Saturday, April 05, 2008

The Power of Incentives: Gas Price and Smiling Face Edition

Fundamentally, economics is a study of incentives. Typically, particularly in undergraduate classes, economists focus on financial incentives. At this point, you are all familiar with the intuition that higher (lower) prices are associated with smaller (larger) quantities demanded. For instance, higher gas prices are associated with decreased desire for driving (and increased use of public transportation) -- at least in Boston:

The high cost of gasoline has helped fuel a sharp increase in MBTA riders over the first two months of the year and a decrease in the number and length of traffic jams, according to T officials and traffic specialists.

The number of T trips rose from 27 million in February 2007 to nearly 30 million in February 2008, up more than 11 percent for the month, Massachusetts Bay Transportation Authority officials said. The numbers were up about 5 percent for January. Combined, the average increase is 8.3 percent.

The rising MBTA numbers follow a national trend. More Americans rode public transportation last year than at any time in history, according to the American Public Transportation Association, which also cited gas prices as a major factor.

People who monitor traffic patterns said the price of gas, which has risen about 50 cents per gallon in Massachusetts over the past year, has also played a part in a smoother ride on the highways.

However, economists are only begining to recognize the power of social incentives. Basically, people like to fit in and, believe it or not, we can tap into this incentive to change energy use:

Everyone talks about the future weather, but so far nobody has done much about it, not even the many people and politicians convinced that climate change will be a serious problem. This situation comes as no surprise to the behavioral researchers who have been studying the human brain’s penchant for making dumb choices.

We can’t even prepare properly for something as straightforward as our own retirement. We’ll put in long hours shopping for a cellphone or a television set, but we’re too busy to agonize over pension plans: in one study, most people spent less than an hour choosing theirs. We’re not good at making immediate sacrifices for an abstract benefit in the future. And this weakness is compounded when, as with climate change, we have a hard time even understanding the problem or the impact of our actions today.

But we also have peculiarities that could be useful in reducing greenhouse gas emissions. With the right prompting, we’ll make sacrifices for the common good and perform acts of charity that we’d never do for any amount of pay. We’ll reform our behavior strikingly to conform with social norms. We’ll even make astute cost-benefit judgments if we get simple, clear feedback — that’s why cars come with idiot lights.

We need the right nudge, to borrow the title of the new book applying the lessons of social psychology and behavioral economics to everything from health care to climate maintenance. The authors of “Nudge,” Cass Sunstein and Richard Thaler of the University of Chicago, agree with economists who’d like to reduce greenhouse gas emissions by imposing carbon taxes or a cap-and-trade system, but they think people need extra guidance.

“Getting the prices right will not create the right behavior if people do not associate their behavior with the relevant costs,” says Dr. Thaler, a professor of behavioral science and economics. “When I turn the thermostat down on my A-C, I only vaguely know how much that costs me. If the thermostat were programmed to tell you immediately how much you are spending, the effect would be much more powerful.”

It would be still more powerful, he and Mr. Sunstein suggest, if you knew how your energy consumption compared with the social norm. A study in California showed that when the monthly electric bill listed the average consumption in the neighborhood, the people in above-average households significantly decreased their consumption.

Meanwhile, the people with the below-average bills reacted by significantly increasing their consumption — not exactly the goal of the project.

That reaction was avoided when the bill featured a little drawing along with the numbers: a smiling face on a below-average bill or a frowning face on an above-average bill. After that simple nudge, the heavy users made even bigger cuts in consumption, while the light users remained frugal.

Mr. Sunstein and Dr. Thaler suggest applying those principles with something more sophisticated than smiley faces. A glowing ball called the Ambient Orb, programmed to change colors as the price of electricity increases at peak periods, has been given to some utility customers in California, who promptly reduced their usage by 40 percent when the ball glowed red in peak periods.

Another gadget, the Wattson, which changes colors depending upon how much electricity a house is using, collects data that can be displayed on a Web site. Clive Thompson, a columnist for Wired, has suggested that people start displaying the Wattson data on their Facebook pages, an excellent idea that I’d like to take a little further.

I like the idea of using social norms to influence behavior. I believe that as a post-materialist, highly-individuated society, we are very isolated from both the (ecological, social, etc) ramifications of our actions, as well as from how our actions relate to those of others. As such, I do think there needs to be some mechanism to restore the social exchange. For example, not just a smiley on one's electricity bill, but a more public display of behavior. I guess, PGE does this with the "I Support Renewable Energy" lawn signs, which I personally find kind of facetious, but I'm sure there are other possibilities. Facebook... phone book listings... text signatures... business cards... I'm sure there are plenty of avenues for this. Further, communities might come together to reduce their neighborhood block and have block ratings based on lowered emissions.
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