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When Behavioral Economics Clashes with Traditional Economics - applications of behavioral science don’t happen in a vacuum

January 3, 2017

People who work in behavioral economics (to be accurate, most often, behavioral science) somehow claim that their field – behavioral economics – is superior to that of traditional (pure) economics.

 

I’m very fortunate to have a very good understanding of behavioral science and a reasonably good understanding of traditional (normative) economics.

 

I believe that there is an ignored conflict between applied behavioral science and traditional economics:

applied behavioral science endeavors clash with free market economics.

 

 

 

A few months back, I was contacted by an organization who wanted to contribute to the reduction of greenhouse gases emissions by encouraging people to change their diets. In very short the goal was to get people to eat more plant-based meals and to get them to shift, at least partially, from eating beef to eating chicken.

 

To overly summarize, cows have a very large greenhouse gases footprint compared to chickens. Cows are one of the major sources of methane – a gas that has five times the impact of CO2 on global warming (per ton of gas).

 

Personally, I believe that we should do more for curbing global warming and if I need to eat fewer beef steaks and hamburgers in order to make my contribution to keep our planet inhabitable for future generations of humans, then be it. Skipping one hamburger or steak a month and having chicken instead would not make a huge impact on life’s quality.

 

 

There are, however, two deeper implications of this seemingly minor change in food consumption.

 

First, there is an economic and social negative impact for cattle farmers. If 1% of the US population (approx. 320 million) gives up, on average, one beef meal a month, that implies that there will be 3.2 million fewer beef meals each month. Assuming each beef meal contains 225g (0.5 lb), that is a consumption decrease of 720 metric tons (360,000 lb) of beef each month. Annually that would be a decrease of 8,640 metric tons (4,320,000 lb).

 

Steering (nudging?) people to eat less beef is a good thing for the environment. At the same time, it is an economic burden on cattle farmers. Interventions that have an overall positive impact on greenhouse gases emissions, have a social negative impact on a not-so-privileged social group – the cattle farmers. 

 

Some over-enthusiasts (read radicals) will say that farmers can switch from raising cattle to raising chicken or that ranches can be downsized to adjust to the new consumer preferences. These changes are very difficult to implement. 

 

Second, there’s a law in traditional economics that holds true in most situations: if demand decreases, the price will decrease too.

 

If demand for beef decreases, then there will be an over-production, at least for some time and the price for beef will decrease. Subsequently, because of the decrease in price, at least to some extent, demand for beef will increase.

 

Moreover, if demand for chicken increases, due to people shifting from beef to chicken based meals, then the price of chicken will increase, at least till the supply part adjusts to the new market conditions.

 

Whether we like to admit it or not, purchasing and subsequent consumption are influenced by prices. If beef becomes cheaper, consumption will increase. If chicken becomes more expensive, consumption will decrease.

 

These price-driven influences on consumption might counter-balance, even cancel, the consumption changes driven by behavioral interventions.

 

My argument is not that endeavors of shifting consumption are futile or unworthy of taking into consideration. My argument is to take into account the broader context in which such an endeavor takes place and its broader implications.

 

As Richard Thaler said that “decision makers don’t make choices in a vacuum”, we have to admit that:

 

Applications of behavioral science don’t happen in a vacuum.

 

 

 

 

 

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