Understanding Climate Change: Economic Behaviour under Risk and Uncertainty

Abstract

In this report we address the question of how individuals respond to the risk and uncertainties related to global, long-term environmental issues, such as climate change. To this purpose we study individual economic behaviour in an experimental setting. First we review decision and game theory in order to outline the main mechanisms of individual economic behaviour as they have emerged in science over the last decades. Next, we use the concept of commons dilemma, as well as previous studies on climate change, risk perceptions and behaviour, in an attempt to characterize the decision situation posed by this particular global environmental issue. Based on this extensive literature review we build a conceptual model of economic behaviour under risk and uncertainty in the context of climate change. We formalize and test some of the links in this model by means of a laboratory experiment, in which participants are asked to contribute part of their endowments to a climate change mitigation fund in order to reduce the probability of loss of income at the end of the game. In our setup and analysis we pay special attention to the influence of uncertainty on the individual investment in the fund. An online decision environment, with easy manipulation of parameters, has been constructed for the experiment. A total of 80 participants played a series of six games in sequence. Our findings suggest that uncertainty does not play a significant role in the decision making process; beliefs and perceptions are more important. In addition, participants’ investment level in the climate change fund is suited to the malignancy of the problem, i.e. to the necessary effort (cost) of effective action. Previous experiences in the series of games are also found to influence behaviour, which indicates that investment levels might be affected by how solvable the problem at hand is perceived to be. A next step in this research would be to play the game with multiple participants investing in the same climate fund, in order to explore the commons dilemma aspect.