behavioral economics


The NYT piece suffers from peculiar worldview of American and European journalists who think all good innovations come from their part of the world (Singapore pioneered congestion pricing for road use in 1975), but let’s focus on the positive: the drawing out of lessons from Thaler and Springsteen about the need to address hardwired perceptions of fairness: Technology is making “variable” or “dynamic” pricing — the same strategies that ensure a seat on an airplane, a hotel room or an Uber car are almost always available if you’re willing to pay the price — more plausible in areas with huge social consequences. Dynamic pricing of electricity could help bring down pollution, reduce energy costs and make renewable energy more viable. Constantly adjusting prices for access to highways and congested downtowns could make traffic jams, with all the resulting wasted time and excess emissions, a thing of the past. Any sector where supplies tend to be fixed but demand fluctuates — the water supply, health care — would seem like prime candidates for variable pricing.
When I was studying economics in the 1980s, it was quite vulnerable to the criticism that the entire edifice was built on a shaky assumption: homo economicus. But now that Kahnemann, Thaler et al. have slain h.e., economics is that much stronger.
How do YOU think? We tell ourselves that when people are faced with making a decision, they would make reasonable, well informed and carefully thought out decisions. Oftentimes, we think (unconsciously of course) that other people think in the same way that we ourselves do. But for the vast majority of time, this is just not how it works. The latest World Development Report explains the three principles of human decision making: thinking automatically, thinking socially, and thinking with mental models.
We’ve been arguing that electricity is up for a major change and that the change is going to be driven by the infusion of ICTs into all aspects of electricity generation, transmission, distribution and supply. Here’s another example. Hopefully this does not require smart meters and that high consumption devices in our countries can work with the gizmo. IT’S July, and it’s starting to get hot. This month last year — on Friday, July 19, 2013 — New York City broke its electricity usage record.
About a year back, we predicted that the new electricity tariff will shock people into changing behavior: “the currently proposed tariff structure will create “bill shock” among consumers, and nudge a certain percentage of consumers to voluntarily reduce demand. But this will be insufficient.” The evidence is in. It has happened. The 2013 Sri Lanka Central Bank Report states: Electricity consumption in the ‘Domestic’ sector decreased by 1.
In our recent intervention on Sri Lanka’s electricity tariffs, we offered to help the regulatory agency and the service suppliers apply the learnings of behavioral economics to the task of reducing the five percent of peak-load demand that was responsible for 17 percent of the total cost. In this oped, an author we quoted in the submission, supports pilot project proposed by the transport authority of Singapore. By providing free train rides, the LTA hopes to harness the power of free to shift demand from peak to off-peak travel. Congestion is a 10 to 20 per cent phenomenon; transport planners do not need to shift a majority of commuters to off-peak hours. As long as 10 to 20 per cent do, that is sufficient to alleviate congestion and improve the commuting experience for all.
We at LIRNEasia are seeking to apply nudge principles to how utilities (and governments) communicate with their customers (citizens). Therefore, it was not surprising that this caught my eye when reading about Google’s employee perks: So the candy (M&Ms, plain and peanut; TCHO brand luxury chocolate bars, chewing gum, Life Savers) is in opaque ceramic jars that sport prominent nutritional labels. Healthier snacks (almonds, peanuts, dried kiwi and dried banana chips) are in transparent glass jars. In coolers, sodas are concealed behind translucent glass. A variety of waters and juices are immediately visible.
Behavioral economics has brought to the fore the power of the default. As big data makes it easier to understand people’s actual behaviors and guide their choices, the power of the default is beginning to be fought over. Interestingly, it’s Microsoft versus the rest. Next came an incensed open letter from the board of the Association of National Advertisers to Steve Ballmer, the C.E.
Universal acclaim rarely comes to a theorist who tries to implement his ideas. As administrator of the White House Office of Information and Regulatory Affairs, he reviewed the rules implementing President Obama’s health care act and the Dodd-Frank financial regulatory reform law. He backed major environmental initiatives, including higher fuel efficiency standards for cars and trucks and new toxic emissions rules for power plants. He approved the revamping of the decades-old food pyramid (it is now a “plate”), the tightening of salmonella rules for eggs and a crackdown on prison rape. He midwifed a deal between appliance manufacturers and the Department of Energy to make refrigerators more energy efficient.

Power of the default

Posted by on October 16, 2011  /  0 Comments

Behavioral economics is becoming a major component of LIRNEasia’s toolkit. The discussion below refers to the decision architectures that appear to keep the money flowing into Google. But most people, of course, never make that single click. Defaults win. The role of defaults in steering decisions is by no means confined to the online world.
I co-taught an experimental graduate seminar with one of my colleagues at Ohio State University in the early nineties where we explored what policy could learn from research on how people actually behaved, thought and decided. I taught the first half of the seminar by deconstructing various policy and regulatory debates (dominated by lawyers and economists) to lay bare the fundamental (and unexamined) assumptions regarding human behavior. She taught the second half, talking about how behavioral research could challenge or confirm those assumptions. This then led to multiple funded projects and dissertations that she directed on policy-relevant social science research. It was possibly because of this “priming” (a key concept in contemporary behavioral research) that I was unquestioningly amenable to the suggestion to study how poor people actually used ICTs that came from the research planning sessions we conducted as part of the launch of LIRNEasia in September 2004.