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Energy and our Expensive Thinking

by: Paul Kando

The house consumes 1,122 gallons of oil per year at a cost of over $4,000. Implementing the energy audit report's recommendations will reduce that to 438 gallons of oil costing about $1,500 a year. The savings come from air sealing, insulating the basement ceiling, installing interior storm windows, insulating walls, and so on. The audit report shows a break-even price for each recommendation: the amount the couple could spend on a given improvement and recover from the corresponding savings. (e.g. a $137 annual saving from adding insulation to the attic will pay back a $2,392 loan) The report assumes no fuel price rise, because no one can predict the future price of oil. However factoring in historical oil price inflation — 6% per year on average — once improved, the home's fuel cost savings will add up to $13,754 in five years, $32,160 in ten years, $56,793 in 15 years and so on. A $13,000 investment in the recommended improvements will be fully recovered in 5 years, and over the remaining mortgage term of 20-years these home owners will save $89,759. Not a bad deal.

House Savings
photo credit: Wikipedia

There is only one problem: these homeowners think they can't afford to do this. Yet they will keep on shelling out $4,000 (plus 6% compounded) on heating this house, year after year, as long as they live in it. How can they afford this recurring expense? Common sense would suggest that they put at least the report-projected annual savings ($2,440 in this case) into some of the recommended improvements this summer, recover most of it over next winter, then reinvest the anticipated savings year after year in energy efficiency improvements until all the recommendations have been implemented. The couple insists they can't even afford $2,440 right now. They plan to remodel the kitchen instead. Isn't there some government grant available? they ask.

There was a time I would have empathized with such perceived money issues. Today, looking at the two nearly-new cars in the driveway, the maze of pricey exercise equipment in the den, the two four-foot flat screen TVs, the swank entertainment center — not to mention the perfectly functional kitchen — I don't believe this couple's problem is financial.

Nor are their priorities unique. Contrary to a fundamental assumption found in economics textbooks, market actors don't act rationally, writes psychologist Daniel Kahneman, the 2002 Nobel laureate in economics, in his 2011 best-seller, Thinking, Fast and Slow. We humans think in two distinct ways. Our "fast thinking" ability is a survival mechanism we share with other animals. A deer freezes for a second upon hearing a branch crack, then, noticing me, turns and runs away. Driving, I see a moose suddenly emerge from the bush and swerve to avoid hitting it. This is fast, instinctive thinking when there is no time to analyze the situation. Our animal-brains respond to whatever we sense, almost automatically.

In contrast, preparing a tax return, coordinating a trip with people from different time zones, writing a speech, or figuring how to finance improvements that pay for themselves over time, require weighing options, analysis, doing math — "thinking slow". We are all capable of it, but it takes effort - perhaps more than we are willing to give it. Given the chance, we'd rather avoid "thinking slow" deferring, instead, to "answers" provided by authority figures, preachers, politicians and advertisers. We are even willing to believe that multiple-choice tests our children are coerced into taking measures their preparedness (or their school's) - without even asking "how?" It takes less effort to follow, so we develop a habit of avoiding critical questioning and analytical thinking. Instead we rationalize our fast-thought decisions after the fact: "It made perfect sense to swerve to avoid the moose", we claim - as if we had time to consider what might have made sense a few feet short of a collision. Global warming is a hoax, after all a politician keeps saying so on TV.

We are all tempted to think fast when slow thinking is called for, because it is easier. So let's cut some slack for people. Are the owners of this house, who fail to make good decisions, or politicians who make nonsense claims on TV, stupid? Could it be that they just fail to "think slow" - getting away with it because the rest of us do as well? Could it be that we all tend to be preoccupied with things we perceive to be of great present urgency: today's bills, making a talking point, pleasing the boss (or a campaign contributor), keeping up with peers, a new car or kitchen? Aren't these issues of the moment, much like the sudden sight of a moose, simply sensed? Climate change, the present value of future savings, adding value to a house that might not be sold for years, future years' heating bills, the opportunity cost of questionable decisions - aren't these "future issues" that require slow thinking? How much do I have to invest in insulation to save up for a new kitchen?

I suspect we are all able to "think slow" - follow fact and science instead of so-called opinion leaders, for instance — with a little mental discipline and practice, and make sensible decisions. Asking "who benefits?" is a good place to start. Better than a government grant.