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How to regulate the psychology of regulators

My latest column in the Wall Street Journal is
about the psychology of bureaucracy. just as we need to understand
the human proclivities that give rise to booms and busts in
markets, so we need to understand the human proclivities that
motivate officials. Here are five identified by Slavisa Tasic,
starting with `illusions of competence’:

Psychologists have shown that we
systematically overestimate how much we understand about the causes
and mechanisms of things we half understand. The Swedish health
economist Hans Rosling once gave students a list of five pairs of
countries and asked which nation in each pair had the higher
infant-mortality rate. The students got 1.8 right out of 5. Mr.
Rosling noted that if he gave the test to chimpanzees they would
get 2.5 right. So his students’ problem was not ignorance, but that
they knew with confidence things that were false.

The issue of action bias is better
known in England as the “dangerous dogs act,” after a previous
government, confronted with a couple of cases in which dogs injured
or killed people, felt the need to bring in a major piece of clumsy
and bureaucratic legislation that worked poorly. Undoubtedly the
rash of legislation following the current financial crisis will
include some equivalents of dangerous dogs acts. It takes unusual
courage for a regulator to stand up and say “something
must not be done,” lest “something” makes the problem

Motivated reasoning means that we
tend to believe what it is convenient for us to believe. If you run
an organization called, say, the Asteroid Retargeting Group for
Humanity (ARGH) and you are worried about potential cuts to your
budget, we should not be surprised to find you overreacting to
every space rock that passes by. Regulators rarely argue for

The focusing illusion partly stems
from the fact that people tend to see the benefits of a policy but
not the hidden costs. As French theorist Frédéric Bastiat argued,
it’s a fallacy to think that breaking a window creates work,
because while the glazier’s gain of work is visible, the tailor’s
loss of work caused by the window-owner’s loss of money-and
consequent decision to delay purchase of a coat-is not. Recent
history is full of government interventions with this

“Affect heuristic'” is a fancy name
for a pretty obvious concept, namely that we discount the drawbacks
of things we are emotionally in favor of. For example, the
Deepwater Horizon oil spill certainly killed about 1,300 birds,
maybe a few more. Wind turbines in America kill between 75,000 and
275,000 birds every year, generally of rarer species, such as
eagles. Yet wind companies receive neither the enforcement, nor the
opprobrium, that oil companies do.


By Matt Ridley | Tagged:  wall-street-journal