Effective Regulation of Public Utilities

          Last month's essay, Commissions are not Courts; Regulators are Not Judges, argued against regulatory reactivity.  Courts exercise judicial power, addressing only the parties' pleas; commissions exercise legislative power, making policy to serve the public.  The difference is profound.  A commission that addresses only the parties' self-interests will fail to achieve the larger public interest.

          Yet some regulators do see themselves as judges.  They wait for disputes to resolve rather than look for problems to solve.  Their choice is rooted in personal preference, because it has no statutory basis.  And it cannot produce the best possible decisions.  Thanks to discoveries from the fields of psychology and behavioral economics, we now know that passivity leads to error.

System 1 and System 2

          Psychologist Daniel Kahneman describes two "modes of thinking," known as System 1 and System 2.¹  System 1 "operates automatically and quickly, with little or no effort and no sense of voluntary control."  It is "the source of the impulses that often become your choices and your actions."  System 1 is illustrated by the mental effort required to complete the phrase "2 times 2 equals ...."   System 2, in contrast, "allocates attention to the effortful mental activities that demand it...."  It is represented by the mental effort it takes to multiply 17 x 24.

          Here's the problem.  Most of the time, System 1 operates "without your conscious awareness of its activities. . . .[I]t cannot be turned off."  And it is "radically insensitive to both the quality and the quantity of the information that gives rise to impressions and intuitions."   As a result, it is "the origin of many of the systematic errors in your intuitions"—errors that are "often difficult to prevent."   We can prevent these errors and biases only by the "enhanced monitoring and effortful activity of System 2."  If System 2 fails to detect the errors, we get biases.

What You See is All There Is

          A common source of biased thinking is a mental tendency Kahneman calls WYSIATI—"What you see is all there is."  WYSIATI is a product of System 1.  You treat the information in front of you "as if it were all there is to know."  From that incomplete information, you "build the best possible story, . . . and if it is a good story, you believe it."  In fact the less information you have, the easier you can "construct a coherent, believable story”—even if the information you have is not true or not complete.   A mind influenced by WYSIATI "will achieve high confidence much too easily by ignoring what it does not know."

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          ¹ Kahneman won the Nobel Prize in Economics in 2002.  Quotes in this essay come from his Thinking, Fast and Slow (2011), a must-read masterpiece on the origins and types of mental biases that afflict us all.