Climate Change Offers a Sharp Test of the Predictive Power of Behavioral Economics

I would like to return to a theme of a recent blog post I published here.  Everyone knows that behavioral economics has had a great decade.  You don’t have to be as smart as Sunstein and Thaler to appreciate a good nudge.  For some background on behavioral economics, I suggest reading this piece  or these slides.

Allow me to apologize upfront for making a bunch of simplifications.  This is a blog post!  I will not put this entry on my vita.   In my work on climate change adaptation, I have assumed that we will not figure out how to solve the global free rider problem and thus will not cap our aggregate greenhouse gas emissions.   This pessimism is based on my travels in China, my discussions with people in the developing world (who seek to become middle class urbanites) and my examination of Congressional voting patterns on carbon mitigation efforts.   Given that we have released too much gas, I have focused on the micro economic “small ball” of how we individually and collectively adapt to climate change.  Behavioral economics and neo-classical economics offer sharply different predictions of our future.

Let’s do the cliche easy case in which we are 100% Homer Simpsons.  By this I mean that the world is populated with Homer Simpsons. He is a behavioral economist’s poster boy as he focuses on current pleasure and lives life now making a bunch of choices that his future self will regret.  Homer doesn’t know “that he doesn’t know” what climate change will do to the world.  He lives in ignorant bliss about the coming days of pain that his suburban lifestyle has unintentionally caused.  He makes no backup plans and his society suffers a terrible and ironic day of reckoning.  Like the Titanic, they sink.

Let’s do another easy case, we are 100% Mr. Spock.   He is neo-classical man. He sees the iceberg and he comes up with a pro-active plan to steer around it.  Rational expectations and recognizing “known unknowns” leads him to take out insurance in terms of reducing carbon emissions now and making strategic investments such as retreating from areas where sea level rise will flood.   Such a population faces lower adaptation costs because of pro-active ex-ante investments and shrewd responses as climate change unfolds.

Now, the interesting case is the mixture model.  Assume we are a population comprised of 98% Homers and 2% Spocks.   What is the equilibrium outcome in this case?  The world has 7 billion people so there are 140 million Spocks among us.  Will they have to repopulate the world after the days of pain begin in 2050?   I don’t think so.    The Homers and their expected aggregate suffering in our Hotter unpredictable future creates a huge market opportunity for the 2% Spocks.   Anticipated pain creates a profit opportunity for the entrepreneurs.  These entrepreneurs will focus on a series of challenges ranging from food production, to transportation, to flood resistance, to water delivery to help us to adapt to the new challenges we will face.

The point of this blog post is that the existence of “behavioral agents” actually helps us to adapt to future crises because it creates a market for solutions.  I agree with Joe Romm and other climate hawks that such Homers hurt in today’s political arena because they can’t be convinced to vote for a carbon tax but we need to separate out median voter politics from market outcomes.

To finish this blog post, and to repeat for the 200th time, I am a fan of a huge carbon tax now.  I would vote in favor of $8 a gallon gas ( I don’t drive and I’m deeply concerned about climate change).     There hasn’t been enough discussion that at the heart of the climate change debate is the belief among the intellectual elite that we are Homer and that we aren’t armed with either wits or anticipation about the new challenges we have unintentionally unleashed.








Author: Matthew E. Kahn

Professor of Economics at UCLA.

16 thoughts on “Climate Change Offers a Sharp Test of the Predictive Power of Behavioral Economics”

  1. I’m with you on carbon price, but I’m kind of baffled why you aren’t pushing congestion charges at the same time. You can save a Hell of a lot of gasoline if road tolls make car pools a direct benefit to commuters. First, by getting a lot more seat-miles out of the same car trip, second, by lessening congestion so that the cars spend less time fruitlessly idling in traffic. What’s not to like?

  2. It’s worth pointing out that capping aggregate emissions is a different kind of problem than managing the impact of climate change. Emissions are global. Everyone has to participate in capping them. As you point out, it’s unlikely that that degree of coordination can be achieved. But managing impacts is local. No two localities are going to be equally affected. Within the US, Florida will be affected differently than Vermont; California differently than Pennsylvania; Houston differently than Chicago. Some US localities have begun planning. I know there is a California report that identifies the threats from climate change: diminished water supply, increased wildfire danger and flooding are the big ones. New York’s MTA has begun identifying low-lying subway vents where there’s a risk of water entering the tunnels. My own small city — Alexandria VA — which has a history of minor flooding along the waterfront has studied the increased risk of flooding from various sea-level increases and even come up with a set of possible flood control measures, with pros and cons, so that people can begin to think about which, if any, measures should be adopted. I don’t think that any locality in the US has yet come up with a definitve plan for dealing with their local climate change impacts, but in some localities the process has begun.

    It is, I think, bureaucrats will save us, not entrepreneurs. Those countries, states and cities that have good bureaucrats will, in some form, survive climate change. Those that don’t, won’t.

    The US, unlike some other countries, is a very mobile society. People move from unsuccessful localities to successful ones. We have prospered over the last sixty years or so despite a massive migration from the north and Midwest to the south and southwest. If, over the next sixty years, we see a similar migration from the localities that don’t manage the impact of climate change well to those that do, it’s effect may well be similar.

  3. Headline: Climate Change Offers a Sharp Test of the Predictive Power of Behavioral Economics

    So? People have always taken economic advantage of disasters…
    Which is all to suggest you buried your lede for the 200th time:

    I am a fan of a huge carbon tax now.

    As anybody with a brain should be:

    Capitalism has caused global warming by treating the finite atmosphere as if it were an infinite Commons. Full stop.
    If Capitalism can fix the problem it created (and that’s a big if) it will need not a nudge, but a huge government tax cudgel.
    Anything else, as most of your post suggest, is merely profiting off of a disaster.

    By the way:

    Your model of Simpsons and Spocks omitted the oversized influence of the rogue coal billionaires who would have us merely profit off the looming disaster. They stand in opposition to where the world must go. They are not the first entrenched class in history to block the future. But all such entrenched classes have gone the way of dinosaurs and the landed gentry. There is no reason to believe the Kochs won’t fall too. The sooner the better.

    1. Spocks, Simpsons, Smithers, and Burns then.

      Smithers enabled the evil while being somewhat good intentioned, and Burns…

      My current approach to limiting carbon emissions is to go big on nuclear, and bury the waste in active coal mines with minimal containment.

      1. To quote the Halloween “Frankenstein” episode from back in the day, “For God’s sake, Smithers, this isn’t rocket science–it’s only brain surgery!”

  4. The only policymakers you looked at were American politicians? Trapped in a time-warp 18th-century constitution, deliberately misinterpreted to increase the already excessive number of veto points? The mean constitution worldwide allows for much more decisive action, as in China. If Iran’s leaders wanted to go for renewables, it would happen quite quickly.

    If you want to construct an optimistic mitigation scenario (I’m not saying this is probable, but it’s possible) you’d look at the UK and Australia, which have both shifted policy recently quite rapidly greenwards. They in turn have looked at Germany and Denmark, and these are not obviously suffering greatly from going first: sunk coasts from the subsidies, but a nice market niche in the technologies. Solar plants are going up in such unlikely places as Serbia, Bulgaria, and Ukraine. You can get to a tipping-point where the political coalition of the sane, the vested industrial interests in renewables, and the national security lobbies for energy autonomy, becomes a global majority. The USA is widely seen already as a carbon delinquent, and anti-Americanism (say in Latin America) works in favour of a sound policy.

  5. As far as making money’s concerned, I’ve got a bet with a skeptic that can earn me $6k:

    A few other bets have been arranged, but most skeptics are skeptical of putting their money where their mouths are.

    Re adaptation, it’s already happening. I’m a director of a California water district, and we’re already spending money on this. Too bad there’s no carbon tax to compensate for it.

  6. I am writing up an interview with NASA/Columbia’s James Hansen, who is promoting an interesting plan, “Fee and Dividend,” a rising carbon tax, $10/ton, rising over ten years in steps to $100/ton, with 100% rebated to legal residents per capita, with import duties on manufactured goods and raw materials from countries without equal carbon taxes. According to Hansen, 60% of Americans would get more back from their monthly dividends than they would lose due to rising prices of energy and goods. He figures we have just a few years left to adopt something equally aggressive or else have to face our children and grand kids and explain that, sure, we could have done something to avoid driving over the cliff, but we preferred to pretend we didn’t know.

  7. Two economics biases are on display here. One is individualism. What matters to humans survival is not how smart the individual is, but the cohesion of the group. A bunch of Homers sticking together will beat any number of Spocks (we are group animals) [digressive example – in WW2 Japanese POW camps the percentage of Australians who survived was much higher than that of the Brits, who in turn did better than the Americans. the Australians shared equally, the Brits divided by class, and the Americans did every man for himself]. If climate disruptions stress existing societies, the most cohesive will do best. These could well be migrating peasants.

    The second one is that the problem sets some very constrictive boundaries around markets. If a key resource is short, what counts most is capping and sharing. How you allocate is a secondary problem. Climate disruption is going to throw up all kinds of key shortages – of energy, water, cropland and more (see the Nature paper by Hansen et al on several different capacity constraints at There will be money to be made, but it will largely be spent on repair and movement, which do not add to total capability.

    1. I think you mean “a bunch of Homers sticking together will outcompete any number of Spocks” rather than “beat”. For example, if you have a huge chunk of the population that doesn’t believe in basic sanitation and acts accordingly, you’re going to have waterborne diseases regardless of how hard the Spocks work at boiling. And probably, unless the Spocks move to a different planet, they will succumb as well.

  8. If I read you correctly,you’re saying that human ingenuity + profit motive will NECCESSARILY spit out an adequate solution.Did I miss a step? Or are you simply preposterously optimistic?

    1. Did I miss a step? Or are you simply preposterously optimistic?

      If you read Matt regularly, you will see his operating premise is that mankind is smart enough to solve the problems he wasn’t smart enough to prevent from happening in the first place.

    1. that so called physicist is not actually correct about the “waste heat” effect from solar energy– the original photon has all the energy, if it is absorbed by the earth that is the waste heat whether or not we “use” it some how, not more not less.
      try again. A like argument for wind– the energy in uncaptured-by-humans wind doesn’t magically go into something not heat. indeed converting geothermalenergy to electricity and back to work in your house does not make more “waste heat” than was already present in the geothermal system to be tapped. the only place that waste heat argument makes vague sense is when talking about release of energy from chemical bonds– and then if you review the magnitudes (as the global warming folk have of course) you realize that the waste heat from breaking a carbon bond is much less than the extra trapped heat from solar energy induced by one CO2 over its lifetime.
      this is sad.

      1. it would be true if we did fusion on earth, regarding waste heat. Especially at exponential growth rates over centuries.

    2. My comment was useful to me in the somewhat irrelevant way that I can now differentiate between commenters who understand the laws of thermodynamics and those who do not. It is unclear whether Matthew understands the issue or not.

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