How Behavioral Economics Impacts You and Our Planet

Here we go again. Pump prices are down from the painful historic highs of just a few years ago. In response, Americans are buying trucks and SUVs in record numbers with comparatively low MPG. Have you noticed that gasoline prices are going up?

We are repeating history. After the 1974 oil embargo, we bought fuel-efficient vehicles that reduced gasoline demand. Reduced demand, along with increased supply, contributed to reduced pump prices in the 1980s. Then, with lower gasoline prices, we started buying gas-guzzlers again. That created the demand that led to $5 per gallon gasoline.

And now, we are doing it again!

This is evidence of what I call worse-information economics. This is where we use the “worse” information versus “better” information to make a decision. For example, we buy cars and trucks based on today’s pump prices. That is “worse” information compared to “better” information based on either historical experience or an understanding that the price-cycle for gasoline ultimately trends higher over time.

Worse information economics, the economic community calls it behavioral economics, attempts to understand why we make these types of consumption decisions. It is a valuable path for explaining why we have global warming. It also explains what we will do about it.

Worse information economics

You do not have to be an economist to know we do not always make rational decisions. An obvious reason is that we act on emotions. In the retail industry this is called impulse buying.

Research points to much of our consumption not being based on need. It is driven by the desire to create a good feeling. Shopping feels good when we land a bargain. Retailers, by design, have made shopping into one big bargain hunt. Shopping is also fun when it is a social experience. Retailers have turned shopping mails into social platforms including theaters, exercise centers and dining. Online retailers create a similar atmosphere using social media.

All of this is worse information decision-making. In pursuit of fun we often lose sight of the financial, societal and environmental implications of our consumption. We use credit cards rather than cash to delay the financial reality of our purchases. We ignore that the bargain piece of clothing we just bought is manufactured in a foreign country’s sweat shop. Too often we buy with little regard of the environmental impacts of a product’s production and its likely disposal in a landfill.

We make these types of decision even when we attempt to be analytical. For example, the average car price is $30,000. Most fully-equipped models easily reach $40,000 to $50,000. Most of us would not pay these prices if we had to pay in cash out of our savings accounts. But we are now annually buying 17 million of these vehicles because we use worse information. We compare a six- or seven-year car payment to the cash purchase price. We make a purchase based on “I can afford a $800 per month car payment” rather than "I am paying $50,000 for a vehicle that will be worth half that in 24 to 36 months."

Worse information economics is driving climate change

Sixty-five percent of us believe that we confront a global crisis based on human actions generating climate-changing gases. Yet few of us significantly modify our decisions to stop global warming. Why?

The answer is worse information economics. On an individual basis, the fossil fuel industry -- and fossil fueled utilities -- work great for us. We enjoy our cars, homes and businesses fueled with fossil fuels. The technological challenge and cost of reducing our fossil fuel consumption appears daunting or even suspect. The cost of change pails against today’s benefits from doing nothing.

We are caught in using the “worse information” in our consumption decisions. We concentrate on what optimizes our welfare today. We rationalize, or just ignore, the data that says we are creating global warming with very costly consequences.

Worse information economics optimism

The history of removing lead from gasoline provides reasons for optimism. Consumers and industry actively resisted removing lead from gasoline for fifty years. Consumers feared how removing lead would hurt their engines. Industry saw it as a threat to their profitability.

But the reality was that we were poisoning our children. Change happened only after American parents finally focused on the truly meaningful issue (the “better” data) tied to protecting America’s children and not on the issue of maintaining mechanical and oil industry benefits.

The result was captured in a CDC chart that measured lead levels in children's blood before and after we removed lead from gasoline. The curve was shaped like a cliff. We removed lead from gasoline, and the lead in our children’s blood was dramatically reduced. And today our gasoline engines, fueled with unleaded gasoline, deliver superior performance with longer service lives.

This is the potential for solving global warming. Unfortunately, we are still caught in a decision-making cycle of using the “worse” information rather than the “better” information. But this type of decision-making is increasingly being exposed. It is increasingly difficult for consumers to ignore global warming’s externality cost measured by enhanced severe weather, famine and disease.

This will erode consumer use of “worse information” in making decisions. It will push us to adopt disruptive technologies that will reduce or eliminate green house gas emissions. Adopting these technologies will create economies of scale that will propel them to price-competitive leadership compared to fossil fuel technologies. Economics does work. Too often it is a painful process like we are experiencing with global warming.

Image credit: Wikimedia Commons