May 21, 2011

Behavioral economics of economists

Hundreds of studies document that under many circumstances people do not behave in a perfectly rational, self-interested way. These systematic deviations from the ideal Homo economicus are the subject matter of behavioral economics. Behavioral economics has implications for policy. Some economists argue that the pervasiveness and potential harmfulness of people's psychological biases and quirks justify government command of individual behavior, or at least some "nudging". But policy-makers, including voters, politicians, bureaucrats and scientific advisors, are people and thus have their own cognitive biases, including the bias blind spot, that result in commanding or nudging others in the wrong direction - not to mention that may seek their own good instead of that of society.

Elisabeth Gsottbauer and Jeroen C. J. M. van den Bergh review the behavioral economics literature and draw some implications for environmental policy in the journal Environmental and Resource Economics (Environmental policy theory given bounded rationality and other-regarding preferences). It is a very good review. And it may illustrate the paradox of irrational people guiding other irrational people. At some point they write:

Pichert and Katsikopoulos (2008) offer an experimental analysis of consumer decision-making relating to green electricity use. They examine peoples’ motivation for choosing green electricity in laboratory experiments and find that default options have a strong influence on consumer choice. A policy lesson drawn is that, in order to promote pro-environmental behavior, green electricity should be presented as the default option for consumers.
Gsottbauer and van den Bergh don't explain what they mean by "green electricity," so I went to the original Pichert and Katsikopoulos 2008's paper (Green defaults: Information presentation and pro-environmental behaviour, published in the Journal of Environmental Psychology). For the purpose of their study, Pichert and Katsikopoulos classify "renewable energy sources such as water, wind, biomass, and the sun" as "green" and "environmentally friendly," and "electricity generated from detrimental or at least controversial energy sources such as coal or atomic power" as "grey."

I am aware that all this may be just an exercise in the study of how people make decisions, and that which kind of electricity is better for the environment - or, more precisely, has smaller environmental negative externalities - is a technical problem outside the scope of behavioral economics. Or maybe Gsottbauer and van den Bergh actually believe that water, wind, biomass, and solar power are environmentally better - have smaller environmental externalities - than coal and nuclear. They really do sound like wanting to nudge people into using what they call "green" electricity. And this is not an isolated instance in their article. They also seem to want to nudge people into sorting domestic waste to facilitate recycling. Does all this reveal their bounded rationality? Are they perhaps unconsciously engaging in wishful thinking, neglect of probability, anchoring, overconfidence, bandwagon effects, attentional bias or false consensus effects?

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