Many everyday decisions are flawed. People misunderstand credit card debt, underinvest in energy efficiency and retirement savings, and “sell low” when the stock market tumbles.  Based on several decades of research in psychology and economics, homo economicus has evolved into homo sapiens.  This transition is captured in Daniel Kahneman’s best-selling book, Thinking Fast and Slow, and in Richard Thaler’s history of the emergence of behavioral economics, Misbehaving. If we accept human limitations, the natural question emerges: How do we help decision makers make better decisions for themselves and society?

caloriesOne approach is to change the decision maker’s environment. This is well-illustrated in work by Brian Wansink, an expert onpeople’s bad (and good) food habits, who has shown that the central placement of salad bars and fruit in cafeterias can double their consumption.  A second approach is to change the information that is presented to decision makers. The benefits of providing information are hotly contested. There is a history in economics of assuming decision makers have full information or are rationally foregoing it if it is costly to gather; the law often requires information provision by companies—sometimes this is a policy change intended to help consumers, and sometimes this is a legal step designed to reduce liability.  But information provision alone is not sufficient and is not the point – how it is presented matters.  To take one familiar example, the nutrition label that appears on US food products has an overwhelming amount of information and provides little guidance on what it means or how to use it.

We would argue that the best way to help consumers is not to simply give them information (picture the long credit card disclosure statements you periodically receive), but to make it usable. Our main focus has been on energy use.  Every time consumers buy a new automobile in the US, they see a window sticker on every vehicle describing the car’s fuel economy, expressed as miles per gallon (MPG).  What information would you put on an energy label to help consumers make better decisions about energy use (and the environment)?

We propose four principles for providing better information (which abbreviate to CORE):

1) Do the calculations for consumers

2) Translate information to personal objectives (e.g., costs, environmental impact)

3) Provide relative comparisons (e.g., other products, daily goals)

4) “Expand” important outcomes (e.g., costs over time)

We briefly illustrate the logic behind each principle.

Calculations

American consumers are used to comparing cars in terms of miles per gallon, and they know that, all else equal, more is better—the car will use less gas and thereby cost less to run and hurt the environment less.  Unfortunately MPG itself is tricky to use when estimating cost savings and environmental benefits.  Consider a family that owns two cars, one that gets 10 MPG and another that gets 20MPG, both driven the same distance each year (e.g., 10,000 miles). They are considering trading one in for a more efficient vehicle. Which trade-in would save more gas?

A. 10 MPG vehicle for a 20 MPG vehicle

B. 20 MPG vehicle for a 50 MPG vehicle

Intuitively, B seems far better – it is a larger improvement in MPG both in absolute and relative terms.  However, to know the actually gas savings, one has to calculate them by taking a distance, such as 10,000 miles, and dividing it by MPG.  The relationship between MPG and gas consumption is highly curvilinear (technically, a reciprocal) and this has surprising implications.  Dividing 10,000 miles by MPG reveals that the 10 to 20 MPG trade in reduces gas use from 1,000 gallons per year to 500 gallons per year; the 20 to 50 MPG trade in reduces gas use from 500 gallons to 200 gallons.  The family saves more gas by having two 20 MPG vehicles than a 10 and 50 MPG vehicle.  In this example, “doing the calculations” means giving consumers a consumption metric in which the amount of gasoline used is calculated for some meaningful distance, such as 100 miles of driving (Europe, which uses the metric system, uses a consumption metric of liters per 100 kilometers). In this case, choosing Option A saves an estimated 300 more gallons of gas than Option B.

Objectives

In the end, however, people don’t care about gas, but how gas consumption affects more basic concerns, such as their personal costs and the impact on the environment. Research has shown that people are poor at making these translations on their own.  In his book Thinking Fast and Slow, Daniel Kahneman describes a general problem of becoming trapped by the presentation of information: People use information as it is presented (such as MPG) and do not translate it to other things they care about (e.g., gas consumption, costs, and environmental impacts) either due to a lack of awareness, a lack of knowledge, or a lack of motivation.  Kahneman refers to this problem of getting trapped as “what you see is all there is” (WYSIATI). Translation requires effort to do the math, knowledge of the right numbers and operations to use, and perhaps most important of all, awareness that something important is at stake.  For example, annual fuel costs are perfectly related to greenhouse gas emissions, but research shows that people with a pro-environmental attitude do not spontaneously recognize this link—they need to see an environmental indicator (such as a greenhouse gas rating) to remind them and guide them to pay attention to this outcome.

Relative

When people learn about gas use or costs, the numbers are often hard to interpret – are they big or small?  Is using 163 therms of natural gas to heat your home a lot or a little?  Is a $112 monthly bill big or small?  Recent research has shown that consumers are more motivated to reduce their energy use if they are provided with a meaningful comparison, such as their average neighbor’s energy use or the gas consumption of an average car.  Ambiguous energy and cost numbers now become more meaningful; people are motivated to be better than average (or at least no worse!).

Expanded

Finally, when you give people information about energy and cost, it matters what scale you use.  No one cares about pennies per day (Fundraisers often use this frame to show how reasonable their requests are!).  But gallons and costs expressed over a large but realistic number, such as the lifetime of a car, reveals numbers in the thousands.  For example, a 20 to 25 MPG trade saves one gallon every 100 miles. But that one gallon is 1,000 gallons over 100,000 miles (which drivers regularly exceed these days) and a $3,000 to $4,000 difference in gas costs.

In 2013, the fuel economy label was redesigned, and it now incorporates many of these features, including a consumption metric (gallons per 100 miles), translations to annual fuel costs and greenhouse gas ratings, and a relative, expanded number that calculates a vehicles additional savings (or costs) over five years compared to an average vehicle.

fuel economy

Information and Technology

The best way to provide information is of course evolving as technology changes. Labels continue to be important since many consumers will rely on them at the point of purchase – and consumer magazine and government sites often follow the lead of labels in what they report in their tables.  Going forward, however, information is likely to be used more dynamically through online software and apps on mobile phones. (The QRC code on the bottom right of the new fuel economy label will help facilitate this transition.) In this spirit, Duke University provides an online calculator that will help people apply the CORE principles to their own car decisions.

http://www.gpmcalculator.com/

The calculator has two windows that ask for the same inputs:

  • Enter the MPG for one or more vehicles (this facilitates comparisons with a current vehicle)
  • Select a useful distance in miles (including the life time number of 100,000 miles)
  • Select a likely price of gas

The Personal GPM Calculator will then show the gallons of gas you will use and the gas costs you will incur.  The Gas Saving Calculator uses the same inputs but also calculates the additional savings and costs between two or more vehicles.

This sort of calculator solves a number of the problems the CORE principles are designed to address.  It turns MPG into consumption, translates it to costs, and expands it to larger scales so that the impact is tangible. Such a calculator could be useful in a wide range of settings, such as home energy use, calorie intake, etc.

Although more information is often unhelpful to consumers (think again of the credit card disclosure statements), better information can be an important tool for guiding better decisions. From a policy perspective, better information has two attractive features: It preserves individual choice and it costs very little to implement.

Rick Larrick.Fuqua School of Business faculty

Rick Larrick is the Michael W. Krzyzewski University Professor in Leadership and a Professor of Management and Organizations at Duke University's Fuqua School of Business. He serves as the faculty director for Fuqua’s Center for Energy, Development, and the Global Environment (EDGE) and is a faculty affiliate of the Center for Research on Environmental Decisions (CRED) located at Columbia University. Larrick’s research interests include individual, group, and organizational decision making. Specific areas of research examine the wisdom of crowds, goal setting, and “debiasing” (techniques for helping people make better decisions).

Larrick has published in psychology, management, and general science journals, including the Journal of Personality and Social Psychology, Psychological Review, Proceedings of the National Academy of Sciences, Cognitive Psychology, Management Science, Academy of Management Journal, and Organizational Behavior and Human Decision Processes. He is an associate editor for the journal Management Science and on the editorial boards of Psychological Science and the Journal of Behavioral Decision Making. Larrick received his Ph. D. in social psychology from the University of Michigan in 1991. Prior to joining Duke in 2001, he taught at Northwestern’s Kellogg Graduate School of Management (1991-1993) and at the University of Chicago’s Graduate School of Business (1993-2001). Larrick received his B.A. in psychology and economics from the College of William and Mary.