Can understanding human irrationality help solve our energy problems?

Hunt Allcott, a behavioral economist with a two-year appointment as the Energy and Society Fellow in MIT’s Department of Economics and the MIT Energy Initiative, wants to apply his field’s insights to the realm of energy use. 

Q. Why should we invest in behavioral research pertaining to energy efficiency, and what are the specific kinds of research we can do right now?

A. It’s an economic argument. There are lots of different technology-centered R&D investments that we can and do make: Fuel cells, hybrid vehicles, wind power. But we can also invest in new social science research that can inform policies and programs that encourage people to consume energy differently. The argument Sendhil and I make is that we have to compare across all of these classes and say, “What’s cost-effective in terms of achieving our goals?” We use the results from recent large-scale energy conservation programs that were motivated by behavioral science to show that behavioral science R&D is an underexplored and potentially cost-effective approach.

Let me give you two examples of how economics can inform energy efficiency policy. First, much of the policy-oriented research in behavioral economics has been about identifying barriers in individual decision making that keep us from making the choices that, in a perfect world, we would have wanted to make for ourselves. Perhaps the leading example of this has been helping people to make better choices about how much to invest in their retirement plans, and what funds to hold. One of the things I’m interested in is to document whether consumers make similar types of mistakes when they go to buy air conditioners, or cars. It’s a complex decision, and the benefits of energy efficiency occur incrementally and in the future, so those benefits are not very salient. Depending on the types of mistakes that consumers are making — if we conclude they are indeed making mistakes — we can design policies to nudge them in ways that they would find helpful.

Second, economists tend to think of energy consumption as driven primarily by prices. Indeed, in many domains, I think we reflexively focus on price at the expense of failing to model other important drivers of consumer choice. There’s a lot of research in behavioral economics that suggests we can influence people to conserve energy, or do other things, in many ways other than raising prices. I think an important research area is to document whether policies and programs based on these sorts of insights can increase welfare or be cost-effective in reducing carbon emissions.

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