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Archive for February, 2010

The key assumption in economics is the assumption that individuals are rational – whatever preferences they may have and whatever economic behaviour they demonstrate. Some within the profession, and many more outside it, disagree with this assumption.

Are people really able to make rational decisions that are in their best interest – especially when they are not familiar with the circumstances of the decision they are making?

This is a question we often face in trying to collect data on people’s preferences for and behaviour towards environmental resources; data that we need in order to find ways of changing such preferences and behaviour for the benefit of the environment – and society of course.

The sceptics’ answer to the question would be no. I would say yes. To explain why, let me personalise the question: Am I able to make rational decisions that are in my best interest? And let me try to break it down to its key words…

MY:

  • My, not yours. You may not be able to understand my final decision because if you were in my place, you probably would have decided something else.

INTEREST:

  • Is about meeting my needs and wants…we have fundamental needs in common: to live, love/be loved, contribute to society etc. My ‘interest’ is not only limited to increasing my personal income – contrary to what most people mistakenly think as the only thing we economists are interested in.

In making decisions about my best interest, I am

MOTIVATED

  • Not entirely by selfish reasons – some interpret ‘rationality’ as a form of selfishness – but also by my care for other people now, future generations, environment etc.

My decisions and hence my rationality

DEPENDS on (or in economic terminology, they say, ‘bounded by’) my resources:

  • Resources – how much money, talent, education, time and other resources do I have?
  • Information – what I know, who tells me, how they tell me – the more the better, and a little gut instinct of course!
  • Other opportunities – what else can I do with my resources? If there is something better on offer, I may make a different decision and vice versa.

So considering all of this, and with the passing of time and accumulation of knowledge and experience, I may not make the same decision or behave the same way every time. And I almost certainly won’t make the same decision / behave the same way as all other people.

This inconsistency across my decisions does not make them irrational. Because rationality is about the process through which I make decisions, not the resulting decision.  So I look for consistency in the way I make decisions – do I consider the above factors and others, do I look at the pros and cons of a decision? Most people do, most of the time – which is as good as it gets…but they may end up making very different decisions.

As they say in the pastures I come from, “the mind has one path”…but there are many different destinations (or decisions).

In environmental economics, we set our conceptual framework around this very process with regards to people’s preferences and behaviour – how do people perceive pros and cons of their use of environmental resources. Then we collect empirical data to see if the framework fits the reality. Then we can know how to influence how people interpret their best interest.

Oh, yes, I know I left out the bit “especially when they are not familiar with the circumstances of the decision they are making”

At a seminar I went to while still studying, a professor of environmental economics had addressed this beautifully so I will use his words (with apologies to the person who said it as I can’t remember his name): ‘People make decisions all the time even if they are not personally familiar with the likely outcomes…otherwise no one would ever get married!’

Regardless of whether we can call marriage a rational decision, I hope it is a happy one for all involved!

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The Aldersgate Group launched this report on resource efficiency yesterday afternoon in a fancy room in the House of Commons. Its about the fact that using stuff more carefully might contradict glutoness human instincts, but could be good for our economy. As economists are taught, natural resources are finite, but we humans have seemingly limitless capacity for ingenuity. So if we adopt limits on our use of resources (hence protecting the environment), we will stimulate that ingenuity and might actually be better off.

Environment Minister, the Rt Hon Hilary Benn, spoke nicely at the launch. Arriving late, he had to listened to Prof Paul Ekins talking about resource use – something all environment ministers should do, although preferably shortly after they enter the job rather than shortly before an election. The Minister said the right things about ending ‘waste’, and proudly told us that everywhere that sells batteries now has to accept them for recycling – sound extension of the polluter pays principle.

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Some undetermined time ago, around the autumn of 2009, my family and I drove up to some undetermined location to visit a couple of my parents’ friends…. and to view the birthing of adorable little seal pups.

“How come I have never heard of this before?” I hear you ask as you open up a new browser window to search for the location and attempt to remember to visit next year, “and why is Betsy being annoying by saying ‘undetermined’ a lot?” you add as an afterthought.

Well, see, I could give you the location and time of my visit; however those in charge would rather I didn’t.  Which is rather silly, I must admit, but I may as well play along, at least until they get themselves sorted, while I explain to you why they’d rather I not tell you but also why this is all rather silly.

As you can expect with their wide eyes and roly-poly natures, birthing seal pups are quite an attraction to the general public, enough of an attraction, at least, to draw thousands to the beach to watch them this year.  The local farmer who owns the land where people parked their cars probably made a nice tidy profit charging just £1 per car.

However, this kind of popularity causes problems for those who are attempting to preserve the area to allow the seals to continue doing their thing.  Unless properly controlled, huge crowds may disturb the seals and children (and adults) reaching through fences to pet seal pups and leaving the human scent on them may cause these pups to be abandoned by their mothers.  The footpaths which also serve as viewing areas are quite narrow, and although the day I went was quite cold and slightly wet, they were getting pretty full by the time we left.

After a conversation with our parents’ friends who live nearby, it became clear to me that seal-watching is growing exponentially in popularity every year and that the conservation group’s attempts to keep viewing numbers low are failing.  People are telling people who are telling more people.

How else can they control numbers?  There is a simple solution: by charging entry fees.  Entry fees that are high enough would lower viewing numbers by discouraging people who do not want to see the seal pups enough to pay the entry fee from visiting the site, while people who really want to see the seal pups would be willing to pay the entry fees and would be able to see them with less disturbance.

A common argument against an entry fee scheme to lower numbers is that it is pricing people out of seal-watching.  However, I would argue that the current scheme (of no charge and futile attempt to keep it a secret) is actually worse – increasing visitors to this ‘free’ activity may price the seals out!

Furthermore, the conservation group would be able to use the income generated from viewers on conservation programmes and to improve the site and possibly make it easier to accommodate more viewers without disturbance to the seals.

The only question left here, I guess, is how much should the entrance fee be?  The fee should capture the benefit that people receive from viewing the seals, but also take into account any other costs they have incurred along the way.  A survey of visitors (and would-be visitors) could find out how much people value the experience and  identify the additional benefits over incurred costs.

Incidentally, these costs that people have already incurred serve as a good estimate of the minimum benefit that people receive from viewing the seals.  For example, counting for only the fuel my parents spent £40 to get four of us to the seals and back.  That spending on petrol reveals an average minimum value of £10 per family member to see the seals (and my parents’ friends).  The actual benefit will be more than the minimum spend…a survey will have to be used to figure out how much more!

...because you can never have too many cute seal photos in a blog post!

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