This website uses cookies so that we can provide you with the best possible experience. If you continue to use this site we will assume that you are happy with this. You can find out more about how we use cookies here. If you would like to know more about cookies, or how you can delete them, click here.

Putting a value on planning: What can we learn from behavioural economics?

27 May 2015

Dr Phil O'Brien

All the major parties’ manifestos for the 2015 general election acknowledged the existence of a housing shortage, something long known by the RTPI and by planners working in the UK. The gap between the number of houses built and measures of demand, indicated by the relative affordability of housing, has in recent years prompted increased attention from researchers from a mainstream (or neoclassical) economics perspective.

While this body of work has gone some way to quantifying the costs imposed by low rates of house building, it can be regarded as limited both in respect to its evaluation of the planning system (by focusing largely on its regulatory aspect), and in its simplification of complex sequences of decision-making such as household choice and development control decisions.

With regards to the former limitation, the economic role played by planning is much greater than that embodied in its regulatory function. Most neoclassical assessments of the role of planning regard its social benefits as essentially unquantifiable; instead they concentrate on the ‘costs’ attributable to the restriction of land use, which are regarded as a by-product of this regulatory function.

However, the RTPI’s research programme exploring the economic value of planning takes an alternative viewpoint. As part of this work, Professor David Adams’ and Professor Craig Watkins’ 2014 research paper The Value of Planning discussed the various economic roles played by planning, suggesting that the ability of planning to contribute to growth is widely underestimated. In fact, the regulatory aspect that has been the focus of mainstream economics analyses of planning is only one of a range of mechanisms through which planning influences economic outcomes. Others include shaping markets (for example, through the development of plans and strategies), and a stimulating role through which planning facilitates the operation of markets via tools such as land assembly and public-private development partnerships.

With regard to the oversimplification of decision-making processes in housing and planning, the restrictive assumptions made by mainstream economics approaches, such as those that treat houses as interchangeable consumer goods and house buyers as ‘rational optimisers’ who always seek the best available alternative, can be questioned by behavioural economics.

Behavioural economics is a branch of economics that uses insights from behavioural psychology to explore the decision-making of economic actors. In contrast to the uniform rationality assumed by neoclassical economics, behavioural economics regards economic actors as operating within a so-called ‘bounded rationality’, in which decision-making is influenced by routines, institutional contexts and emotions. Such an approach frames the decision-making process in terms of more human complexities, such as desires for fairness, reciprocity, risk aversion, personal or idiosyncratic preferences (often called ‘non-standard preferences’), and emotive or even illogical biases (known as ‘systematic biases’).

As a result, decisions are sometimes made using rules of thumb rather than strict logic, especially under conditions of uncertainty. Institutional and social contexts offer rules and norms that are adhered to by individuals whose behaviour, constrained by their desire to fit within social norms and structures, serves to maintain these same structures.

What are the implications of this perspective for, say, understanding the housing market? It helps to take us beyond thinking about housing choice as a straightforward financial process – for example, it recognises how people’s choices might be for a ‘type’ or ‘culture’ of community or area, and how social status and aspiration might influence the housing market. In short, it is an economic perspective that feels closer to the real world.

While the 2015 general election produced a clear result, the implications for the future of planning and housing remain to be seen. But by exploring alternative approaches to delivering housing growth from elsewhere in Europe from this perspective, our project aims to offer some lessons on how this challenge might be met.

A project presently being conducted at the University of Liverpool under the RTPI’s SPIRe (Small Project Impact Research) scheme is using information economics, a field related to behavioural economics, to improve our understanding of the development process. Information economics, together with its methodological toolkit, game theory, addresses the decision-making of individuals and groups that may have different (or unequal) information, for example a developer and a local authority regarding the costs and hence viability of a particular development.

While behavioural economics has already been used to explore housing choice and the effects of different institutional contexts on planning outcomes, information economics could provide us with a better perspective on the interactions between planners and developers outside of formal channels (such as planning applications). Given a better understanding of the strategies adopted by these market participants, it then follows that changing the legal and policy environment in which such negotiations take place might lead to a more efficient and effective planning system.

Our project is exploring how state-market interactions in three different European planning jurisdictions have led to planning outcomes that are radically different from both those typically found in the UK, and what might be expected if a more ‘hands-off’ was adopted in which regulatory controls were loosened.

While the 2015 general election produced a clear result, the implications for the future of planning and housing remain to be seen. But by exploring alternative approaches to delivering housing growth from elsewhere in Europe from this perspective, our project aims to offer some lessons on how this challenge might be met. In particular, we are interested in whether the relationship between public sector planners and private sector developers in the UK might benefit from being more collaborative and cooperative, and which might lead to longer-term thinking and planning – something which might benefit everyone.

About Dr Phil O'Brien

Dr Phil O'Brien is Research Associate in the Department of Geography and Planning, University of Liverpool. Phil is research assistant on the RTPI-commissioned SPIRe project, led by Dr Alex Lord at the University of Liverpool. Phil completed his PhD on regional economic development at the University of Liverpool in 2014.