Capitalism and Society Volume 2 Issue 1 2007 Article 3 Behavioral Decision Research Legislation and Society Three Cases Max H Bazerman Harvard Business School Copyright c 2007 The Berkeley Electronic Press All rights reserved Behavioral Decision Research Legislation and Society Three Cases Max H Bazerman Abstract Economists have a great deal of influence on the legislative and judicial branches of government This is good But the dominance of economics in Washington has led to the undervaluation of other social sciences This paper explores the limitations of a traditional economics approach the benefits of the consideration of behavioral decision research and behavioral economics and an analysis of how this pattern affected decision making in three distinct episodes Bazerman Behavioral Decision Research Legislation and Society Throughout my career I have been an active consumer of the news starting my day by reading the New York Times reasonably thoroughly as least for a business school professor Often I have been appalled by the nature of the decision making processes used in important policy domains My critical stance has continued as the U S government has used confused decision making to launch a disastrous war in Iraq missed clear signals of the need to defend our nation against extremists far in advance of the 9 11 tragedy Bazerman and Watkins 2004 and acted as the main barrier to the global response to climate change which may well prove to be the greatest disaster of the Bush administration Bazerman 2006 Aside from my daily consumption and criticism of public policy news as a behavioral decision researcher I have played a small part in three very different episodes of Washington policy making since 2000 These experiences allow me to highlight a number of generalizable deficiencies in the policy making arena from the lens of a behavioral decision researcher For readers who do not know me I study imperfections in how people make decisions After getting my doctorate I spent the last 20 years of the past millennium running controlled experiments to better understand how human judgment departs from rationality in systematic and predictable ways Behavioral decision research has its roots in the concept of bounded rationality offered by Herbert Simon in the 1950s March and Simon 1958 Simon 1957 The field came to life as an intense area of inquiry with the groundbreaking research of Daniel Kahneman and Amos Tversky in the 1970s Kahneman and Tversky 1979 Tversky and Kahneman 1974 Both Simon and Kahneman eventually won the Nobel Prize in Economics for their work though neither of them are economists Tversky passed away too early to receive the prize with Kahneman Since the 1970s behavioral decision research has boomed cutting across psychology economics law medicine marketing negotiations and many other areas of application In the stories that follow I will describe relevant aspects of this field Prior to 2000 I had little direct exposure to Washington D C other than running a souvenir stand at the Redskins stadium while a college student at the University of Pennsylvania in the mid 70s I attended a few conferences in D C worked a bit with a D C based not for profit and liked eating Ethiopian food in the Adams Morgan section of the city but I had no professional interaction with the federal government Since 2000 I have visited Washington fairly regularly and the three primary reasons for my travels provide the stories described in this paper In contrast to using controlled laboratory experiments which offer a clear method for inferring cause effect relationships I will be using data from three personal stories to provide opinion and analysis I will tell the three stories which Published by The Berkeley Electronic Press 2007 1 Capitalism and Society Vol 2 2007 Iss 1 Art 3 come from very different political institutions in chronological order The first story deals with a policy making process at the Securities and Exchange Commission SEC The second deals with an administrative legal proceeding regarding anti trust enforcement by the Federal Trade Commission FTC with precedent setting implications The last story deals with the Department of Justice s DOJ civil lawsuit against the tobacco industry arguably the largest civil litigation in history In each story I will highlight the insights that I see behavioral decision research providing to an important policy context While I clearly see an important role for economic logic in the policy making process I criticize economic theory when used at the exclusion of other social science knowledge Indeed my central goal is to provide evidence for the need for social sciences other than economics to be brought to the legal and policy making domains Later in the article I will discuss the role of different theories from social science in the policy formulation process The Impossibility of Auditor Independence In 1997 I published an article with Kimberly Morgan and George Loewenstein entitled The Impossibility of Auditor Independence Bazerman et al 1997 As far as we knew through the early part of 2000 no human being had read our published paper No one requested a reprint at least not from me The paper was about auditing after all and in 1997 few people were interested in that topic It turned out however that someone did read the published paper Lynn Turner then chief accountant at the SEC As a result in 2000 I learned that the SEC was interested in hearing about our work Loewenstein and I headed off to Washington and each provided 10 minutes of insights from our 1997 paper to the SEC which was holding hearings on auditor independence Our argument was very simple The primary reason for auditing to exist as an institution is to provide stakeholders with an independent assessment of the financial condition of firms To understand the concept of auditor independence consider former Chief Justice Warren Burger s words from a unanimous U S Supreme Court ruling in the case of United States v Arthur Young Co The independent auditor assumes a public responsibility transcending any employment relationship with the client The independent public accountant performing this special function owes ultimate allegiance to the corporation s creditors and stockholders as well as to the investing public This public watchdog function demands that the accountant http www bepress com cas vol2 iss1 art3 2 Bazerman Behavioral Decision Research Legislation and Society
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