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Facilitating and Aiding Human Decisions to Adapt to or Mitigate the Impacts of Climate Change
Howard Kunreuther The Wharton School
University of Pennsylvania
Elke U. Weber Center for Research on
Environmental Decisions Columbia University
December 2012 Working Paper # 2012-19
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THE WHARTON RISK MANAGEMENT AND DECISION PROCESSES CENTER
Established in 1984, the Wharton Risk Management and Decision Processes Center develops and promotes effective corporate and public policies for low‐probability events with potentially catastrophic consequences through the integration of risk assessment, and risk perception with risk management strategies. Natural disasters, technological hazards, and national and international security issues (e.g., terrorism risk insurance markets, protection of critical infrastructure, global security) are among the extreme events that are the focus of the Center’s research.
The Risk Center’s neutrality allows it to undertake large‐scale projects in conjunction with other researchers and organizations in the public and private sectors. Building on the disciplines of economics, decision sciences, finance, insurance, marketing and psychology, the Center supports and undertakes field and experimental studies of risk and uncertainty to better understand how individuals and organizations make choices under conditions of risk and uncertainty. Risk Center research also investigates the effectiveness of strategies such as risk communication, information sharing, incentive systems, insurance, regulation and public‐private collaborations at a national and international scale. From these findings, the Wharton Risk Center’s research team – over 50 faculty, fellows and doctoral students – is able to design new approaches to enable individuals and organizations to make better decisions regarding risk under various regulatory and market conditions.
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1
FacilitatingandAidingHumanDecisionstoAdapttoorMitigatetheImpactsof
ClimateChange
HowardKunreuther1&ElkeU.Weber2
Abstract
Utilizingfindingsfrompsychologyandbehavioraleconomics,thispaperproposes
strategiesthatreduceindividuals’cognitiveandmotivationalbarrierstothe
adoptionofmeasuresthatreducetheimpactsofclimatechange.Wefocusonways
toencouragereductionincarbon‐basedenergyusesoastoreducegreenhousegas
emissions,andencourageinvestmentinadaptationmeasurestoreduceproperty
damagefromfuturefloodsandhurricanes.Knowledgeofindividualdecision‐
makingprocessescanguidetheseprescriptiveinterventions,suchaschoice
architectureincombinationwitheffectively‐framedeconomicincentives.
JEL:D1,D81,Q54
1WhartonSchool,UniversityofPennsylvania.
Email:[email protected]
2CenterforResearchonEnvironmentalDecisions,ColumbiaUniversity.
2
FacilitatingandAidingHumanDecisionstoAdapttoorMitigatetheImpactsof
ClimateChange
HowardKunreuther&ElkeU.Weber
1.Introduction
Fiftyyearsofempiricalevidenceindicatethathumanjudgmentsandchoices,
especiallyinsituationsofriskanduncertainty,areinfluencedbyfactorsconsidered
tobeirrelevantbynormativetheoriesofchoicesuchasexpectedutilitytheory(see
Weber&Johnson,2009,forarecentreview).Peoplefrequentlychangetheir
decisionwhentheobjectivelysamechoicealternativesaredescribedorframedin
differentways,orwhenthedefaultoptionischanged.Theseandotherdeviations
fromnormativebehavioroccurbecauseindividuals’preferencesareaffectedbythe
specificdecisioncontext(Slovic1995).
Judgmentandchoiceisinfluencedbyinternalstatesandexternalcircumstances
becausedecisionmakers’attention,processingcapacity,andmemoryarelimited
(Simon1982).Todealwiththeselimitations,perceptionisselectiveandvaluations
areoftenrelativetoareferencepoint(TverskyandKahneman1991;Weber2004).
Bothdeliberativeprocessesandotherlesseffortfulmodesareused.
Inthispaper,weexaminedescriptivemodelsofhumanjudgmentandchoicefrom
behavioraldecisionresearchandbehavioraleconomicstobetterunderstand
perceptionsofandresponsestoclimatechangerisks.Usingempiricalinsightsinto
howindividualsactuallymakechoicesunderriskanduncertainty,wepropose
strategiesthatwillencourageindividualstoinvestinpromisingmeasuresto
mitigategreenhousegasreductionsandhelpadapttotheimpactsofclimatechange.
Thefollowingfourexampleshighlightthechallengesforadaptationandmitigation
measuresastheyrelatedtoclimatechange:
3
InstallingSolarTechnologyandReducingEnergyConsumption
TheWattfamilyinCaliforniaisconsideringwhethertospend$15,000toinstall
solarpanelsintheirhomethatwillreducetheiraverageannualenergy
expendituresbysomewherebetween$3,000and$6,000overtheircurrentsystem.
Solarpanelswillallowthemtolockinlong‐termelectricityratesandprotectthem
fromlargeincreasesshouldon‐gridutilitypricessoarduetopossibleclimate
changerepercussions.Thefamilycomparedthecostofsolarpanelswiththeir
expectedsavingsinenergyexpendituresoverthenextseveralyears,andconcluded
thatitwasnotworthspendingthemoneyonthesolarpanels.Theyhavesome
concernsaboutclimatechangeandareuncertainaboutitspotentialnegative
impacts,suchasthehighercostsoftheirelectricity.Theyfeelthatexpertsdisagree
aboutthemagnitudeandimpactofclimatechangeinthenext20years,andso
decidenottoinvestinthesolarpanelstoday.
TheWinterfamilyinJuneau,Alaskaexperienceda45‐daypowerfailurein2008,
afteralargeavalanchedestroyedasectionofthemainhydroelectrictransmission
line.Backupgeneratorsusingdieselfuelsweretheonlysourceofelectricity,
reducingavailabilityandcausingelectricitypricestoincreaseby500percent.To
savemoney,everymemberofthefamilyreducedtheirenergyconsumption,from
notusingtheclothesdryertoturningdowntheheat,switchingtoCFLbulbs,and
reducingthenumberofbulbsinlargerlightfixtures.Itisnotclearwhethertheywill
continuetodothisinthefuture.
InvestinginFloodAdaptation
TheLowlandfamilyrecentlymovedtotheshoresoftheMissouriRiverandis
consideringwhethertoinvest$1,200infloodproofingtheirhousesoitisless
susceptibletowaterdamagefromfutureflooding.Hydrologistshaveestimatedthat
theannualchanceofaseverefloodaffectingtheirhomeis1/100.Shouldsucha
disasteroccur,thereductionindamagefromfloodproofingthehomeisexpectedto
be$40,000.TheLowlandfamilydoesnotbelievethatitisworthincurringthecost
offloodproofingtheirhomesincetheyperceivetheriskoffloodingtobebelow
4
theirthresholdlevelofconcern,eventhoughtheyareawarethatglobalwarming
maycauseincreasesinwaterdamageinthecomingyears.
TheWatertonfamilyinCornwall,UKexperiencedseveralincidentsoffloodingin
theirhomeandtheirlocalareacausedbymajorrainfalls,withrunoffsthatexceeded
thecapacityofdrainageinfrastructure.Theyhavedecidedtoinvestinflood
reductionmeasuresandvoluntarilypurchasedfloodinsurancetoprotect
themselvesagainfuturelossesbecauseoftheserecentevents.
TheWattandLowlandfamilieswerereluctanttoincurthecostsassociatedwith
investinginadaptivemeasuresrespectivelyforthefollowingreasons:
Theirbeliefthatclimatechangewillnotimpacttheminthenearfuture.
Uncertaintyabouteconomicandsocialimpactsofclimatechange.
Theimpactofimmediateupfrontcostsofundertakingtheseinvestmentson
otherconsumptionneedsrelativetotheperceivedexpectedlonger‐term
benefitsofthesemeasures.
Ontheotherhand,theWinterandWatertonfamilieswerewillingtotakestepsto
reducetheirenergyconsumptionandprotectthemselvesagainstflooding
respectivelyforthefollowingreasons:
Recentexperiencesmadethemawareofthenegativeconsequencesfromnot
havingelectricpowerreadilyavailableorthedamagestopropertyand
contentsthatcanbecausedbyaflood.
TherespectiveincidentsinJuneauandCornwallmadethepotentialimpacts
ofclimatechangesalienttothem.
Theyfocusedonthepotentialbenefitsfrominvestinginthesemeasuresnow
ratherthantheirlong‐termexpectedbenefits.
5
Incombination,thesefourexampleshighlightthefollowingtwopoints:
Decisionsaremadebyindividualsinwaysthatdifferfromnormativemodels
ofchoicesuchasexpectedutilitytheory.
Toencourageindividualstoinvestincost‐effectiveadaptationmeasures,one
needstoconsidertheirdecisionprocessesandthebehavioralfactorsthat
impacttheirchoices.
Section2examinestheprocessesusedbyindividualsinmakingdecisionsandhow
theydifferfromnormativemodelsofchoice.Section3focusesonhowrisk
perceptionandbehavioralresponsestoclimatechangeaffectadaptationand
mitigationdecisions.Wethendiscusshowtheprivateandpublicsectorscan
incentivizeindividuals/householdstoinvestinmeasuresthathaveeconomic
benefitstothemwhilemitigatingclimatechangeanditsimpacts.Theconcluding
sectionbrieflysummarizesthepaperandsuggestsdirectionsforfutureresearch.
2.Individuals’DecisionMakingProcesses
Thepresenceofriskanduncertaintyraisesthefollowingquestionswithrespectto
individuals’decisionprocesses:Whendoindividualsrelyontheirintuitionand
experience‐guidedjudgmentandwhendotheyemploysystematicalgorithmsto
evaluateandselectchoiceoptions?DanielKahnemaninhisNobeladdress(2003)
andbookThinking,FastandSlow(2011)addressesthisquestionbycharacterizing
twomodesofthinking,System1andSystem2thatbuildonalargebodyofcognitive
psychologyandbehavioraldecisionresearch.[Theconceptualdistinctiongoesback
toWilliamJames(1878)andHeidegger(1962)].
System1operatesautomaticallyandquicklywithlittleornoeffortandnosense
ofvoluntarycontrol.Itusessimpleassociations(includingemotionalreactions)
thathavebeenacquiredbypersonalexperiencewitheventsandtheir
consequences.
System2initiatesandexecuteseffortfulandintentionalmentalactivitiesas
needed,includingsimpleorcomplexcomputationsorformallogic.
6
Eventhoughtheoperationsofthesetwoprocessingsystemsdonotmapcleanly
ontodistinctbrainregionsandtheprocessessubsumedunderthetwosystems
oftenoperatecooperativelyandinparallel(WeberandJohnson,2009),Kahneman
(2011)arguesconvincinglythatthedistinctionbetweenSystem1and2helpsto
makeclearthetensionbetweenautomaticandlargelyeffortlessprocessesand
effortfulandmoredeliberateprocessesinthehumanmind.
Manyofthesimplifieddecisionrulesthatcharacterizehumanjudgmentandchoice
underuncertaintyreflecttheinfluenceofthelessanalyticSystem1.Suchdecisions
areguidedbytheexpectations,beliefs,andgoalsofthedecisionmaker.Often,
decisionsmadebylesseffortfulSystem1processesleadtoreasonableoutcomes
andrequiremuchlesstimeandeffortthanifoneweretoundertakeamoredetailed
analysisofthetrade‐offsbetweenoptions.Inthissensetheyreflectconstrained
optimization,withattentionalandprocessingcapacityconstraintscausingdecision
makerstobeonlyboundedlyrational(Simon1982).Decisionsusingsuch
simplifiedheuristicsandSystem1processesareleasteffectiveforchoicesthat
requireonetofocusonlongtermoutcomesthatarehighlyuncertain.Decisionsthat
involveclimatechangemitigationandadaptationfallintothiscategory.
Incaseswheretheoutputsfromthetwoprocessingsystemsdisagree,theaffective,
association‐basedSystem1usuallyprevails,becauseitsoutputcomesfasterandis
morevivid,capturingthedecisionmaker’sattentionovertheoftenmorereliable
anddiagnosticbutalsopallidstatisticalinformation(ErevandBarron2005).
Howdoesoneevaluatethechoicesmadebyindividualsfromasocietalperspective?
Traditionalwelfareeconomicsdefinesagooddecisionasonethatisbasedon
individualsmaximizingtheirdiscountedexpectedutility[E(U)]withoutfocusingon
thepsychologicalaspectsofdecisionmaking(BernheimandRangel2009;Robinson
andHammitt2011).Toillustratethispointinthecontextoftheaboveexamples,
considertheLowlandfamily’sdecisiononwhetherornottoinvestinflood‐proofing
measuresthatwillcostthem$1,200butwillreducefloodlossesby$40,000(from
7
$100,000to$60,000)ifafloodwithanannualprobabilityofp=1/100occurs.Ifthe
family’swealthiscurrentlyWandtheyplantoliveinthehouseforthenextTyears
thediscountedE(U)ofinvestingandnotinvestinginfloodproofingisgivenby:
whereβ=theannualdiscountrate,whichisassumedtobeconstantovertime.
IftheLowlandfamilywereriskneutral(thatis,iftheyperceivedthecostsof
benefitsofthetwoactionsproportionallytotheiractualdollarvalues),andhad
accurateinformationontheprobabilities,costs,andexpectedbenefitsfrom
investinginflood‐proofingmeasures,theywouldincurthe$1,200iftheyplannedto
liveintheirhouseforthreeormoreyearsifβ=.10.1Eveniftheyintendedtomove
beforethattime,theywouldbewillingtoincurthesecostsiftheycouldexpectthat
thepropertyvalueoftheirhomewouldreflectthereducedlossesfromfloodingdue
totheirinvestmentintheselossreductionmeasures.Ifthefamilywasriskaverse
and/orβ<.10,theywouldbeevenmorelikelytoinvestinfloodproofingmeasures
foranygivenvalueofT.
TheWattfamilywouldundertakeasimilarcalculationiftheywereusingthe
expectedutilitymodeltodeterminewhethertoinvest$15,000insolarenergy
panelsandtheiraverageannualenergybillwasreducedbysomewherebetween
$3,000and$6,000overtheircurrentsystem.IftheirwealthwasW*thentheir
decisionwouldbedeterminedbycomparingthefollowingtwooptionsand
choosingtheonewhichhadthehighestdiscountedE(U):
1SinceWisirrelevantwhenapersonisriskneutral,theexpecteddiscountedbenefitsfrominvestinginfloodproofingwhenβ=.10is
whichexceeds$1,200whenT>3.
8
E(U)[SolarPanels]=ΣU(W*‐15,000‐3,000)/(1+β)t
E(U)[NoSolarPanels]=ΣU(W*‐6,000)/(1+β)t
IftheWinterfamilyplannedtoliveintheirhouseforonlyT<5years,thenthesolar
panelinvestmentwouldnotbeworthwhileifthefamilywasriskneutral,unlessthe
propertyvalueincreasedsignificantlytoreflectthesavingsinenergycostsfromthis
investment.Inthisexample,uncertaintyexistsinthevalueofTandtheprojected
savingsinenergycostsinthefutureduetoclimatechange.
Ifresponsestopolicyinstrumentsareproducednotbyrationaldeliberationthat
carefullyincorporatesallpast,present,andfutureinformation,butareinstead
determinedbyaselectiveandoftenmyopicfocusthatmaybenecessitatedby
processingconstraints,policyinstrumentsmaynothavetheirdesiredeffect.Policy
prescriptionsbasedonrealisticprocessingassumptionsmaydifferfromthose
guidedbytheassumptionsofexpectedutilitymaximization.
Dietz(2003)providesabroaderandpsychologicallymorerealisticdefinitionof
whatconstitutesagooddecision,bothintermsofprocessesandoutcomes.Inthe
contextofenvironmentallyrelevantchoices,hedefinesagooddecisionasonethat
(1)increaseshumanandenvironmentalwell‐being,and(2)isalsoconcernedabout
equityandfairnessinbothitsprocessesandoutcomes.Decisionmakersshouldbe
(3)remindedtodrawonallrelevantfactsandvalues.Theyshould(4)relyon
decisionprocessesthatdrawonhumanstrengths,ratherthan(5)becompromised
byhumanweaknesses.Theprocessshould(6)alsoprovidedecisionmakerswith
theopportunitytolearn.Thefirsttwodescribecriteriaforgooddecisionoutcomes,
whilethelastfourdefinequalitiesofagooddecisionprocessthatwillpromotegood
choiceoutcomes.
9
InthefourexampleshighlightedintheIntroduction,theWattandLowlandfamilies
madeintuitivedecisionsthatfocusedonrelativelyshorttimehorizonstoevaluate
theirchoiceoptions,ratherthanengaginginoptimalSystem2processesthatmade
appropriatetradeoffsacrosstherelevanttimehorizonofthedecision.TheWinter
andWatertonfamiliesmadedecisionsthatwereconsistentwiththeoneschosenif
theyhadmaximizedexpectedutility,butthebasisfortheiractionswerevery
different.Thesefamiliesalsofocusedonshorttimehorizonsbutintheircasethey
wantedtotakestepstoavoidanotherdisasternextyear..Thefollowingsection
examinesreasonsforthisbehavior.
3.RiskPerceptionandBehavioralResponsestoClimateChange
Akeychallengeindesigningmitigationandadaptationmeasurestoreduceclimate
changerisksandtheirimpactsistorecognizethelimitationsofdecisionmakersin
dealingwithriskanduncertainty.Asindicatedabove,actionsareoftentriggeredby
automaticandlesseffortfulSystem1processes,ratherthanbyutilizingprobability
theorytoconsiderthelikelihoodofuncertainevents,choosingtheoptionthat
maximizesexpectedutilityorengaginginotherdeliberativeandeffortfulSystem2
processes(seeWeber2006,forareview).
Inadditiontoadverseoutcomes,twopsychologicaldimensionshavebeenshownto
influencepeople’sintuitiveperceptionsofhealthandsafetyrisksacrossnumerous
studiesinmultiplecountries(Slovic1987).Thefirstfactor,dread,captures
emotionalreactionstohazardslikenuclearreactoraccidents,ornervegas
accidents,i.e.,thingsthattriggerpeople’sautomaticfearresponses,oftenbecauseof
aperceivedlackofcontroloverexposuretotherisksandbecausetheconsequences
areperceivedtobecatastrophic.Thesecondfactor,unknowability,referstothe
degreetowhicharisk(e.g.,DNAtechnology)isperceivedasscarybecauseitisnew,
withunforeseeableconsequencesandwithexposuresnoteasilydetectable.Bothof
thesereactionsshowthatintuitiveperceptionsofriskaremoreafeelingthana
statisticalconcept(Finucaneetal.2000;Loewensteinetal.2001;PetersandSlovic
2000).
10
ClimateChangePerception
Whileintuitiveperceptionsofriskareadaptiveandrelativelyaccurateinabroad
rangeofsituations,theycanleadtosystematicdeviationsfromexpertassessments,
especiallyforrisksthatinvolvesmallprobabilitiesandhighdegreesofuncertainty
butdonottriggernaturalreactionsofdread.Climatechangerisksunfortunately
havethesecharacteristics.Theyarelowanduncertainprobabilitiesofpotentially
veryadverseconsequencesthatneverthelessdonotelicitstrongfears,becausethey
tendtobeabstractandalsohaveoftennotbeenexperiencedpersonally(Weber
2006).
ToillustratethispointfortheLowlandfamily,a1/100probabilityoffloodingwith
consequencesthathaveneverbeenexperiencedisanabstractstatistictothem.In
theabsenceofavisceraladverseresponsetoflooding,thelikelihoodoftheir
sufferingdamageisbelowtheirthresholdlevelofconcern.SimilarlyfortheWatt
family,climatechangeisanabstractthreatthatmighthaverelevancefordistant
continentsorfuturegenerations,butdoesnotpresentanimmediateandpersonal
threattowarranttheirattention.Asmostpeopleconsiderthemselvesexpertson
theweatheranddonotdifferentiatebetweenclimateandweather,theserisksare
notviewedasneworuncontrollable(Bostrometal.1994;Cullen2010).
Laypersonsthinkaboutclimatechangeinwaysdifferentfromthoseofclimate
scientists,includingtheuseofdifferentmentalmodels(Kempton1991;Bostromet
al.1994).Whenclimatechangefirstemergedasapolicyissue,peopleoften
confuseditwiththelossofstratosphericozoneresultingfromreleasesof
chlorofluorocarbon.Asthe“holeintheozonelayer”issuehasrecededfrompublic
attention,thisconfusionhasbecomelessprevalent(Reynoldsetal.2010).Today,
greenhousegasesareoftenwronglyequatedwithmorefamiliarformsofpollution,
suchassulfuroxide.Peoplethusmaketheincorrectinferencethat“theairwill
clear”soonafteremissionsarereduced(StermanandSweeney2007)when,infact,
11
mostgreenhousegasescontinuetowarmtheplanetfordecadesorcenturiesafter
theyareemitted(Solomonetal.2009).Thisleadstounderestimatingtheneedfor
immediateaction.
BehavioralResponsestoRiskandUncertainty
ThereareseveralfeaturesofbehaviorthatleadhouseholdssuchastheWattand
Lowlandfamilytodecidenottoinvestinadaptationandmitigationmeasures.
RelativeEncoding,PerceivedLosses,andLossAversion.Relativejudgmentsarealot
easiertomakethanabsolutejudgments:Areyoubetterofftodaythanfouryears
ago?vsHowwellareyouoff?Anaturalcomparisonwhenevaluatingpossible
choiceoutcomesisthestatusquooranotherrecentevent,andourperceptual
neuronsencodesuchrelativedifferencesratherthantheabsolutevalueofobjects
(Weber2004).Prospecttheory(KahnemanandTversky1979;Tverskyand
Kahneman1992)introducessuchreference‐dependentencodingintopeople’s
evaluationsofconsequencesandaddsanotherobservedregularity:anoutcome
perceivedasalossrelativetothestatusquoorotherreferencepointisgiven
greaterweightthanthesameoutcomeperceivedasagain,aregularitylabeledloss
aversion.Inotherwords,peoplearemuchmoreafraidoflosingsomethingthatthey
havethanofnotgettingsomethingtheywant.Theupfrontandcertaincostsofthe
solarpanelsandthefloodprotectionthusloomlargefortheWattandLowland
families,muchmoreprominentlythanthepotentialbenefitsoftheseinvestments
downtheroad.
BudgetConstraints.Thesimplestexplanationastowhyindividualsfailtoinvestin
adaptationandmitigationmeasuresinthefaceoftransparentrisksisaffordability.
Leavinglossaversionaside,iftheLowlandfamilyfocusesontheupfrontcostof
flood‐proofingtheirhouseandtheWattfamilyreflectsonthecostsofinstalling
solarpanelsandeachfamilyhaslimiteddisposableincomeafterpurchasing
necessities,theywouldchoosenottomaketheseinvestmentswithoutundertaking
anyformalanalysis.Abudgetconstraintmayalsoextendtohigherincome
12
individualsiftheysetupseparatementalaccountsfordifferentexpenditures
(Thaler1999).Undersuchaheuristic,ahomeownermightsimplycomparethe
priceofthemeasuretowhatistypicallypaidforcomparablehomeimprovements.
Thefamilymaythendecidethatfloodproofingorsolarpanelsexceededwhatthey
hadbudgetedforinthisaccount.Suchconstraintsoftenleadtotheuseof
lexicographic(ratherthancompensatory)choiceprocesses,whereoptionsetsare
createdoreliminatedsequentially,basedonaseriesofcriteriaofdecreasing
importance(Payneetal.1992).
Under‐weighingtheFuture.Afundamentalfeatureofhumancognitionisthatweare
influencedmorebycuesthatareconcreteandimmediatethanabstractanddelayed
ones(Marxetal.2007).Normativemodelsofintertemporalchoiceprescribethat
weshouldgivelessweighttodistantfutureoutcomesbyaconstantdiscountrate,as
illustratedabovebytheLowlandandWattfamiliesiftheymadetheirdecisionsby
maximizingexponentiallydiscountedE(U),whereoutcomevaluationfallsbya
constantfactorpertimeunitdelay.Incontrast,humantemporaldiscountingtends
tobequasi‐hyperbolic,whereoutcomevaluationsfallveryrapidlyforevensmall
delayperiods,sothattemporallydistanteventsaregivenmuchlessweightthan
theywouldiftheywerediscountedexponentially(Laibson1997).Asa
consequence,theupfrontcostsofmitigationandadaptationmeasuresloom
disproportionatelylargerelativetotheirdelayedexpectedbenefitsduringthelifeof
theproperty.
Anextremeformofdiscountingismyopicbehaviorwherethedecisionmakeronly
focusesonthepotentialbenefitsofaninvestmentoverthenextTperiods.Suppose
therearesignificantexpectedbenefitsfromtheadaptationormitigationmeasures
tenortwentyyearsinthefutureduetotheimpactsofglobalwarmingonsealevel
riskand/orhigherelectricitycosts.Ifpeople’stimehorizonisonlytwoyears,then
decisionmakerswillnotconsiderthesepotentialreturnsastheyshouldiftheywere
usingnormativemodelsofchoicesuchasexpectedutilitytheory.
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RoleofPastExperienceinInvestinginAdaptationandMitigationMeasures
Recently,adistinctionhasbeenmadebetweenlearningaboutriskyanduncertain
eventsfrompersonalexperiencevs.numericorgraphicsummarydescriptionsof
possibleoutcomesandtheirlikelihoods.Learningaboutuncertainevents‐‐bethey
extremeweathereventsorpossibleoutcomesofdifferentclimateriskmitigationor
adaptationresponses‐‐fromrepeatedpersonalexperiencecapitalizesonthe
automatic,effortless,andfastassociativeandaffectiveprocessesofSystem1
(Hertwigetal.2004).
Learningandrespondingtoupdatedimpressionsaboutthelikelihoodofdifferent
consequencesinsuchexperientialenvironmentsiswellpredictedbyreinforcement
learningmodelsthatputalotofweightonrecentexperiences(Weberetal.2004).
Suchmodelsdescribeandpredictwellthevolatilityofthepublic’sconcernabout
climatechangeinresponsetorecentweatherevents,describedinthelastsection.
Learningfromstatisticaldescriptions,ontheotherhand,requiresSystem2
processes(e.g.,theinterpretationofnumericalorgraphicalprobabilityandoutcome
information)andaremodeledatanormativelevelbyprobabilityandEUtheoryand
atadescriptivelevelbyprospecttheory(KahnemanandTversky1979).
Focusingoncurrentorrecentlocalweatherabnormalitiesthatonehaspersonally
experiencedcaneasilyleadtomisestimationsoftheclimatechangerisk(Lietal.
2011).Thiscanresultinoverreactionstorecentextremeweathereventsthathave
beenassociatedwithclimatechangesuchasHurricanesKatrinaorSandyandto
dismissalsofglobalwarmingwhengoingthroughaspellofcoldweather.Public
perceptionsoftherisksofclimatechangearethusfarmorevolatilethanexpert
estimates(Krosnicketal.2006).
Theevidenceismixedwhenweexaminewhetherindividualslearnfrompast
experiencewithrespecttoinvestinginadaptationormitigationmeasuresthatare
likelytobecost‐effective.Evenafterthedevastating2004and2005hurricane
14
seasons,alargenumberofresidentsinhigh‐riskareashadstillnotinvestedin
relativelyinexpensiveloss‐reductionmeasures,norhadtheyundertaken
emergencypreparednessmeasures.Asurveyof1,100adultslivingalongthe
AtlanticandGulfCoastsundertakeninMay2006revealedthat83percenthadtaken
nostepstofortifytheirhome,68percenthadnohurricanesurvivalkit,and60
percenthadnofamilydisasterplan(Goodnough2006).
ThisbehaviorcontrastswiththeWatertonfamilywhoexperiencedseverelosses
fromrainfallandhencewasreadytoinvestinprotectivemeasures.Residentsin
Cornwall,UKbecameconcernedwithclimatechangeandmoreopentoundertaking
mitigationandadaptationmeasures,becausethelocalmedialinkedtheincreasein
rainfallintensityandfloodrisktoglobalwarming(Spenceetal.2011).
TheWatertonfamily’sinvestmentinadaptationmeasuresfordealingwiththeflood
riskissimilartothedecisionbyresidentsinCaliforniatobuyearthquakeinsurance
voluntarilyfollowingthe1989LomaPrietaquakeandthe1994Northridgequake.
(Incontrasttohomeownersinsurance,earthquakecoverageisnotrequiredasa
conditionforamortgageeveninactivelyseismicstatessuchasCalifornia.)Inthe
1970s,lessthan10percentofthehomeswereinsuredagainstearthquakedamage.
By1995,over40percentofthehomesinmanyareasalongthecoastwereinsured
againstthisrisk(Palm1995).Therehavebeennosevereearthquakessince1985
andthepercentageofresidentsthathaveearthquakeinsurancein2012has
droppedto10percent.Similarbehaviorhasbeenobservedwithrespecttothe
purchaseandcancellationoffloodinsurancepoliciesevenwhenpropertyowners
wererequiredtohavecoverageasaconditionforafederallyinsuredmortgage
(Michel‐Kerjanetal.2012).ItwouldnotbesurprisingfortheWatertonfamilyto
droptheirfloodinsuranceiftheyhavenotexperiencedfloodingoverthenextfew
years.
Thetendencytocancelinsuranceafterseveralperiodswithoutanyadverseevents
canbeseenasevidencethatpeopleviewinsuranceasan“investment”thatneedsto
15
“payoff”inordertobeseenasprofitable,andnotasprotectionagainstcatastrophic
lossesforwhichitisdesigned.Suchvolatilityisalsoconsistentwithreinforcement
learningmodelsthatdescribedecisionsfromexperience,withtheirbuilt‐infocuson
recentfeedback.Inthelate1950s,thechiefofpoliceinCrescentCityevacuatedthe
entiretotownafterreceivingatsunamiwarning,butnowavecameandhewas
ridiculed.In1963,theresidentsinCrescentCitywerewarnedthreetimesaboutan
approachingtsunamifollowinganearthquakeinthePacific,butnoneofthem
occurred.AsimilarwarningthefollowingyearaftertheAlaskaearthquake
(Magnitude8.4ontheRichterscale)wasignoredbymostofthepeopleinthearea,
butthetsunamididhitthetownandkilledelevenpeople(Yutzy1964;Anderson
1969).RecentstoriesinthemedianotedthatresidentsofNewYorkCity’sStaten
IslandfailedtoevacuateduringHurricaneSandy(witheightgettingkilledasa
result),becausetheyevacuatedtheyearbeforeforHurricaneIrene,afterreceiving
warningsoftheseverityofthestormtotheircommunitythatdidnotoccur(Semple
andGoldstein2012).
Turningtoinvestmentinenergyusereductionorenergyefficiencymeasures,there
isempiricalevidencethatpeopledevelopenergy‐conservationhabitswhenforced
totaketemporarymeasuresinresponsetoapowershortageorotherdisruption.
TheWinterfamilyandotherresidentsofJuneau,Alaskasubsistedonafractionof
theirpreviousenergybudgetforanextendedperiodoftimeduetoseveredpower
lines.Responsetothiselectricity“crisis”includedelectricityconservationthat
beganwithintwodaysoftheeventandreducedelectricityuseby25percentover
theperiodofsupplydisruptionrelativetothesameperiodin2007.Conservationof
about8percentrelativeto2007persistedafterthetransmissionlinewasrepaired
andelectricityratesreturnedtonormal.AsecondavalancheonJanuary9,2009
damagedthesamesectionoftransmissionlineandcausedasecondsupply
disruption,albeitshorterinduration(nineteendays)andmagnitudeofprice
increase(200percent).Thistimeobservedconservationduringthedisruptionwas
less(12percentrelativeto2007)whilepersistentconservationaftertheevent
increasedbytwopercentagepointsto10percentrelativeto2007.Evenafterprices
16
wentbacktonormalthough,theirenergyconsumptionoverthenextyearwas
down10percentcomparedtopreviousyears(LeightyandMeier,2010).
Theseempiricaldatasuggestthatwhenitcomestoprotectingoneselfagainstlosses
fromnaturaldisasters,individualsatriskhesitatetoincurtheupfrontcostsof
protectivemeasures,suchastheLowlandfamily’sdecisionnottoinvestinflood
proofingmeasuresthatmayservethemingoodsteadforyears.Ontheotherhand,
floodinsuranceisviewedasanattractivepurchasefollowingadisaster,as
illustratedbytheWatertonfamily,presumablybecauseindividualsmayregretnot
havinghadcoverageandimaginewhattheywouldhavesavedhadtheyhadbeen
protected(BraunandMuermann2004).Withrespecttoinvestmentinsolar
technology,householdssuchastheWattfamilywillbereluctanttoincurthe
investmentsforsolartechnologybecauseofitshighinitialcostsbutarewillingto
incurthelowercostsofcurtailingtheiruseofelectricityfollowingpowershortages,
asillustratedbytheWinterfamily.
4.StrategiesforAddressingClimateChange
Thissectiondiscussestherolethatchoicearchitecturecoupledwitheconomic
incentivescanplayinencouragingindividualstomakedecisionsthattheywillnot
regretafterhavingmadethem.Theuseofchoicearchitecturecanbecomplemented
bywell‐enforcedregulationsandstandardsthatarepoliticallyfeasibleandare
designedtoimprovebothindividualandsocialwelfare.Weillustratehowchoice
architecturecanbeappliedtothetwoproblemcontextsweareconsideringinthis
paperwithrespecttoclimatechange:reductionofenergyuseandfloodadaptation.
ChoiceArchitecture
Choicearchitecture,atermcoinedbyThalerandSunstein(2008),indicatesthat
people’schoicesoftendependinpartonhowpossibleoutcomesofdifferentchoice
optionsareframedandpresented.Framingtypicallyreferstothewayinwhich
outcomesaredescribedasgainsorlossesrelativetoareferencepoint,whichcan
17
eitherbethestatusquooranothervalue.Choicearchitectscaninfluencedecisions
byvaryingthereferencepoint,orderinwhichalternativesand/ortheirattributes
arepresented,andtheselectionofdefaults(seeJohnsonetal.2012).
Querytheory(WeberandJohnson2011)documentsthatpeoplegeneratemore
supportingargumentsforthechoiceoptionthatisconsideredfirst.Thishasbeen
observedinnumerouslabstudiesandinreal‐worldsettingslikeelections,where
candidateslistedfirstontheballothaveaclearadvantage(Krosnicketal.2001).
Argumentsinfavorofthestatusquotendtobequeriedfirst,resultinginastrong
statusquobias,observedinmanycontexts(SamuelsonandZeckhauser1988;
Johnsonetal.2007).WhenCFLbulbswereprovidedastheno‐choicelighting
defaultinahouserenovation(vs.incandescentbulbsbeingthedefault),choiceof
CFLbulbsincreasedfrom56percentto80percent(Dinneretal.2011).
Mostchoicearchitectureinterventionshavefocusedonchoiceswheretheoutcomes
areknownwithcertainty.Adaptationandmitigationdecisionswithrespectto
climatechangeinvolvedecisionsunderriskanduncertaintythatrequireoneto
focusonrepresentingthelikelihoodofspecificeventsoccurring.Aneventwhose
likelihoodisextremelysmallandwhoseoutcomedoesnotelicitastrongaffective
reactionwilltendtobeignored(i.e.,treatedasifitwillnothappen).Potential
disastersattributedtoclimatechange(suchasflooddamagefromsealevelrise)will
tendtofallintothislattercategory,whendescribedasstatisticalphenomena.As
pointedoutabove,whensuchlow‐probabilityeventsareexperienced,individuals
focusontheoutcomesandatleasttemporarilyoverweightthelikelihoodofits
futureoccurrence(Weberetal.2004).
Thesedifferencesinpeople’sresponsetolow‐probabilityeventsprovideentry
pointsforthedesignofchoicearchitectureinterventionsdesignedtorectify
inaccurateanddysfunctionaldecisionweights.SoftwaredevelopedbyGoldsteinet
al.(2008)isanexampleofaninterventionthatsimulatesrepeatedexperiencewith
18
aneventtogivepeopleanintuitivefeelfortheconsequencesofdifferentprobability
levelsinthedomainofconsumerfinance.
Choicearchitectureinterventionsdesignedtoprovidedecisionmakerswitha
differentandmoreaccurateintuitiveperceptionofthelikelihoodofanevent,can
alsodrawonsupporttheory(TverskyandKoehler1994;RottenstreichandTversky
1997).Thisisparticularlyimportantiftheeventgenerateslessattentionandhence
alowerlikelihoodofoccurrencethanitsprobabilitywarrants,Supporttheory
formalizesthefrequentempiricalobservationthatthejudgedprobabilitiesof
separateconstituentsofaninclusiveevent(e.g.,differentadverseconsequencesof
climatechange,includingdroughts,fires,coastalflooding,stormsurges,malaria
increases,etc.)usuallysumtomorethanthejudgedprobabilityoftheinclusive
eventitself(e.g.,adverseclimatechangeconsequences),aneffectthatismediated
bythemoreconcretenatureofthe“unpacked”listofconstituenteventsandtheir
greaternumber,whichgivesgreateropportunityformemory‐basedretrieval
processestogenerateavailableevidence.
Afinaltoolforchoicearchitectsisthecertaintyeffect,i.e.,people’stendencyto
stronglypreferanoptionthatyieldsacertainoutcomeoveroptionsthatofferthe
sameoutcome(orevenbetteroutcomes)withonlyaveryhighprobability.Prospect
theoryincorporatesthiseffectinitsprobabilityweightingfunction,todescribesuch
choicesthatareinconsistentwiththemaximizationofexpectedutility.
Guaranteeingcertainpositiveoutcomesratherthanonesthathaveahigh
probabilityofoccurrenceshouldbeconsideredindesigningchoicearchitecture
interventionsasitrelatestoadaptationandmitigationmeasures.
WewillnowillustratehowchoicearchitecturecanencouragetheWattandLowland
familiestoundertakemeasuresthatbenefitthemaswellasimprovesocialwelfare
byreducingtheglobalimpactsofclimatechange.
19
EncouragingReductionofEnergyUse
Dietzetal.(inpress)outlinesixdesignprinciplesforencouraginghouseholdsto
adoptenergyefficientmeasuresorinvestinnewenergytechnologies:targeting
actionsthathavethegreatestimpact;providingfinancialincentives;communicating
theprogramsmartly;providingaccurateinformationfromcrediblesources;making
actionsimple;andprovidingqualityassurance.Twoelementsoftheseprinciples
arethatthey(a)recognizetheimportanceofdescribingthedecisioninawaythat
willgetpeopletopayattentionand(b)thattheyusefinancialincentivesinaway
thatovercomespeople’sreluctancetoincurtheupfrontcostsassociatedwiththe
proposedmeasure.Informationprovidedmustbeaccurateandcomefromcredible
sources.Thesedesignprinciplessuggesthowchoicearchitecturecanbeappliedto
thedecisionfacingtheWattfamilywithrespecttoinstallingsolarpanelsintheir
house.
FramingtheProblem.Togettheprocessstarted,amessageneedstobeconveyed
thatmakesthedecisionmakerreceptivetoconsideringenergyefficientmeasures.
Recentresearchhasindicatedtheimportanceofhighlightingindirectanddirect
benefits(e.g.,beinggreen,energyindependence,savingmoney)inpeople’s
adoptionofenergyefficiencymeasures(Jakob2006).Onealsoneedstorecognize
theimportanceofpoliticalidentityconsiderationswhenchoosingthenatureof
thesemessages(Grometetal.2012;Hardistyetal.2012).Bypresentingthedirect
economicbenefitsfromadoptingthesemeasures,oneismostlikelytostrikea
receptivechord.Inthisregard,thedecisionshouldbeframedsothatthefamily
understandsthatbyinvestinginsolarpanelstheywouldbesavingmoneynextyear
aswellasinthelongertermthaniftheycontinuedwiththeircurrentoperations.
StructuringEconomicIncentivesinPsychologicallyAppealingWays.Giventhe
importanceofprovidingshort‐termeconomicincentivesforencouraging
investmentsinsolartechnology,thesolarcompanycouldagreetopaytheupfront
costofthepanelssotherewouldbenoinitialexpenditurebytheWattfamily.The
companywouldthenissuealoantiedtothemortgage,sothatthecostofthesolar
20
panelswillberepaidoverthenextfifteen,twentyorthirtyyearsbytheproperty
owner.
Thecompanywouldalsoprovideaccurateinformationtohouseholdsontheir
annualsavingsrelativetowhattheirenergybillwouldhavebeenwithoutsolar
panels.Thesehomeownerscanthencomparethesesavingswiththeirannualloan
paymentstothesolarcompany,becausethetwoamountsarebeingprovidedina
comparablemetric(i.e.,annualamount).Toprovideshort‐termincentivesthat
capitalizeonthecertaintyeffect,thesolarcompanycouldguaranteethatthe
monthlyannualloancostswouldalwaysbelowerthanthesavingsinenergycosts;
portionsoftheloanpaymentscouldbedeferredtothenextmonthortheloan
extendedsothehouseholdwouldreliablysavemoneyeachmonthbyinvestingin
solarpanels,turningthischoiceoptionintoadominatingalternative,withlong‐
standingevidencethatconsumersfrequentlysearchfordominatingchoice
alternatives,becausetheystronglydisliketradeoffs(Montgomery1989).
SolarcompaniesinCaliforniasuchasStellarSolar
(http://www.stellarsolar.net/residential‐solar‐panel‐installation‐san‐diego.html)
haveaprogramsimilartothisone.ItalsoisthebasisofthePACEprogramadopted
by28statesbutviewedbyFannieMaeandFreddieMacastooriskyforissuinga
mortgagetohomesthathaveadoptedit(KunreutherandMichel‐Kerjan2011).
Toencouragegreaterenergyefficiencyinhomes,feedbackcouldalsobeprovidedto
householdsthatcomparestheirenergyconsumptiontothoseofneighbors.The
companyOpowerhasbeenhighlysuccessfulinthisregardbyissuingreportsthat
compareenergyusageamongneighborswithsimilarly‐sizedhousesandalso
includetargetedtipsforhouseholdstolowertheirenergyconsumptiontothe
"normal"neighborhoodrate.(Seehttp://en.wikipedia.org/wiki/Opowerformore
informationonOpower’sactivities).Alcott(2011)estimatesthatOpower’sHome
EnergyReportletterstoresidentialutilitycustomersthatprovidedescriptivenorms
bycomparingtheirelectricityusetothatoftheirneighborsreduceenergy
21
consumptionby2.0percent,witha6.3percentreductionforthehighestusedecile
anda0.3percentreductionforthelowestdecile.
Thesenon‐priceinterventioneffectsareequivalenttothatofashort‐runelectricity
priceincreaseof11to20percent,andtheircosteffectivenesscomparesfavorably
tothatoftraditionalenergyconservationprograms.Ifsocialnormsareestablished
thatencouragegreateruseofenergyefficienttechnologyatthehouseholdlevel,this
effectwillcrosstoamoremacrolevelbyencouragingmanufacturerstoinvestinto
theR&Dofsuchtechnologyandbyencouragingpublicsectoractionssuchaswell‐
enforcedstandardsofenergyefficiencyaspartofbuildingsalerequirementsashad
beenpracticedinDavis,CAforthirtyyears(Dietzetal.inpress).
Ifindividualconsumersaredisinclinedtoinvestinfront‐costloadedenergy
efficiencyinvestmentsthatarenonethelesscosteffective,thisshouldalsocreate
marketopportunitiesfornewservices.Appliancecompanies,forexample,could
potentiallyswitchtheirbusinessmodelfromthecurrentonewheretheysell
refrigeratorstoonewheretheysellrefrigerationservices,providingenergy‐
efficientfridgesthatgetfrequentlyupdated,aswellasthepowertorunthese
devicesforamonthlyfee.
UsingDefaults.Energy‐efficientandgreen‐energychoiceoptionscanbepresented
tohouseholdsinavarietyofwaysthatincreasetheirlikelihoodofbeingselected.
Onewayistolisttheenergy‐efficientappliancesfirst,forexample,atthetopofalist
ofproductsinagivencategory,ortoprovidelistsormatricesofproductspresorted
byenergyefficiencyratherthanmanufacturerorprice.Makingenergy‐efficient
productsortechnologytheno‐choicedefault,forexampleinbuildingcodes,is
anotherwaytoincreaseuptakeofsuchtechnology(Dinneretal.2011).Thisdoes
nottakeawayanychoiceautonomyfromdecisionmakerswhocan(butfrequently
donot)overridethespecifieddefault.Thesameholdsforthechoicebetween
differentprovidersofelectricity.Forexample,makinggreenenergy(ratherthan
conventionalcarbon‐generatedenergy)thedefaultoptiontoGermanutility
22
customersresultedinaverylargepercentageofhouseholdsacceptingthisoption
andstayingwiththatoptionevenwhenfeedbackaboutitshighercostswas
experienced(PichertandKatsikopoulus2008).
AdaptationMeasuresforFloodReduction
ManyindividualsexhibitbiasestriggeredbySystem1behaviorwhentheyconsider
whethertoinvestinadaptationmeasurestoreducelossesfromfutureclimate‐
changerelatedextremeweathereventssuchasflooding.Morespecifically,theydo
notpayattentiontotheconsequencesarisingfromthehazardbecausethey
perceiveitschanceofoccurrenceasbelowtheirthresholdlevelofconcern.In
addition,theyhaveshorttimehorizons,soplacetoolittleweightonoutcomesthat
occurtenortwentyyearsfromnowthatcouldbeimpactedbyclimatechange.Asa
result,theimmediatedisutilityoftheupfrontcostoftheadaptationmeasureis
greaterthanthediscountedexpectedbenefitsoverthelifeofthepropertyfrom
investinginthismeasure.
Choicearchitecturesuggestsanumberofwaystoencourageindividualsand
householdstoinvestinfloodadaptationmeasuresusingappropriateSystem1and
System2behaviortoguidehouseholdsinmakingtherelevantbenefit‐costtradeoffs
byutilizingaccurateinformation.
FramingtheProblem.Researchrevealsthatpeoplearewillingtopayconsiderably
moretoreducetheriskofadverseeventsifthelikelihoodoftheeventisan
imaginableratioratherthanaverytinyabstractprobability.Forexample,saying
thattheriskofaneventoccurringwhenoneisprotectedishalfofwhatitiswhen
oneisnotprotectedelicitsafarstrongerreactionthansayingtheriskisreduced
from.000006withoutprotectionto.000003withprotection.Otherstudiesshow
thatpeoplerespondtofrequenciesratherthanrelativefrequenciesorprobabilities
(Epstein1994).Thus,presentinga.01riskas10in1,000or100in10,000insteadof
1in100makesitmorelikelythatpeoplewillpayattentiontotheevent.Most
23
peoplefeelsmallnumberscanbeeasilydismissed,whilelargenumbersgettheir
attention(Slovicetal.2000).
Adjustingthetimeframealsocanaffectriskperceptions.Peoplearemorewillingto
wearseatbeltsiftheyaretoldtheyhavea.33chanceofaseriouscaraccidentovera
fifty‐yearlifetimeofdrivingratherthana.00001chanceeachtrip(Slovicetal.
1978).Propertyownersarefarmorelikelytotakefloodriskseriouslyiftheyare
toldthechanceofatleastonefloodduringa25yearperiodis1in5ratherthanthe
comparableannualprobabilityof1in100(Weinsteinetal.1996).Suchinformation
provisionprogramscouldbesupportedbyinsurersandrealtors(programstargeted
totheirclients)andlocal,stateandfederalgovernments.
Onecanalsounpackthehazardbyfocusingonthebenefitsofprotectionagainst
specificeventsratherthanonagenericclassofevents.Controlledexperiments
yearsbeforetheterroristattacksof9/11revealedthatconsumersarewillingtopay
moreforinsuranceagainstaplanecrashcausedbyterroriststhanforflight
insuranceduetoanycause(Johnsonetal.1993).Thisfindingsuggeststhatciting
thebenefitsofprotectingoneselfagainstanotherhurricanesuchasSandymightbe
moresuccessfulinattractinginterestthanamessageframedmerelyintermsof
reducingfutureflooddamage.
TwoGuidingPrinciplesforInsurance
TheNationalFloodInsuranceProgram(NFIP)providesastartingpointfor
implementinginitiativesthatcanpersuadehomeownerstoprotectthemselves
againstlossesfromflooding.TherecentrenewaloftheNationalFloodInsurance
PrograminJuly2012authorizedstudiesbytheFederalEmergencyManagement
AgencyandtheNationalAcademyofSciencestoexaminewaysofincorporating
risk‐basedpremiumscoupledwithameans‐testedinsurancevoucher,twokey
elementsinencouraginghomeownerstoinvestinadaptationmeasures.
24
Thesetwoguidingprinciplesshouldbeutilizedinredesigningtheratestructurefor
theNFIP:
1. Premiumswouldreflectriskbasedonupdatedfloodmapstoprovidesignals
toindividualsastothehazardstheyfaceandtoencouragethemtoengagein
cost‐effectivemitigationmeasurestoreducetheirvulnerabilityto
catastrophes
2. Toaddressequityandaffordabilityissues,homeownerscurrentlyresidingin
flood‐proneareaswhosepremiumsincreasedandrequiredspecial
treatment(e.g.,lowincomeresidents)wouldbegivenameanstested
insurancevouchertoreflectthedifference.
StructuringEconomicIncentivesinPsychologicallyAppealingWays.
Toencourageadoptionofadaptationmeasuresagainstflooddamage,flood
insurancecouldbecoupledwithhomeimprovementloans.Similartothechoice
architectureforencouragingadoptionofsolarenergy,long‐termhome
improvementloanscouldspreadthecostoftheadaptationmeasureoveraperiodof
years,thusovercomingone’sreluctancetoinvestinadaptationmeasurescausedby
afocusonshort‐termhorizonsandhyperbolicdiscounting(Kunreutheretal.in
press).Homeownerswhoinvestedinadaptationmeasureswouldbegivena
premiumdiscounttoreflectthereductioninexpectedlossesfromfloodswhetheror
nottheyhadaninsurancevoucher.
ToillustratehowtheLowlandswouldbenefitfromtheproposedprogram,consider
theexamplepresentedinSection2illustratingtheattractivenessofinvestingin
floodadaptationifthefamilyutilizedexpectedutilitytheoryinmakingtheir
decisions.Undertheproposedprogram,iffloodinsurancepremiumsreflectedrisk,
thereductionintheannualinsurancepremiumwouldbe$400[thatis,
.01($40,000)].Theadaptationmeasurecosts$1,200,butwithafive‐yearhome
improvementloanatanannualinterestrateof10percent,theyearlyloanpayment
willbeonly$295.TheLowlandswouldthussave$105eachyearbyadoptingthis
measure,makingitadominatingalternative.
25
Oneshouldalsoconsidertyingthefloodinsurancepolicyandthehome
improvementloantothepropertyratherthantothehomeowner.Thismeasure
wouldavoidcancellationsofpolicieswhenindividualshavenotexperienced
damageforseveralyears.Inthecontextofchoicearchitecture,oneismorelikelyto
keepinsurancewhenhavingapolicyisthedefaultoption(forwhichnoactionis
requiredandthepremiumisfoldedintothepropertytax)thanifthehomeowneris
sentarenewalformrequestinganactivedecisionthatinvolvespaymentofthe
insurancepremiumforthecomingyear.Anotherwaytoavoidcancellationof
policieswhenindividualshavenotcollectedontheirinsuranceistooffermulti‐year
insurancewithannualpremiumsfixedforapre‐specifiedtimeperiodsuchasfive
years.
Onemotivationformovingtomulti‐yearfloodinsurancetiedtopropertycomes
fromanin‐depthanalysisoftheentireportfoliooftheNFIPthatrevealedthatthe
mediantenureoffloodinsurancewasbetweentwoandfouryears,whilethe
averagelengthoftimeinaresidencewassevenyears(Michel‐Kerjanetal.2012).
Homeownersevenallowtheirfloodinsurancetolapse,whentheyarerequiredto
purchasefloodinsuranceasaconditionforafederallyinsuredmortgage.Some
banksandfinancialinstitutionshavenotenforcedthisregulationforatleasttwo
reasons:fewofthemhavebeenfinedand/orthemortgagesaretransferredto
financialinstitutionsinnon‐floodproneregionsofthecountrythathavenotfocused
oneitherthefloodhazardriskortherequirementthathomeownersmayhaveto
purchasethiscoverage.Recentestimatesshowthatonlyhalfofthoselivinginflood
proneareashavefloodinsurance(KrieselandLandry2004;Dixonetal.2006).
Enforcementofbuildingcodesisalsonecessarytoencourageadaptationmeasures.
FollowingHurricaneAndrewin1992,Floridareevaluateditsbuildingcodeandalso
beganenforcingastatewidebuildingstandardandrequiringalllicensedengineers,
architectsandcontractorstotakeacourseonthenewbuildingcode.Theseactions
resultedingreatercompliance,initiallyoutoffearofsanctions,butafterawhile
26
reinforcedbydescriptivesocialnorms(“everyoneelseisdoingit”)andhabit.Data
fromHurricaneCharleyrevealedthathomesbuiltunderthenewcodehadaclaim
frequencythatwas60percentlessthanthosebuiltundertheoldcode(Kunreuther
andMichel‐Kerjan2011).
Communityleadersmayalsotakestepstoconvinceresidentsoftheimportanceof
investinginadaptationmeasuressotheircommunityisviewedasflood‐safe.The
leaderscanpointoutthatifeveryoneinvestsinadaptation,thepropertyvaluesof
homeswithadaptionmeasureswillincrease.Thismessagemayconvincelaggards
tofollowsuitbycreatingasocialnorm.
5.ConclusionsandFutureResearch
Thispaperhighlightstheimportanceofunderstandingindividuals’perceptionof
riskandtheirdecisionprocessesindevelopingstrategiestoinvestinadaptationand
mitigationmeasuresthatpromisetoimprovetheirindividualwelfareaswellas
reducetheconsequencesofclimatechange.Basedonarichsetofempiricaldata
fromcontrolledexperimentsandfieldsstudiesweconcludethatthiscanbe
accomplishedthroughchoicearchitecture.Byreframingtheproblemandproviding
short‐termeconomicincentives,individualsaremorelikelytofocusonthelong‐
termbenefitsofthesemeasures.Whenprobabilityinformationisprovidedby
simulationsinsteadofasabstractnumericprobabilityinformation,individualsare
morelikelytofocusonthelikelihoodofaneventoccurring.Providinginformation
onthebehaviorofothersmayhelptocreatesocialnorms.
Theexpectedutilitymodelisthenormativebenchmarkcurrentlyusedby
economiststoevaluateindividualwelfare.Inthispaperitisthebasisforevaluating
optimalSystem2decisionstoinvestinwaystoreduceenergyuseormakeone’s
housemoreresistanttodamagefromflooding.Whatwehavelearnedfrom
researchinpsychologyandbehavioraleconomicsisthatpeoplefrequentlybehave
inwaysthatareinconsistentwiththerationalassumptionsofexpectedutility
theory.Alternativemodelsthatexaminepreferenceconstructionandchoiceunder
27
uncertaintyprovidebetterpredictionsofhowpeoplewillviewclimatechange
mitigationandadaptationdecisions,andmoreimportantly,alsoprovideuswith
entrypointsforthedesignofdecisionandinstitutionalenvironmentsthathelp
individualsandsocietiesachievebetterdecisions.
Futureresearchisneededtoexaminefactorsthathavebeenshowntochange
behaviorindeterministicenvironmentstoseehowimportanttheyarein
influencingaperson’spreferencesunderriskanduncertainty.Onewillthenbeina
betterpositiontospecifytheappropriateuseofchoicearchitecturecoupledwith
economicincentivesandwell‐enforcedregulationsorstandardsthatwillaffect
preferencesamongoptions.Itwillalsoenableonetodeveloprefinedatheoryof
behavioralwelfareeconomicsthatcanmoreeffectivelyaddresswaystoencourage
mitigationandadaptationmeasuresasitrelatestoclimatechangeandothersocial
problems.
28
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