Investments in energy efficiency entail uncertainty, and when faced with uncertainty consumers have been shown to behave according to prospect theory: preferences are reference-dependent and exhibit loss aversion, and probabilities are subjectively weighted. Using data from a choice experiment eliciting prospect theory parameters, I provide evidence that loss-averse people are less likely to invest in energy efficiency. Then, I consider policy design under prospect theory when there are also externalities from energy use. A higher degree of loss aversion implies a higher subsidy to energy efficiency. Numerical simulations suggest that the impact of prospect theory on policy may be substantial.
Prospect theory and energy efficiency
Published 2019 in Journal of Environmental Economics and Management
ABSTRACT
PUBLICATION RECORD
- Publication year
2019
- Venue
Journal of Environmental Economics and Management
- Publication date
2019-07-01
- Fields of study
Economics, Environmental Science
- Identifiers
- External record
- Source metadata
Semantic Scholar
CITATION MAP
EXTRACTION MAP
CLAIMS
CONCEPTS
- choice experiment
An experimental choice task used to elicit prospect theory parameters from participants.
- energy efficiency investment
Investment decisions aimed at reducing energy consumption or improving the efficiency of energy use.
- externalities from energy use
Costs or benefits of energy consumption that fall on parties other than the decision maker and are not fully reflected in private choices.
- loss aversion
A stronger aversion to outcomes framed as losses relative to a reference point than to equally sized gains.
- numerical simulations
Computational scenario analysis used to evaluate how the model affects policy implications.
- policy design
The process of choosing policy instruments and their levels for energy-efficiency outcomes.
- prospect theory
A behavioral framework in which choices depend on a reference point, losses loom larger than gains, and probabilities may be weighted subjectively.
Aliases: PT
- subjective weighting of probabilities
The prospect theory component that maps objective probabilities into subjective decision weights.
Aliases: probability weighting
- subsidy to energy efficiency
A policy payment designed to encourage adoption of energy-efficiency improvements.
REFERENCES
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