Understanding households’ investment behaviour

In the BRISKEE project, the micro level investigation concerns households (see project overview here). A large survey of 1,500 to 2,000 households each in 8 EU member states provides deeper insights into households’ investment behaviour and attitudes concerning energy efficiency investments in their homes.

The energy used by households depends (beside the households’ energy consumption patterns) on the decisions that households make when purchasing energy-related technologies ranging from lightbulbs over household appliances to building retrofits. When deciding about an energy-related purchase, one typically faces the trade-off between paying a higher purchase price now and saving money on the energy bill in the future. In assessing the costs and benefits of insulating a home, or purchasing energy-saving appliances, households somehow try to evaluate the future value of these investments. Although very few households make a thorough calculation, this more or less intuitive decision-making process involves applying implicit discount rates which reveal households’ preferences for time and risk, as well as other barriers to energy efficiency investment (lack of information, poor access to technology, etc). Thus, a discount rate is typically not applied by the household when they make their decision, but an implicit discount rate can be calculated based on the actual investment. decision. Since households' willingness to wait or to take risks varies, these discount rates differ across households. The fact that households face different barriers (i.e., have different access to technology and information) is also reflected in the discount rates.

Owing to constraints on time, attention, and individuals’ ability to process information, the evaluation of investments may lead to biased choices. For example, individuals tend to value immediate rewards much more than they value future rewards. Likewise, individuals value losses larger than gains of equal amounts. As a consequence, individuals may fail to invest in energy efficiency measures which involve higher costs today, but save money on energy bills over many years. Moreover, the implicit discount rates observed from actual investments reflect other “barriers to energy efficiency” such as poor information about the energy performance of appliances and homes, or limited ability to borrow money from banks.

BRISKEE explores the time and risk preferences of individuals accounting for differences in household characteristic, technology characteristics and countries. BRISKEE conducted representative household surveys in 8-10 EU Member States. Risk and time preferences are elicited via experimental economics methods. The impact of time discounting and risk preferences on the diffusion of energy efficient technologies are explored. Relying on the survey data, econometric methods are employed to estimate the adoption of energy efficiency measures, accounting for time and risk preferences, attitudes, social and psychological norms, and socio-economic factors.