If you have read the book “Thinking, Fast and Slow” by Daniel Kahneman, you were introduced to the notion that humans have two brains: a reptilian brain, System 1, which is fast, intuitive, and emotional (an evolutionarily useful trait when running away from a tiger), and a slow-thinking analytical brain, System 2, which is more logical and deliberate (and is a more recent biological development that makes us human). In addition to becoming a best-selling author, Kahneman was the only psychologist to have won the Nobel Memorial Prize in Economic Sciences, as his work integrated insights from psychology into economics. His academic profile is formidable: his work has been cited more than half a million times by authors across different disciplines.
While Kahneman’s legacy is huge, it is also relevant for the field of renewable energy and energy efficiency, since his ideas (many of which were developed with his collaborator Amos Tversky) helped explain sometimes unexplainable human pro-environmental or technology adoption behavior. For example, his work on bounded rationality helped other researchers explain why consumers were leaving money on the table by not investing in energy-efficient technologies, even when it was both financially and environmentally beneficial to do so. The secret sauce of Kahneman and Tversky’s approach was that they did not view humans as “homo economicus,” utility-maximizing machines, but rather as imperfectly rational people with biases who rely on mental shortcuts when processing huge amounts of incoming information. Currently, Wikipedia lists over 100 cognitive biases (shown below), and in many ways, Kahneman’s work spearheaded this search for human imperfections.
Kahneman’s work informed the design of energy efficiency programs. For example, when utility customers received energy consumption reports comparing their usage to that of their neighbors, behavioral changes were more likely to follow. These behavioral “nudges” aimed to encourage pro-environmental behavior by making small changes to the decision-making context. The framing effect is particularly salient, as humans tend to draw different conclusions from the same information depending on how it is presented. Imagine another situation when utility company consumers are presented with a choice of different electricity packages, ranging from the cheapest fossil fuel-based electricity mix to the cleanest yet most expensive locally-produced 100% solar electricity package. When the default option was set to fossil fuel-based electricity, most consumers stayed with this option. When the default option was set to solar electricity, the outcome was similar. This illustrates the “status quo bias” of individual consumers in favor of keeping the default setting. Another similar example is the automatic opt-in of Community Choice Aggregation (CCA) programs. If customers were automatically enrolled in the CCA, they were likely to stay. If they had to manually choose to enroll or switch from their current provider to the CCA, participation was much lower. The status quo bias is a powerful force that explains the relatively slow speed of energy transitions.
Kahneman’s work has shown that humans tend to undervalue long-term gains, which can be detrimental to the adoption of renewable energy technologies. For example, many consumers might be influenced by the heuristic (a mental shortcut) that upfront cost is the most important variable in choosing a vehicle. This has greatly disadvantaged the sales of electric cars, which break down less often, are cheaper to operate, and have a total cost of ownership that is either on par with or even lower than traditional cars. The same goes for the purchase of solar panels. Many potential solar adopters focus primarily on the upfront cost, ignoring the benefits of renewable energy credits (RECs), net metering, and other relevant metrics.
Kahneman and Tversky developed Prospect Theory, showing that humans are generally more averse to losses than they are welcoming to gains. In other words, we will be more upset over the loss of $100 than we would be happy about winning the same amount. This has a direct influence on how energy policies are written. Research has shown that policymakers are more likely to adopt policies framed in terms of avoiding losses (e.g., reducing dependence on fossil fuel imports) than achieving gains (e.g., creating green jobs). Similarly, investors in solar power tend to give more weight to potential losses rather than gains, leading to a more cautious approach to investment.
In sum, Daniel Kahneman not only had an enormous impact on social sciences but also successfully popularized his ideas among the general public. His ideas gave birth to a multitude of scientific studies investigating behavioral aspects of the energy transition, ranging from consumer adoption of new technologies to policy design, utility conservation programs, and the biases and heuristics that renewable energy investors should be aware of. Kahneman’s last work, published in late 2023, focused on managing AI risks and proposing urgent priorities for AI R&D governance. He passed away in March 2024, leaving behind an unparalleled legacy as one of the most impactful social scientists of the last century.