comparison to other bidders (Capen, Clapp, and Campbell, 1971; Bazerman
and Samuelson, 1983; Kagel and Levin, 1986). The winning bidder has failed to draw a key
inference: The party who most overestimates the value of the prize often makes the winning bid.
Similarly, when city leaders estimate the value of a baseball team, the “winning” city will be the
one with the most overoptimistic estimate of the team’s value. If a bidder assumes that her
organization, city, or state will win an auction, she should recognize that she may have
overestimated the value of the commodity in comparison to other bidders. The other bidders
may not value the prize for reasons the winning bidder has not considered.
The creation of excess capacity in the context of sports arenas is consistent with Camerer
and Lovallo’s (1999) observation that overconfidence may lead too many firms to enter a market
and with Zajac and Bazerman’s (1991) discussion of cognitive blind spots in market-entry
decisions. Even in domains where competition is generally beneficial, an excess of entrants can
result from cognitive biases. In the case of competition for sports teams, the fact that market
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entrance is subsidized by taxpayers exacerbates the harms created by excess capacity. It would
be best if everyone supported some sort of regulation preventing such practices – even an
agreement among the cities themselves. But pushing such regulation through would itself
require time and money, losses that might loom larger than the gain. In fact, the long-term gains
of regulation or mutual agreement would far outweigh short-term losses.
Efforts to curb the stadium-building frenzy have failed at the national level, leaving cities
to fend off owner threats one by one. In San Antonio, thanks to a Texas law that gives school
districts a voice in proposed tax deals affecting land values, a local school board was able to
block the Spurs’ bid for a $156 million arena. When the board of the North East School District
voted against the deal, the Spurs were forced to abide by their decision. “If you have to choose
between the National Basketball Association and children, it’s no choice,” explained school
board president Bruce Bennett (Johnson, 1999). But most politicians, lacking both regulatory
support and a clear understanding of the pitfalls ahead, are only too happy to hand over the keys
to the city treasury.
The Global Fishing Crisis and Future Generations
Fishing has become an increasingly dangerous profession in recent years. Vietnamese
have shot at Thai fishers, the Malaysian navy fired on a Thai trawler, Russians shot at Japanese
fishers, Iceland used force to exclude Danish trawlers from its waters, and a Portuguese naval
boat fired on a Spanish fishing boat, to name just a few cases (Zimmermann, 1996). Such
violence is part of the mounting economic and social disruption that has occurred as the world
overharvests the oceans (McGinn, 1998). The result of too many well-equipped boats chasing
after too few fish, overharvesting has become a global epidemic. Once-plentiful species have
disappeared, forcing consumers to adapt to low-quality fish. Eleven of the world’s 15 major
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fishing regions and nearly 70 percent of the most sought-after species of fish are in decline. Two
hundred million jobs, a world resource, and peace between nations are all at risk.
The pattern of devastation has been quite predictable. Improved technology and
increased funding allow capacity to increase until fishers are catching unsustainable amounts of
fish. When scientists note that populations are threatened, fishers dispute the evidence. In good
years, fishers expand their capacity; in bad years, they lobby for, and receive, government
support. As fish populations are destroyed, fishers move on to less attractive species and other
locations. Half of the world’s fishing vessels could be taken out of commission without any
reduction in potential harvest (McGinn, 1998). Too many boats are chasing too few fish.
Government subsidies – in the form of tax incentives, low-interest loans, and direct
subsidies – are arguably the leading threat to the world’s fish populations (Porter, 1996). Such
aid encourages fishers to either remain in or enter an overextended fishery. Currently, fishers
operate at huge losses; for each U.S. dollar earned worldwide from fishing in the late 1980s,
governments, taxpayers, and fishers spent $1.77. By 1989, direct and indirect subsidies totaled
$54 billion against estimated revenues of $70 billion (Zimmerman, 1996). These handouts
distort markets, increase overcapacity, and speed up the destruction of the fishing basin.
Common sense tells us that if fishers would harvest fewer fish, the fish remaining would
have the chance to regenerate their species, providing sustainable catch for these and future
fishers. Why do humans instead choose to behave so self-destructively? Flawed human
decision-making lies at the root of the world fishery crisis.
The global fishing crisis is a classic social dilemma. Each fisher has an incentive to
harvest as much possible to maximize profits. Of course, when all fishers in the fishing basin act
in this way, they harm themselves by depleting the fish supply. Similarly, each nation can justify
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subsidizing its fishing fleet to remain competitive in the marketplace, but when all nations
behave competitively, they all suffer. While regulations and treaties are logical solutions to such
social dilemmas, special-interest groups have proven very effective at blocking them.
A special aspect of the fishing dilemma is that society should be motivated to preserve
fish populations beyond our own lives, so that future generations will benefit from thriving
oceans and an adequate supply of nutritious fish. Fishers who defect in the present social
dilemma are trading immediate benefits for long-term costs for themselves and others, including
those who are not yet alive (Wade-Benzoni, 1996; Wade-Benzoni, Hoffman, Thompson, Moore,
Gillespie, and Bazerman, in press). For this reason, the fishing problem can be viewed as a
unique type of social dilemma: an intergenerational dilemma (Wade-Benzoni, 1996), or a social
trap (Messick and McClelland, 1983).
Why do fishers resist coordinated efforts to allow the oceans to recover? Because
decision makers tend to deny the long-term effects of their behavior. When they focus on
present concerns, people are likely to discount the future, even if they would personally benefit
from taking future interests into account. The tendency to overweight the present at the expense
of the future pervades human decisions. Homeowners often fail to adequately insulate their
homes, even when they would save a great deal of money in the long run and help conserve
natural resources (Gately, 1980; Ruderman, Levine and McMahon, 1986). According to Mannix
and Loewenstein (1992), high discount rates help to explain why most businesses fail to invest in
the long term, pay little attention to customer loyalty, and dedicate few funds for research and
development. In the same manner, fishers concentrate on snaring as many fish as they can now –
a relatively small amount compared to the much larger future catch they are sacrificing.
Overweighting the present can be viewed not only as foolish, but immoral, robbing opportunities
21
and resources from future generations. Certainly we have a moral obligation to remember future
inhabitants of the earth when making decisions that will impact them.
Much of our tendency to overly discount the future can be attributed to wishful thinking
in an uncertain environment. Psychologists have found that people view themselves, the world,
and the future much more positively than reality can sustain (Allison, Messick, and Goethals,
1989; Kramer, 1994; Taylor, 1989). In one study, most subjects claimed they had a better-thanaverage chance of living past 80 (Weinstein, 1980). Similarly, subjects who bet on sporting
events tend to bet on the team they hope will win, even if the odds are stacked against them
(Babad and Katz, 1991). In such cases, people expect the future to better and brighter than they
should reasonably assume it will be (Kramer, 1994; Tyler and Hastie, 1991). These positive
illusions enhance self-esteem, increase personal satisfaction, and assist individuals in persisting
at difficult tasks. But wishful thinking can also lead decision makers to deny that a problem
exists, often until it is too late.
Because estimates about the future will always contain some degree of uncertainty,
intergenerational dilemmas leave room for decision makers to indulge in wishful thinking.
Insisting that scientists who predict species depletion are “doomsayers” or flat-out wrong, fishers
cling to the positive illusion that fish supplies will recover with no adjustment to their own
behavior. They ignore the fact that small changes in their fishing practices could eliminate the
eventual need for massive upheaval, such as the loss of their jobs. Unfortunately, reality is too
often deaf to their wishes (Baron, 1998).
Because of the insidious nature of psychological biases, we can hardly expect fishers to
solve this intergenerational dilemma on their own. Governments, currently major contributors to
the crisis, need to become part of the solution. The most obvious recommendation may be the
22
creation of an international agreement to bar countries from subsidizing their fishing fleets.
Indeed, it would make more sense to tax the fishing industry for the resources they are removing
from common ownership than to continue to subsidize them for doing so. Only through joint
agreement will parties be able to reverse the current crisis and improve the long-term welfare of
all nations. Common-sense restraints should be placed on the lobbying activities and campaign
contributions of special-interest groups, which are bound to fight such an agreement.
The other essential component of a long-term solution to overharvesting is restricting
access to fish harvests. Once an appropriate harvesting level is identified for a fish species or
fishing basin, strategies could be developed to encourage fishers to fish up to, but not beyond, a
maximum sustainable yield – an equilibrium between a fish population’s ability to reproduce and
the value of future harvests. Harvests could be reduced in one of two ways. First, regulations
and taxation could be imposed on fishers to keep the ocean from being depleted; the political left
typically prefers these measures. Alternatively, property rights could be granted to the ocean,
giving owners a greater incentive to manage their portion of the scarce resource; the political
right typically prefers this approach. Note, though, that because property rights must be
enforced, governments will be involved either way.
Early community-based management projects have been highly successful. When fishers
in Alanya, Turkey faced a declining harvest, their local fishing cooperative began to rotate
designated fishing sites among fishers, who enforced the system through informal and formal
penalties (Ostrom, 1990). As a consequence, the best locations are not overharvested, and fish
supplies and profits have recovered. In 1991, the Filipino government devolved management of
near-shore fisheries to municipalities and local fishing communities. This change has allowed
23
fishing cooperatives to provide its members with supplemental income projects and with credit,
lending, and marketing services.
Any solution to the fishing problem requires resolution of a social dilemma. Parties must
become willing to invest time and effort on behalf of a regulatory or privatization scheme that
can be expected to benefit the vast majority of people over time. Of course, short-term thinking
prevents most parties from even considering such advocacy. We hope early, small-scale efforts
will inspire governments and fishers elsewhere to cooperate on long-term solutions to the crisis.
Free Trade and the Nationalist Impulse
In December 1999, the World Trade Organization (WTO) held its annual meeting in
Seattle with its upcoming series of “Millenial Round” talks high on the agenda. Formerly a
sedate, low-key affair, the 1999 meeting received front-page press across the globe, thanks to the
thousands who turned out to voice their opposition to free trade. The two-day demonstrations
included a 25,000-strong march, a traffic-blocking sit-in, and the vandalism of businesses in
downtown Seattle by self-described “anarchists.” With visiting dignitaries trapped in their hotel
rooms, the WTO meetings came to a temporary standstill. When the delegates were finally able
to congregate, their frustration led to dissension and inaction; they returned home having
achieved none of their goals (Lacayo, 1999).
A patchwork of special-interest groups known as non-governmental organizations
(NGOs), the protestors included environmentalists who believe the elimination of trade barriers
will destroy nature, nationalists who fear the homogenization of world culture, and labor union
activists who think open trade eliminates jobs in developed countries and exploits workers in
emerging nations. The NGOs succeeded in promoting the previously murky issue of free trade
into a hot-button issue. Most of the activists are well meaning, and their causes certainly deserve
24
our concern and attention. But by focusing on blocking all new trade agreements, rather than
focusing specifically on changing worldwide environmental and labor standards, they destroyed
larger opportunities for gain. NGOs typically disregard what is arguably the most important
benefit of open trade: its proven ability, in combination with other factors, to alleviate poverty
worldwide (Bannister and Thugge, 2001).
While loosened trade restrictions will cause short-term upheaval, including the loss of
some jobs and possible environmental costs, free trade can be expected to bring about greater
long-term benefits to all. The most important of these include the creation of productive jobs for
workers around the world and the eventual promise of a cleaner environment through improved
technology. Historical trends support the view that free trade is directly related to economic
prosperity. The Smoot-Hawley Tariff Act of 1930, which inflated U.S. tariffs up to 59 percent of
imported goods, has been blamed for contributing to the Great Depression. In Europe,
protectionist policies during this era are believed to have turned a worldwide recession into an
economic meltdown and to have played a part in the outbreak of World War II. Conversely,
loosened trade restrictions in the second half of the century are credited with the phenomenal
postwar recoveries of Germany and Japan and, according to the WTO, with lifting an estimated
three billion people out of poverty. In recent decades, the standard of living in Asian countries
such as South Korea, Singapore, and Malaysia improved dramatically following their entrance
into the world marketplace. One study determined that open economies have grown an average
of 2.5 percent faster than closed economies, with even more dramatic discrepancies among
developing countries (Sachs and Warner, 1995).
The anti-trade goals of protecting U.S. jobs and creating new environmental restrictions
typically clash with the desire of poor countries to become active participants in the world
25
market. Poor nations have begun to demand a voice in global trade negotiations, but they will
not achieve their goals without the help of the wealthy. As we have argued, some policy changes
benefit everyone, while others will hurt some while helping others. Such is the case with the
easing of trade barriers, which can be expected to cause short-term harms to rich nations and
untold benefits for the poor. Effective governments will recognize the wisdom of these “nearPareto improvements.” When solutions to these complex problems are efficient, the loss to the
rich will be much smaller than the gain to the poor; small amounts of money and other goods
have greater value to those who have so little. Of course, the losers will protest such changes
loudly, and politicians will be reluctant to impose losses on vocal constituents. Although
accepting losses is never easy, maintaining artificial trade barriers would impose greater losses
upon us all.
Even when they understand that the benefits of increased trade outweigh its harms, many
citizens of wealthy nations continue to oppose new agreements that would relax trade barriers,
such as the North American Free Trade Agreement (NAFTA). As we discussed in the context of
organ donation, the omission bias causes people to worry more about harms caused by action
than about those caused by inaction (Baron, 1996). In an experiment designed to assess people’s
opinions about free trade, most subjects opposed to NAFTA said that trade agreements should
not result in the loss of jobs, even if the agreements prevent many more job losses then they
cause. When asked if they would approve an agreement that would “cause 10,000 job losses in
the U.S. but prevent 11,000 job losses in the U.S. over the same time period,” NAFTA
opponents, more than others, tended to oppose the agreement (Baron, 1996). This opposition
illustrates the irrational desire to avoid harmful actions even when they produce overall gains.
26
The omission bias is particularly common when inaction harms people of other nations,
whom it is easy to consider outside our zone of responsibility. This introduces a second bias into
the equation: nationalism. In psychological terms, nationalism can be viewed as a type of
parochialism, or narrow loyalty to one's group. Because it reflects a preference for one group
over others, nationalism can be considered a kind of prejudice. Now that racism and sexism are
widely condemned, nationalism may be the last type of prejudice to be widely tolerated. This
bias often takes subtle forms. A later question in the study described above asked subjects
whether they would favor a trade agreement that would cause job gains in Mexico and job losses
in the United States, such that the gains in Mexico would be 10 times the losses in the United
States. Three-quarters of the American student subjects did not support such an agreement
(Baron, 1996); they were willing to sacrifice ten Mexican jobs for every American job.
Baron (1996) also asked subjects if they would favor the hypothetical agreement if they
were citizens of a third country. Three-quarters of them said they would support it. They were
also asked whether they would support an agreement involving Pennsylvania (where the study
was done) and another U.S. state, in which Pennsylvanians would lose a certain amount of jobs
but those in the other state would gain ten times as many. Most supported this agreement. “This
agreement would hurt Pennsylvania, but it would greatly help the economy of the whole country,
so I would support it,” said one. “I realize the implications of this last question, and it makes a
valid point: If different countries could work together and look out for the benefits of the whole
world, as the states of America are united, then everyone would benefit.”
This is our point exactly. Most of us consider the effects of our behavior, including the
effects of political action such as voting, on others. Why should this concern for others stop at
the border? It is just as arbitrary to limit our concern to co-nationals as it is to limit it to people
27
of the same race or sex. If voters considered the best interests of humanity when they voted, and
if they were willing to tolerate small losses for some in return for large gains for others, all
would benefit. In the long run, we will achieve greater prosperity worldwide by taking
opportunities to expand trade. To enlarge the pie of resources for all, citizens of prosperous
countries must become willing to accept small and temporary costs at home.
Discussion
The collective outcome of rational individual behaviors can lead to suboptimal communal
outcomes (Schelling, 1978). Political scientists have explained such suboptimality as the natural
evolution of a web of political action (Brennan and Buchanan, 1985). We accept these analyses,
but also argue that another means of understanding suboptimal government decisions should be
explored. When applied to the behaviors of politicians and citizens, the findings of decisionmaking research yield new explanations for failed government policy. This research also
suggests possibilities for improving government decisions.
In this paper, we have highlighted a variety of psychological mechanisms to explain a
number of suboptimal government policies. While featuring a variety of specific policy
domains, our main goal is to begin to construct a roadmap of psychological tools that will be
useful across policy arenas. Below, we quickly review some the psychological mechanism that
can serve as tools to diagnose flawed government decision-making. What we present below is
not a comprehensive list of known biases, but a selection of those that best account for current
practices in social decision-making. They all arise from the widespread human failure to make
wise tradeoffs by accepting small losses in exchange for larger gains.
Omission bias. As citizens strive to lead just, moral lives, the admonition “Do no harm”
is often – but not always – a useful guideline. In our discussions of organ donation and free
28
trade, we described opportunities for great gains that would require society to inflict some small,
temporary harm. People can be predicted to oppose such programs, despite the fact that failure
to act can be regarded as a harm (Ritov and Baron, 1990, 1999; Spranca, Minsk, and Baron,
1991).
Status-quo bias. People are often unwilling to give up what they already have – their
“endowment” – for a better set of options. In such instances, losses loom larger than expected
gains (Thaler, 1980; Samuelson and Zeckhauser, 1988). When a person receives an offer for a
new job that is much better than her old job on some dimensions and marginally worse on others,
she can be expected to turn down the offer (Samuelson and Zeckhauser, 1988). Most changes to
government policy will require certain losses in exchange for greater gain. For many decision
makers, losses will be more salient than any gain. The status quo bias is an irrational barrier to
legislative change.
The fixed-pie approach to negotiations. People tend to over-simplify negotiations,
viewing them as “fixed pies” (Neale and Bazerman, 1991). In other words, parties tend to
assume they are fighting over a limited amount of resources whose size cannot be increased.
Environmentalists and industry leaders frequently adopt such polarized view in disputes over
land and conservation. In fact, most negotiation situations are made up of a number of issues,
each of which has multiple dimensions. When parties have differing assessments about the
importance of these various dimensions, they can make tradeoffs to improve the overall quality
of the agreement. Because our intuition leads us to focus on losses rather than gains, we tend to
ignore such opportunities (Bazerman, Curhan, Moore, and Valley, 2000).
Unwillingness to help solve social dilemmas. A central role of good government is to
resolve conflicts in which individuals must decide whether to pursue the short-term goals of a
29
small group to which they belong or the broader interest of society. As evident in the case of the
German coal miners, when individuals fight on behalf of a narrowly defined group, society often
suffers (Bazerman et al., 2001). Solutions to such social dilemmas exist, but coordinated action
is required. Inevitably, a new social dilemma arises: It is in each citizen's narrow self-interest to
let others do the work of persuading public officials to take action. However, such small
sacrifices can bring about great benefits.
Ignoring secondary effects. In the United States, our current election system gives too
much power to wealthy special-interest groups, thereby decreases the amount of resources
available to society as a whole. In exchange for small losses to those who have already benefited
unfairly from the current system, cooperation on campaign-finance reform would benefit us all in
the long term. Nevertheless, the public and the media consistently allow Congress to quietly
defeat or weaken campaign-finance reform legislation year after year. Why does the public pay
scant attention to this crucial issue? We argue that most people do not think about the secondary
effects of boring issues on vivid issues such as education or welfare reform, even when these
secondary effects have enormous collective importance (Bazerman et al., 2001).
Discounting the future. Most people agree with the assertion that “we should leave the
earth in as good a condition as we received it.” But, as shown by the worldwide failure to
address the current fishing crisis, government policies often belie this view. Human beings have
a general tendency to discount the future pain that our actions cause. Specifically, we
overweight the present at the expense of the future, a phenomenon that only increases in severity
when the future includes future generations (Wade-Benzoni, 1996). Global warming, the
destruction of the rainforests, and the unsustainable use of water debt all reflect the tendency to
discount the long-term effects of our decisions. We need to learn to recognize that by absorbing
30
small losses in the present, we may be able to protect future generations from the negative effects
of our short-sighted policies.
Diplomatic training includes significant doses of lessons on the benefits of democracy,
the role of advocacy groups, the political process, and the logic of key actors in the system.
Most citizens and students of diplomacy, however, do not have access to the type of the insights
from decision-making research that are highlighted in this paper. Whenever citizens and
politicians fall victim to the decision mistakes discussed, resources that might be available for
healthcare, education, defense, tax reduction – or whatever issue concerns us most – are
squandered. Thinking more rationally about politics is a worthwhile goal for everyone. We
hope the ideas in this paper open up new directions for research on government decision making.
31
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