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Loss Aversion: A Highly Effective Motivation Factor

Created 1/5/2013 by Curt Nichols
Updated 2/14/2013 by Rob Penney
619 views • 5 comments
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A University of Chicago-led study showed that students gained as much as a 10 percentile increase in their scores if their teacher received a bonus at the beginning of the school year. (Credit: Photo by Jason Smith)

OK.  I’ll admit it right up front – I listen to NPR, National Public Radio.

Occasionally NPR has an energy-related story.  When they do, my ears perk up.  But, there are other times when an NPR story captures my attention too.

A few weeks back, it happened with a story about improving student performance in the Chicago area.  NPR told how teachers were motivated by “loss aversion”.  Loss aversion is the tendency for individuals to prefer avoiding losses rather than accruing gains.

 

 


These teachers were split into three groups: those with no incentive payment, those that were promised a reward at the end of the year for good student performance, and those that were paid up front, but would be required to pay the school back if their students didn’t perform well.

The threat to have to return that payment (or loss aversion) resulted in student improvements that were double the other two groups.  The teachers promised a year-end bonus did no better than those with no monetary reward.  The only students that performed better were those taught by teachers that wanted to make sure they didn’t have to re-pay their pre-paid bonus.

So, what does that have to do with energy efficiency?

Since loss aversion is such a strong motivator, we might want to think about incorporating that into our energy efficiency programs.  If we provide up-front incentive payments that have to be paid back if energy projects don’t perform as expected, we may be able to use loss aversion to leverage much more efficiency than we can with incentive payments after the fact.

 

 


One big benefit of up-front incentive payments would be customer attention.  Commercial and industrial facility managers have grown accustomed to incentive programs that provide payments after a project is completed and verified.  But, many of those programs require up-front applications.  Think of the attention that your program would get if the incentive payment was made up-front as well.

As the Chicago story showed, another benefit is motivation.  With their incentive payment already in hand, loss aversion will motivate the facility managers to get the most out of their energy efficiency project.  They may not be able to double their savings the same way teachers doubled their students test scores, but even if they just get 10 to 20% more, that’s still helpful to a utility incentive program with aggressive goals and tight budgets.

One more benefit is customer engagement.  Since this kind of pre-payment would most likely be applied to complex custom incentive projects that might take some time to complete, it would provide the perfect opportunity for utility-customer engagement during that process.  That could result in a better project, one that’s completed quicker, or at the very least, one that the utility rep would know a lot more about.

 

 

Up-front incentive payments?  Sure it’s a crazy idea.  Or, is it?

If loss aversion can motivate teachers in Chicago to double student’s test scores, couldn’t it do the same for facility (energy) managers in the Pacific Northwest?  If it doesn’t generate additional savings, you still get the savings you pre-paid for.  And, if you don’t even get that, at least you get your money back.

So, I’m looking forward to an efficiency program that will test this concept.  I want to tune into NPR some day and hear that a Northwest utility used loss aversion to double their incentive program energy savings just the way it was used to double student performance in Chicago.

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© Curt Nichols
New Buildings Institute
January 2013

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Comments (5)
David Harris on 01/07/13 on 03:04 PM (Pacific Time)
Great article. Thanks for posting.
Curt Nichols on 01/08/13 on 02:50 PM (Pacific Time)
David, thanks for visiting Conduit and reading my blog.  And, thanks for your feedback too.  I appreciate hearing from my readers.  Thanks again.
Levin Nock on 01/10/13 on 03:25 PM (Pacific Time)
Great article!  Incentives paid at the beginning of a construction project could support integrated design, which often involves extra upfront costs for energy modeling and design charrettes.  For example, the National Renewable Energy Lab (NREL) recently built a 360,000 square-foot (sf) Net-Zero-Energy office at no net incremental cost.  (The local construction price for new office space around Denver is $300/sf, and this building cost $259/sf.)  Some financial strategies included: 
·         They gave a $200,000 stipend for energy modeling to each of 3 competing design-build teams, even before the final contract was awarded.
·         The RFP required guaranteed energy performance over the first year’s occupancy, as a bonus payment for success or a penalty for failure.  Based on your article, it might work even better to pay the full bonus upfront, and then take it away if energy performance is inadequate. 
·         More info at http://www.nrel.gov/sustainable_nrel/rsf.html
Dave Yang on 02/08/13 on 06:25 AM (Pacific Time)
Very good "food for thought".   It will be interesting to see if this is implemented or "trialed" in any program.

Dave
Rob Penney on 02/14/13 on 02:08 PM (Pacific Time)
I'm not sure this is practical for utilities, pounding on the door of a valued customer to take back their incentive payment because the customer didn't model the heat pump performance quite right.  However, I have long thought that psychology has as much to do with efficiency gains than technology.  I agree with the pain avoidance over pleasure principle--it works for me (at least on me--I try to avoid using it on others).  I hope this article spurs a broader discussion of actionable applications of the psychology of efficiency improvements--what motivates people to pay for extra wall insulation rather than the hot tub, but pay 20% extra for the super efficient appliance, to program the thermostat and set back before going on vacation, to turn off appliances when not in use, to change furnace filters?   Thanks.

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