Behavioural Economics Policy

Introduction

According to a recent report from the Cabinet Office’s Behavioural Insights Team (BIT or Nudge Unit), ‘[t]oday, about half of the UK’s greenhouse gas emissions come from the energy used for heating’ (Behavioural Insights Team, 2011:15). Accepting reducing greenhouse gas (GHG) emissions as a normative societal goal (IPCC, 2013; Stern, 2007), any serious policy aimed at such a reduction broadly in the UK must include provisions for reducing emissions related to heating. This essay critically evaluates three related policy proposals contained in the BIT’s report entitled ‘Behaviour Change and Energy Use’ (2011) that seek to identify effective measures for reducing energy use through insights from behavioural economics (BE). To do so, this essay examines responses from academics regarding the BIT report and questions whether its methods truly constitute a behavioural-economics response to this policy issue or amount to little more than rebranding a conventional-economics policy response. The essay’s primary finding is that while the insights the BIT employs for identifying causes of the policy issue do indeed draw on BE, this is not always the case for appropriate policy responses. This finding provides evidence for the theoretical claim made by multiple authors that ‘nudges’ are not always up to the task of responding proportionately to complex challenges such as climate change (e.g., see Corner & Randall, 2011; Selinger & Whyte, 2012; Yeung, 2012).

This essay begins with critical analysis of the three proposals, examining supporting and critical evidence for the BIT’s claims. This analysis is followed by discussion on an additional perspective not considered by BE yet quite relevant to human behaviour. Finally, the essay concludes with a discussion of the insights gleaned and their possible application.

Analysis of the BIT report

Synopsis and support for the BIT report

This essay focuses on only three proposals contained in the BIT’s (2011) report: the Green Deal, the Renewable Heat Incentive (RHI), and Home Energy Reports (HERs).

The Green Deal

The Green Deal provides incentives to households to invest in energy-saving improvements, such as loft or exterior wall insulation, at no upfront cost. The monthly savings in energy bills are used to finance the improvements, so occupants face no increased monthly bills. Importantly, the financing is tied to the residence rather than the residents, which addresses the disincentive to tenants of investing in improvements in a property where they will not be residing long enough to realise the benefits. In an effort to overcome the initial inertia of the status quo (i.e., not insulating), the BIT conducted an experiment and found that ‘[o]ffering home owners a loft-clearance service can significantly increase the odds of installing loft insulation by over a factor of 4. This result highlights the importance of addressing non-monetary barriers to behaviour change, specifically in this case, the hassle factor of clearing your loft’ (Behavioural Insights Team, 2012: 3). The efficacy of non-monetary incentives is corroborated elsewhere in the academic literature (see Bichard & Thurairajah, 2013; Dietz, Stern, & Weber, 2013).

RHI

Next, the RHI is designed to spur installation of greener household heating systems. At the time of the report’s publication, the Government was soliciting public feedback on how best to structure the policy, and some findings from the academic literature are relevant to the discussion. One such point is that ‘[i]f onerous procedures are required to prevent fraud [for example], then the costs in time and the tepid response to programs should be weighed against the savings from fraud prevention’ (Dietz, Stern, & Weber, 2013: 86). Further, Dietz et al. (ibid.) suggest that, in order to maximise adoption, programmes can minimise paperwork participants must complete, create a social norm of adoption, and coincide with the time of purchase of a home (when upgrade costs represent a small percentage of overall purchase price). Moreover, Bichard & Thurairajah (2013) find that ‘it may be possible to build a strategy to motivate actions…that link non-cash incentives, education and awareness, and norm-based actions stimulated by visible green community activities’ (p. 182). Both of these studies find that non-cash incentives can have an important role in well-designed domestic energy conservation policies.

HERs

The BIT’s research on HERs draws on the findings of American power company Opower. In behavioural experiments conducted by the company, descriptive and injunctive norms are invoked, respectively, through (1) provision of a numerical composite score of household energy use and (2) an indication of how residents are doing in energy conservation efforts as measured by a score of 0-2 smiley faces, enabling residents to compare themselves to their neighbours. The BIT report indicates that ‘[i]njunctive norms appear to be critical in mitigating a “boomerang effect”’(Behavioural Insights Team, 2011: 20) wherein better-than-average households regress toward the mean due to seeing themselves ahead of the average.

Criticism

Conflating BE and Nudge and its application to the Green Deal

BIT is informally known as the ‘Nudge Unit’; however, as Selinger & Whyte (2012) point out, ‘[n]udging is not the same as behavioral economics’ (p. 26). The team’s formal name and informal moniker indict the team for conflating the two ideas. As Oliver (2013a) declares, ‘The use of behavioural economics to inform policy has over recent years been captured by those who advocate nudge interventions’ (p. 685). Oliver continues with a warning: ‘those attempting to apply behavioural economic theory should be sound in their theoretical claims, otherwise the entire behavioural economic approach could become (re)marginalised by the mainstream economics community’ (pp. 693-4).

Elsewhere, Oliver states that ‘behavioural economics should not be used as a reason for not regulating against the often socially harmful activities of private sector interests. In fact, in some circumstances, behavioural economics can offer the intellectual foundation to help inform politicians of where it is appropriate to regulate and how to design regulation such that there is a reasonable expectation that it might work’ (2013: 375). Such a finding, however, does not necessarily mean that the appropriate—or proportionate—response to an issue identified by employing BE insights must or even should be informed by BE insights.

This discussion of conflating BE and Nudge has specific implications for the Green Deal experiment. Thus, the BIT’s invocation of proportionality in its promotion of ‘prompted choices’ (over defaulting participants into the programme) ‘to encourage individuals who may not otherwise have considered taking up energy efficiency measures through prompts’ (Behavioural Insights Team, 2011: 13) could be viewed as perplexing, given the possible mismatch of such ‘soft law’ and its ‘limited policy potential’ in ‘solv[ing] complex policy issues’ (Selinger & Whyte, 2012: 26; see also Corner & Randall, 2011 and Rasul & Hollywood, 2012) such as climate change. While BE might (partially) explain the causes of inaction (e.g. inertia, present bias) on installing wall or loft insulation, for example, an appropriate and proportionate response to the larger issue of excessive GHG emissions, given the gravity and pressing nature of the issue, may rightly include strict command-and-control regulation or a globally-agreed price for carbon (see Stern, 2007), both of which violate the tenants of Nudge (Thaler & Sunstein, 2009) thinking. Thus, conflating BE and Nudge may lead to an unnecessary confusion of terms and a misapplication of policy instruments to a given policy problem. Clearly defining the two terms and understanding when to apply each could inform both the BIT and public expectations.

RHI

Despite the stated goal of identifying behavioural insights to spur adoption, however, the final version of the RHI appears to have opted for a purely cash incentive structure. This traditional economic incentive does not fall within the purview of the BIT, which could explain why the BIT has not referenced the RHI in subsequent reports. However, its inclusion in the initial report exacerbates a problem alluded to above: a misunderstanding of terms, in this case a poorly applied definition of BE, could result in BE’s remarginalisation in the mainstream economic community (Oliver, 2013a). Its inclusion also risks giving the appearance the BIT is merely attempting to rebrand traditional economic incentives that otherwise might not gain popular support.

HERs

Although the research on HERs provides some of the most empirically tested results on a behavioural approach to reducing energy use, several criticisms have emerged. Rasul & Hollywood (2012: 350) identify three: ‘First, they do not provide conclusive evidence on which types of behavioral change drove the bulk of energy savings’. This is because they do not provide detailed data, but rather only relative data, on energy usage, which is insufficient for identifying specific actions for energy usage reduction. ‘Second, …the studies [did] not test which message types (singular or combined) appeared to have a stronger and sustained bite on behavior, nor if any caused an unhelpful response’. Better experimental design might have identified a more useful combination that could result in further energy reduction. ‘Third, the studies fail to consider alternative channels through which differential impacts may be driven’. Without improved methods, it cannot be determined whether the intervention worked ‘because its message interacted with…individual’s own ideology or set of beliefs about social identify [sic]. These are important areas for future study to provide a more complete understanding of non-price interventions’.

In addition, the total energy savings demonstrated (2-3%, as the BIT report claims), although statistically significant, fail to respond proportionally to the issue of climate change, which demands significantly steeper cuts to avert the most disastrous effects (Stern, 2007). Again, a different experimental design might improve results, but such relatively insignificant cuts risk creating a single action bias, which ‘may be especially problematic if the first behavior people adopt is actually ineffective’ (Truelove & Parks, 2012).

In addition, even if the injunctive norms (smiley faces) succeed in preventing boomerang effect in household energy consumption, it remains ‘crucial to understand whether when a household saves £60 due to the nudge, do they invest it in energy-efficient appliances or airline tickets’ (Rasul & Hollywood, 2012: 351)? How extra money is spent could mean any environmental incentive scheme results in a net negative environmental impact. Although environmental attitudes are shown to affect intention, their link to environmentally friendly behaviours is less clear. Rasul & Hollywood (2012) suggest that ‘more work is needed to examine the extent to which any spillovers into other behaviors might counter or augment gains to energy saving’. But some evidence already exists. In a study by Poortinga, Steg, & Vlek (2004), ‘home and transport energy use were more strongly related to sociodemographic variables’ (p. 89) than to intentions, suggesting that the increase in disposable household income generated from Green Deal energy savings may result in increased consumption and thus a net-negative environmental impact. As Dolan (2011) points out, such spillover effects are not addressed in the BIT’s report and are an opportunity for improvement in subsequent reports.

One possible solution to avoiding negative spillover effects from extra disposable cash on hand would be to offer an additional incentive to reinvest savings in further energy-saving measures. For example, all energy-saving home improvements could each be assigned a number of points. For each improvement undertaken, residents would accrue the points, which would be redeemable for a credit toward the purchase of further energy-saving improvements. Government, charities, or private-public partnerships could fund such a scheme, which would encourage continuing reinvestment in energy-saving improvements.

Additional Discussion

The criticisms examined thus far have primarily addressed shortcomings of existing features of the BIT’s proposals. This section addresses a more fundamental, perspective-enhancing omission, which is shared as a means of placing the policy issue of reducing energy use in its broader context. This fundamental, paradigm-shifting critique of the BIT’s energy use report comes from ethnographers Lockton et al. (2013). Their research posits that

·      ‘people don’t set out to “use energy”: its use is a side effect of solving everyday problems, meeting needs’ (p. 348);

·      ‘the concept of “behaviour”—at least as commonly expressed in the current “behaviour change” discourse—is itself still too far abstracted from really understanding energy use’ (pp. 348-9);

·      ‘[e]ven the more psychologically informed approach of the Behavioural Insights Team’s work on energy nevertheless focuses mainly on applying behavioural economics effects to frame costs and social norms differently, rather than attempting to address the intricacies of energy-related decision-making in everyday life’ (p. 349, emphasis added); and that

·      ‘[t]he design of products and services influences how they are used’ (p. 350).

As innocuous as these statements sound at face value, they collectively assert a fundamental principle absent from the BIT report: if the objective is to reduce energy use, addressing the effects of design without addressing design is only half an approach.

In a study by Combe, Harrison, Dong, Craig, & Gill (2011), only a third of participants could benefit from their energy-saving heating systems because of how complicated using the system was. Such findings underscore the importance of product and system design over attempts to instruct or correct users on the most efficient way to use products or systems after they have already been created. Ideally, products and services should be designed such that there is no possible way to consume or use them unsustainably, thus eliminating the risk of negative environmental impact from consumer misuse. This is one of the benefits of structural changes, including Government’s Green Deal and RHI. But an even more fundamental design question asks: is there another (better) way to provide comfortable living conditions? The question may be for designers to answer, but asking the right questions is an important step towards building public support for climate change interventions proportional to the gravity of the problem, which will doubtless require more than behavioural insights alone (Corner & Randall, 2011).

Conclusions

This essay has provided a critique of three specific policy recommendations put forward by the BIT, it has provided suggestions for improvements, and it has found that while BE insights played a role in identifying and framing the policy issues addressed by the recommendations, the appropriate responses are not always within the purview of a ‘Nudge Unit’. This is not to downplay the emerging role of BE in the policy arena; rather, it is to contextualise it. BE insights and nudges are but two tools in an array that are available to policymakers. Provided they are properly implemented, they offer a step toward objectivity and empiricism in policymaking, useful tools for any policymaker. Further research is still needed to determine their effectiveness, but such research is built into their implementation and will come in time.

WORKS CITED

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Dolan, P. (2011). The Behavioural Insights Team’s report on energy use is good first step, but there are still concerns about compensating behaviours, experimental design and the quality of evidence. blogs.lse.ac.uk. Retrieved April 25, 2014, from http://blogs.lse.ac.uk/politicsandpolicy/2011/10/03/behaviour-change-and-energy-use/

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[1] See https://www.gov.uk/government/policies/increasing-the-use-of-low-carbon-technologies/supporting-pages/renewable-heat-incentive-rhi for details.