Geoffrey Myers, School of Public Policy, LSE
Many governments around the world have set up behavioural or ‘nudge’ units to develop public policies in response to people’s bounded rationality and cognitive biases. But if such features are a fact of human life, what are the implications of the inevitable behavioural biases of the decision-makers in public policy processes? My book makes a contribution to the developing field of behavioural public administration in the specific context of auctions to award licences providing rights to use specific frequency bands for cellular mobile services in parts of the radio spectrum. Spectrum auctions are mainstream practice throughout the world, raising hundreds of billions of dollars for governments in countries on every continent – a few of the examples are Australia, Brazil, Hong Kong, India, South Africa, UK and the USA.[i]
The radio spectrum is a scarce natural resource that we use every day of our lives, whether browsing the internet or checking social media on our smartphones, watching terrestrial or satellite television, listening to the radio, opening car or garage doors with a remote key fob, travelling on taxis, buses, trains, boats or airplanes that use wireless communication, or using the emergency services if something goes wrong. In auction design, the details matter so that spectrum auctions can work out broadly as expected, be highly successful, or go embarrassingly wrong. This applies in both developing and developed countries, where the regulators designing and running the auctions face different circumstances and are characterised by varying degrees of institutional strength.
Biases in determining target levels for obligations included in spectrum auctions to increase mobile coverage can arise from an excessive focus on salient headlines – such as 98% of premises with indoors coverage of 4G in the UK’s 4G auction in 2013 – and from limited attention on complex engineering details that affect the quality of services experienced by the public – such as some buildings being constructed from materials which are harder for radio signals to penetrate or containing areas that are deeper indoors. There are practical examples of headline coverage target levels over-promising at the time of the popular policy announcement, yet the subsequent practical implementation under-delivering – such as compliance with the UK’s 2013 obligation only in fact achieving lower coverage than the headline target (shallow indoor coverage of only 95%, and even less deeper indoors).
For auction design decisions, politicians or lay policy officials can have over-confidence in those auction formats whose bid mechanics are intuitive, when the strategic complexities lie beneath the surface. For instance, single-round sealed-bid auctions or Simultaneous Multiple Round Ascending Auctions (SMRAs) have significant strengths, but they can also suffer from:
- aggregation risk (wining only one of two items in the auction which together yield a complementary synergy value);
- substitution risk (a bidder wishing to switch its demand between substitute spectrum, but being unable to do so due to the bidding mechanics); and
- bid shading (a company lowering its bid amount below its true value in order to reduce the price paid if it wins).
By contrast, other formats such as Combinatorial Clock Auctions (CCAs) can suffer from under-confidence due to the ‘heavy machinery’ of their complicated mechanics masking their suitability in relevant circumstances. For example, CCAs are not always desirable and their complications can give rise to problems, but they also have advantages which decision-makers can under-appreciate, such as:
- package bidding allowing bidders to express large synergies in their bids and remove aggregation risk;
- ability to submit multiple mutually exclusive bids to avoid substitution risk; and
- prices being set by reference to the highest losing bids (‘second prices’) to induce less bid shading.
It is inevitable that public discourse tends to focus on simpler headlines than complex, nuanced details, yet this disparity can at times be problematic. Public credit can be earned from headline coverage requirements that sound more ambitious, contributing to the risk of over-promising. Conversely, the focus of media reporting of auctions on the salient amount of revenue generated can fuel the blame game. The UK’s 2013 spectrum auction yielded revenues falling £1 billion below the pre-auction forecast of £3.5 billion, which led politicians like the Chancellor of the Exchequer to become a blame magnet.[ii] This was unjustified, because both the forecast and design decisions were made by independent public bodies (the Office of Budget Responsibility and Ofcom respectively), and revenue-raising was not even an auction objective. The media focus on revenue in reporting about auctions is itself a bias towards simpler headlines. Limited attention is paid to the greater complexity related to the objectives for economic efficiency and public value outcomes, which are nevertheless usually far more important.
As we have seen, spectrum auctions provide examples of biases in decision-making processes for popular requirements to improve mobile coverage in rural areas, for highly technical auction design choices, and for public discourse about what counts as successful policy. The biases arise from an excessive focus on salient headlines or from over-confidence where policy complications are less prominent; or conversely they can be caused by limited attention or under-confidence where complexity obscures effectiveness.
While behavioural features are endemic to human decision-making when a need for judgement is paramount, a wide range of techniques can assist to mitigate some of the worrying implications.[iii] In the external blame game, a strong reputation can assist a public organisation to weather storms from hostile political or media debate, making reputation management a core skill for public administrators. In the organisation’s internal decision-making process, experts can play a useful role through strong communication skills to demystify analytical complications and by offering an inclusive perspective to grapple with wider values and policy challenges in the political sphere. Of course, experts have their own biases, such as from the world view of their professional norms.[iv] We can all benefit from a useful corrective to the risk of overconfidence through a healthy dose of humility that no-one knows it all.
This blog is based on the new (open access) book “Spectrum Auctions: Designing markets to benefit the public, industry and the economy” by Geoffrey Myers, published by LSE Press
Notes
[i] For example, there is auction data from 85 countries in the empirical analysis by Koutroumpis and Cave (2018) ‘Auction Design and Auction Outcomes’, Journal of Regulatory Economics, vol. 53, no. 3, pp.275–97.
[ii] See the cartoon in The Guardian, ‘Kipper Williams on the disappointing 4G auction’, 21 February 2013, which shows an auctioneer at a lectern with a gavel saying: ‘What am I bid for this ritual humiliation of the Chancellor?’: https://www.theguardian.com/business/cartoon/2013/feb/21/kipper-williams-cartoon-4g-auction-george-osborne.
[iii] Hallsworth, Egan, Rutter and McCrae (2018) ‘Behavioural Government: Using behavioural science to improve how governments make decisions’, Institute for Government, https://www.instituteforgovernment.org.uk/publication/report/behavioural-government.
[iv] For example, evidence of confirmation bias driven by ideological predisposition among UK government and World Bank policy professionals is found by Banuri, Dercon, and Gauri (2019) ‘Biased Policy Professionals’, The World Bank Economic Review, 33(2): 310–327.