Editor’s Note: The Journal of Institutional Economics article by Cass R. Sunstein and Reid Hastie found here provides a theoretical basis for understanding the importance of independent review of planned federal regulations.

Abstract 

Many institutions, large or small, make their decisions through some process of deliberation. Nonetheless, deliberating institutions often fail, in the sense that they make judgments that are false or that fail to take advantage of the information that their members have. Micro mistakes can lead to macro blunders or even catastrophes. There are four such failures; all of them have implication for large-scale institutions as well as small ones. (1) Sometimes the predeliberation errors of an institution’s members are amplified, not merely propagated, as a result of deliberation. (2) Institutions fall victim to cascade effects, as the initial speakers or actors are followed by their successors, who do not disclose what they know. Non-disclosure, on the part of those successors, may be a product of either informational or reputational cascades. (3) As a result of group polarization, deliberating institutions sometimes end up in a more extreme position in line with their predeliberation tendencies. Sometimes group polarization leads in desirable directions, but there is no assurance to this effect. (4) In deliberating institutions, shared information often dominates or crowds out unshared information, ensuring that institutions do not learn what their members know. Informational signals and reputational pressure help to explain all four errors. The results can be harmful to numerous institutions, including large ones, and to societies as a whole. Markets are able to correct some of these problems, but cascade effects occur there as well.

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