Behavioural agents (with any kind of behavioural bias) also respond to incentives
But their biases can also be affected by other means.
Examples:
Behavioural agents (with any kind of behavioural bias) also respond to incentives
But their biases can also be affected by other means.
Green Nudges
Nudge (economic definition)
A nudge is defined as a change in the decision environment that influcences people’s behavior without prohibiting any choices or significantly changing the economic incentives
from Thaler and Sunstein, 2009
Originally, the role of nudges was to counteract poor choices made by individuals, in areas such as personal savings and health
Traditional Nudge: improve welfare of agents: a behavioral solution to a behavioral problem.
Green nudge: influence people’s behavior, through changes in the choice architecture, in order to reduce negative externalities: a behavioral solution to a traditional economic problem.
Classification
Cognitive nudges
Correct for bounded rationality, inattention of self-control. Make it easier to “do the smart thing”.
For instance, help individuals with self-control problems, present-bias….
Example: put healthy food at the top of a restaurant menu.
It does does not assume that individuals make poor choices for themselves because of bounded rationality. But it works because individuals have cognitive or self control limitations.
Moral Nudges
A moral nudge draws on people’s social preferences, their desire for status, to follow norms or to have a positive self-image. The nudge rewards “doing the right thing” by providing the individual with moral (dis)utility.
Example: bounded rationality or self-control could lead an individual defaulted into a green tariff to stick with the new socially desirable default.
Compare with the neoclassical agent
\[\max_{s.t. h(x)\leq0} U(x)\]
Cognitive Nudge: help agent solve optimization
Moral Nudge: affects agents preferences
Some Examples
Nudge Type
Example
Defaults
If I manage to summarize that in a few words, will that fit?
Simplification of information and salience
Changes in physical environment
Reminders
Social comparison
Normative appeal and peer pressure
Commitment and goal Setting
Defaults
Default Browser
The default effect refers to the tendency of people to stick with an alternative already chosen by someone else, even when the cost of making an active choice is very small.
Default Browser
Why does it work?
people interpret the default as a suggestion from someone better informed
lowers the cost of a decision (from no-decision to the default)
loss aversion or status quo bias make people stay with the default
Result:
consumption of paper dropped by around 15 percent
no indications that the effect was any smaller 28 weeks after the change had been introduced
Change the default temperature on thermostat for OECD employees from the standard 20 °C to a lower default.
Result:
1-degree decrease resulted in a lower average temperature initially, the effect disappeared and went into the opposite direction after a few weeks.
Simplification of Information and Salience
Decision makers are innatentive to certain informations and make therefore suboptimal decisions.
Example: consumers ignore fuel and electricity costs when buying cars or lightbulbs.
Note that this can correspond to:
limited rationality: agents lack cognitive power
rational innatention: since acquiring and processing information is in general costly, it might be rational to ignore some
Label: lifetime energy costs
Is it really a nudge ? Or just release of information?
In Tiefenbeck et al. (2016), real-time feedback on energy use, in the shower, was given in the form of an animation of a polar bear standing on melting ice.
-> reduced the average shower time by 22 percent
Changes in the Physical Environment
The design of the physical can nudge people to the preferable behaviour, or give clues on appropriate conduct.
The topic is under-studied despite some famous examples.
Kallbekken and Saelen (2013): in a buffet restaurant, 50% smaller plates led to a reduction of around 20% of food consumption.
Reminders
A reminder increases attention to a decision and reduces forgetfulness.
Can have unexpected effects:
draw attention to a decision that the decision maker would rather avoid
create guilt and/or cognitive dissonance
Reminders of participation in voluntary land conservation programs
-> Increase participation rate
Wallander, Ferraro and Higgins (2017)
Bill
After receiving an electricity bill households reduce consumption by 0.6% to 1%.
Gilbert and Zivin (2014)
(A way to reduce peak demand?)
Social Comparisons and Social Preferences
We have seen that individuals exhibit other-regarding preferences
In econ, there are several associated concepts/theories:
altruistic motive
consumption externalities / conspicuous consumption (keeping up with the Jones)
positional preferences
…
In behavioural economics we posit that social informations (information about others) impact individual’s behaviour.
Social information can be classified between:
descriptive message: this is what others do
injunctive message: this is the appropriate behaviour
Send message to consumers: Substantial energy conservation will be required for the society during critical peak-demand hours in summer and winter.
Compare with economic incentives (dynamic pricing)
Outcome:
electricity use down by 8% for moral suasion, 16% for economic incentives
for moral suasion, consumption back to normal after end of messages (dishabituation)
for economic incentives, green behaviour persists for longer
Commitment and Goal Setting
Several strands of behavioural economics postulate the existence of several selves (with different goals/preferences) and discuss some kind of self control.
The time inconsistency between today’s self and tomorrow’s self leads to commitment issues
The inconsistency between one’s self-image and actual behaviour leads to cognitive dissonance.
Social Comparisons and Social Preferences
We have seen that individuals exhibit other-regarding preferences
In econ, there are several associated concepts/theories: