People Respond To Incentives

I remember sitting in a bible study where one member, an elderly ex-Lord Mayor*, said that if there was one thing that would make the world a better place, it would be that everyone followed the Ten Commandments.

My bible study group

The elderly, ex-Lord Mayor holds forth at bible study

Now, it’s hard to disagree with many of the commandments. I disapprove on the whole of people going around killing each other, stealing, lying and all that sort of thing; although I’d be rather flattered if anyone coveted my ass.

I think he wanted the commandments to be drummed into everyone’s ear at school, and then for people to be constantly exhorted to behave better. It’s a nice thought, but I’d doubt it’d work. People tend not to like being told what to do.

There is another school of thought out there. I have recently been re-reading Steven Landsburg‘s The Armchair Economist: Economics and Everday Life.

Armchair EconomistThe first sentence goes:

Most of economics can be summarized in four words: “People respond to incentives.” The rest is commentary.

And in economics, incentives tend to work through the price system.

There has recently been an experiment** comparing these two approaches – (i) appealing to morality to change behaviour (called moral suasion), and (ii) using economic incentives. It had nothing to do with any of the commandments, but to do with discouraging people using electricity during peak hours***.

691 households in Japan were assigned into three groups, and their electricity consumption was monitored each day over a period of peak-demand:

  1. One group was told that it was important to save electricity, and would receive day-ahead and same-day messages asking them to, please, reduce their electricity consumption. (Moral suasion).
  2. A second group were also given messages, but they were told that electricity prices would be between 2-4 times higher during off-peak hours. (Economic incentives).
  3. A third group had smart meters installed, but received no messages. (Control group).

Guess which method worked best?

Electricity ExperimentThe blue line (moral suasion) is lower than the green line (control group) – so asking people to behave differently has some effect. But clearly the red line (economic incentive) is lowest of all. When people have to pay more for doing something, they do less of it.

God had a hard time with the stiff-necked Israelites, and wasn’t averse to using incentives himself. Pretty big ones. A plague here. Dropping some manna from Heaven there. But they were a little too irregular to have any real effect. Maybe he should have used some economics?

Ten Commandments

* This was the same elderly, ex-Lord Mayor who also wanted to ban divorce, as I related in this post.

** Hat-tip to the excellent Marginal Revolution economics blog for bringing this to my attention.

*** Even as someone who is quite concerned about saving the environment and reducing Global Warming, I have to admit there is a preachy environmentalist movement out there trying to shame us into changing behaviour. I’d prefer to see economic approaches tried.

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