Aiding Decision-Making to Reduce the Impacts of Climate Change

Abstract

Utilizing theory and empirical insights from psychology and behavioral economics, this paper examines individuals’ cognitive and motivational barriers to adopting climate change adaptation and mitigation measures that increase consumer welfare. We then propose strategies that take into account the simplified decision-making processes used by individuals and resulting biases. We make these points by working through two examples: (1) investments in energy efficiency products and new technology and (2) adaptation measures to reduce property damage from future floods and hurricanes. In both cases there is a reluctance to undertake these measures due to high and certain upfront costs, delayed and probabilistic benefits and behavioral biases related to this asymmetry. The use of choice architecture through framing and the use of default options coupled with short-term incentives and long-term contracts can encourage greater investment in these measures.

Keywords: climate change, decision processes, behavioral economics, energy efficiency, mitigation and adaptation measures, choice architecture

JEL Classification: D01, D03, D1, Q41, Q42, Q5, Q54