Monthly Archives: July 2007

Availability Heuristics and Anecdote-driven Environmental Legislation

In the article A Behavioural Approach to Economics and Law, Jolls, Sunstein and Thaler (1988, 1518-1521) discuss the role of availability heuristics in leading to environmental over-regulation.

Availability heuristics indicates the systematic overestimation of the likelihood of an event when instances of that event materializing come easily to mind. Two main factors affect how easily an event comes to mind: its observed frequency and its salience. Salience will be greater the more recently the event materialized and the more intense was its media coverage.

Joss et al. (1998) argue that when the probability of an environmental harm is judged inaccurately due to the availability heuristics, legislation will tend to become anecdote-driven and may lead to over-regulation of more easily available environmental hazards while others less available may end up being under-regulated.

As an example of anecdote-driven regulation, the authors take the Superfund legislation. Superfund legislation, they argue, is better explained by the public pressure determined by the availability heuristics rather than than by the conventional economic theory of interest groups. The issue of abandoned hazardous waste dumps had become highly salient following the active media coverage in 1978-1980 of the Love Canal case (a case of leaks of chemical waste into the Canal between 1943 and 1952). High salience led to an overestimation by the public of the environmental hazard posed by abandoned hazardous waste dumps and led to intense public concern and pressure for legislative intervention.

Reference

Jolls, Christine, Sunstein, Cass R., and Thaler Richard (1998) A Behavioural Approach to Economics and Law, Stanford Law Review 50: 1471- 1550.

Available from here.

Behavioral Economics and Sustainable Forest Management

Jack Knetsch of Simon Fraser University investigates the links between behavioral economics and forest management in the chapter Behavioral Economics and Sustainable Forest Management from the book “Economics, Sustainability, and Natural Resources: Economics of Sustainable Forest Management”, 2005, Dordrecht and New York: Springer, pp. 91-103. Below is the abstract:

Taking account of recent findings that, for example, people value losses more than otherwise commensurate gains, discount future losses at lower rates than future gains, and tend to make choices on the basis of mental accounts, could markedly improve the guidance offered by economic analyses of forest management options. Asymmetrical incentives and restraints facing individuals and organizations favour continued use of earlier views of standard economic assumptions and such evidence is now largely ignored as are issues such as the appropriate choice of measure to use in valuing the various gains and losses being traded off in managing forest lands.

Behavioral Economics and Climate Change Policy

I am always looking for papers on applications of behavioral economics to environmental policy. Today, I found the interesting paper by John Gowdy Behavioral Economics and Climate Change Policy. Below is the abstract:

The policy recommendations of most economists are based on the rational actor model of human behavior. Behavior is assumed to be self-regarding, preferences are assumed to be stable, and decisions are assumed to be unaffected by social context or frame of reference. The related fields of behavioral economics, game theory, and neuroscience have confirmed that human behavior is other regarding, and that people exhibit systematic patterns of decision-making that are “irrational” according to the standard behavioral model. This paper takes the position that it is these “irrational” patterns of behavior that uniquely define human decision making and that effective economic policies must take these behaviors as the starting point. This argument is supported by game theory experiments involving humans, closely related primates, and other animals with more limited cognitive ability. The policy focus of the paper is global climate change. The research surveyed in this paper suggests that the standard economic approach to climate change policy, with its almost exclusive emphasis on rational responses to monetary incentives, is seriously flawed. In fact, monetary incentives may actually be counter-productive. Humans are unique among animal species in their ability to cooperate across cultures, geographical space and generations. Tapping into this uniquely human attribute, and understanding how cooperation is enforced, holds the key to limiting the potentially calamitous effects of global climate change.

While looking for Gowdy’s full paper, I also came across an interesting blog, which I added to my link list. It is the Environmental Law Prof Blog by Susan L. Smith Professor of Law Willamette Univ. College of Law. Prof. Smith sights Gowdy’s paper here.

Experimental and environmental economics at ESA 2007

Have you ever conducted a contigent valuation study in which you need to portray some kind of risk (risk of oil spill, risk of wildfire, etc..) in an understandable form? If you have, you’re certainly aware of the difficulties in portraying risk in contingent valuation surveys.

In her ESA 2007 presentation Virtual Experiments And Environmental Policy at http://www.luiss.it/esa2007/programme/programme3.php?paper=212
Rutström Elisabet (co-authors Stephen Fiore, Glenn Harrison, and Charles Hughes) demonstrated the use of virtual experiments to assess the willingness to pay of people for an increase the forested area subject to prescribed burn in Florida. Prescribed burns are a tool to reduce the risk of wildfire, so that crucial to measuring such willingness to pay is the subjects’ proper understading of such risk and of the variables that affect it.

You can follow audio and video an earlier presentation of the same paper ( Feb 2007) by Glenn Harrison from the the web page of RFF’s Frontiers in Environmental Economics conference at http://www.rff.org/rff/Events/Frontiers-of-Environmental-Economics.cfm#Paper3

Here is the abstract:

“We develop the concept of virtual experiments and consider their application to environmental policy. A virtual experiment combines insights from virtual reality in computer science, naturalistic decision-making from psychology, and field experiments from economics. The environmental policy applications of interest to us include traditional valuation tasks and less traditional normative decision-making. The methodological objective of virtual experiments is to bridge the gap between the artefactual controls of laboratory experiments and the naturalistic domain of field experiments or direct field studies. This should provide tools for policy analysis that combine the inferential power of replicable experimental treatments with the natural “look and feel” of a field domain.”

On the last day of ESA 2007 there was another presentation related to environmental economics by Stefan Traub titled “Energy Taxation And Renewable Energy: Testing For Incentives, Framing Effects And Perceptions Of Justice In Experimental Settings”. Here’s the abstract (no link available for the paper):

“This paper addresses the following two questions: First, how does the individual willingness-to-pay for green electricity – some kind of public good – react on different institutional settings? Second, are individual votes on taxes for the support of green electricity subject to framing effects resulting from different institutional settings and do these votes correspond to different perceptions and attitudes concerning public finance and environmental policy? We try to answer these questions by means of an artefacutal field experiment that was conducted with 368 subjects. Six different treatments were run, which were based on two different institutional settings, namely the poluter-pays principle and the public-pays principle. Preliminary econometric analysis suggest that much of the individual variance in the willingness-to-pay can be explained by the treatment variables as well as by the subjects’ attitudes towards public finance and environmental policy.”

Teaching economics with experiments

Final day at ESA 2007. Today Dieter Balkenborg will talk about on “Bringing economics experiments into the classroom”. The ESA 2007 site hasn’t got his presentation nor his paper to download, so here’s is a link to Balkenborg’s earlier presentation given in Bristol at the New Lecturers Workshop on 14th October 2006 titled “Classroom Experiments and Games” available at
http://www.people.ex.ac.uk/dgbalken/FEELE/FEELE.html