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Behavioural Economics: Making a case for ‘irrational’ policies

Behavioural Economics: Making a case for ‘irrational’ policies

By Archit Jain

It was a hot day, 10 years ago in San Marcos, California. Graduate students assisting Robert Cialdini, a professor of psychology at Arizona State University, were running house to house putting signs on every door. Their objective was simple: To encourage people to turn off their air conditioning and turn on their fans.

The experiment

The sign on the doors of the first set of household read: “Did you know you could save $54 a month this summer?” One group received a message about the environmental benefits of switching off their air conditioners and switching on their fans. Another group got a message about being good citizens, helping prevent blackouts.

Which of the three worked the best? None.

They all had zero impact on energy use. It was as if the graduate students hadn’t turned up at all. It was contradictory to traditional economics which holds that people respond to financial incentives.

Even if the idea of combating climate change and being a ‘good citizen’ doesn’t appeal to households, they should ideally care about saving money?

Another conundrum was that there was a fourth sign that worked. It read: “When surveyed, 77% of your neighbours said that they turned off their air conditioning and turned on their fans. Please join them”.

“Social pressure is powerful stuff”, says Alex Laskey, founder of Opowers, which partners with utility companies to deliver personalised home energy reports. Amongst other things, this report contains information about the amount of energy a household’s neighbours are consuming.

When price interventions fail, we must look for fresh ways of looking at the problem.

Our planet is warming, slowly but surely. Beyond any reasonable doubt, human activity has contributed to this process. Yet, people are slow to respond to conservation initiatives, even though advancements in science have served people’s own financial interests. When price interventions (such as greenhouse gas emissions taxes or R&D subsidies) fail to increase the consumption of energy efficient technologies, we must look for fresh ways of looking at the problem.

A case for ‘irrational’ economics?

In the US, total energy use fell when smiley faces were printed on electricity bills of efficient households.

Behavioural economics, as the California example shows, can help understand why these attitudes persist and how they can be changed. In the US, total energy use fell when smiley faces were printed on electricity bills of efficient households. A ‘rational’ adult responds to smiley faces the same way a third grader does. A research conducted in China demonstrated that in trust-based relationships, where service companies are embedded in local businesses, social or political networks are essential to the implementation of energy efficient projects. This is contrary to the traditional economic belief that personal relationships do not play a major role in economics.

Energy efficiency and economics

Uganda employed energy efficient cookstoves | Photo Courtesy: First Climate

Another case in point comes from Uganda. Despite the considerable cost reduction achieved by the average household by using energy efficient cookstoves, uptake tends to be far lower than expected. Uganda made use of a famous tool in the behavioural economist’s kit, called ‘Present Bias’, to solve this problem. Present Bias is the tendency to give bigger weights to payoffs that are closer in time. Citizens in Uganda were convinced about the economic benefits of buying the cookstoves. They were then allowed to pay for them a few months later. If future payoffs are less important, future payments should be more tolerable. Indeed, with the offer of the new contract, uptake increased. It increased from 4% to 46% in the city of Kampala and from 5% to 57% in Mbarara.

Part of the reason why many developmental programs fail despite the noblest of intentions is that they are designed for logical and rational individuals.

We may believe we are rational but most of us are not. Recognising the irrationalities of the human mind and exploiting psychological insights to address them can improve the efficacy of our energy conservation efforts. This can be done by promoting efficient products or of raising uptake of renewable alternatives.

Featured Image Source: Source Power and Gas
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