The Potential Role of Behavioural Economics for the 2017 German G-20 Presidency

T
he Federal Republic of Germany assumed last December the 2017 presidency of the G-20, after China held the 2016 presidency since December 2015. Proposed in the aftermath of the financial crisis of Asia and Latin America, the G-20 started in 1999 as a long-term global-governance informal forum rather than an organisation.

Even though the starting objective was to prevent problems on the balance of payments and financial markets by focusing on monetary, fiscal, and financial policies, nowadays the G-20 has expanded its list of priorities with the inclusion of the sustainability pillar, stressed by unprecedented energy challenges and a saving potential of 27% by 2020 in the European household sector reported by the European Union (European Commission, 2006).

Since the first G-20 presidency, the objectives of the committee have been hard to match, what, in light of the beginning of a new presidency, offers some ideas to reflect on. In parallel, the successful behavioural approach taken by the Obama Administration (The White House, 2016; Social and Behavioural Sciences Team, 2016) might sow the seeds of a bitter dissension in the international arena, re-considering the neo-classical economic approach brought into disrepute against a brand-new, flourishing behavioural way. In line with those reflections, a growing body of evidence in the empirical literature on behavioural economics and environmental policy points to soft policy interventions yielded by behavioural drivers in environmental policy intervention (Muñoz-Salido, 2016). As in protecting the environment seems to be no rush, must policy-makers move beyond traditional intervention paradigms in environmental negotiations?

Most important behavioural drivers which influence human perceptions are framing and heuristics. On the one hand, framing influences how individuals perceive a prospect by playing with the structure and format in which it is offered. An illustrative framing paradigm is given by Kahneman (2012), who asked individuals for their preference upon two different ways for addressing a flu epidemic with a different degree of risk. Individuals’ choice was clearly determined by framing the question in terms of saving lives – gain – or preventing deaths – avoiding a loss – instead of considering their actual level of risk. If the question was framed in terms of preventing deaths, the majority of individuals chose the risky way, whereas if it was framed in terms of saving lives, the majority of individuals chose the less risky solution. Theoretically, Kahneman’s (2012) results overlap Tversky & Kahneman’s (1992), which brought individuals’ risk aversion for gains and risk seeking tendency for losses into the ground of the behavioural economics. On the other hand, heuristics is an automatic shortcut that the mind takes within ambiguous and difficult decision scenarios. Following the seminal work of Tversky & Kahneman (1974), three recurrent heuristics paradigms are representativeness, availability and anchoring. In the context of environmental economics, an individual may assess the risk of an environmental disaster to occur by basing her judgment on either the prospect’s similarity with other prospects, the frequency with which it happens or by anchoring its likelihood with previous standard comparisons. For instance, an individual within an environmental negotiation may judge the probability of having a hurricane in her country by either assuming that the aforesaid environmental disasters only happen in tropical countries, regardless the actual probability of it to occur.

In short, this way that individuals perceive prospects’ probabilities instead of valuing their actual Bayesian probabilities implies a feature of human bounded rationality when assessing potential environmental effects that can imply a determinant factor for successful environmental policy adoptions, which makes the objectives of the G-20 Sustainability Pillar even harder to match.

Bearing in mind lessons from above regarding individuals’ insensitivity to probabilities but sensitivity to outcomes, it’s easy to reflect on using the ‘proximity’ impact in order to increase mental images’ influence over behaviour. This could fight against individuals’ automatic shortcuts and underweighting tendency of environmental consequences and hence achieve to influence their perception. One famous paradigm of this application is that achieved by the documentary ‘An Inconvenient Truth’ (Gore, 2006), which, in 2006, achieved to influence dozens of governments around the world. The documentary aims at raising the global warming awareness by reporting imminent fatal consequences. Reaction were remarkable. Prime Ministers of dozens of countries urged population to watch it as well as included it as a content in schools, achieving to gently and effectively ‘nudge’ institutional policy-makers from the globe. Furthermore, another convincing intervention though in light of framing and loss-aversion within institutions is that committed by Steinacker (2006), who finds governments’ pro-active attitudes to problem-solving when outcomes are presented as a negative externality rather than a positive, implying a potential chance for nudging in environmental negotiations.

Linking all of those reflections, G-20 German presidency could aim at centering on framing the potential consequences of not protecting the environment into a fatal and immediate set of events, stressing individuals’ loss aversion and sensitivity to outcomes. Alternatively, they could also try to influence individuals’ loss-aversion and tendency to underweight probabilities of suffering potential consequences of such behaviour by showing individuals’ their traumatic consequences and using heuristic techniques to change their perception of that prospects. G-20 German presidency could use such soft interventions as part of its administrative strategy within the G-group for assuring to prioritize the 2017 Sustainability Pillar.

Enrique Muñoz-Salido

MSc Candidate in Economics and Finance, University of Brighton. Master's Specialisation Student in Mixed Methods Research, OUDCE, University of Oxford. University of Brighton Santander Scholar. Co-Founder and Secretary of the Brighton University Economics Society.

ABOUT MD

Modern Diplomacy is an invaluable platform for assessing and evaluating complex international issues that are often outside the boundaries of mainstream Western media and academia. We provide impartial and unbiased qualitative analysis in the form of political commentary, policy inquiry, in-depth interviews, special reports, and commissioned research.

 

MD Newsletter

 
Top