Managerial Biases and Energy Savings: An Empirical Analysis of the Adoption of Process Improvement Recommendations

Abstract

We investigate the adoption and non#adoption of ene rgy efficiency initiatives using a database of over 100,000 recommendations provided to more than 13,000 small and medium sized manufacturing firms. Even though the average payback across all recommendations is just over one year, many of these profitable opportunities are not implemented. Using a probit instrumental variable model, we identify four biases in the adoption of these recommendations. First, managers are myopic as they miss out on many profitable opportunities. Second, managers are more influenced by upfront costs than by net benefits when evaluating such initiatives. Third, adoption of a recommendation depends not only on its characteristics but also on the sequence in which the recommendations are presented. Adoption rates are higher for initiatives appearing early in a list of recommendations. Finally, adoption is not influenced by the number of options provided to decision makers. This contributes to the debate about whether or not choice overload occurs. We highlight decision biases previously unobserved in the Operations Management literature using field data rather than experimental data. We draw implications for enhancing adoption of energy efficiency initiatives and for other decision contexts where a collection of process improvement recommendations are made to firms.