List of Most Common Behavioral Economics Obstacles

8/9/2019 List of Most Common Behavioral Economics Obstacles

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List of Behavioral Economics Principles that can Inform Energy PolicySebastien Houde, Annika Todd

questions: [email protected] Energy Efficiency Center at Stanford University

2/17/2010

WORK IN PROGRESS

1. FramingFraming of information can bias choice in systematic and predicted ways. Well-known framing effects that

have implications for energy programs are listed below.

Framing Effects Reference / Example Implications for energy use

Loss aversion:

people focus on losses

much more than on gains.

when given a choice between surgeryand radiation therapy, describing

surgery outcome statistics as a 90%

survival rate yielded a significantly

higher preference for surgery thanwhen described as a 10% mortality

rate (McNeil et al. 1982)

Framing problems in slightly differentways, such as placing decisions in a

positive frame versus a negative

frame, has been shown to change

decisions by around 26% in several

studies (Tversky and Kahneman 1981;

Kahneman, Knetsch, and R. H. Thaler

1991; Cormier O'Connor et al. 1985).

energy information should beframed as preventing a loss,

rather than incurring a gain;

This appliance is 6 times less

efficient than the best in class orYou are currently loosing $5

every month by not consistently

turning off your lights is more

motivating than This appliance

is 2 times more efficient than the

average appliance or You could

gain $5 every month by

consistently turning off your

lights.

Have a graph with moneysaved or energy saved on the

Y axis so that using more energy

visually looks like a loss.Presentation of technical

information can induce

more deliberative

thinking.

Suggests that displaying KhWcould have some benefits

trade-off with the fact that

people may no clues

Mental Accounts people

tend to group spending

into different accounts

People often have a separate budgetfor food, clothing

Energy costs can be monitoredjointly with other, more salient,

expenses, such as savings, food

calories.

Frame energy savings in specificways. E.g. UK's Winter Fuel

Allowance, British ColumbiaClimate credit

Sunk Costs - If people

have already paid for

something, they feel more

attached and more

invested in it.

Classic example is people buy a ticketto a concert, in the first 15 minutes

you realize the concert is terrible, but

you feel obligated to stay for the rest

of it anyways because you already

paid for the ticket.

This makes it hard to get peopleto throw out non-efficient items

such as incandescents.

Frame information to reduce thesalience of capital costs for

durables. Framing of incentives,


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e.g. cash for clunkers

People that pay for a HAN aremore likely to try to really get

some use out of it by saving

electricity.

Segregation and

Integration of monetarylosses and gains -

Presenting a small cost on

its own is more salient

than embedding it within

a larger cost.

This is because of utility concavity. If you want to emphasize thecost, present it on its own, if youwant to de-emphasize the cost,

embed it.

You are currently loosing $5every month by not consistently

turning off your lights is more

effective than You could reduce

your $125 electricity bill to $120

if you consistently turned off

your lights

On the other hand, if the hiddencosts are large for a target

behavior, aggregation of smallamounts is desirable. (Save

$100/year by buying EE fridge

rather than save $0.30 per day)

Reference Dependent

Preferences - people

judge their well being

relative to some reference

point, which could be

what they expect, what

they have habitually

experienced, or what

other people are doing

for social example, see prosocialbehavior below

A consumers energy use shouldbe framed relative to an effective

reference point. Show their

energy use:

o Relative to the goal of 10%reduction from last year.

o Relative to those who areusing less energy.

o If people use above theaverage amount ofenergy, use the average as

the benchmark, but if they

use less than the average

amount, use the best

household as the

benchmark.

o If people set a goal, makesure that the goal is hard

to attain or else they will

stop after the goal has

been reached

Defaults / Endowmenteffect / Status Quo

For example, in countries where thedefault option is to donate organs(presumed consent), participation

rates are 25-30% higher than

countries in which not donating is the

default (informed consent),

controlling for other factors (Abadie

and Gay 2006).

Employee participation in 401(k)

Switch a program from opt-in(where the default is non-enrollment in the program) to

opt-out (where the default is

enrollment in the program).


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plans increase from 37% to 86%

under automatic enrollment

(Madrian and Shea 2001).

Pichert and Katsikopoulos (2008)present evidence from the field and

from experiments demonstrating that

the use of opt-out programsimproves enrollment in plans that

charge extra for green energy.

Setting the default temperature onwashing machines to cold was

calculated to save 24% (McCalley

2006).

Real factory workers were either a)promised abonus if their productivity

as above a certain threshold for a

time period, b) given a provisional

bonus that they could keep unless

productivity went below a certain

threshold. Both increased

productivity over control, but b) was

1% more productive than a). (Hossain

and List)

Risk seeking behavior for

losses people would

rather gamble to try to

prevent any loss than take

a small loss with certainty

2. Choice Architecture and HeuristicsChoice architecture refers to the organization of the options, attributes and information constituting a

choice set.

Research has shown that rationally bounded decision-makers use different decision strategies to navigate

through different choice architectures. Given that different strategies lead to widely different outcomes,

there is then a room for interventions to construct choice sets that nudge decision-makers to beneficially

outcomes. Research in this field is however still nascent. There are however a numbers of important

principles that have emerged.

Principles Example Implications

Choice overload toomuch choice might be

demotivating, and

might induce people

to do nothing (default

or status quo

behavior)

Customers in a grocery store who werepresented with a display of six jams to

taste were more likely to purchase jam

(12% bought jam) than if there were 24

jams to taste (2% bought jam) (Iyengar

and Lepper 2000).

People are less likely to opt-in to a

program if, in order to do so, they must

Too much choice might be demotivatingand induce the status quo.

- Restrict the number of recommended

target behaviors.


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choose between too many options. For

example, when the number of possible

401(k) plans to choose from are

increased, the likelihood of enrollment in

any plan decreases. (Madrian and Shea

2001)

Choice framing:extremeness aversion,

compromise effect

and irrelevant

alternatives.

Individuals will tend to choose the optionthat represents a compromise (people

wont buy the cheapest nor the most

expensive item on a wedding registry).

Also, adding an irrelevant alternative to a

choice set may favor other options.

Suppose that we have 2 recommended

behaviors, A and B, where B has more

impact but is more difficult to

implement. We can propose a third

option C that is even more difficult to

implement (and even maybe less

efficient) to make B more appealing.

3. Prosocial BehaviorPro-social and especially pro-environmental behaviors may be important motivational factors for some

households. Pro-social behaviors can be a complement to monetary-based motivations, but may also be a

substitute. Providing monetary incentives may crowd out pro-social behaviors.

In economics, a lot of research has been done on the theory of private contributions to public goods.

There exists a wealth of experimental evidence in this domain.

Principles Examples ImplicationsStatus and self-image

- people are more

likely to contribute

when their actions

are visible to others,

when they can

communicate with

others, and where

the users share a

group identity

In one field experiment on voting, researchersshowed that mailing letters that listed the voting

record of every household in a neighborhood for

a past election along with the promise of re-

sending the list with updated records for an

upcoming election improved voter turnout by

8%, an effect which is comparable to direct

contact by door-to-door canvassers and much

cheaper (Gerber, Green, and Larimer 2008).

Exploit the fact that people contribute mo(i.e. provide greater effort for pro-social

behavior) when others can observe their

contributions.

- Display a leaderboard, or a list of peoplewho have made significant conservation

efforts.

Free-riding one

person has a lowmotivation to

contribute to the

public good (by

reducing energy use)

because it makes

virtually no difference

in world wide

emissions

Note that this is different that what is commonlyreferred to in the energy domain as free riding(where people who would have bought an ee

appliance anyways use a rebate)

Create sharing mechanisms that minimizefree-riding, e.g. fair lotteries.

Create smaller groups/networks wherepeople contributions are made salient.


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Fairness / Inequality

/Punishment people

tend to be averse to

inequalities and

unfair outcomes, and

are willing to pay in

order to reward orpunish others.

People are willing to contribute to the publicgood, but only if others also contribute to the

public good.

The ability to punish others who do notcontribute can increase contributions to public

goods. This is true whether the punishment is

monetary or if it is in the form of disapprovalpoints, although it is higher with monetary

punishment.

Implement a Provision Point Mechanismwhich people contribute money towards

goal, but are refunded their money if the

isnt met. For example (Rose et al. 2002)

Traverse City Light and Power in Michigan

successfully built a windmill using this

mechanism, and The City of Fort Collins inColorado raised money for three separate

wind turbines in this way.

Make it obvious that others in the commare making an effort to reduce energy us

Other-Regarding

Preferences / Social

Norms / Social

References (A specific

form of Reference

Dependent

Preferences) - People

care about levels of

performance,

possessions and well-

being relative to

others, rather than in

absolute levels.

Social references alone, without any feedback orother information, have been shown to achieve

20-28% electricity and gas reductions in several

studies (Nolan et al. 2008; Schultz et al. 2007;

Goldstein, Griskevicius, and Cialdini 2007;

Cialdini 2003).

Feedback plus social references, includingfeedback about neighbors and communities,resulted in 27% reductions in electricity use in

one study (Staats and Harland 1995).

A 2008 study showed that utility customersreduced household energy consumption by 9%

more when they learned that the vast majority

of their neighbors were conserving, rather than

when they were told about environmental

benefits or about personal cost savings (Nolan et

al. 2008). This finding has been replicated many

times with hotel guests reusing their towels,

national park visitors staying on trails, and in

other situations (Goldstein, Griskevicius, and

Cialdini 2007). Showing energy use relative to the average

caused people who were above the average to

lower their use, but caused people who were

below the average to increase their use, unless

counteracted with a smiley face (Schultz et al.

2007).

Providing information that all of yourneighbors are using less energy is much m

motivating than providing info about

environmental harm.

Inducing competition and displaying rankisystems can cause the reference point to

to focusing on other people

Interpersonal

communication

Hood River weatherizing project, undertaken bythe NRDC and the Pacific Northwests electricity

suppliers - initially, less than 10% of customers

signed up for the program. However, when the

project switched to relying heavily on local

residents, such as speakers at schools andchurches, 85% enrolled in 2 years, and 95% by

the end. Cavanagh and Hirst, 1987; Engels,

Kaplan and Peach, 1987).

A Canadian study of strategies to reducesummer use of water on residential lawns found

that simply providing information on efficient

use was not effective in reducing consumption,

but when residents received a home visit and

Use community groups such as churches,schools, community leaders to dissemina

programs or information.


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were asked to commit to reduced usage, three

quarters of them made the commitment, and

overall water consumption was reduced by

more than 50% (Durham Region 1997).

4. Commitment Mechanisms / Goal Setting / Time inconsistency

People tend to procrastinate, and they tend to put off things that are costly. They want to save energy,

but they want to install insulation next year (not this year). When next year comes, they want to put it off

again. This problem can be solved by commitment mechanisms, in which individuals commit to

performing some action by a specific date.

We refer to commitment mechanisms as the terms of informal contracts that individuals voluntary agree

upon. The aim of commitment mechanisms is to guide and incentivize individuals in the process of

working through their goals.

Principles Implications ExampleFirst-Cost Bias:

Discount Rates, Time

Inconsistency (First

Cost Bias), and Self-

Control.

People are systematically biased in

that they value immediate rewards

(and dislike immediate costs) much

more than they value future rewards

(and dislike future costs), to a degree

that is not explainable by any

reasonable discount rate (Strotz 1955;

Thaler 1981; Loewenstein and Thaler

1992)

Repackage costs so that the benefit is gainedup front, such as BerkeleyFirst.

Use commitment mechanisms such as publicgoal setting /commitments

Goal Setting setting

goals can help people

overcome

procrastination andalso set a reference

point.

In two studies, feedback plus goalsetting mechanisms achieved around

22% reduction in electricity and gas

use (McCalley 2006; McCalley and

Midden 2002).

Setting personal or group goals for energyuse / reduction could be very effective

Commitment Ask people to make commitmentshelps people overcome

procrastination / time inconsistency

issues

Ask consumers to make a commitment toperform an energy efficient improvement at

some point in the future. For example,

people could be asked to commit today to

replacing their fridge with an energy efficient

one in one year.

Commitment

increases - Begin

small, make it easy to

say yes; merely sayingyes makes it very

likely the individual

will follow through.

Then make larger

requests.

Once individuals have agreed tosmall behavioral changes, and taken

those steps, the pro-

environmentalist values becomeinternalized, and are made a source

of personal identity and self-esteem.

At this point they are likely to

undertake more substantial changes

in behavior.

For example, Californiahomeowners asked to display a 3-

inch square sign that read Be a Safe

A commitment can also take the form ofthem engaging in one activity (installing a

shower flow restrictor), pointing out other

sustainable behaviors that they are alreadyengaged in.


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Driver. 2 weeks later: asked to

display a PSA billboard in the front

lawn that read Drive Carefully

(Freedman and Fraser 1966). Only

asked to display billboard -- -- 17%

complied. Asked first and second

request -- -- 76% complied.

5. IncentivesNot surprisingly, monetary incentives can have substantial impact upon behavior. However, in many cases

the results are disappointing. There are several reasons for this. First, small piece-rate monetary

incentives are typical, for example, in the form of rebates on compact fluorescent light bulbs. However,

small piece-rate monetary incentives actually decrease desirable behaviors because the reward crowds

out intrinsic motivations. Non-monetary social incentives such as cooperation, competition, and norms

can be more effective than piece-rate monetary incentives (Lepper, Master & Yow, 2008).

Principles Implications

Crowding out - If

people are

intrinsically

motivated to perform

a behavior,

introducing a small,

piece-rate monetary

reward may actually

decrease the

behavior

For example, offering people $7 to donateblood actually decreases blood donation

(Mellstrom and Johannesson 2008).

In another example, people who wereoffered money in compensation for a

nuclear waste facility in their area reported

being less happy than those who were not

offered the money (Frey and Goette 1999).

This might only be true with small amounts(Gneezy, Rustuchini 2000)

Offering a non-monetary, environmentalreward might not cause this crowding out.

Reciprocity / Gift

Exchange - people

tend to want to repay

gifts or efforts of

others.

Offering people a monetary gift (notconditional on effort) is more motivating

than a piece-rate (conditional on effort)

reward.

There is some evidence that this is only atemporary increase in effort, immediately

after the gift is given (Gneezy, List 2006)

For example, doctors were less likely toreturn a voluntary questionnaire if they

were given a check to be cashed only upon

completion rather than a check that could

be cashed regardless of completion (Fehr

and Falk 2002)

Rather than offering monetary incentives foreach energy conserving behavior or each

energy efficient purchase, an in-kind gift

might be offered to consumers, with the

suggestion that they then conserve energy.

Utilities might match CO2 emissionsreductions of their customers by purchasing

voluntary offsets.

In kind gifts - Offeringpeople a gift in-kind

a non-monetary gift

is more motivating

than giving people a

monetary gift equal

to the cost of the gift.

For example, when students were asked tocatalog the books from a library, students

who were given a gift of a thermos worth

$10 upon arrival provided an average of

30% more output than students who were

given a gift of $10 upon arrival (Kube,

Marchal, and Puppe 2008).

see above (reciprocity).

Tournament / A tournament style reward structure Competitions between neighborhoods or


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Competition (where only the top performer receives a

reward) is more motivating than a piece-

rate reward structure (Gneezy, Niederle,

and Rustichini 2003).

Oberlin did a 2 week competition withstudents and found reductions (Petersen et

al. 2007) Stanford has a competition during winter

quarter each year, gets ~8% reductions

(Annika and Carries unpublished)

between cities to see who can reduce the

most energy use. Prizes could be

community prizes.

Lotteries / Certainty

Effect - people

overestimate small

percentages, and so

believe that their

chance of winning is

higher than it actually

is, and therefore are

more motivated to

put in effort in order

to increase their

probability of

winning.

Balaji Prabakhar did lotteries fortransportation (in India). Increased off-

peak driving activity from 20% to 40%.

Average commuting times for everyone

were reduced by 24% (unpublished?).

Result of prospect theory (Kahneman andTversky 1979)

Rather than giving people appliance rebates,give them a lottery ticket that would make

the entire appliance free.

Endowment effect real factory workers were either a)promised a bonus if their productivity was

above a certain threshold for a time

period, b) given a provisional bonus that

they could keep unless productivity went

below a certain threshold. Both increased

productivity over control, but b) was 1%

more productive than a) (Hossain, List2009)

Give people a reward, then take it away ifthey dont save enough energy.

6. LearningPresumably, energy feedback will foster learning among consumers. How people learn is a vast topic, but

two particular principles may be important to consider.

First, learning often involves an exploration and exploitation trade-off. This type of trade-off consists of

sample information sequentially explored until a certain knowledge capital is attained, after which

individuals simply exploit the knowledge they already have. It is well known that this type of learning gives

rise to skewed distributions, meaning that if people initially sample information that they found useless or

unpleasant, they will simply stop exploring and switch to the exploitation stage. They will then have an

incomplete distribution of the information. In this way, the first sessions that people interact with theinterface are crucial.

The second principle is that imitation and social learning play an important role in the diffusion of

technologies.


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List of Most Common Behavioral Economics Obstacles