A Nobel Prize for a Behavioral Economics Pioneer: Are There Lessons for Regulation?

Richard Thaler has won the Nobel Prize in Economics, by undermining the “rational actor” assumption central to economics. He proved that humans’ economic decisions are afflicted by systematic biases. His discoveries have direct application to utility regulation.

Less interested in economists’ formulas than in humans’ quirks, a young Thaler began keeping “The List”: examples of decisions—including economists’ decisions—that were economically irrational. Then, inspired by the groundbreaking work of psychologists Amos Tversky and Daniel Kahneman, Thaler spent decades proving that people have consistent, predictable biases that distort decision-making. Thaler describes his work superbly in Misbehaving: The Making of Behavioral Economics (2015). The book is both autobiography and economic history, because Thaler's career made economic history.

Thaler also wrote, with Cass Sunstein, the great book Nudge: Improving Decisions About Health, Wealth, and Happiness (2008), whose applications to utility regulation I discussed in a prior essay. Kahneman himself won the Economics Nobel in 2002, a prize Tversky would have shared had he lived. Kahneman detailed his discoveries in his masterpiece, Thinking Fast and Slow (2011); the entire subject was recently retold for popular readership by Michael Lewis in The Undoing Project: A Friendship that Changed Our Minds (2017).

Reading these four books causes one to ask: Might the biases discovered by these intellectual eminences affect utility regulation? (I use “bias” not in the conventional sense of having a closed mind, or a predisposition to favor one side of a debate, but rather in the Thalerian sense of having a propensity to make decisions based on irrelevant factors.) Among the many bias-types discovered by Kahneman, Tversky and Thaler, consider these three . . .


Testimony, Papers, and Presentations

The testimony relates to AltaGas’s proposed acquisition of WGL Holdings, Inc. and Washington Gas Light Company.
The testimony addresses the following: the effect of the transaction on consumers, including: (1) reasonableness of the purchase price, including whether the purchase price was reasonable in light of the savings that can be demonstrated from the merger and whether the purchase price is within a reasonable range; (2) whether ratepayer benefits . . .
Testimony addresses the issues of whether the proposed transaction affects the interests of ratepayers; the ability of JCP&L and MAIT to provide safe, adequate, and proper utility service at just and reasonable rates; and whether the proposed transaction is in the public interest.
This expert report was submitted to a federal trial court in May 2016 on behalf of City of Jacksonville, Florida. The litigation, and report, involve a 1943 disaffiliation of a gas corporation from its holding company, as mandated by the Public Utility Holding Company Act of 1935. The report explains why the disaffiliation did not prevent liability for the costs of environmental cleanup, if such liability exists under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, from passing to the new corporation.

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Regulating Public Utility Performance

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UDC Law School Panel
Is the Exelon Takeover of Pepco in the Public Interest?

Nigeria Electricity Regulatory Commission
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I highly recommend Scott Hempling. I have known him since 2003, since he was a consultant for the Hawaii Public Utilities Commission on various important and cutting-edge policy regulatory matters in Hawaii, through his time as the Executive Director at the National Regulatory Research Institute. His expertise, knowledge, and experience in all regulatory and energy matters is unmatched, and he would be a highly valuable resource and asset in any such endeavor.
— Carlito P. Caliboso, former Chairman, Hawaii Public Utilities Commission