L IMITED INFORMATION, THE P OSSIBILITY OF R ATIONAL C HOICE

AND THE C ONTINGENT V ALUATION M ETHOD *

by

Joshua S. Gans
Melbourne Business School
University of Melbourne
200 Leicester Street
Carlton, Victoria 3053
Australia

E-Mail: J.Gans@mbs.unimelb.edu.au

First Draft: July 9, 1993

This Version: September 18, 1997

The contingent valuation method (CVM) for assessing nonuse values has
undergone significant criticism recently on various fronts. In this paper, I analyse
the notion that imposing reasonable bounds on the rationality of agents might
undermine the basis for any method that attempts to elicit nonuse values on
environmental goods from individuals, including CVM. The model of bounded
rationality applied is that of Gans [1996]. On the basis of that model, it is argued
that in complex and unfamiliar situations one would not expect individuals to be
able to express their true preferences. Following this line, I discuss the
possibilities for using experts for valuation as well as for providing information
for decision-making on the preservation of public resources. Journal of
Economic Literature Classification Numbers: D81, Q28 & Q38.

Keywords: contingent valuation method, impossibility theorem, nonuse values,

experts, rational choice, bounded rationality.

*I thank Kenneth Arrow, Graciela Chichilnisky, Larry Goulder, Paul Milgrom, Jaana Remes, Scott Stern, Eric
Talley, and workshop participants at the Stanford Institute for Theoretical Economics Summer Conference for
useful comments and suggestions. All responsibility for views taken lies with me.
2

I. Introduction

The problem of determining the actual social costs of environmental damage has

plagued policy analysts for decades. In order to decide whether projects that involve some

harm to the environment should be undertaken or what the monetary level of damage payouts

should be in cases of pollution litigation, one needs to collect information on the impact felt by

individuals in the economy. When individuals actually use an environmental resource, such

information can potentially be gained from market transactions (e.g., the amounts people are

willing to pay to travel to a national park). However, often the benefits individuals derive from

an environmental resource are existence or nonuse values -- that is, satisfaction is generated

by the knowledge that a resource exists rather than the actual use of that resource. Collecting

information about such values that can be used in cost-benefit analysis or damage assessment

has posed practical and theoretical problems for policy-makers.

The relevance of nonuse values for environmental resources has been upheld in the

courts,1 contingent on their reliable measurement. This was solidified in legislation with the

Oil Pollution Act of 1990.2 To date, however, the primary method developed to elicit

information on nonuse values from individuals is the contingent valuation method (CVM). Its

approach is to survey a sample of the population directly regarding their willingness to pay for

environmental preservation.3 And the estimates of the costs of environmental damage from

applications of the CVM have been used to influence policy-decisions from the denial of

mining permits in the Kakadu Conservation Zone in Australia to technological changes to

improve visibility over the Grand Canyon.

Nonetheless, the CVM has been the subject of considerable criticism. The CVM Panel

(Arrow et. al., 1993) set up by the National Oceanic and Atmospheric Administration

1 See State of Ohio v. Department of the Interior, 880 F.2d 432 [D.C. Cir. 1989].
2 33 U.S.C. 2701 et seq.
3 For a comprehensive survey see Mitchell and Carson [1989].
3

addressed criticisms based on the plausibility of assessed costs, the sensitivity of estimates to

survey design, survey responses that tended to violate the axioms ascribed to rational choice,

the absence of a meaningful budget constraint, the appropriateness of sample selection, and

“warm glow” effects. Such criticisms led the Panel to recommend against excessive reliance

on CV surveys for the purpose of establishing nonuse values.

It is not, however, the task of this paper to discuss all of these criticisms. My purpose

here is a theoretical one: to examine, in a precise manner, the validity of criticisms based on

limited information and bounded rationality. In so doing, I draw upon two fields to which

Clement Tisdell has been an important contributor -- the economics of the environment

(Tisdell, 1991) and decision-making by boundedly rational agents (Tisdell, 1996). It is widely

recognised that, in order to be useful, respondents to CV surveys must have a large amount of

information regarding the projects and the environmental resources they are asked to value. The

CVM Panel writes,

Suppose information is desired about individuals’ willingness to pay to prevent a chemical
leak into a river. Presumably, their responses would depend importantly on how long it would
take for the chemical to degrade naturally in the river (if it would at all), what ecological and
human health damage the chemical would do until it had degraded, and so on. Absent
information about such matters, it is unreasonable to expect even very bright and well-
informed respondents to place meaningful values on a program to prevent leaks. (Arrow et.al.,
1993, p.4605)

The hope then is that by providing the requisite information about these characteristics of the

environmental resource, respondents could make judgments that would reflect their true

willingness to pay. Such notions have been formalised and discussed by Milgrom [1992].

Nonetheless, what is present in the minds of detractors of the CVM goes beyond the

idea that respondents merely have limited information. They question whether individuals with

bounded rationality can use the information provided to them properly enough to report their

true willingness to pay. (See, for example, Diamond and Hausman [1992]; Milgrom [1993])

At present, however, there has been no formal modeling of plausible bounds on rationality that

suggest that problems of the CVM go beyond limited information. In what follows, I will

develop a framework for addressing the issue of whether bounds on rationality might plausibly
4

invalidate the usefulness of the CVM. In so doing, I will show what types of limitations on the

information processing ability of agents may cause us to doubt even informative and well

designed CV surveys and why these limitations are plausible for decision-making in

environmental contexts.

II. A Model of Bounded Rationality

The framework to be discussed in this section is essentially that of Gans [1996]. That

paper explores extensively the implications of bounded rationality for the possibility of

achieving rational choice in complex and highly uncertain contexts. It uses the intuition of

social choice theory to obtain these results. Here I will motivate that framework by developing

the problem within the sphere of the CVM. The earlier paper, contains a more general

discussion of the issues than the application discussed here.

A typical CV survey asks respondents to choose their willingness to pay for some

environmental resource (e.g. the preservation of 20,000 whooping cranes).4 This approach, in

effect, implies that agents have ranked a bundle of goods with the environmental resource

preserved among possible private good bundles for which they actually have knowledge about

their monetary values. Thus, suppose that individuals are being asked to specify the value to

them of preservation of the Kakadu Conservation Zone. Let X represent the set of possible

bundles, including those with or without preservation of the Kakadu Conservation Zone. The

bundle set has a typical element x. For simplicity, suppose that individuals are always

indifferent among bundles which preserve the Kakadu. Denote then a representative such

bundle -- the preservation bundle -- by x*. Thus, if in an overall ranking of bundles for an

individual, x * lies between x 1 and x 2 -- bundles that have monetary values of v 1 and v 2

4More recent CV surveys have favoured a referendum style to elicit willingness to pay (McFadden, 1993). The
analysis to follow applies equally to that style of survey.
5

respectively for the individual -- then x* will be assigned a monetary value of v* such that
v* ∈[v1 , v2 ] .

All is fine if individuals’ overall orderings over elements of X satisfy the normal axioms

of rationality -- that is, the ordering is a preference relation that is complete, reflexive and

transitive. Then some monetary value can be assigned to bundles that represents individuals’

preferences. However, if the ordering failed transitivity, for instance, it is not clear that a

reported willingness to pay would represent an individual’s true interests. In such cases, when

making binary comparisons, agents could report v* below v2, but above v1, even though v1

may be strictly greater than v2. Thus, if individual orderings do not satisfy the usual notions of

rational choice, the principle of eliciting values from individuals for the purpose of appropriate

cost-benefit analysis is undermined.5

Are there reasons for concern about whether individuals’ orderings over bundles may

fail the usual requirements of rational choice? In what follows, I will show that in decision-

making contexts such as those for specifying nonuse values, individuals may fail to have

overall orderings over bundles that satisfy certain reasonable properties. The intuition for this

result comes from social choice theory. Here, as in social choice theory, we view decision-

makers as not possessing an a priori overall ordering over bundles -- in social choice theory,

the decision-maker is the social planner, who needs to construct an overall ordering over social

states. The overall ordering must be constructed from the information at hand. In social choice

theory, the desired information would be individual cardinal utilities. In the application here,

such desired information for individuals would include knowledge of the environmental

resource and its potential utility generating benefits and also its interaction with other factors of

importance (say, for instance, the economy and the surrounding ecology, as well as cultural

significance). The range of environmental resources is too vast, however, for individuals to

have a predetermined preference ordering. It is not even plausible to suppose that the existence

5 The considerations here go beyond the actual welfare measure, be it willingness to pay or some other measure
related to consumer surplus. All such measures are based on individuals in some sense understanding their true
orderings and it is this feature of them that I am focusing on.
6

of all resources is known. Thus, the usual presumption in choice theory that such an ordering

exists is not reasonable here. Instead, individuals should be viewed as constructing such an

ordering on the basis of information they acquire.

At any particular instance, let e denote the information that is sufficient for an individual

to construct an overall ordering. For example, e may contain information regarding private

bundles and a description of a particular environmental resource, preserved or not. Individuals

then use this description of bundles and their consequences to construct an overall ordering

over bundle descriptions. Of course, there are many possible descriptions and choice

situations that can occur. Thus, each particular e belongs to a set E, which I refer to as the

decision context. It is individuals’ knowledge about E that will determine their ability to

construct an overall ordering at any particular instance. So even though individuals may face

different descriptions, e, at different times, it is appropriate to view them as achieving some

consistency in the way in which they use this information to construct an overall ordering.

Thus, when determining whether rational choice is possible in environmental contexts, I will

consider mechanisms and algorithms available to the agent that map from realisations of the

decision context into preference orderings in a manner that is somewhat consistent across

elements of E. Such a consistency notion is required to develop a refutable notion of choice.

The motivation of this paper is to suppose that individuals do not possess full

knowledge of E. Even if they had complete knowledge of private bundles and their

consequences, individuals surely do not possess such knowledge of all possible descriptions

of environmental resources. This is the reason that the presumption of a possession of the a

priori ordering of traditional choice theory is not appropriate. Here I will suppose instead that

individuals do possess some knowledge -- what I will call the frame of the decision problem.

The frame is, in effect, some summary of the knowledge of the decision context. There are, of

course, many forms a frame could take. In this paper, I will develop a particularly natural and

plausible one. But it must be remembered that it is only one possible way of considering

bounded rationality.
7

What form does the frame take? I suppose that individuals, while not having complete

knowledge of descriptions of environmental resources and their consequences, do possess

some knowledge of how they would rank alternative bundles based on certain characteristics of

elements of E. Formally, a characteristic, i, is a function drawn from a set finite set, I. This
function is denoted ρi (e): I × E → Ei , where E i = {ω ij } j =1i is the set of possible values or
E

realisations of i. Each characteristic possesses Ei ≤ E possible values or realisations. For

descriptions of environmental resources, possible characteristics could include the uniqueness

of the resource, its aesthetic qualities, its ecological importance, biodiversity considerations,

actual present and future use benefits, and time to recovery from damage, among others. Or,

indeed, they may include characteristics based on the consumption of private goods in the

bundle. The point is that while the list of characteristics may not provide an exhaustive

description of the resource (and other private goods), each one has the property that a given

resource could satisfy only one realisation of a characteristic. Thus, the Kakadu Conservation

Zone may be either unique or not unique but not both.

To abstract away from the considerations of limited information and to focus on the

alternative problem of bounded rationality, I suppose that individuals obtain -- either from prior

knowledge or from appropriate survey design -- knowledge of what the realisation of each

characteristic is for the environmental resource being evaluated.6 Therefore, in evaluating their

willingness to pay to prevent mining in Kakadu, individuals know whether it is unique or not,

what the ecological impact of mining will be, exactly how long it may take for the ecosystem to

recover and any permanent harm that may come. Moreover, given this knowledge, individuals

are able to evaluate each characteristic and form an evaluation ranking of bundles based on each

i, separately. Let ℜ be the set of all (logically) possible complete and transitive relations over
the set of bundles, X. An evaluation is a mapping from E i into ℑi ⊆ ℜ , with outcome Ri,

called an evaluation ranking -- i.e., for x, y ∈ X, we write xRiy to refer the statement that

6For expositional purposes, I also suppose that private goods are not subject to the problems addressed in this
paper. It will be clear that this would only add to the difficulties highlighted here.
8

bundle x is (weakly) preferred to y with respect to characteristic i (Let Pi and Ii be the strict

preference and indifference relations, respectively).

These evaluation rankings form the frame of the decision problem. This is all the

information an individual has from which to construct an overall ordering, R, over bundles in
X. Formally, an overall decision function, f({R i}), is a mapping from ℑ1 ×...×ℑk to ℜ .

The realisation of f(.) is the overall preference relation, R. However, we do not suppose that

individuals can use any f to construct an overall ordering. For instance, it is reasonable to

suppose that if all characteristics yield the same (strict) ordering of any two bundles, then so

should the overall ordering. That is,

Assumption P. If xP iy for all i, then xPy must hold.

In addition, since the individual has many evaluations to use as information to develop an

overall ordering, it seems reasonable that, at the very least, no single one should determine the

individual's preferences. Thus, the following property should hold.

Assumption ND (Non-Dominance). There exists no evaluation i* such that for all

evaluation rankings in the domain of f(.), and for each ordered pair, x, y ∈ X, xP i* y
implies xPy.

The overall ordering ought not be dominated by a single characteristic.

Now, consider the following assumption that captures the limitations on the

information processing ability of individuals.

Assumption I (Independence of Irrelevant Alternatives). Take any two bundles,

x, y ∈ X. Suppose initially, xRy under e. Suppose that as we change from e to an e’ with
a new corresponding characteristic realisation, {ω ij}i ∈I , the evaluation rankings between x
and y remain unchanged for all I. Then xRy holds after the change.

Essentially, this assumption says that evaluation rankings are noncomparable. Thus,

individuals cannot make statements like the following: “x is ranked higher than y if the

environmental resource were unique and it was not very aesthetically pleasing.” To do this

would imply that the individual could take into account the entire decision context when

forming an overall ordering, which is the restrictive assumption that motivated this framework.
9

As such, noncomparability between characteristics or evaluations is a very reasonable

hypothesis in environmental contexts. Individuals may know that they value a resource more

when it is more unique but they may not be able to determine a priori whether they would value

it more if it were more unique but less attractive. The bounded rationality here stems from the

notion that, when the decision context is highly complex and uncertain, individuals cannot

trade-off, perfectly, the information reported by different characteristics.

Finally, some initial assumption about the relationship between ℜ and ℑI = ℑ1 ×...×ℑk

needs to be made.

Assumption U. ℑI = ℜ k .

Thus, for the moment, I suppose that the domain of the overall decision function is unrestricted

in that any possible ranking can be reported by any evaluation.

As stated, these assumptions are now formally equivalent to the axioms imposed on the

social welfare function in social choice theory. As such, they lead to an impossibility theorem

for individual choice that is analogous to Arrow’s Impossibility Theorem for social choice

(Arrow, 1963).

Theorem. Suppose that the set of characteristics, I, is finite, and the number of
elements of X is three or more. Then there does not exist any overall decision function,
f({R i}), that yields a complete, reflexive and transitive overall preference relation, R,
satisfying Assumptions P, ND, I and U.

Basically, in this application, the theorem means that individuals’ reports of willingness to pay

for an environmental resource will be based either on a dominated overall ordering or on one

that is not complete, reflexive and transitive, and, hence, not satisfying the requirements of

rationality. This casts serious doubt on the whole concept of eliciting information from

individuals for the purpose of cost-benefit analysis.

III. Implications for the Valuation of Environmental Resources

10

Taken literally, the Impossibility Theorem for individual decision-making poses grave

problems for the CVM. But it does, potentially, indicate the forces generating some of the

difficulties of CV surveys discovered empirically in the recent literature.

First, it has been claimed that CV surveys are subject to an excessive dependence on

survey design. If individuals’ orderings were intransitive or if they were dominated by a

characteristic that was particularly salient in a particular survey specification, small changes in

the particulars of survey questions and information could lead to large changes in survey

responses.7 Second, some reported willingnesses to pay have not changed appreciably as the

scale of the resource to be preserved is increased by orders of magnitude. Thus, according to

Kahneman [1986], respondents reported similar willingness to pay for cleaning up lakes in one

region of Ontario and cleaning up all lakes in Ontario. Similar results were reported by

Desvousges et.al. [1992] and Mead [1992]. Once again, if individuals’ evaluations were

dominated by characteristics unrelated to scale, such phenomena are possible. To be sure, the

Impossibility Theorem is only suggestive of an explanation for the reported experimental

evidence on problems with the CVM. Empirical tests based on the framework presented here

would be necessary to confirm that the type of bounded rationality embedded in the

independence assumption was at the heart of the experimental results.

As in social choice theory, the impossibility result presented here is not necessarily

immutable. While assumptions P and D are very desirable, we could examine the effects of

weakening assumptions U and I. Beginning with U (unrestricted domain), as I emphasised in

Gans [1996], while the reasonableness of this assumption in social choice theory lies in

philosophical presumptions about the freedom of preferences of individuals, there are no such

presumptions in an individual choice context. Thus, it is very possible that the range of

information that could form the part of any evaluation is not unlimited, restricting the evaluation

rankings that are possible. Moreover, in looking for such restrictions, there are no constraints

here to motivate them by equity or civil rights arguments or the like. On the other hand, it

7 The effects here are analogous to the role of agenda changes in voting theory.
11

would not be reasonable to rely on concavity restrictions to preferences of the kind given by

single-peakedness.

In Gans [1996], I introduced a theorem that showed that by restricting the possible

evaluations to ones consistent with the single crossing property, an overall ordering which was

complete and transitive was possible. The single crossing property is stated as follows,

(SC) Take any x, y ∈ X such that x ≥ y . If xR i y (xP iy), then xR i′ y ( xPi′ y ) for all i ′ > i .

Basically, this definition is of a form of ordinal complementarity between evaluation rankings

and characteristics. Suppose, for simplicity, that the characteristic set, I, was composed of

three characteristics: uniqueness, beauty, and biodiversity considerations. Then the theorem

says, for example, that if when a resource is unique, it is its most beautiful, and, if when it is

not aesthetically pleasing to the individual, it is unimportant as regards biodiversity, then it is

possible to generate a complete and transitive overall ordering. This is done by a method

similar to pairwise majority voting (see Gans and Smart, 1996).

Thus, if characteristics are such that there is sufficient complementarity among the

information that forms the basis of evaluation rankings, then rational choice is possible. In

such cases, it is possible that eliciting nonuse values from individuals may be successful.

Nonetheless, this is a reasonably strong requirement in environmental contexts. For example,

suppose that the three characteristics were uniqueness, beauty and the length of impact. There

is little reason for the length of impact to be correlated with the uniqueness or beauty of the

resource. The length of impact depends on the project in question, whilst uniqueness and

beauty are intrinsic to the environmental resource. Moreover, as we expand the number of

characteristics to be considered, the less likely it is that the condition of sufficient

complementarity will be met.8

So if a relaxation of U does not seem to overcome the conclusions of the previous

section, what of relaxing the independence assumption? This is something that is difficult

8 As discussed in Gans [1996], similar considerations apply to more standard domain restrictions of single-
peakedness and the like.
12

because it is the motivating assumption behind the paper. Suppose though that individuals

imposed some real-valued measure on bundles for each characteristic, weighed characteristics

arbitrarily, and simply computed the total weighted measures for each bundle. Ordering the

bundles by total weighted measure would result in a complete and transitive relation that was

not necessarily dominated by a single characteristic. Nonetheless, while not very

sophisticated, this overall decision function would violate the assumption of independence of

irrelevant alternatives. Therefore, by removing a bundle from consideration one could alter the

orderings of all remaining bundles. This would include the case when removed bundles were

actually infeasible. Potentially then, reported values in surveys could violate the axioms of

revealed preference. Again this would undermine the validity of the CVM and the principle of

eliciting information on values from individuals. Of course, if the measures and weights were,

in fact, the true ones that reflected an individual’s real interests about the trade-offs between

characteristics, there would be no problem. This, however, is unlikely.

The point to be emphasised then is that even if CV surveys were designed under ideal

circumstances, that respondents were provided with the sufficient information about the

environmental resource in question, and there were no concerns about "warm glow" effects,

that is, that respondents were not reacting to the process of information retrieval, the

requirements of rationality that underlie the CV approach would probably not be satisfied. This

is essentially because the decision context of the problem involves nonuse values. Thus,

individuals, by definition, have not had experience with deriving satisfaction and identifying

their value for any given environmental resource presented to them.

IV. The Use of Experts

In the previous sections, I argued why there is reason to believe that boundedly rational

individuals should not be relied upon for information regarding nonuse values. Nonetheless,

the need for policy action demands an alternative. But, to the extent that any decision lies
13

within the judgment of some individual, or set of individuals, the problems of the impossibility

theorem would seem, at first glance, to be pervasive. In this section, however, I will examine

the potential role of experts in mitigating these problems.

The use of experts to determine the net benefits of environmental preservation has

received relatively little attention in the economics literature. A notable exception is Milgrom

[1992] who discusses the role of more informed experts in determining the monetary

equivalent of nonuse values. That paper addresses the trade-off between relying on an expert

with access to greater information about the environmental resource and the potential problems

that arise from the possibility that an expert's interests may differ from the population at large.

Basically, Milgrom shows that as long as the difference between an expert’s interest and those

of representative individuals is not substantial, then deferring judgments on the level of nonuse

values to experts is optimal because they possess better estimates of the net benefits of

environmental preservation.

Here I wish to argue that a similar line of reasoning applies in the case of bounded

rationality within the context of the framework outlined above. The basis for this argument lies

in the fact that experts have the possibility of being able to learn to make better valuations,

whereas, generally, individuals do not. Basically, the problem of the kind of non-rational

behaviour that the impossibility theorem predicts is a problem of making incorrect decisions.

When individuals report their willingness to pay or even when they answer referendum type

questions, if they are unable to compare evaluations based on different characteristics, their

answers will based on a nontransitive overall ordering or will be dominated by a single

characteristic. In either case, their answer will not reflect their true interests (assuming these

exist).

What if, however, experience in decision-making in a particular context meant that one

could receive some feedback as to whether previous decisions reflected true interests or not?

That is, after making a decision, individuals may be able to, ex post, determine why their

decision did not reflect their actual interests and learn to, partially at least, trade-off and
14

compare information from different characteristics. Thus, an experienced decision-maker

could learn, for example, how unique an environmental resource had to be in order to make it

worth-while to sacrifice some aesthetic appeal. Over time then, to borrow an idea from Scott

Stern [1991], individuals could acquire improvements in their technology of decision-making,

i.e., in the terminology of this paper, they could learn how to weight different evaluations in

environmental resource contexts. Then it is possible that the limitations on rationality could be

overcome. The above model of bounded rationality allows room for learning, given sufficient

feedback on the quality of past decisions.

But this is essentially the point: in order to improve their technology of decision-making

individuals need some feedback on their decisions -- that is, experience. This, however, is

precisely what the representative respondents on CV surveys do not have. This would suggest

that one should rely on the information of agents that potentially have gained some experience

in these matters. Therefore, one might suppose that the conclusion of this line of argument

would be that environmental experts would be more suited to value environmental resources

than other citizens. At least, if the problems were only one of bounded rationality and their

interests were no different from other citizens, one could do no worse by relying on experts

solely for information on values.

The logical conclusion of this line of thought rests on several premises, not the least of

which is the nondivergence of expert interest from the interests of ordinary citizens. As is well

known, due to the high uncertainty associated with the causes and effects of environmental

damage (e.g., see Arrow, 1992), expert opinion can differ greatly. As Arrow [1992] notes, in

the presence of scientific uncertainty, this is intrinsic to the nature of externalities and public

good information acquisition, since the policies associated with these generate distributional

conflicts. Thus, expert opinion can, for various reasons, differ. Moreover, the type of

learning associated with overcoming noncomparability problems can potentially be path

dependent. That is, starting from different perspectives, experts could learn acquire different

decision making technologies. It is beyond the scope of this paper to explore this issue more,
15

suffice it to say, that experts, who, initially, minimise the extent of environmental damage, may

learn to research in the direction that supports such a position. The same is true of experts who

inflate potential environmental harm.

Nonetheless, in an early paper, Arrow [1974] argues that this conflict in research

agendas can be socially good because all the relevant information is eventually gathered. It

then rests on some third party to weigh the arguments through some adversarial context. But

Arrow is careful to point out that he is not justifying court based judgments on this issue.
To be absolutely clear, I am not assenting to a common view, that externalities can be handled
through the usual processes of the civil law. In such a procedure, each individual example of
an externality is the object of a separate action. A procedure like this seems extremely
uneconomic from the viewpoint of information. Essentially the same arguments have to be
used again and again; either there is vast repetition, or instead it will not pay to collect the
costly information for any one use, so in fact the cases will be incorrectly decided. (Arrow,
1974, pp.183-184; the italics are his)

To these reasons, this paper adds another. Judges are not much more likely, in environmental

contexts, to be able to weigh different characteristics, even if summarised by only two

viewpoints, than ordinary citizens. However, a specialised organisational form -- a type of

quasi-judicial environmental review board -- could, potentially, gain the requisite experience in

weighing the two or more viewpoints associated with environmental valuations and policies.

Thus, as an organisational form, a specialised agency could overcome the problems suggested

by the model of bounded rationality presented in this paper.9

In this type of institution for collective decision-making judges become, in a sense,

valuation experts as opposed to information experts that are usually what we hold

environmental experts to be. But there are perhaps other institutions that could be imagined

that may create valuation experts. Permanent committees in political bodies are another form

where the politicians become the valuation experts. Another possibility would be to place

ordinary citizens on the planning boards of public authorities and regulatory agencies. They

could be part of the decision-making process and since their interests may not differ

9 Of course, as argued by Sanders [1994], one must be careful about the biases that could come from hearing
conflicting testimonies from experts. His analysis applies more to jury trails and would be less of a factor with
a specialised quasi-judicial agency.
16

significantly from most others, the experience gained may give a more rational basis for their

judgments and, most importantly, input information on citizen valuation into the collective

choice process.

V. Conclusion

Methods of eliciting information on values from individuals, as McFadden [1993]

points out, lie at the heart of any social choice problem. This paper takes Arrow’s social choice

difficulties to another level. When one has reason to suspect that the limitations on information

processing ability described by the model presented here are particularly active, social choice

difficulties aside, one has a problem in using individual information for the purposes of cost-

benefit analyses.

The flavour of this argument is not new. It has a modern tradition dating back to

Galbraith [1957], Boulding [1958] and, more recently, Mirrlees [1987]. What was done in

this paper, was to identify the particular bounds on agents that lead to potential irrationality --

namely, the noncomparability between characteristics. Thus, the argument that bounded

rationality might pose problems for obtaining information from individuals was made precise.

Nonetheless, unlike its counterparts in social choice theory, in this application, the

impossibility results, are potentially mitigated by learning by experience in trading off

evaluations in certain decision contexts. Thus, whilst reporting nonuse values for

environmental resources may be impossible for individuals with little judgmental experience in

that area, (valuation) experts may be able to learn to make these delicate trade-offs and, in the

process, provide the information necessary to make appropriate collective choices.

17

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Arrow, K.J. (1992), “Information Acquisition and the Resolution of Conflict,” mimeo,
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Arrow, K.J. et.al. (1993), “Natural Resource Damage Assessments Under the Oil Pollution
Act of 1990,” Federal Register, Vol.58, No.10, pp.4601-4614.

Boulding, K. (1958), Principles of Economic Policy, Prentice-Hall, Englewood Cliffs.

Desvousges, W., F.R. Johnson, R. Dunford, S. Hudson, K.N. Wilson and K. Boyle (1992),
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