Beyond Rawls: Risk Aversion, Expected Utility, and the Case for Social Insurance
John Rawls’ theory of justice famously uses the original position and veil of ignorance to argue for principles of fairness in resource allocation. Under the veil of ignorance, individuals do not know their social position, talents, or preferences. Rawls reasons that such individuals, being rational and risk-averse, would choose principles that protect them in the worst-case scenario—leading to a system that ensure basic needs—such as food, shelter, healthcare, and education—are met for everyone, because they might end up in a position of extreme need. Thus, Rawls proposes that inequalities in society are only justified if they benefit the least advantaged members. Ensuring basic needs for everyone aligns with this principle because it establishes a safety net that improves the condition of those who might be worst off. While this perspective is compelling, it can be enriched by incorporating insights from behavioral economics and expected utility theory.
Rationality, Risk Aversion, and the Worst Case
Rawls’ argument hinges on the idea that individuals in the original position would opt for safety nets because they cannot predict whether they’ll be born into privilege or disadvantage. This risk aversion drives them to select a system that secures basic needs like food, shelter, and healthcare for all. But the decision to mitigate the risk of the worst-case scenario does not logically follow from rational choice and risk aversion. Rawls does not fully explore how the probability of being born into disadvantage might influence these decisions. In a context where the odds of being in the “worst-case scenario” are perceived to be higher, rational individuals would be even more inclined to prioritize a robust social safety net.
Expected Utility vs. Expected Wealth
Rawls’ framework benefits from considering expected utility rather than expected wealth. Expected utility theory, rooted in behavioral economics, shows that the utility gained from increases in wealth is asymmetric with the utility lost from decreases in wealth. This concept is often illustrated by the Prospect Theory curve, introduced by Daniel Kahneman and Amos Tversky. The curve demonstrates that losses are felt more acutely than equivalent gains, a phenomenon known as loss aversion.
Under this framework, individuals making decisions in the original position wouldn’t simply aim to their expected wealth, as classic economists might suggest. At the same time, they would not allocate resources to assure that the worst-case scenario is always tolerable, as Rawls would suggest. Instead, they’d focus on reducing the risks of severe losses, even if that means accepting some reductions in expected wealth.
From this perspective, Rawls’ framework aligns more closely with modern social insurance systems. People contribute to collective funds for disaster relief, public health, and disability support because they recognize the risks and uncertainties of life. They are willing to trade some wealth for the security of knowing that basic needs will be met under adverse conditions. Buying insurance, whether private or public, reflects a preference for trading potential gains for reduced exposure to catastrophic risks. This behavior reflects not just altruism but a rational strategy for maximizing expected utility. When the stakes are high and the probabilities uncertain, individuals show a willingness to sacrifice some wealth to mitigate significant losses.
A Social Insurance Perspective
This enriched understanding of Rawls’ original position suggests that individuals would prefer policies that provide a balance between economic growth and social safety. While free-market economists might emphasize maximizing wealth, this approach shows why people might rationally opt for systems that prioritize risk mitigation and loss reduction. Incorporating the asymmetry of utility gains and losses into Rawls’ theory provides a more nuanced explanation for why societies with strong social insurance systems tend to flourish. By safeguarding against severe losses, these systems reflect a rational response to the uncertainties of life—one that aligns with our deeper understanding of human behavior.
