Tuesday, January 7, 2014

Rational Ignorance: Cause, Consequence and Cure

Over on the facebook page for tax choice...Scott Thurston wrote...
How? If you give more responsibility to citizens they are more likely to research it? How does it naturally follow, and how is rational ignorance the logical consequence of the current system?
The current system takes the power of the purse away from the citizens and gives it to congress.  This means that taxpayers don't have the option to shop for themselves in the public sector.  So even if you take the time to research and study how effective the EPA is...no matter what you learn...you're not going to be able to change the percentage of your money that goes to the EPA.  Any effort to do so will greatly exceed the potential benefit.  This is why it's logical not to make the effort to learn about the EPA.

The consequence of rational ignorance is that benefits are concentrated and costs are dispersed.  The EPA will cater to special interests and the costs will be dispersed among the rationally ignorant taxpayers.

The cure is simply to implement tax choice.  Taxpayers don't want their hard-earned money to be wasted...so once they can shop for themselves in the public sector they'll make the effort to ensure that they get the most bang for their buck.  This requires due diligence.

Here are some passages on the topic...
It is often worthwhile for an individual beneficiary to find out the value of promised benefits, as these tend to be concentrated, and hence large for each beneficiary. But it is often not worthwhile for the individual voter to put any effort into calculating the costs of the financing of benefits, as these costs are highly dispersed, and hence small for the individual voter in each case. Indeed, it is likely that people are much less informed about such abstract macroeconomic matters as the 'excess burden' of taxes, than about their own, much more concrete needs for economic security in the future, even though the latter type of misinformation
is ofted used as an argument for compulsory social security (the 'paternalistic' argument). - Assar Lindbeck, Overshooting, Reform and Retreat of the Welfare State
People employ what economists call rational ignorance. That is, we all spend our time learning about things we can actually do something about, not political issues that we can’t really affect. That’s why more than half of us can’t name either of our U.S. senators. And why most of us have no clue about how much of the federal budget goes to Medicare, foreign aid, or any other program. Even if a citizen studies the issues and decides to vote accordingly, he has a one in a hundred million chance of influencing the outcome of the presidential election, after which, if his candidate is successful, he faces a Congress with different ideas, and in any case, it turns out the candidate was dissembling in the first place. Instinctively realizing all this, most voters don’t spend much time studying public policy. - David Boaz, What Big Government Is All About
Imagine buying cars the way we buy governments. Ten thousand people would get together and agree to vote, each for the car he preferred. Whichever car won, each of the ten thousand would have to buy it. It would not pay any of us to make any serious effort to find out which car was best; whatever I decide, my car is being picked for me by the other members of the group. Under such institutions, the quality of cars would quickly decline. - David Friedman, The Machinery of Freedom
Not only does a consumer have better information than a voter, it is of more use to him. If I investigate alternative brands of cars or protection, decide which is best for me, and buy it, I get it. If I investigate alternative politicians and vote accordingly, I get what the majority votes for. The chance that my vote will be the deciding factor is negligible. - David Friedman, The Machinery of Freedom
Externalities play an enormously greater role in institutions controlled by voting. If I invest time and energy in discovering which candidate will make the best President, the benefit of that investment, if any, is spread evenly among 200 million people. That is an externality of 99.9999995 percent. Unless it is obvious how I should vote, it is not worth the time and trouble to vote 'intelligently', except on issues where I get a disproportionately large fraction of the benefit. Situations, in other words, where I am part of a special interest. - David Friedman, The Machinery of Freedom
Before going to UCLA to do graduate work, I had been reading books and articles by Gordon Tullock, James Buchanan, and Anthony Downs. They had shown that the probability of affecting the outcome of a typical election was so close to zero that the expected value of voting was substantially less than its cost. Therefore, they concluded, there was no point in voting, no matter which way you would vote, even in a close election. - David Henderson, Voting, Public Goods, and Free Riders
Imperfect models of the complex environment that the politician (and constituent) is attempting to order, institutional inability to get credible commitment between principal and agent (voter and legislator, legislator and policy implementer), the high cost of information, and the negligible payoff to the individual constituent of acquiring information all conspire to make political markets inherently imperfect. - Douglass North, Understanding the Process of Economic Change
In a statewide election, the probability that a voter will be killed in an auto accident on the way to the polls is quite likely larger than the probablility that his vote will affect the outcome of the election. - Dwight R. Lee, Overcoming Taxpayer Resistance by Taxing Choice and Earmarking Revenues
In the real world, demand revelation meets with the same problem that has long confounded students of democracy. As Anthony Downs and others have shown, rational voters have little or no incentive to spend their time or effort gathering or providing information about their preferences. And even if the information were available, what is the incentive for a bureaucratic (monopolistic) supplier of a public good to give voters the greatest amount of value at the minimum of cost? - Edward H. Clarke, Demand Revelation and the Provision of Public Goods
If anyone insisted on deliberating with maximum scrupulousness every one of the economic acts he undertakes every day, if he insisted on rendering a judgment of value throughout to the last detail concerning the most trifling good that he has to deal with by way of receipt or expenditure , by utilization or consumption, such a person would be too much occupied with reckoning and deliberating to call his life his own. The correct maxim and the one which would be observed in economic life is "Be no more accurate than it pays to be." In really important things, be really exact; in moderately important things be moderately exact; in the myriad trifles of everyday economic life, just make the roughest sort of valuation. - Eugen Böhm-Bawerk, Capital and Interest
Since each person has a fixed number of votes - either 1 or 0 - regardless of the amount of information he has and the intelligence used in acting on this information, and since minorities are usually given no representation, it does not "pay" to be well-informed and thoughtful on political issues, or even to vote. - Gary S. Becker, The Economic Approach to Human Behavior
Although choices in the private sector are also affected by advertising and other selling activities, rational individuals become reasonably well informed about most private decisions because they and their families usually bear the main consequences of their mistakes. The incentive to become well informed about political issues is weaker because each individual has only a minor effect on political outcomes decided by the majority (or by similar rules). Hence the average person knows far more about supermarket prices or the performance of cars than about import quotas or public wages. Although rational political behavior has appeared to be contradicted by widespread voter ignorance and apathy, the opposite conclusion is justified because rational voters do not invest much in political information. - Gary S. Becker, A Theory of Competition Among Pressure Groups for Political Influence
This greater complexity of political choice is compounded by an inability to gain from any investment in knowledge. In a market setting, a person can gain by storing food during the boom periods; it is a simple task to profit directly from knowledge. In a political setting, however, even if a person has acquired knowledge about the more complex question of "why," there is no way that he can profit from his knowledge because a change in policy will take place only after a majority of people have come to the same conclusion. Consequently, it is rational to be considerably more ignorant about general policy matters than about matters of market choice. - James M. Buchanan, The Theory of Public Choice: II
In addition to the uncertainty factor, which can be readily understood to limit the range of rational calculus, the single individual loses the sense of decision-making responsibility that is inherent in private choice. Secure in the knowledge that, regardless of his own action, social or collective decisions affecting him will be made, the individual is offered a greater opportunity either to abstain altogether from making a positive choice or to choose without having considered the alternatives carefully. In a real sense, private action forces the individual to exercise his freedom by making choices compulsory. These choices will not be made for him. The consumer who refrains from entering the market place will starve unless he hires a professional shopper. Moreover, once having been forced to make choices, he is likely to be somewhat more rational in evaluating the alternatives before him. - James M. Buchanan, Gordon Tullock, Individuality Rationality in Social Choice
In markets for private goods, consumers internalize the benefits and costs of their purchases. If you don't like your new car or the cup of coffee you've purchased, you have an incentive to spend more time comparing alternative brands of cars and coffee, and adjust your behavior accordingly. But if a new kind of pollutant is thought by scientists to deplete the earth's ozone layer, to warm the planet, or to threaten the ecosystem of an endangered species, there is little reason for most people to study the issue carefully, since each person's consumption choices have a negligible impact on whether the atmosophere is altered, or another species becomes extinct. This line of reasoning suggests that ignorance by respondents to CV surveys is not anomalous; it is a predictable fact explained by the incentive structure of public goods problems. - Jonny Anomaly, Public Goods and Government Action
Overall, government action seems likely to reduce the robustness of institutions and to exacerbate collective-good problems because removing the ‘exit’ option prevents individuals from judging how their personal contributions affect outcomes. When taxpayers who fund failing programmes cannot exit with their own money, then the only form of accountability left is that of democratic voice. Yet, given the minuscule chance of affecting the result of a large-number election it is rational for voters to remain ignorant about the relative effectiveness of specific programmes. It is precisely this ignorance that may allow opportunistic behaviour to go unchecked. - Mark Pennington, Robust Political Economy
Where citizens have little choice about the quality of public services supplied to them they will also have little incentive to do anything about it. The costs of attempting to do anything about the services they receive are likely to exceed any tangible benefit that they themselves will receive. As a result, individuals face situations in which anticipated costs exceed anticipated benefits. The rational rule of action in such cases is to forego the "opportunity" to accrue net losses. - Vincent Ostrom and Elinor Ostrom, Public Goods and Public Choices
Public choice theory, developed by George Mason University Professors Gordon Tullock and James Buchanan, recognizes that the probability of any voter's ballot making any difference in the outcome of any election, including last year's Florida election, is essentially nil. In other words, the only way my vote changes the outcome of an election is if my vote breaks a tie and the probability of a tie is close to zero. - Walter E. Williams, Rational Ignorance

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