Are Nudges Good? Prove It!

By Syon Bhanot (Swarthmore College) and Shenstone Huang (Swarthmore College, Class of 2016)

If you’re reading this, you probably like nudges. You probably think they are a terrific way to change behavior in ways that are socially beneficial. Think of the classic social information nudges used to encourage environmental conservation, like Opower’s household mailers (Home Energy Reports, or HERs, pictured below) showing homeowners how their electricity usage stacks up against their neighbors’. Evidence suggests that they are cheap, easy to understand, and reduce energy use (see Allcott, 2011). What’s not to like?

Opower's Home Energy Reports (HERs) show consumers how their electricity usage compares to their neighbors'.

Opower's Home Energy Reports (HERs) show consumers how their electricity usage compares to their neighbors'.

While the benefits of these nudges may seem clear, their net effect on households isn’t so obvious. Sure, households may save more money and ‘feel warm and fuzzy’ for helping Mother Earth, but living in a dimly-lit house isn’t as nice as living in a bright one, and people may also suffer psychological costs from the shame caused by these mailers. How can we truly know whether or not the positives outweigh the negatives?

A new NBER working paper by Hunt Allcott (NYU) and Judd Kessler (Wharton), The Welfare Effects of Nudges: A Case Study of Energy Use Social Comparisons, tries to answer this question. The authors looked at households in upstate New York who were receiving Opower HERs and asked three questions: 1) how much do HERs save households on their gas bills?; 2) how much are these households willing to pay for HERs?; and 3) are these HERs, on net, welfare improving for society as a whole?

The key question is the third one, and it is the most challenging to answer. Why? Well, for one thing, it is hard to put a number on how much the mailers are valued by households. Fortunately, the authors have a simple solution. Specifically, they asked households how much they would be willing to pay for another year’s worth of reports, and used that as a proxy for how much the household values the reports. They then jump to the broader question of whether the HERs are good for society, by adding together the benefits (consumer welfare, energy savings, and decreased air pollution) and subtracting the costs (implementation costs, inconvenience to the households, and gas utility profit loss). Only if the benefits exceed the costs, they argue, can we say that the HERs are socially beneficial.

The authors do the math, and argue that the HERs do in fact increase social welfare, by approximately $0.70 per household per year. Interestingly, they find that average natural gas savings from HERs amounts to $5.52/heating season per household, while the average household willingness to pay for a year’s worth of HERs is $2.85. Why aren’t households willing to pay at least as much as they save? The authors point to this difference ($2.67) as reflecting the time, comfort, and psychological costs from HERs. Ignoring such costs can lead us to significantly overstate the welfare gains from HER-style programs. Indeed, in this case, the authors estimate that failing to account for non-energy costs would lead us to overstate the welfare gain from HERs by “a factor of five.”

Where does this leave us? This research shows that we should question whether nudges are net positives in all instances. Researchers and policymakers can and should try to tease out psychological costs in addition to financial costs, because their magnitudes matter. And they should think hard about the methods they use to nudge; for example, HERs are currently sent out by default and households have to opt-out from receiving the reports. However, many do not dislike HERs enough to take the time to opt-out, and these people are the ones who generate the welfare losses. One potential solution is to use existing data to determine the types of people most likely to value HERs, and target only those individuals for HER delivery. Clever, data-driven strategies like these might just achieve the impossible - satisfying both “nudgers” and nudge-skeptics!