using decision errors to combat climate...

Using Decision Errors to Combat Climate Change

George Loewenstein

Behavior, Energy, and Climate Change Conference

Washington DCNovember 17, 2009

• Behavioral economics: applications of psychological insights and research findings to economics

• Behavioral economics isn’t a substitute for conventional economics, but complements it

• Conventional economics offers:– insights into why we are failing to solve the

problem of climate change – e.g., externalities/free-rider problems

– potential solutions – e.g., carbon tax; cap and trade

• Behavioral economics offers complementary explanations and solutions

Impediments to progress on climate change

• Lack of global concern• failure of international climate change

negotiations• barriers to implementing effective

domestic policies – e.g., carbon taxes• difficulties of changing individual

behaviorsBehavioral economics provides explanations for,

and in some cases potential strategies for dealing with, each of these

• Lack of global concern• Failure of international climate change


domestic policies – e.g., carbon taxes• Difficulties of changing individual

behaviors

Lack of concern about climate change (traditional economics has little to offer)

Lack of concern about climate change (cont.)

What accounts for lack of concern?

• adaptation• intangibility• motivated

judgment (wishful thinking)

• not caused by other (hostile) humans

Behavioral economics: Concern about problems often bears little connection to their objective severity…

Reason #1: adaptation and the ‘fear deficit’

• We are evolutionarily programmed to respond to immediate threats and to changes in our environment

• We adapt to ongoing (or very gradually changing) states of affairs – e.g., – Wortman and Silver (1987): quadriplegics reported no

greater frequency of negative affect than control respondents!

– Tyc (1992): “no difference in quality of life or psychiatric symptomatology” in young patients who had lost limbs to cancer compared with those who had not.

Figure 1

Concern as a function of problem severity

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Objective measure of severity

Subjective level of concern

While the objective measure of problem severity follows a steady trend upwards (left vert ical scale), the subjective level of concern bounces around below the threshold of taking mit igating action, set equal to 1 on the scale to the right. The level of subjective concern does not rise in accord with objective severity because of adaptation.

Loewenstein & Dowlatabadi (working paper) “You Don't Know What You've Lost When It's Gone: Ramifications of Human Adaptation for Global Climate Change “

"This very adaptability enables [us] to become adjusted to conditions and habits which will eventually destroy the values most characteristic of human life."

R. Dubos (1965). Man Adapting.

Reason #2: intangibility and remoteness

• We respond much more powerfully to the tangible – the ‘here and now’ than to things that are intangible and remote –e.g., identifiable victim effect

An experimental demonstration(Small & Loewenstein, 2003)

• Each of a group of 10 subjects given $10 and privately assigned a unique I.D. number

• Half (the “victims”) randomly chosen to lose the money

• Fortunate participants who kept their $10 could give part of all to a “victim”

• Victim’s I.D. number determined either just before or just after the decision to give

Amount given to victims

Mann Whitney Z= -2.3, p < .05

Condition n Mean Median

Undetermined 37 $2.12 $1.81

Determined 39 $3.42 $3.81

Field study of charitable giving• Participants: 234 people at public places in Pittsburgh

filled out a (unrelated) survey for $5.00.• Afterwards, participants given a choice of keeping their

payment or donating it (anonymously) to a Habitat for Humanity home.

• Told about four needy families on the waiting list to receive a Habitat home – e.g., .

A single mom with three kids. Her current home is plagued by infestation, a leaky roof, birds in the attic, and high gas bills.

• Charity request: “Pittsburgh Habitat [will decide/hasalready decided] based on need, which of the families just described is in the most need, and that family will move in to the house being built…”

Median Donations

Mann Whitney Z= -1.99, p < .05

“Will decide” $2.00“Has decided” $4.00

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Effects of (in)tangibility and remoteness can be seen in patterns of charitable giving

Reason #3: Motivated judgment (wishful thinking)

• Our brains are not objective information processors: we can believe almost anything if we are sufficiently motivated to do so

• Tom Gilovich:– When we want to believe something: “can I believe

it?”– When we don’t want to believe something: “must I

believe it?”• Best examples are from the ‘real world’ – e.g.,

‘facilitated communication’ (1980s and 90s)

Reason #4: Not caused by hostile humans

• We have evolved to be especially responsive to threats from other (hostile) humans– DC sniper versus ‘naturally’ occurring

automobile accidents– 9/11 versus climate change– Remarkable response to Pearl Harbor versus

climate change

How to increase concern?Many ideas (none very satisfying) from brainstorming

session…• Make greater use of media (e.g., Inconvenient Truth)• Video games – e.g., SimWeather; modify assumptions

and see how to avert crisis• Use children to get through to parents• Use religion and religious institutions• Change behavior, then attitudes will follow. • Get people who already do stuff to display it and signal

to others – analogous to “livestrong” wristband• Policy makers and citizens, may require different

strategies

Concern as a function of problem severity

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Objective measure ofproblem (no policy)

Objective measure ofproblem (with policy)

Subjective level of concern(no policy)

As in Figure 1, a steady trend towards more severe problems is not sufficient to trigger actions other than adaptation, however, in the 25th period, a sudden increase in the problem severity, along with the amplification

Our only hope?




behaviors

Big part of problem: self-serving bias

• negotiators interpret what is fair in a self-serving fashionno settlement that all sides view as fairwilling to sacrifice personal payoff to obtain ‘fair’ settlementimpasse

Research on the self-serving bias• Messick and Sentis (1979) Two subjects work different

number of hours on a task. Person who works 7 hours earns $25. Subject works Other works Fair pay

10 hours 7 hours $35.24

7 hours 10 hours $30.29

Egocentric bias: $4.95

• Roth and Murnighan (1982) Subjects bargained over how to distribute 100 lottery tickets. The lottery prize was $20 for one player and $5 for the other. Those who stood to win $20 thought it was fair to divide the tickets equally; those who stood to win $5 thought it was fair to divide expected values equally high rates of impasse.

• My own research on self-serving bias: – shows that:

• bias increases with ambiguity of fairness• bias arises from disputants’ selective sifting

through information– documents existence and impact of bias in

field study of union-school board negotiations

• None of the research has examined self-serving bias in disputes involving allocation of losses, which are likely to be far more difficult to resolve.

Babcock, L., & Loewenstein, G. (1997). “Explaining Bargaining Impasse: The Role of Self-Serving Biases”. Journal of Economic Perspectives, 11, 109-126.

The self-serving bias is overwhelming in climate change negotiations

“The developing countries ask, why should developed countries be allowed to pollute more now simply because they polluted more in the past? In fact, because the developed countries have already contributed so much, they should be forced to reduce more…The United States refuses to go along unless developing countries are brought into the fold; and the developing countries see no reason why they should not be allowed to pollute as much per capita as the United States or Europe.”

Joseph Stiglitz, “A New Agenda for Global Warming”

Implications of self-serving bias for international climate change negotiations

1. One feature of self-serving bias: people tend to believe that their biased perspective is objective and hence shared willingness to settle through:

• neutral arbitration (albeit decreased by concerns about sovereignty)

• delegation to higher authority2. Need to move beyond emissions cap &

transfer formulation of problem. • some countries should commit to emissions caps• other countries should commit to taking very

specific actions




behaviors

• Since Reagan, ‘tax’ has become a dirty word

• People view emitting greenhouse gases as a property right – e.g., people don't see gas tax as an

enforcement of rights (they see it as "big government").

• People would be upset of they saw neighbor watering lawn in a drought, but not if neighbor is spewing out greenhouse gases from SUV

Possible to make carbon tax more palatable?

• Implement taxes gradually (play on adaptation)• Frame carbon tax as a tax on gas companies (combined

with a lump sum check to the consumer)• Increase gas tax only when price drops (opportunity cost

rather than out of pocket cost)• Make distribution of tax revenues as tangible as

possible; e.g., – Give people options about how to take the dividend:

• immediately as a lump sum (perhaps provided by private capital markets)

• deferred, perhaps tax free, for retirement– Reduce other taxes to compensate




behaviors

• Human behavior is hard enough to change when self-interest is at play– obesity– saving and debt– medication adherence; statins, blood

pressure, warfarin– “energy paradox”

• Even more difficult when benefits of behavior change accrue largely to others!

Implication # 1: Favor solutions that minimize individual decision making -- e.g.,• supply-side solutions (e.g., nuclear power) better

than demand-side (reduced use by consumers)• efficiency (accomplishing same task with reduced

energy) better than conservation (e.g., driving less)

• one-time change in behavior (e.g., installing programmable thermostat) better than continuous change (e.g., turning down (up) the thermostat)

• eliminate potential for undesirable behavior –e.g., ban on sales of incandescent bulbs in Europe [saving on CFL $62.95 per light bulb]

Implication #2: Exploit decision errors that ordinarily contribute to suboptimal behaviors

Examples of decision errors:• Default/status-quo bias (because defaults are

rarely in interests of individual or society)• Present-biased preferences over-spending,

over-eating, etc.• Over-weighting of small probabilities

attraction of lotteries

Using the default bias to promote healthy meal choice

• Subway customers offered a free “Meal Deal”for filling out a short survey

• 2x2x3 Design:

– Calorie Recommendation (Present vs. Absent)

– Calorie Information (Present vs. Absent)

– Convenience (Low‐Calorie, Mixed or High‐Calorie Featured Menu)

Low CalorieMixed

(Version A) High Calorievs. vs.

We manipulated convenience via “Express Menu” on first page, with full menu available on subsequent page

Results: Information•No main effects on calories ordered of:

•calorie information F(1, 280) = 1.85, p=.17•calorie recommendation F (1, 280) = .09, p =.77,•nor interaction

•But…

Main effect of convenience, F(2,280) = 18.52, p<.001

Using present-biased preferences to promote saving

• Inadequate saving due in part to present-biased preferences (people not willing to make immediate sacrifice to save money)

• Save More Tomorrow (SMarT) Plan (Benartzi & Thaler,2001) exploits present-biased preferences:– Employees agree to increase 401k put-aside next year– Financed out of wage increase (which is reduced)

• Uses present-biased preferences to promote savingHighly effective!

Using lottery incentives (plus social norms) to promote HRA completion at multi-site employer

• 3 groups:– Control - $25– Direct payment - $50– Dutch Lottery - $25 plus lottery

worth $25• Workforce divided into groups of

<10• Groups chosen at random each

week to win prize• If group’s number chosen,

individuals only eligible to win if had completed HRA

• Uses social norms and peer pressure and anticipated regret

Source: Haisley E, Loewenstein G, Pellathy T, Volpp KG, 2009

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Other applications..Lottery incentives and deposit contracts to promote weight loss

Lottery incentives to promote warfarin adherence

Figure 1: Adherence under lotteries compared to historic controls

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Similar ideas can be used to promote emissions reductions

• Dutch lottery for use of public transportation?

• Special parking, HOV lanes, for certified low emission vehicles?

• Agency to oversee that all defaults on goods and services are emissions-reducing?

Example: How to get people to install and program programmable thermostats?

• Need to make thermostats easier to install & program– thermostats should come with desirable default

program already installed– web-based interface (perhaps based on a calendar

program) to simplify programming– way to get expert help in programming – e.g.,

• students who visit your house (which would have educational dividends as well)

• bring USB stick that plugs into unit to, e.g., Home Depot• web or phone-based support• x-prize to promote simple, effective, design?

• Dutch postal code-style lottery?– Prize contingent on having installed and programmed unit. – Accumulating prize money if the chosen winner doesn't receive

the prize

Conclusions…• Global climate change is a devilishly

difficult problem, due both to economic and psychological reasons

• Only likely to be progress following a ‘crisis’; need to be prepared for such a crisis with good solutions in hand

• Solutions to problem will need to take account of human fallibility and, to some degree, exploit it

How not to change behavior (a dubious use of defaults)…

using decision errors to combat climate...

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