15 July 2010

The unimportance of being right

In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger. How facts backfire, Joe Keohane, 11 July
It's a scary, but not unexpected, finding. With so much information and misinformation about, we tend to ignore the facts that go against our prejudices. All the more reason then, you might think, for policy debates to concern themselves with social and environmental goals, rather than the different - prejudiced - views about the ways of achieving them. The world is too finely grained for most of our political prejudices. We are fairly sure, for instance, that central planning, as practiced by the Soviet Union and China, was a disaster for human welfare. But central planning isn't always a bad thing. Far better to let unprejudiced actors work out for themselves what works best for any particular social goal, on the basis of evidence and an incentive to get things right.

That's where Social Policy Bonds could enter the picture. Investors in the bonds would have powerful incentives to work out the best approaches to social and environmental problems, and to terminate failures. Careful definition and targeting of society's desired goals would mean that the bondholders' interests would be exactly congruent with those of society. If bondholders held mistaken views about how to achieve these goals, they would lose. They certainly wouldn't profit by pumping more resources into their failed projects. That's in stark contrast to the current system, whereby government agencies face few sanctions even if they make huge mistakes and persist with them for decades.

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