Behavioral and Experimental Insights on Consumer Decisions and the Environment

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Behavioral and Experimental Insights on Consumer Decisions and the Environment

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Title: Behavioral and Experimental Insights on Consumer Decisions and the Environment
Author: Shrum, Trisha Renee ORCID  0000-0001-8660-155X
Citation: Shrum, Trisha Renee. 2016. Behavioral and Experimental Insights on Consumer Decisions and the Environment. Doctoral dissertation, Harvard University, Graduate School of Arts & Sciences.
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Abstract: In the following essays, I apply theoretical insights and experimental methods from behavioral science to address three questions at the intersection of environmental economics and consumer behavior.

In Chapter 1, I use an experimental intervention to explore the role of salience in the willingness to pay for climate change mitigation. The long time horizon between the mitigation decision and the benefits of that decision may hinder optimal investment in climate change mitigation. The immediate costs of the decision loom large in the decision-maker's mind while the future benefits have lower prominence in their decisions. As a result, climate change mitigation decisions may be prone to salience bias. In an online randomized control experiment, I test whether tasks focusing attention on the risks and challenges of climate change will increase the willingness to pay for climate change mitigation. In the Letter treatment, the writing task is framed as a message directed to a particular individual living in the year 2050. In Essay treatment, the writing task is framed as an essay on the risks and challenges of climate change. I find that compared to a control group, both writing tasks that focus attention on the risks and challenges of climate change increase the willingness to donate to a climate change mitigation non-profit organization. However, the two treatments appear to operate through different pathways. These findings contribute to the understanding of how to effectively bridge the psychological distance between choice and consequence for climate change mitigation. They also have broader implications for the interplay between psychological distance and salience bias in a broad range of decision-making contexts.

In Chapter 2, coauthored with Joseph Aldy, we model the consumer welfare impacts of gasoline price volatility under expected utility theory and prospect theory. The salience of gasoline prices among the U.S. public reflects consumer concerns about the price, and the uncertainty around the price, of gasoline. Volatility in gasoline prices reduces the ability of credit-constrained households to smooth consumption, and could result in substantial welfare losses for such households. Volatility reduces the information value of prices, which can undermine consumer decision-making for new investments. Gasoline price volatility may also reflect energy and environmental policies. As decision-makers compare the welfare impacts of policies that accomplish the same goal (e.g. reduce carbon dioxide emissions) but generate different levels of volatility in energy prices (e.g. fixed carbon tax compared to a fluctuating allowance price), the effects of consumer price volatility are often left out of the analysis. The goal of this research is to understand how energy price volatility affects consumer welfare. Focusing specifically on the gasoline market, we estimate the risk premium for increased gasoline price volatility due to a carbon allowance market. Under an expected utility theory model, households with highly inelastic demand or high-risk aversion tend to prefer fixed prices but have low risk premiums. Under a prospect theory model with reference-dependent utility, loss aversion leads to a strong preference for fixed prices with risk premiums around 2% of the average price. The salience of gasoline prices creates a strong reference point and the level of attention focused on "pain at the pump" when prices rise sharply implies loss aversion. Thus, prospect theory may be particularly well-suited to this market setting. By clarifying the welfare impacts of gasoline price volatility, we will better understand the full set of tradeoffs among energy policy options that have differential effects on fuel price volatility.

In Chapter 3, I use a series of experiments to explore the impacts of eco-friendly labels on perceptions and evaluations of product attributes. Expectations may affect how people evaluate product attributes. If people expect different levels of performance from eco-products and regular products, then the presence of an eco-product label may bias their evaluations. Six experiments examine how expectations of the objective performance of eco-products affect perceptions of those products and subsequent product preferences. Holding objective performance constant, I find that prior expectations bias the evaluations of eco-product attributes. Expecting energy efficient bulbs to generate unpleasant lighting causes people to evaluate the lighting as unpleasant; expecting toilet tissue from recycled paper to be coarse causes people to evaluate the toilet paper as coarse. Using a study designed to isolate the effects on sensory perception, I find that expectations do not bias the sensory perception of product attributes. Instead, I find that consumers follow Bayesian predictions of combining prior expectations with a new perceptual signal to form posterior evaluations. This research may help explain the slower than expected take-up of energy efficient products (referred to as the "energy efficiency gap"), and the persistence of beliefs that eco-products underperform standard products, when many objectively do not.
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