Energy Scores, Financing, and the Myth of Rationality

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bad decisionsGeeking out on behavioral economics…

A few statements in meetings over the past few weeks suggested that more a rating or score and a better loan product are all we need to drive more homeowners to improve the efficiency of theirs homes. That ain’t so.

As rebutted by a couple of manufacturers who have a strong interest in selling products to increase the efficiency of homes. “People aren’t buying ROI.” They are right.

It’s time to stop propagating a couple of myths surrounding what makes most people buy–or not buy–home energy upgrades. The common assumptions are 1) if we give people good information and/or 2) if they can find a way to pay for the improvement, including with financing that will be paid for by the energy savings they’ll move ahead.

Such thoughts drive many programs, and unfortunately some contractors, too. I say “unfortunately” because the assumptions just aren’t valid. Successful contractors already know this explicitly or implicitly.

Behavioral economics tells us that simply proving good information and financing doesn’t lead to action.

Don’t get me wrong—I believe we should have good information. And we also know that access to financing contributes to bigger more comprehensive projects. Both these things are good. But for the average consumer, they are not enough. As Amory Lovins said, “People don’t want heating fuel or coolant, people want cold beer and hot showers.” If we want to scale, if we want to see widespread action, we have to pay attention to what really motivates people and what stops them from moving forward.

To do that, we need need to have questions to find out what will really drive each homeowner to action. And we need to pay attention to behavioral economics and what behavioral research has shown drives our decisions and choices—including choices consumers make about whether to spend money to improve their homes.  Ignoring these principles means we risk wasting time, wasting money, and missing big opportunities both as businesses and in meeting program and policy goals.

People don’t like to lose things.  We are affected by loss aversion, with research suggesting, for example, that people prefer to avoid losing $100 more than gaining than prefer to win $100. Some studies suggest that losses are at least twice as powerful, psychologically, as gains.  This has clear implications for energy-efficiency where we have to spend (lose) money to save money (energy). This tendency gets in the way of economic arguments for energy-efficiency.

The status quo bias, points to the fact that we’re often more comfortable where we’re at than with the idea of change. (Some research suggests loss aversion may really be the inertia of the status quo.)

I’ll conclude this post with a mention of single action bias which I’ve seen hurt home energy-efficiency efforts. This is a very big deal for approaches advocating “screening audits” or audits with a simple direct install measures.  People often responds to uncertain and risky situations, with a bent toward making the decisions simple and direct. Compound this with a perceived threat or harm, and people are likely to fall back on a single action, even when it provides only a small incremental benefit or risk reduction.  And then feeling better, they often take no further action.

Frequently programs and contractors alike will offer “small concessions” to homeowners something simple they can do with the hope of moving them forward. Sounds logical. Unfortunately, these simple steps are frequently seen be homeowners not as a first step, but as a last step. I got an audit—problem solved! They wrapped my water heater—problem solved! I don’t need to do more (even when the big performance issue in the house remains completely untouched).

Now, sometimes small steps do lead to big steps. But it’s important to realize the full cost of the small steps. If these small concessions are the focus, we must take care to point homeowners to the next steps and then facilitate moving them there.

There are many decision-making concepts that come into play. And they’re worth exploring.

Some further reading on the topic:

Cheers,
Mike

1Dan, Daniel, Daniel. I’m seeing a name pattern emerging! Does anyone have any good reading recommendations by authors named Beth, Edmund, or Mary?

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

Comments

  1. Kathy Kuntz  November 6, 2015

    Nice post, Mike. It is painful to see so little regard for the realities of human behavior in efficiency program design.

    I do, though, want to take issue with you on small steps vs big steps. While single action bias is real, so is commitment and consistency. There’s strong research showing that if I take one action that demonstrates a certain belief or commitment (e.g., signing a petition) then I’m much more likely to be persuaded to take another bigger action consistent with that first action. Similarly, if I make a public commitment to something I’ve a strong need to see that commitment through–it turns out the need to be seen as consistent is pretty universal; that’s why politicians are so quick to accuse their rivals of flip flopping. A well designed program can move households down a continuum, starting with small (ideally public) actions and building toward whole-house measures. Indeed, this might well be the way to get broad participation; it builds momentum (and creates potential off ramps for households with less comprehensive needs). And in the end you’ve got households who see themselves as part of the solution who will evangelize to others – which leverages the most important behavioral concept of all, social norms.

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    • Mike Rogers  May 27, 2016

      Somehow I missed your comment earlier, Kathy. And it’s a good one.

      I think we actually agree. “Small concessions” is real, and can be a good way to get people moving in the right direction and taking further action. At the same time “single action bias” is real, too (humans…we’re a funny lot!). I emphasized the trap of the single action, because I’ve seen it in play with some poorly designed and executed programs. (There are more factors at play here, too…time for the full length essay!)

      So you’re right in that a “well designed program can move households down a continuum”, emphasis on the “well-designed”. My point was that we have the remember that the small concessions aren’t the end goal, and strengthen the ability to move along the path and not let the single action bias sneak in an stop things.

      If we have a better understanding of how people make decisions, we’ve got a chance at being more effective!

      reply
  2. Naomi Mermin  November 6, 2015

    Spot on. I didn’t see you in the meetings I was at, but boy you nailed it. The information/financing solution appears to be most frequently espoused by folks with little to no experience in the science of marketing or as I like to think of it the presenting information that results in action and similarly don’t understand finance.

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