The energy industry is heading into the unchartered waters of deregulation, competition and increasing consumer choice, with a very imperfect understanding of how consumers are likely to respond. Technological innovation and tariff reform have encouraged higher expectations of energy providers, at the same time that rising prices and declining trust render consumers volatile and unforgiving of missteps. At this moment, both the opportunities and risks are high.
In theory of course, the new environment of competition and choice is good for both consumers and the energy industry. Federal and state governments are making earnest endeavours to enable an efficient market and optimal utilisation of the nation’s energy infrastructure. Likewise, with the very best of intentions, the industry is investing considerable effort and resources in providing consumers with a wide array of technological and pricing alternatives from which they can choose. The potential gains are enormous.
But, human beings are extremely averse to loss and risk, and will often forego the prospect of large future gains to avoid even small but tangible losses in the present. These ‘losses’ can include even just the ‘hassle’ of choosing among pricing plans, the inconvenience of switching, the fleeting experience of occasional thermal discomfort, or vague worries about whether one has made the right decision.
Little wonder that human beings are highly inertial. It takes a great deal to tempt them away from even an unsatisfactory status quo, unless the new state being promised them is clearly and certainly superior to the comfortably familiar one whose shortcomings they’re already aware of.
And contrary to widespread opinion and practice, piling on more information, or options, won’t help. There is probably no law of psychology better supported (but less well known) than this: human decision-making deteriorates (or is avoided altogether) the more information or choice is provided.
In fact, providing more (or more complex) information is the surest way to guarantee that no decision will be made at all.
In energy markets, as elsewhere, consumers regularly fail to select the option that is (objectively) in their own best interests, or fail to make use of their selection in ways that maximise the utility they can derive from it, or avoid making any decision among the alternatives at all ('status quo bias’). And all of these propensities grow still more marked as information, choice and complexity increase.
Pervasive irrationality in human decision-making is of course not confined to energy consumers. But it is perhaps less well understood in energy than in some other domains, being an industry dominated by engineering and ‘classical’ economic perspectives, and only recently confronting the true complexities of consumer choice.
As consumers negotiate the many decisions and alternatives that confront them each day, making ‘smart’ energy choices inevitably comes well behind finding the soccer boots for training, or figuring out how to use SnapChat. Consumers cope with this vast “wall of noise” by 'satisficing' rather than 'optimizing'. They revert to simple rules of thumb, heuristics and cognitive biases, mostly below the level of conscious awareness. They over-weight losses relative to gains, go to excessive lengths to avoid any kind of risk, and heavily discount the future. They under-weight things that are further away in time or space. They are excessively swayed by the first thing, the last thing, the tangible and the concrete, the emotional and the personal. They pay close attention to norms, follow the crowd, and bring their behaviour into conformity with others (the ultimate decision shortcut, after all). They are influenced by irrelevant problem framing. They procrastinate, or avoid making decisions altogether.
The good news is this: human decision-making is irrational, but it is “predictably irrational”. The ways in which regular folk deviate from the cost-benefit analysis and utility maximization attributed to classical ‘economic man’ are well-known and highly predictable…. so predictable we are able not merely to avoid or overcome these cognitive and behavioural barriers to the outcomes you seek, but actually use the peculiarities of human decision-making to your advantage.
For example, if people tend to stick to the status quo and like to follow the crowd, make the outcome you seek the 'new normal'. Show them what they will certainly lose by failing to act, rather than potentially gain by acting. Make the thing you want them to do the very easiest thing to do, and inaction hard or costly. Above all, simplify everything. Normal human beings prefer white space to words. Though many still find it hard to fathom, the empirical evidence is clear: less information and fewer options make for more, and better decisions.
Copyright © 2020 Concentric.Energy