Jonah Lehrer suggests leveraging “mental accounting” to create a free lunch by imposing a tax on homeowners to pay for energy retro-fitting that they won’t notice because of its small size relative to the price of the house:
But I can already hear the naysayers: Won’t homeowners object? Won’t that just add thousands of dollars to the cost of buying a home?Enter mental accounting, an irrational bias that can be tweaked to produce positive outcomes. Because a home is already such a gigantic purchase, and because the home buying process is already so saturated in peculiar fees (inspection charges, loan points, escrow fees, mortgage broker expenses, etc.) I’d argue that consumers will be much less sensitive to the cost of a home renovation. They’ll barely even notice the $5000 “energy efficiency charge” when it appears on their massive bill from the real estate agent. (Besides, they’ll get a big chunk of the money back as a tax credit.) In other words, they’ll act just like me the last time I stayed at a fancy hotel, when I ordered the internet and ate the peanuts.
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June 21, 2009 at 6:08 pm
Matt Rognlie
I don’t want to dismiss this suggestion out of hand, since I’m willing to accept the possibility that bounded rationality and informational limitations mean there’s a legitimate role for mandates, and the sale of a home is as reasonable a time as any to impose these mandates.
Still, I think Lehrer is stretching when he applies “mental accounting” to this policy question. First, as the amusing title of your post suggests, our psychological biases don’t prevent these retrofits from costing real resources; the fact that we don’t notice money is gone doesn’t erase the fact that it’s been spent. We need to be sure that any mandates are overwhelmingly likely to save money before we implement them. Second, Lehrer goes too far when he claims that we won’t even notice a missing $5000. This isn’t a trivial amount, and it will have a real impact on the liquidity of the housing market.
Of course, if the $5000 spent on retrofits is *certain* to yield $10,000 in savings, it’s a good deal for everyone. But the standard economic question — why this isn’t already being done if it’s such a good deal — is still valid, and if the explanation has to do with informational limitations, you have to wonder if there’s a less heavy-handed policy “nudge” that will achieve the same results.