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Behavioral Economics and Climate Change Policy

January 2007

By John M. Gowdy
Rensselaer Polytechnic Institute Working Paper

The policy recommendations of most economists are based, explicitly or implicitly, on the rational actor model of human behavior. Behavior is assumed to be self-regarding, preferences are assumed to be stable, and decisions are assumed to be unaffected by social context or frame of reference. The related fields of behavioral economics, game theory, and neuroscience have confirmed that human behavior is other-regarding, and that people exhibit systematic patterns of decision-making that are "irrational" according to the standard behavioral model. This paper takes the position that these "irrational" patterns of behavior are central to human decision-making and therefore, for economic policies to be effective these behaviors should be the starting point. This contention is supported by game theory experiments involving humans, closely related primates, and other animals with more limited cognitive ability.

The policy focus of the paper is global climate change. The research surveyed in this paper suggests that the standard economic approach to climate change policy, with its almost exclusive emphasis on rational responses to monetary incentives, is seriously flawed. In fact, monetary incentives may actually be counter-productive. Humans are unique among animal species in their ability to cooperate across cultures, geographical space, and generations. Tapping into this uniquely human attribute, and understanding how cooperation is enforced, holds the key to limiting the potentially calamitous effects of global climate change.

External Link: Behavioral Economics and Climate Change Policy [PDF]

Read More: Economy, Environment, Global

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