So Richard Thaler has won the Nobel prize for Economics in 2017 for his work on behavioural economics.
Years ago, I posted a rhetorical question on the Met Office intranet. I’d spent six years working for an economic consultancy founded on an econometric model of the UK economy, projecting economy-energy-environment futures. At the Met Office I was working on forecasting low cloud, using a scheme that combined known atmospheric physics with parametrisation of the known unknowns, and varying the parameters to create ensembles. Weather is of course notoriously difficult to forecast, as a non-linear system subject to minute variations in observed starting conditions. My question was: “Is it easier to forecast the weather, which obeys the laws of physics, or the economy, in which the actors are swayed by the forecasts?”
Later, I moved into the Health Forecasting team at the Met Office, which was trying to forecast periods of increased risk of exacerbation, and trigger anticipatory care for people with COPD. That required a combined understanding within the team of weather, air quality, prevailing viruses, impact on the physiology, human behaviour, IT, and the structure and culture of the NHS!
That’s why I like this article in the Economist about Thaler’s win and work:
For a very long time, economists hoped to treat individuals a bit like particles in physics, whose activity can be described by a few well-understood rules, which allow researchers to model and understand complex interactions between particles. The rules, they reckoned, were things like perfect information, forward-looking reasoning and rationality. Of course economists understood that individuals didn’t always behave according to those rules, but the idea was that, in aggregate, the rules would allow for a pretty good approximation of reality.
Then came the behavioural economists…
…and why I enjoyed reading Nudge, the book Thaler co-authored with Cass Sunstein. I thought I’d repost what I wrote about it in 2010.
A friend sent me a book called “Nudge” for Christmas (thanks Stephen). It originally hails from the US, but my copy is the “New International Edition”, which makes it sound a bit like a Bible translation (but doesn’t appear to have influenced the spelling). And I suppose environmental and social activists could use it as a sort-of bible in the modern sense of the word, i.e. as a source of information, advice and ideas for influencing individuals, companies and governments. It’s not about ‘command and control’ policies, but about designing how choices are offered to achieve desirable results, e.g. better eating habits, higher rates of pension scheme membership, more organ donations. Here are a few snippets related to the environment.
Campaigns to encourage energy efficiency are far more effective if framed in terms of losses than savings. In other words, if you don’t insulate your loft, you’ll be losing £200 a year to your gas company.
Following the herd
We choose what others choose. For example, people were told about how much energy they and others in their neighbourhood consumed in a week, and whether they were above or below average. In the next week, above-average consumers decreased their energy use. Unfortunately, the below-average consumers increased their use! But half of the households were also given an emoticon to indicate social disapproval 🙁 of their above-average consumption or social approval 🙂 of their below-average consumption. In this case, the above-average consumers decreased their energy use even further, while the below-average consumers kept their usage low.
The Toxic Release Inventory was originally just intended to provide the US Environmental Protection Agency with information about the quantities of potentially hazardous chemicals stored or released into the environment by companies and individuals. It didn’t mandate any behavioural change, but resulted in greatly reduced emissions as companies tried to avoid the adverse publicity of being on the ‘blacklist’.
Labelling goods with their energy/water consumption when used (A-G rating) and ideally their embodied energy (energy consumed in their manufacture and maybe transport) helps in making decisions over whether to replace that old washing machine, and if so, with which model.
Often we don’t have immediate feedback on the consequences of our choices; the cost of turning up the thermostat isn’t apparent until our next monthly or quarterly energy bill. Smart meters are being rolled out across the country, but will only provide information about your consumption back to the electricity companies. Many local libraries have stocks of electricity monitors for borrowing, and these will tell you how much electricity you are using at any one time – it may well be shocking!