The chapter reviews several kinds of judgmental bias that have been documented by psychologists and show how each of these seems to have contributed to recent financial crises, notably the subprime mortgage crisis of 2007, but also other examples such as the collapse of Long-Term Capital Management in 1998 and the management of the Greek debt crisis from 2008. The biases reviewed are well-known to students of human judgment and decision-making and include judgmental overconfidence (including undersampling), positive illusions, temporal discounting, the affect heuristic and groupthink. We then ask how these cognitive biases can be corrected for in the future, and suggest that greater use of causal models may give finance and macroeconomics greater predictive power. We take our psycho-historical review as showing that the persistent evidence of irrationality in consumers, financial analysts and government experts means that markets cannot be left to regulate themselves, and that other means (education, training, choice design, regulation of compensation packages and so on) need to be explored.
Caroline Attia and Denis Hilton
Daniel Schwartz, Taciano L. Milfont and Denis Hilton
In this chapter, the authors review and discuss the drivers that affect sustainable consumption by focusing on behavioural interventions employed in public policies by private organizations and governments. They differentiate interventions that may promote intrinsic (pro-environmental or prosocial) motivation from those that consider extrinsic factors, such as financial incentives and reputational motivation. They also discuss how policy tools, called nudges, can affect behaviour without a substantial change in the available choice set or its associated economic incentives. They find that the effect of providing financial incentives on sustainable consumption is mixed, and that financial incentives may mobilize non-economic drivers in a similar way to nudges. These considerations invite a closer examination of what is considered intrinsic motivation in the domain of sustainable consumption and how it should be measured, as well as how green financial incentives can be structured and framed in a way that favour nudging effects as well as purely economic price effects.