Why we still buy incandescent bulbs?

CFL (Compact Flourescent Light) delivers savings in two forms

  1. Longer life and hence savings from replacement costs
  2. Energy efficient leading to savings on operational costs

The lowest grade  CFL lasts  five times as long as a high quality, “long life” incandescent bulb and saves $36 over its lifetime in energy costs.  The  said CFL costs $5.22 and the long life incandescent costs $0.42 each. Even excluding opportunity costs of buying and changing light bulbs, that is a total savings of  $33 over five years. (Source WSJ)

This does not even address the environmental costs savings from using less energy.

So why do we still keep buying incandescent bulbs when the economics of a CFL are clearly better?  I think the answer lies in our we discount future benefits. If we are rational decision makers then  the present value of $33 will guide us to simply choose the CFL option.

We are not. We have the tendency to underestimate future benefits and hence value it lower than the value of an option with near term benefits. We read news stories, we understand the benefits of CFL but when it comes to the moment of choice our value curves switch and we pick the incandescent bulb which is priced at $0.42 compared to $5.22 for a CFL. George Ainslie called this the hyperbolic discounting, the same concept that is used to explain addiction and temptation. In some sense we give in to the temptation of the present and forgo future benefits because of our ways of discounting the future.

The EU and the US Governments have announced plans to phase out the incandescent bulb in the coming years. I wonder why wait a few years? Is it not time to put some Nudge to work? Why not take away the temptation that stems from higher near term benefit? The Governments should charge a very high tax on these bulbs, to bring their price close to that of a CFL. Anyone buying incandescent bulb even after  these highly taxed prices do really have a need for them and should be charged another price premium.

Using Pascal’s Wager in Supporting Corporate Environmentalism

Is it a corporation’s role to invest in the environmental projects and try to reduce the impact on the environment? While there is still confusion around the data on the causation of Global warming how can a manager decide to invest shareholder capital in Green projects?

There is line of argument that justifies the need for sustainability projects that is analogous to Pascal’s wager. Pascal’s wager defined for faith in god, stated using decision theory, looks like

God exists (G) God does not exist (~G)
Living as if God exists (B) +∞ (heaven) −N (none)
Living as if God does not exist (~B) ?? not specified
perhaps N (limbo/purgatory/spiritual death)
or −∞ (hell)
+N (none)

So the dominant strategy is to pick Living as if God exists.

In the environmental context, companies are advised to act now, because it is a dominant strategy to pick “Living as if Global warming is an effect of industrial activities”.

However, unlike the religious argument, this assumes that all these environmental friendly initiatives are NPV positive projects. That is investing in them, even if it turned out “God does not exist”, has a positive NPV at the discount rate the corporation uses for its investments. That sure is a big if, not supported in the data. In fact there is more data to suggest otherwise.

The bottom line is shareholders trust the corporation and its executives to invest in projects that have a higher return on investment than the investors can find for themselves.

I believe in reducing consumption and waste. These are necessary for operational excellence. But should the strategy be aligned along Green themes?