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Sunday, November 29, 2020

Freerolls and binds: making policy when information is missing

Duke, A. & Sunstein, C.
(2020). Behavioural Public Policy, 1-22. 


When policymakers focus on costs and benefits, they often find that hard questions become easy – as, for example, when the benefits clearly exceed the costs, or when the costs clearly exceed the benefits. In some cases, however, benefits or costs are difficult to quantify, perhaps because of limitations in scientific knowledge. In extreme cases, policymakers are proceeding in circumstances of uncertainty rather than risk, in the sense that they cannot assign probabilities to various outcomes. We suggest that in difficult cases in which important information is absent, it is useful for policymakers to consider a concept from poker: ‘freerolls.’ A freeroll exists when choosers can lose nothing from selecting an option but stand to gain something (whose magnitude may itself be unknown). In some cases, people display ‘freeroll neglect.’ In terms of social justice, John Rawls’ defense of the difference principle is grounded in the idea that, behind the veil of ignorance, choosers have a freeroll. In terms of regulatory policy, one of the most promising defenses of the Precautionary Principle sees it as a kind of freeroll. Some responses to climate change, pandemics and financial crises can be seen as near-freerolls. Freerolls and near-freerolls must be distinguished from cases involving cumulatively high costs and also from faux freerolls, which can be found when the costs of an option are real and significant, but not visible. ‘Binds’ are the mirror-image of freerolls; they involve options from which people are guaranteed to lose something (of uncertain magnitude). Some regulatory options are binds, and there are faux binds as well.

From the Conclusion

In ordinary life, people may be asked whether they want a freeroll, in the form of a good or opportunity from which they will lose nothing, but from which they gain something of value, when the magnitude of the gain cannot be specified. The gain might take the form of the elimination of a risk. More commonly, people are given near-freerolls, because they have to pay something for the option. Often what they have to pay is very low, which makes the deal a good one. The central point here is an asymmetry in what people know. They know the costs, while they have large epistemic gaps with respect to the potential gains. People often fall prey to ‘freeroll neglect.’ When this is so, they do not see pure or near-freerolls; they seek missing information before choosing among options, even though they have no need to do so.

Freerolls are mirrored by binds, in which people are given an option from which they can only lose, even though they do not know how much they might lose. To know that binds are undesirable, the chooser need not have full knowledge about the range of possible downside outcomes. Nor need the chooser know anything about the shape of the distribution of those outcomes.