25 November 2014

The Cost of Deception

Ezra S writes:*

When one needs to make a certain decision, a basic cost-benefit analysis is often used to weigh options -- especially when it comes to economic or political decision-making processes. Although such processes may seem straightforward, there are sometimes less easily measured, but important aspects to consider.

Take, for example, the 2004 sale of publicly owned hospitals to a private company that took place in Hamburg. The incumbent city government assessed the money they would gain from the sale to outweigh the cost of not being able to control part of the public health care system of its citizens. In a country like Germany where health care is considered a public good, making significant changes with long-term impact within the system always comes hand in hand with a public and political battle. A referendum assessing public opinion found a clear majority (76,8%) against the sale. That result seemed to settle matters until the court ruled that public referenda results were not binding. That ruling allowed the government decided return to its original plan and sell the hospitals to the private company Asklepios.

That selling against the public’s will is problematic with regard to basic beliefs associated with democratic rule is rather obvious, but that shall not be the focus of this post. It shall rather be stressed that the government did not take changing circumstances to its original cost-benefit analysis into account, which were caused by the referendum. The citizens of Hamburg believed that a majority vote against the sale of the hospitals would mean that the city would not sell, period. When the government decided to sell anyways, many citizens felt directly deceived. Psychological research (pdf) has shown that deception causes significant cognitive-emotional and behavioural responses. In this case the trust not only in the government at the time but also in the whole democratic process was diminished. That meant that the ultimate cost for selling the hospitals increased significantly after the referendum, a development that the government did not fully take into consideration.

Bottom Line: Quantifying emotional costs and taking them into account when making a decision, may it be political, economic or of any other nature, might be difficult but is essential. Especially when a party involved is left with a feeling of deception, which triggers distress and negative responses, the resulting increase in costs should not be ignored.

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, other perspectives, data sources, etc.


  1. I think this is an interesting topic, but I am afraid some of the argument is a bit unclear to me. It would be helpful if you elaborate better on how emotional distress produce increased costs, and who it affects. I guess in some sense it affects the political party that made the decision, but it could also affect the general feeling towards the system. However, the two entities will likely be affected in different ways, and the effect will last for different periods of time. I believe that in order to make you argument stand stronger, these are things you should consider.

  2. I agree with Kristian, more specific examples would also be helpful. I would also like to point out, that many public hospitals were closed due to budget cuts - Asklepios in return often 'saved' hospitals from closure which would obviously would be much more detrimental then privatisation. Public hospitals close to my hometown were closed and their patients now had to turn to Asklepios to get any type of treatment - so privatisation could possibly also have positive side effects. Especially since all patients have to be treated, wether privately or publicly insured - it would be interesting to observe both sides of deals like that to get the full picture!


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