Behavioral Economics and Benefit-Cost Analysis
Neoclassical economic theory assumes that individuals act rationally and are primarily motivated by self-interest, making decisions that maximize their own welfare. These assumptions have been increasingly questioned by behavioral economists, who explore the psychological aspects of decisionmaking. While this research has many implications for program design, we focus on its implications for analysis – for valuing benefits and costs in economic terms. We introduce related work then explore three topics: (1) valuing nonmarket benefits; (2) discounting future impacts; and (3) incorporating social preferences. We conclude by considering the implications for the overall benefit-cost analysis framework.
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