White Paper: Using Bounded Rationality and Nudge Theories to Motivate Household and Business Energy and Environmental Sustainability at the ZIP-Level: A Public Service Application

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Jerry Jackson, Ph.D., Jackson Associates

Summary
Bounded rationality is a theory of decision making where individuals apply “satisficing” behavior resulting in an acceptable outcome rather than an optimal outcome. This theory, now widely accepted, was advanced by Herbert Simon in 1956 as a way to explain human decision making in the face of limited or imperfect information, complicated problems, uncertainty and human cognitive limitations. Satisficing decisions criteria are referred to as cognitive heuristics which are mental shortcuts used to make decisions under these circumstances.

Nudge theory was introduced by Richard Thaler and Cass Sunstein in their 2008 book: Nudge – Improving Decisions about Health, Wealth and Happiness. The theory suggests that poor decision outcomes can be improved by acknowledging and using biases, habits and other behavioral and social factors to modify the decision-making process.

This paper presents evidence of poor energy efficiency & sustainability decision-making in the US, discusses the application of both of these concepts to address this issue and provides a framework designed to improve that process. This new framework is used to develop a US ZIP-detailed free online public service App demonstrated with screen shots in a later section of this paper.

The free, public service App can be called as a popup window on any organization’s Web site by including several lines of script. Access to the tool is also available at: https://maisyenergyapps.com/sustainability_tool.htm .

Evidence of Poor Energy Efficiency/Sustainability OutcomesSummary
Energy analysts have long recognized and discussed the so-called “energy-efficiency gap “which is the difference between current energy use and energy use if all cost-effective energy-efficiency investments and behavior were to occur. While a variety of government and utility programs beginning in the late 1970’s have reduced the gap’s size, a consensus estimate of the current efficiency gap is probably around 20 percent. McKinsey & Co. estimated this gap at about 23 percent in its 2009 report, “Unlocking Energy Efficiency in the U.S. Economy.”

A variety of factors are blamed for this gap; the most important and relevant for this analysis are limited, imperfect and or an overwhelming amount of information, uncertainty over actual outcomes, and analysis complexity. This description perfectly fits conditions for observing Simon’s satisficing behavior.

Satisficing criteria typically focus on short-term benefits so promoting detailed financial analysis or long-term sustainability impacts is likely to have little or even a negative impact on promoting energy efficiency investments. Short-term energy cost savings and annual emissions reductions resonate with households while businesses often opt for simple payback calculations as opposed to more sophisticated financial analysis like internal rate of return. (See Energy Budgets at Risk, Chapter 4, and Capital Budgeting: Theory and Practice, in the References section for an overview of business satisficing behavior.)

Applying Bounded Rationality to Improve the Decision Process
These observation suggests that the energy efficiency decision process should be framed to:

1. simplify input information to focus on the most relevant facts (addresses the information problem)


2. apply a credible, simplified, intuitive analysis process (reduces complexity and outcome uncertainty), and


3. present outcome options consistent with satisficing behavior

1. Promote intrinsic motivations using a sustainability score along with details on energy cost and emissions percentiles. Using a top-line focus on a sustainability score focuses attention on improving one’s overall score while information on emissions and energy cost percentile targets appeal to both altruistic and personal goal achievements.


2. Provide relevant objective comparisons. Research shows that motivation based on assessing performance and personal targets is greater when comparisons are perceived as more relevant. In this case, comparisons with households or businesses with similar characteristics in the same ZIP as opposed to compared to comparisons with “typical” nationwide consumers.


3. Provide a meaningful measure of benefits associated with emissions. Pounds of CO2 emissions and reductions have little meaning to most of us. Showing the reduction in equivalent miles driven or equivalent of how may trees would have to be planted for a specific energy use reduction is a much more meaningful and motivational metric. Similarly, providing an actual cost savings estimate associated with meeting a percentile target is much more likely to motivate behavior.


4. Make it easy and fast. Households and businesses should be able to access a Web site and enter information that is readily available (i.e., without looking up/downloading utility billing), provide inputs in a single screen, and get results within 1 minute.


5. Encourage improvements by tapping into indirect competition and intrinsic motivation. Challenge users to achieve a better sustainability score or energy cost percentile. How much cost savings and emissions reduction can be achieved? This information provides the “call-to-action” to motivate users to achieve lower emissions, costs and better sustainability scores.


6. Show limited immediate low-cost, low-effort actions to achieve a new score. Provide information on the most relevant action items for households – things that can be accomplished without professional help and at most a short trip to Home Depot or Lowes. For commercial customers, identify options that can be dovetailed with annual HVAC or other maintenance options. Keep the lists short with the most relevant and likely to be undertaken tasks. Too much information impedes the decision process potentially resulting in no action being taken.


7. Make the process anonymous.In this age where everyone is reluctant to provide personal information, make the sustainability process email and contact-free.

1. Is a free, non-commercial, public service App providing analysis for all ZIP code tabulation areas in the continental US for residences and businesses


2. Can be accessed online, linked to, or installed as a pop-up App on any organization’s Web site (utility, private company, municipality, etc.)


3. Requires only easily-provided user data delivering results in about 1 minute.


4. Compares user cost and emissions to similar households/businesses within the same ZIP code using the industry-standard MAISY Utility Customer Databases consisting of more than 7 million US utility customers and geographically-detailed US EPA emissions data.


5. Provides potential cost and emissions reductions based on self-identified percentile targets


6. Provides easily-applied, low-cost suggestions for energy cost and sustainability reductions

1. Simon, Herbert A. (1956). "Rational Choice and the Structure of the Environment" . Psychological Review. 63 (2): 129–138. Link Here
2. Thaler, Richard H.; Sunstein, Cass R. (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness. Yale University Press. ISBN 978-0-14-311526-7. OCLC 791403664.
3. Granade, Hannah Choi, et. al. Unlocking Energy Efficiency in the U.S. Economy, McKinsey and Company, Inc. July, 2009. Link Here
4. Jackson, Jerry, Energy Budgets at Risk (EBaR): A Risk Management Approach to Energy Purchase and Efficiency Choices (2008), Wiley Finance, ISBN: 978-0-470-28021-8
5. Frederiks,Elisha R. , Stenner, Karen, Hobman, Elizabeth V (2015). “Household energy use: Applying behavioral economics to understand consumer decision-making and behavior,” Renewable and Sustainable Energy Reviews, Volume 41, January 2015, Pages 1385-1394 available at Link Here
6. Lee, T. , “Competition and Motivation” (2016). This is a brief Web note introducing motivational theories that includes links to supporting information. Link Here