Nudge: Improving Decisions About Health, Wealth, and Happiness

by Richard H. Thaler

One of the EPA’s major goals has been to show that energy efficiency is not merely good for the environment; it produces significant savings as well. But from the standpoint of standard economic theory, no such savings should be predicted. Here’s why. If companies could actually save money while protecting the environment, they would already have done that. In a market economy, firms should not need the government’s help to cut their own costs. Competitive pressures should ensure that those that don’t cut costs soon find themselves losing money—and out of the market. In practice, however, things don’t always turn out this way. Managers in firms are busy and can’t pay attention to everything. To implement some change, someone in the firm has to champion the change. In most firms, managers do not think that being the guy who pushes an energy cost–saving policy is the route to the CEO office, especially when the cost savings are small relative to the bottom line. The project sounds boring and penny-pinching, and the manager who suggests it might be destined for a job in accounting rather than the president’s office. In theory, the EPA’s programs shouldn’t have worked. So much for theory. As it turned out, both programs have succeeded in promoting greater use of low-cost energy-efficient technologies.