Behavioral Economics and Climate Change Policy - Essay Sample

Published: 2021-08-15 17:43:55
1646 words
6 pages
14 min to read
Boston College
Type of paper: 
Research paper
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Introduction and motivation

Behavioral economics has been defined as an application of behavioral and experimental psychology to the discipline of human decision making that also include the economic decision making. The traditional economics in context has indicated that human beings make value, rational, optimal-maximizing decisions where behavioral economics allowing for the effect time constraints and emotions have on individual choices. Behavioral economics has been able to build on traditional economics that allows room for emotions and human nature. Behavioral economics modifies the standard financial model to represent psychophysical properties of inclination and judgment, which make restrains on normal computation, determination, and avarice. It goes for giving sound clarifications to observational discoveries that the standard model has an extreme time clarifying. Behavioral economist insists that people act rationally based on their own best interest. Although they exercise this, they are bound to experience more common behavioral problems.

In modern economics, behavioral economics has already established itself as its new subfield. Within the economics community, there is an increased interest in the behavioral economics. In conventional theory, behavioral economics has emphasized that peoples act in a social context and issues such as status and social approval are the main motivators of human behavior. It also emphasizes that material payoffs including social norms and perceived fairness do not solely motivate individual behavior but often influence human decisions. Behavioral economics also emphasis that people have cognitive limitations and so sometimes they make irrational decisions.

The significance of behavioral economics has been intended to help incentive, recognition and rewarding programs and influences sets that maximize the remunerations of their programs for the organization. Concerning the subject of behavioral economics, the paper seeks to review the topic with the climate change policy by looking at the prospects theory application, approach, and contribution to climate change. This paper contends that the psychology of decision can make behavioral economics a stride further to offer a unified model of basic leadership that can establish the frameworks for a science-based arrangement structure for basic issues including culturally diverse collaboration and between generational exchanges. Climate change, one of the best difficulties our species faces, is utilized for instance of how maintainability approaches may be educated by contemporary hypotheses of human decision.

Literature Review

Prospect Theory Applications

From behavioral economics, prospect theory is one of the most applies theories that shows how individuals decide between alternatives that implicates hesitation and risk. Climate change is a standout and the most squeezing challenges in the current ecological arrangement (Osberghaus, 2017). Fitting approaches planned to animate effective adjustment and alleviation ought not solely depend on suspicion of the economics, however, exploit very much explored elective behavioral patterns. Prospect theory gives various climate-pertinent bits of knowledge, for example, the thought that assessments of results are reference subordinate, and the pertinence of saw sureness of results (Osberghaus, 2017).

Behavioral Economics of Climate Change

The article by Madrian (2014) discusses how insights from behavioral economics could affect policy approvals in environmental economics. The significance of behavioral economics is that it enriches environmental economics by bringing it closer to reality thus making it more relevant. It occasionally contended that swarming out mechanisms make economic policy instruments less reasonable to manage environmental issues and that the perception that individuals in some cases participate although when it is not in their constricted material enthusiasm to do as such is a contention for less stringent official policy instruments (Pollitt, Shaorshadze, & University of Cambridge, 2011). However, although natural thought processes can now and again be swarmed out by monetary impetuses, we contend over that monetary motivators will once in a while amplify characteristic inspiration and that, in spite of the way that individuals now and again participate willfully, such collaboration is once in a while maintained over the long haul without some endorse against free-riding behavior. Generally speaking, bits of knowledge from behavioral economics tend to strengthen, instead of making outdated, the conclusion that we require express motivations to successfully and also proficiently manage environmental issues.

In a study by Carlsson and Johansson-Stenman (2012), some important aspect of behavioral economies were incorporated into the economies of climate change that was in respect to the climate negotiations and discount rate. In their argument, Carlsson and Johansson-Stenman (2012) indicated that the choice of discount rate cannot be unraveled from the clarifications of the value premium confuse that a discount rate nearer to the hazard free rate than to the normal profit for speculations is prudent both when we utilize the traditional Capital Asset Pricing Model and when a behavioral economics clarification of the value premium is utilized.

According to Venkatachalam (2008), the ethics of discounting concerning climate change is likely to harm the future imperfect. If the future imperfect will be poorer compared to today's rich then what is expected is an increase in the marginal utility of income which is an indication of a higher weight that is in accordance to the basic logic of Ramsey discounting rule. There are a few explanations for why it seems prudent to pick a generously bring low social discount rate than the normal profit for ventures.

Venkatachalam (2008) also examines the climate negotiations where behavioral economics where studies have indicated that there is a less serving human than the economic man. The confirmation presented indicate that cooperation in conditional which underlines the significance of mechanisms of sanctions in negotiated agreements. In context, taking into account the social preferences that create the prospects of procuring international agreements in comparison to the standard model there are also challenges such as self-serving biases. The risks of potential substantial damages are implied of global climate change.

Behavioral Economics to Policy Design

The remedies of redistributed resources, market failures and collecting tax revenue are the implication of behavioral economics for the design of policy solutions. In reviewing the behavioral economics literature, there are three substantive that arise concerning public policy. According to Madrian (2014), psychological biases of consumers have the capability of generating market inefficiencies whereby the market failure is beyond the traditional taxonomy. Another aspect is psychological consideration might have an impact on the effectiveness of traditional policy tools. The third aspect is that an understanding of psychology can create a significant expansion of the scope of policy tools available to redistribute resources, remedy market failures and collect government revenue.

One of the policies according to Gowdy (2008) that have been encouraged by traditional policy and on a modern day by behavioral informed policy tools in the policy of retirement saving. Public policy has always used financial incentive to promote private saving for retirement. The literature on the effect of one sort of financial incentive motivator, coordinating, on reserve funds design support and commitments. The examinations utilizing the most trustworthy exact strategies find strikingly comparable outcomes in a wide range of settings utilizing a wide range of information sources: A coordinating commitment of 25% builds investment funds design support by approximately five percentage points. In the measurable speech, in spite of the fact that the coordinating commitment t-statistics are significant, its partial R2 is small (Pollitt, Shaorshadze, & University of Cambridge, 2011).

What this means is that the power of behavioral economics has been significant in helping shape more cost-effective policy solutions. Venkatachalam (2008) explains saving as one of the domains that impact consequential policy outcomes. In these circumstances, policy mediations may produce distributional impacts that warrant thought. The specific concern is the potential that a policy intercession may, in reality, make indignant a few people. Be that as it may, it might be that the default result is most industrious for the individuals who are minimum very much educated, and subsequently, people for whom it isn't fitting could be exacerbated off. Some appear to be far-fetched candidates to diminish welfare for anyone: giving individualized data, giving input about the connection amongst behavior and examined results and introducing traits in a way that encourages educated basic leadership (Venkatachalam (2008).

Sustainable Consumption Behavior

Schubert (2017) articulates well that the success of strategies for solving problems of environmental impacts, resource efficiency, and climate change increasingly depends on whether alterations in public behavior can and will complement the methodical solutions available. According to Schubert (2017), the reestablished perspective on existing policy devices and potential methodologies for behavior change are entering an open level-headed discussion that has suggestions for the behavior of people, however, that additionally bring up basic issues about the part of the administration in the general public and progress to supportability.

The application of behavioral economies such as nudging as articulated by Schubert (2017) is that it has significantly helped policymakers in different states and sectors to integrate their behavioral insights into policy design and implementation. The application of nudges has widely been used in competition and consumer policies more importantly when it comes to producing default options in a situation with simplifying complex information for users. Nudges also measure to make key data choices more helpful for individuals have been mostly employed.

There is by all accounts accord among specialists that nudges are a supplement to the customary approach instruments instead of a substitute for coercive measures and monetary devices. Nudges can be sure be utilized by different instruments for conduct change particularly to induce changes in setting specific conduct and for focusing on practices that are programmed, instinctive and non-deliberative (Pollitt, Shaorshadze, & University of Cambridge, 2011). As opposed to being viewed as a silver slug, the biggest guarantee of nudge is by all accounts in helping different plan activities better and in enhancing the adequacy and productivity of strategy apparatuses and the speed of their usage.


The vigor of the discoveries from behavioral economics prompted a developing acknowledgment that the model of outrageous discernment is of constrained an incentive as an indicator of human conduct in complex social circumstances. The time appears to be ready to supplant the reasonable performing artist suspicions hidden current open arrangement with ones that fuse the regularities of human conduct revealed by behavioral science. Psychologists are accomplishing work along this line, but there...

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