Fuqua Insights Podcast: Which Environmental Choices Make the Biggest Difference?

Cassie Bedic  00:03
Welcome to Duke Fuqua Insights, a podcast where we explore faculty research and the actionable takeaways for business leaders at every level. Climate change can make people feel like they need to do everything, or that nothing they do matters. I'm Cassie Bedic, and today we're talking with Professor Rick Lerrick about a more practical path, focusing on the few environmental decisions that have the biggest impact and making those choices easier to understand. Professor Larrick's research examines judgment, decision making, social psychology, organizational behavior, and environmental decisions. In the coming year, he will teach in the new Master in Business Climate and Sustainability, a joint degree program offered in partnership with Duke's Nicholas School of the Environment. Professor, I am thrilled to welcome you to the show.

Rick Larrick  00:55
Thank you for having me.

Cassie Bedic  00:57
Let's just jump right in and get started, and we will be starting with the human reaction to climate change. People feel overwhelmed. Like I mentioned, they either need to do everything or that nothing they do matters. So, why is that?

Rick Larrick  01:10
Yeah, some of it is that it is obviously a big problem, and in kind of classic economics terms, you can think of it as what's known as a ‘commons’ dilemma. Too many people have kind of used a resource, and then it causes this kind of other additional kind of harm. And in some sense, it's rational to react in an overwhelmed way because one person alone, frankly, does not make that much of a difference. So there's a sense in which we feel like anything we do is just a drop in the bucket, and we also feel frustrated if we try to take actions, but we see other people are clearly not taking action. So there's that kind of comparison to others. So all of that I think is overwhelming, and just to pile on, I think another one is depending on the media you choose to look at, you can see lots of very alarming things in the media, which kind of scares you and maybe paralyzes you. And interestingly, I saw a paper in the last couple of weeks on helping people be protected from that feeling of being overwhelmed by kind of creating a little tutorial explaining when you see headlines like this in the media know that this is an attempt to grab your attention, and simply having people be aware of and label what they're seeing really reduce their anxiety, and I think helps make them more open to thinking about climate again instead of just shutting it down and avoiding it.

Cassie Bedic  02:39
Yeah, that's good to know. I know it can seem very alarmist, that's right, and scary. So, in some of your research, you've argued for a more focused approach. Don't do everything. Do the right things. How should people think about identifying the environmental choices that actually have the biggest impact?

Rick Larrick  02:58
This is where there's a useful insight. There's this principle in business that many people know about, known as the Pareto principle, which is that 80% of problems come from 20% of causes, and a variation on that is useful here, which is a lot of your carbon comes from just a few of the actions that you take. So then it's valuable to just prioritize what are the highest leverage kind of actions I can take because those are the biggest contributions I make. So there really are three of them, and two are more controllable than the final one. So the two big ones are the transportation that you use, and I do think there are, you know, increasingly appealing choices. I know that the EV world is kind of caught in a bit of a limbo right now, but I think as the U.S. was through policy trying to push toward EVs, it was missing an opportunity to think about simply putting hybrid engines on gas vehicles, and in a minute, I think we'll have a chance to talk about miles per gallon and kind of where the big gains are with increasing fuel efficiency. But turns out that if you think about hybrid engines, the batteries that they need compared to the batteries that it takes to run an all-electric vehicle, and then kind of all the additional environmental challenges of getting the materials for a battery -- like hybrids are just a really good answer. But I think one of the challenges of thinking about the car that you want to drive is that the perfect can be the enemy of the good. That if we think about we should only be driving electric vehicles because we're kind of pure. If we drive the electric vehicle, a lot of the carbon reduction comes from simply making a gas engine more efficient, which is exactly what a hybrid does, and it does it at a lower cost than electric vehicles, and it does it with an unlimited range, unlike with an electric vehicle. So, thinking about your transportation, driving less if you can, and then just being wise about the next car that you buy. So, transportation is one of the big ones that you can control. The other is food, and I think it's one of the last ones that people are kind of aware of as being a source of carbon emissions, but it's because both of the industrial processes involved in agriculture, but also some unique things about the way we use land and actually the metabolism of cows, all affect the carbon emissions of your food, and so moving toward more plant-based protein makes a big difference. And you know, some of the psychology that I feel like I've already alluded to, I will just bring up here again, which is the perfect can be the enemy of the good. So when I have friends ask me about, you know, should I be vegetarian, I will tell them it's always about more versus less rather than all or nothing. You know, it's really about reducing your beef consumption and a few other beef-related sources of food that makes the big difference. And you don't need to become vegetarian to make that difference. You can just eat less beef, and you will be headed in the right direction. And then the third big category of things where carbon is emitted is in heating your home. Now that obviously depends on where you live, but it is a kind of harder thing to do as you fight the temperature gradient in a cold place in the winter, the amount of energy you need to get to go from 30 degrees outside to 70 degrees in your house is a lot of energy. And I was just surprised by this until I learned more about it. But you know, when it's 90 degrees out and you're getting your house down to 70, that just isn't as big a swing, and it's not as much of a gradient that you're fighting. So that's the other big one. That one's a little bit harder to figure out. What do you do about it? But you know, I'm a homeowner, and I've had to buy new furnaces and air conditioners over time. And there's technology like heat pumps that make a difference in terms of reducing your electricity use and gas use for a furnace. So that's more expensive and more opportunistic, I think, than the other kinds of examples where you could act more on a day-to-day basis. And there's lots of other small things you do with houses, like make sure that it's insulated well. And I think there's a really interesting societal question about the size of homes that we have. It feels like the market drives toward larger, expensive houses, and I know I'm living in a house much bigger than the one I grew up in.

Cassie Bedic  07:49
Right

Rick Larrick  07:49
And as we think about a kind of affordability crisis, there is a need for the ability to have more affordable, smaller homes that, frankly, would be closer to the size of the house I grew up in, which itself would then lower these kinds of heating needs. Right. So those are the three kind of big categories. And then, why is it worth focusing on those three? It's because there's all kinds of other ways people reason about: Am I doing the right thing for the environment? So we get so many messages about the importance of recycling.

Cassie Bedic  08:21
That's what I was thinking about. Yeah, yeah,

Rick Larrick  08:23
And so it's very understandable that if you're thinking about the environment, you think first about recycling. But recycling has very little impact on your your carbon emissions, and so Elke Weber has coined the phrase "single-action bias.” So to the extent that people do think in terms of, well, I'll do something good for the environment. If you pick the wrong thing, like recycling, you've really left your carbon emissions untouched. And it would be easy to think, well, I've checked a box now, you know. Or other ones are like, I turn off the lights, and now I've done all I need to do. Yeah. So the whole point of prioritizing which ones make the biggest difference is also to avoid picking the wrong thing and then patting yourself on the back for having done enough, and you in fact are focusing on something that is not substantive.

Cassie Bedic  09:18
Yeah,

Rick Larrick  09:18
yeah,

Cassie Bedic  09:19
That’s very good to know. I feel like recycling and turning the lights off were drilled into me as a child.

Rick Larrick  09:24
That's right, and it's like I think for some people they're happy to do all of the above, and then it's fine. And I think for other people, if they think they've checked the box with those, that's when we get into we haven't done enough.

Cassie Bedic  09:36
Yeah, that makes sense. One reason that this is hard to make these environmental choices that have big impact is that our intuition is often wrong. Like with recycling, where do people tend to misjudge the carbon impact of everyday decisions?

Rick Larrick  09:52
Yeah, I mean one main problem with judging our carbon emissions is that things simply don't come with labels and stickers on them, and so we're making guesses based on our own kind of theories of things. If we're bothering to think about it, so I do think that one of the drivers of our intuitions is that if you obviously see like exhaust coming out of a tailpipe, or you see yourself putting gasoline into a tank, it is obvious that there are going to be carbon emissions there, and it is why, for example, food I think is much less intuitive. We have a bit of a “Old McDonald had a farm” kind of view of our food production, and so you picture chickens and cows romping around on a farm, and it's much more industrial than that. Plus, just kind of the knowledge of the fertilizer that's needed, which itself has carbon implications. Turning land from kind of being a sink where carbon can go into agricultural land, all of that makes agriculture more carbon intensive than people understand. And through the years, in fact, I have a paper showing that people underestimate the carbon in their food relative to the same kinds of electronic appliances that emit the same amount of carbon. So we just don't see the role that a bunch of things in the agricultural system play in generating carbon emissions, so you know how would we overcome that? There will be some people who want to investigate this and kind of learn it for themselves. You could imagine having some kind of labeling system, and a few food franchises who you know, obviously, from a marketing perspective, they score well on these things. Hence, the desire to try to make a consumer aware that their plant-based proteins are a low source of carbon emissions, and yet does give you the protein that you need. So, obviously, there's not much interest in having some kind of national regulation around labeling foods, but at least from a market perspective, there does seem to be some interest by some companies in helping their consumers be more aware of the benefits that they're achieving for the environment based on their consumer choices through that company. One of my main areas of research, as you introduced, is judgment and decision making, which is kind of the psychology of the challenge of overcoming the information we don't have and trying to think through things. It does feel like simple rules are the easiest way to have people make decisions. Overwhelming them with numbers is going to be a challenge, and then in a field that's essentially tried to tackle this question that is roughly known as behavioral economics, there have been various ways of designing nudges and other kinds of interventions. Choice architecture is one of the terms that's used, like traffic light labels, you could use them for calories or other kinds of nutritional outcomes that people might care about with food. You could do the same thing with carbon, and this is where the EU, the European Union system, has for their appliances, for example, a system of letters and colors and all of these things to kind of guide people, and the EU is also like looking at ways of labeling food to make it clear what the food benefits are. People do have bad intuitions, I think, because there's no salient access to queer information, and you know the best fallback might be give people rules of thumb about focusing in a couple of places rather than trying to throw… there's really no mechanism by which we're going to throw a lot of information at people. It would take other parties to be interested in doing that.

Cassie Bedic  14:05
You've done some influential work on fuel economy and the miles per gallon illusion that we touched on briefly earlier as a little teaser. So, what does that example teach us about how the wrong metric can lead consumers and even policymakers to make worse decisions?

Rick Larrick  14:21
Yeah. So Americans are very used to “miles per gallon” (MPG) miles per gallon as their way of evaluating cars, and since the 70s, it's been required that an MPG number be calculated for every new vehicle, and that it be posted on the side of the car. That's known as the Monroney sticker, is what we see anytime we buy a new car. There is both an environmental concern and a practical one of being dependent on foreign oil. We wanted to help consumers reduce their gas consumption. So, what does miles per gallon literally tell us? It tells us how far we can drive on a gallon of gas. In research with Jack Soll here at Fuqua, we found that when people try to compare cars and they think about well, how much gas will I save? They use MPG at face value and they don't do the right math with it to actually understand the true gas consumption of the vehicles. So I'll give you a little puzzle. So imagine a family that has two cars; they drive them both the same distance in a year. Let's say it's like 10,000 miles. One gets 10 miles per gallon, probably a big SUV. The other gets 20 miles per gallon. Okay, they can trade the 10 in for a 20 mpg vehicle, or they can trade the current 20 mpg vehicle in for a 50 mpg vehicle. So one goes 10 to 20, the other goes 20 to 50, and we ask people which one do you think will save more gas. So most people favor 20 to 50. Right. Okay. So it's the bigger difference, 30 mile-per-gallon gain. That sounds great. Yeah, and it's a bigger percentage increase, so it's more than 100% increase. But it turns out that the 10 to 20 saves substantially more gas than 20 to 50. So the way to understand how much gas you're using is to take a distance, and it's easy to think in terms of 100 miles. So divide 100 by 10 mpg. 100 divided by 10 is 10. Right. You're going to use 10 gallons of gas in that vehicle to go 100 miles. If you were to trade it in for a 20 mpg vehicle, 100 divided by 20 is five. So you will now only be using five gallons of gas. So you have gone from using 10 gallons every 100 miles down to five gallons, and you've saved five gallons. If you trade in the 20 mpg vehicle for a 50, 100 divided by 50 is two gallons. So now you've traded in a car that uses five gallons for 100 miles to get one that uses two gallons for 100 miles. That's just a three-gallon savings. So even though 10 to 20 is a smaller number when we think of it in terms of MPG, it's a bigger number when we think of it as kind of the gallons you use per 100 miles. So you know there's interesting implications of this. One is the real big carbon reduction comes from getting people out of the teens into the 20s up to about 30. That's where you're using about three gallons every 100 miles. By the time you go to 50, you're using two gallons, and by the time you get to 100, you're using one gallon. Those are all great, but it's a really flat part of the curve. So yeah, so we had a paper essentially showing that people get this math wrong. It came out in 2008. At the time it was published, it then got attention of folks in the Obama administration who were revising that sticker on the side of cars, and they recognize that if we continue with MPG, people will continue misunderstanding where the real savings are. And so, like pragmatically, if I'm looking at a 15 MPG vehicle, and the hybrid version of it gets to 20, and it costs a little bit more, I might not think it's worth it. It's only 5 MPGs, but that is exactly where there's a lot of gas savings, and that is where if I could just see what those gas savings are, that I would be motivated to buy the more efficient car. That's not impressive just using MPG numbers, but becomes impressive when you do the additional translations. So part of the revision of the label, which all happened in 2013, was also to show, over five years of driving a car, how much gas will you use, how much will it cost you, and how much better or worse than an average vehicle would it be. And those numbers get pretty big. So now suddenly, the improvement yields 1000s of dollars of either savings or extra costs, and so getting people from superficially using MPG to make their decisions to understanding the right question is how much gas am I using, and then what is the cost of that gas, that often yields big numbers that will we hope motivate people to, in their own self-interest, in terms of the costs, move toward the more efficient vehicle. So that is the MPG illusion. So I did have a colleague point out to me you might discourage people at the high end from chasing the 50 and 100 MPG vehicles, and it's like, well, that's okay. They're basing it on a false premise anyway, and maybe I think of it in terms of as I've gotten my cars into the 30,40, 50 mpg range, I now use my next environmental dollar to make a difference on other things like heating and cooling my house.

Cassie Bedic  19:57
Nice. So when I'm getting a new car in a couple of years, I'm gonna try to remember what you just said, but I will email you to make sure that I did the correct math, just in case.

Rick Larrick  20:06
I'd be very happy to always answer any emails like that. And then, what is useful is if you can remember the phrase MPG illusion, it does show up on the EPA website with an explanation for it, so they will walk you through it as well.

Cassie Bedic  20:22
Amazing. Having reliable information is not always enough because identity and motivation also shape how people respond. Why can the same environmental message motivate one group of people but backfire with another?

Rick Larrick  20:36
Unfortunately, topics like the environment have become very polarized, and so now making statements about the environment tends to reveal where you are on a political spectrum. And we've had some interesting work come out of research done by Aaron Kay here at Fuqua, showing that if you don't like the kinds of solutions that a given problem tends to invite your political attitudes will lead you to then deny there's even a problem at all. So he calls this solution aversion, which is you know if I tell you that climate change is a serious threat and you think that means and you're you know kind of against let's say government interventions, you'll use it to make an argument that there's no good evidence for climate change, for example. So, and I should say, solution aversion cuts both ways politically. So liberals have their own way of saying I don't like that. I don't think there's a problem there because I don't like your solution. You know, in one research project that I did with Howard Kunreuther and Dena Gromet at Penn, we showed that when people are given a chance to buy more efficient light bulbs, where we actually set them up in the lab with real money to go shop for light bulbs, they were very happy to buy at the time a CFL, which was more efficient than the incandescent bulb, and they were even interested in paying more for it when it was priced higher, because it was clear from the labeling that we provided that it had a longer life. It would use only 25% of the energy of the incandescent bulb. All the kinds of nice material features of the fluorescent bulb at that time, that made it more energy efficient and financially attractive. You know, if it was the same price as the incandescent, everyone chose the CFL. If it was more expensive, the political orientation didn't affect it. About 60% preferred the CFL, given all the other financial information. The one thing though that changed everything was when we put a label on the light bulb that said protect the environment, and now we lost not just folks on the conservative end of the spectrum, but even the folks in the middle of the political spectrum. So they were now buying at only about a 30% rate, but the liberals were buying it at a you know 60 to 70% rate. So there is something about this complicated relationship we have when the environmental choice is also wrapped up in is this a political expression or not? Where there is risk, and the classic marketing solution to this is pick your arguments for your segment and make sure that you try to keep them separated as much as possible as you make those arguments. I do think it's interesting to think about what are kind of common-ground messages. So in that paper, for example, we showed that people like the idea of reducing oil dependence. That was more an issue 15 years ago than it is today. But also just energy efficiency is appealing because people like the idea of saving money. So there were ways of finding unifying messages. It was just the environmental one that ended up polarizing. Somewhat related around things like identity and values is more recently I've been doing work on seeing whether people would engage in reducing carbon emissions, and the classic measure that most research in this area has used is an environmental scale. How pro-environment are you? It's been used for about 30 years. It is obviously a predictor of whether people want to now take environmental actions around carbon, but we found that there's actually a whole separate kind of measure that makes a difference, which is your attitudes toward future generations. So, do you have the sense that we have obligations to future generations, and from a kind of fairness perspective, are future others deserving in the way current other people are, and people vary widely on this, and it turns out that it becomes a kind of alternative way for some people to be open to wanting to do things about climate. They don't inherently care about the environment, but they do care about the future generations, and I think it sets up the possibility of at least once again in a kind of marketing segment-like way, thinking about how can we reach the people who may never care about the exact environmental message, but they would care about the future generation message, and that this would be appealing to them.

Cassie Bedic  25:23
It's very interesting. You'll be teaching a class on leading in sustainability in Duke's new Master in Business, Climate and Sustainability joint degree program. What role will you be serving?

Rick Larrick  25:36
Yeah, so this class will come at the end of the program, and the program is exciting because it is a mixture of both business and the environment. So they're getting the foundational knowledge in both, being equipped then to be successful in for profit organizations--many of them, most of them, is the expectation bringing in their expertise on the environment, and so my course is kind of one part standard, “How do you run a team? How do you motivate people?”-- the kinds of standard management topics-- but we'll also have new content on the role that environmental decisions play within firms. I think the main thing that I'm excited about with the course is also to think about it in terms of -- I've had a chance to meet them and they're fantastic -- these fantastic young people are going into firms with their expertise, but they're not going to be in a position of power. So they're going to face the interesting challenge of how do I articulate what we should be doing? How do I keep it simple enough so that it's kind of understood well, but rich enough that people kind of see the value of it and that they care about it? And so I think the interesting role that I'll be playing is preparing students to go out and be effective in this kind of social landscape that they'll be in the firm, where they're not controlling the decisions, but they are working with others and trying to shape the decisions with good information, so the firm's making the best possible decisions.

Cassie Bedic  27:17
Nice. Well, if anyone's up to that task, it's definitely you, professor.

Rick Larrick  27:20
Thank you very much. I'm going to do my best.

Cassie Bedic  27:23
Of course. Thank you so much for being here, professor. I really enjoyed our time together.

Rick Larrick  27:27
Me too. Thank you.

Cassie Bedic  27:34
Duke Fuqua Insights is produced by the Fuqua School of Business at Duke University. You can learn more at fuqua.duke.edu/podcast.