Habits make life easier in a hectic, fast-paced world. It’s hard to fight routine and convenience. There are actions taken everyday that we probably would acknowledge as something we could, to our own benefit, do differently (candy dish, anyone?). We unfortunately aren’t the perfectly rational or consistent decision-makers suggested by traditional economic theory.
However, behavioral economics, a field gaining popularity and credibility, seeks to apply the evidence from behavioral psychology to improve economic models of decision-making. There’s been a recent burst of popular non-fiction titles surrounding behavior and psychology like Predictably Irrational, Nudge, and Thinking, Fast and Slow, (all great reads!) and the President officially established a Social and Behavioral Sciences Team (a.k.a. “The Nudge Squad”), modeled after the success of the UK government.
This line of research is being applied to the design of public policy related to health, diet, finance, savings, retirement plans and the environment. Environmental behavioral economics sets out to find what influences decisions that have an impact on the environment. For example, which method might get the most people to bike to work: pro-environmental messaging, pro-health messaging, improving/expanding the bike lanes and routes of a community, offering an individual a tax rebate on the purchase of a bike, or telling people how many of their coworkers bike to work?
Behavioral economics focuses on two channels of change, in addition to the tried-and-true price incentives. First, we can change behaviors and habits directly: “changing minds”. Or, we can change the architecture of the decision-making environment: “changing context”. We all have the ability to process information, critically weigh the options and change our behavior (for example when I learned that butter was the second largest ingredient of my favorite granola). However, it’s often our subconscious, automatic reflexes that dictate many of our choices. These choices may be based on emotions and associations rather than objective, rational processes. If this is how people make the majority of their choices, how can we encourage people to make better decisions when it comes to their impact on the environment?
Richard Thaler, one of the behavioral economists who authored Nudge, argues that “the solution is to apply the single most useful bit of psychology one can ever learn: If you want to encourage people to do something, make it easy -- or even better, automatic.”
The following are a few examples that highlight how behavioral economic research and concepts influences (via “nudges”) how we impact the environment. Nudges are ways of changing the context in which we make decisions to potentially reach different outcomes, while not limiting consumer choice.
Let’s start small with plastic bags at the grocery store. Here we invoke a concept called loss aversion (sometimes called framing). Loss aversion is the notion that people will react differently if a decision is framed as a loss than as a gain. Furthermore, people tend to be swayed more by a loss than by a gain of the same amount. In some U.S. grocery stores you can earn a 10-cent rebate for each reusable bag you bring. You get rewarded for doing something ‘good’. However, in Europe (and perhaps soon in more U.S. cities), you get charged for any plastic bag you need to tote your groceries home. You get punished for something ‘bad’. These are seemingly the same incentive schemes, but result in very different outcomes. Framing the situation as paying for the bag results in far more people bringing their own bags (or not using a bag at all), whereas ‘getting’ money to not use a bag doesn’t actually encourage many to consistently use reusable bags.
One example from the White House is the website fueleconomy.gov, which lets consumers compare the total fuel costs of a car over five years, rather than only by the traditional metric of miles per gallon (MPG). MPG doesn’t easily or quickly convey the true fuel costs of a vehicle. This is an example of the behavioral economics concept called salience. The fuel costs over the lifetime of a vehicle are often not salient to a consumer the way the price tag on the car window is. By doing the math for consumers and make the information easy to find, the overall fuel costs have a better chance of playing a role in a car purchasing decision.
Salience is a concept that similarly applies to household water and energy use. When someone purchases a home, they’re more likely to think about the price of the home rather than the additional monthly cost of living in the home (e.g. energy and water bills) and thus are less likely to consider the efficiency of the home (e.g. insulation, appliances). These additional costs of being a homeowner are less salient than the sticker price of the house.
Defaults, which relates to the physics concept of inertia, are another concept that’s getting a lot of attention in behavioral economics. People tend to go with the flow and often stick to the default option. Policies can be designed to offer the same options to consumers, but changing the default option to the one that is expected to maximize benefits is an easy way to improve well being without restricting choice. For example, having to request a change of sheets or towels at a hotel vs. these automatically getting changed for you each day you stay. This is one example of changing the decision-making environment from “opt-in” to “opt-out” (i.e. organ donation, retirement plans). Another example: some utilities offer the voluntary option for consumers to pay a bit more for their electricity but then amp up the use of renewable energy sources. If you make this an “opt-in” program, few would participate, but setting it up as an “opt-out” program results in more households who stay enrolled.
Continuing with home efficiency, research finds that informational campaigns (think utility bill inserts) improve knowledge, but don’t actually change energy use behavior. However, social norms reports, like what the company OPower provides, show how much energy a household is using compared to similar neighbors. This nudge does have a significant impact on changing household energy use. As a result of this social norms driven program, households reduce energy use in the short run (e.g. changing light blubs or actually program the programmable thermostat), and in the long term (e.g. improving insulation or HVAC systems). Telling people what other people do has a strong impact on what we do. The concept of norms also ties in with the concept commitment where we seek to be consistent with public promises and try to reciprocate other’s actions, as well as the concept of ego where we tend to act in ways that make us feel better about ourselves. The Opower report includes a smiley face if you’re doing better than your average neighbor. This simple positive reinforcement is typically enough to keep the most efficient households from increasing their energy use when they learn they’re using less than most of their neighbors. Check out Allcott (2011) to learn more.Behavioral economics seeks to find ways to nudge people in the right direction without limiting choice. Small reminders and small changes to the context of the decision-making environment are often easier, more cost-effective means to improve individual well-being and the environment. The following are some visual examples of behavioral economics in action. E-mail me with examples of nudges you see!
A few visual examples of behavioral economics at work:
Invoking social norms to reduce littering in public spaces
Household reminder of the bigger picture when it comes to flipping a switch
Whole Foods' trash options