Optimal Public Policies as based on “Green Nudges” – a necessary step for Smart Cities

Analysis of the assumptions and benefits underlying the design and implementation and “green nudges” for the context of Smart Cities. With particular emphasis on the relationship between behavioral biases in terms of the use of scarce resources and the legal challenges associated with the creation of "green "nudges".

Nudging as part of an alternative strategy for public policies in Smart Cities

“Nudge” is a concept of Behavioral Law & Economics which proposes positive reinforcement and indirect suggestions as ways to influence the behavior and decision making of groups or individuals.

In this regard, nudging rests on an alternative to the “homo economicus” prototype[1] meaning by this latter the figurative human being characterized by the infinite ability to make rational decisions. Concerning the problems with this prototype, Simon (1979) expressly mentioned that “economic science has focused on just one aspect of man’s character, his reason, and particularly on the application of that reason to problems of allocation in the face of scarcity”.[2]

At the same time, Simon (1986) also referred that “[t]he assumption that actors maximize subjective expected utility (economic rationality) supplies only a small part of the premises in economic reasoning, and that often not the essential part”[3], which evidences a set of biases to the rational economic behavior and the need to identify them, namely for the design of efficient and fair public policies.

Effectively, certain economic models have traditionally relied on the assumption that humans are rational and will attempt to maximize their utility for both monetary and non-monetary gains.

However, modern behavioral economists and phycologists – starting with the contribution of Tversky-Kahneman (1979) – have demonstrated that human beings are, in fact, not rational in their decision making, and argue a “more human” subject (that makes somewhat predictable irrational decisions) would provide a more accurate tool for modeling human behavior.

The idea is that our judgment, decision-making, and reasoning processes are underpinned by two distinct cognitive systems: System 1 and System 2.

In general, System 1 processes are heuristic-based, intuitive, biased, associative, automatic, and System 2 processes are rule based, analytical, flexible, and essentially slow.[6]

The identification of this set of biases and limits to rationality raised the need for different approaches to analyze human behavior, especially regarding the search for scarce resources – which, as we will see, is equally relevant to the optimal design of laws.

One of the best-known applications is the nudge, an idea popularized by behavioral researchers Thaler and Sunstein (2008), which has had numerous public-policy and private-sector applications. According to Thaler and Sunstein (2008), a nudge “is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not”.[7]

More recently, according to Sunstein (2019), policies that take the form of a nudge are “choice-preserving approaches that steer people in a particular direction, but that allow them to go their own way”.

Nudge theory advocates change in groups through indirect methods, rather than by direct enforcement or instruction. Therefore, central to the “nudge” concept is that people can be helped to both think appropriately and make better decisions by being offered choices that have been designed to enable these outcomes.

The optimal design of a “nudge” is a critical issue, especially when it is intended to be used in a wide universe of individuals. Since nudges are often created using laws, their optimal design is a critical point for the future of Smart Cities, where the adaptation of human behavior to different levels of resources and to different pressures of supply and demand are going to play a critical role.

 The “Green Nudges” in the general context of Smart Cities

Behavioral insights and nudges are currently used in many countries around the world and will play a critical role in Smart Cities, especially in sectors linked to the optimal use of scarce resources (networks, water, electricity, waste treatment, food, among others).

The new research shows that there is an opportunity for Smart Cities to step into the choice architecture and nudge people toward greener behaviors, in areas as diverse as traffic, water consumption or waste generation.

It is in this context that the progressive allusion to the so-called “green nudges” emerges. Following Schubert (2017), green nudges are “nudges that aim at promoting environmentally benign behavior”, which means that the change of individuals architecture of choice can be made as a way to pursue environmentally desirable goals or targets.

This has everything to do with the designs of Smart Cities, where traditional networks and services are made more efficient with the use not only of digital and telecommunication technologies but also of optimal public policies in terms of the use of scarce resources, at the same time that the consumption of these resources has associated negative externalities (e.g. carbon emissions) that must be internalized.

In fact, environmental sustainability is one of the pillars of the Smart City concept, which means that the use of public policies that induce environmentally efficient behaviors and discourage other environmentally harmful behaviors is highly recommended.

According to empirical experience, many of these environmentally friendly behaviors are not pursued without incentives, whether designed by the public sector or the private sector itself.

However, each of these “green nudges” (which are not exactly incentives but only rearrangements in the architecture of more efficient choices) has legal challenges that call for a multidisciplinary exercise by lawyers, together with economists, engineers, scientists, among others, for the construction of laws in order that environmental goals are compatible with the levels of well-being and the freedom of citizens.

“Green Nudges” – some applications

As we saw previously, one of the most fruitful applications of nudge theory concerns the so-called “green nudges”. Currently, green nudges have very diverse applications in terms of the design and application of environmentally friendly public (and private) policies.

Following Schubert (2017) again, we can comprehensively list the following types of green nudges:

  • Green nudges that capitalize on consumers’ desire to maintain an attractive self-image through eco-friendly behavior, by either simplifying product information or by making certain product characteristics more salient – ecolabels are an excellent example at this level.
  • Green nudges that exploit people’s inclination to imitate the behavior of their peers; this can be done, e.g., by conveying certain social norms through peer comparison.
  • Green nudges that exploit the behavioral effects of purposefully set defaults that stipulate what happens if people don’t actively choose (example: energy providers offering green energy as default).

Each of these “green nudges” can be implemented through a very diverse set of techniques and methodologies, with the necessary variation in associated costs.

A first example concerns waste management and recycling, and the “green nudge” is achieved through the creation of lottery-based deposit return schemes.

Most deposit return programs charge customers a small fee when they purchase plastic, glass or aluminum drink containers, then refund it when the container is returned. Instead, make container return more attractive by having the deposit provide entry into a lottery with large and appealing prizes – which implies that the total amount of money paid out can be the same.

A second example concerns the customization of messages in terms of energy or water consumption.

This “green nudge” – which has some challenges in terms of data protection – is realized through the sending of personalized messages (mobile phone) that are indexed to the average consumption of plastic, water or electricity/natural gas (soft version) or that contain alerts of inefficient use meeting the actual consumption values (hard version).

The use of strong phrases or metaphors can have an efficient behavioral effect.

Good examples can be messages like “For each plastic bag you reuse, you will have another day of access to clean, microplastic-free beaches” (soft version) or “Are you being efficient in using water for domestic purposes? Three liters of wasted water would be enough for an adult, per day” (strong version).

More general messages can also be sent, such as “While taking a shower without turning off the tap, several million children around the world do not have access to drinking water”.

The third example concerns incentives to resort to “default tariffs” (energy and waste sectors, among others), which are typically more expensive than non-default, fixed-term tariffs.

According to the empirical data, if the average maximum consumption levels of those of the “default tariffs” are reduced and the minimums are increased, much higher levels of energy savings are achieved.

At the same time, discount factors on pricing are introduced with an incentive to adhere to this type of tariffs.

Conclusions

Nudges, in particular “green nudges”, are a powerful instrument to guide human behavior towards more environmentally friendly and more efficient choices. As such, it is expected that they will play a crucial role in Smart Cities, with a special challenge for lawyers as to reconcile this type of behavioral inducements with freedom and respect for citizens’ rights.

[1]     See, Becker, Gary S., (1976), «The Economic Approach to Human Behavior» in «The Economic Approach to Human Behavior», The University of Chicago Press, pp. 3-14.

[2]     Simon, Herbert A. (1979), «Rational Decision Making in Business Organizations», The American Economic Review, Vol. 69, No. 4 (Sep., 1979), pp. 493-513.

[3]     Simon, Herbert A. (1986), «Rationality in Psychology and Economics», The Journal of Business, Vol. 59, No. 4, Part 2: The Behavioral Foundations of Economic Theory (Oct., 1986), pp. S209-S224.

[4]     Typically, by maximizing the value of a utility function and checking the so-called Morgenstern-von Neumann axioms.

[5]     Kahneman, Daniel/Tversky, Amos (1979), «Prospect Theory: An Analysis of Decision under Risk», Econometrica, Vol. 47, No. 2 (Mar., 1979), pp. 263-292.

[6]     Lin, Yiling/Osman, Magda/Ashcroft, Richard (2017), «Nudge: Concept, Effectiveness, and Ethics», Basic and Applied Social Psychology, pp.11-14.

[7]     Thaler, Richard H./Sunstein, Cass R. (2008), «Nudge – Improving Decisions About Health, Wealth, and Happiness», Yale University Press, pp. 6 e ss.

[8]     Sunstein, Cass R. (2019), «Nudging: a very short guide», Business Economics, January 2019.

[9]     Schubert, Christian (2017), «Green nudges: Do they work? Are they ethical?», Ecological Economics, 132, pp. 329–342.

Filipe Vasconcelos Fernandes

Filipe Vasconcelos Fernandes

Consultor Senior | Vieira de Almeida
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