(Behavioural Economics cont. 6)

Incentives

In addition to nudges (see elsewhere in the Knowledge Base), people respond to incentives.

Four important questions should be asked around incentives:
"...- Who uses?
     - Who chooses?
     - Who pays?
     - Who profits?..."
Richard Thaler et al, 2021

Incentive-based systems are better than the command and control regulations, mandates, bans, etc.
"...Incentive-based approaches are more efficient and more effective, and they also increased freedom of choice..."
Richard Thaler et al, 2021

Linked with incentive is salience, ie
"...Do the choosers actually notice the incentives they face. In free markets, the answer is usually yes, but in important cases, the answer is no..."
Richard Thaler et al, 2021

For example, in the case of car ownership, the opportunity cost of the initial purchase, depreciation, etc tends to be 'under-weighted'; while the cost of using a taxi is 'over-weighted' in decision-making.

Making cost more salient or obvious will have a significant effect on your behaviour. Some examples

- use of thermostats in your home that are programmed to inform you of the cost per hour of changing temperatures a few degrees will have a greater impact on your behaviour than your monthly electricity bill

- health clubs with walking machines that display the amount of calories used during your exercise will have a greater impact than machines that just count the number of steps, or distance, walked, etc.

- business costs (in a market economy, competitive pressures to encourage organisations to reduce costs so that they survive and thrive, like using low-cost energy-efficient technology).