Behavioral economics provides a scientific foundation for why humans behave the way we do, particularly when we’re stupid (OK, irrational), through “a framework to understand when and how people make errors.” There are lots of learnings from this field for those of us who work in utility regulation, some of which are discussed here. But the one that has popped in my mind continually since entering this field is “anchor bias.”
Most utility requests for additional funding follow the same pattern — the utility asks the regulator for $X million (or billion) to build x widgets (say, EV charging stations, pole replacements, etc.) over some period of time. What follows is a cacophony of stakeholder opinions (ratepayer advocates, environmentalists, businesses, labor, etc.) that support the utility position or oppose it — all of them referencing the original utility position as if etched in granite from the mountain top.
The first thing we need to recognize is the utility’s overwhelming ability to shape the process, and often the outcome. It is well-founded that in a negotiation, “making the first offer leads to an upper hand–what’s known as the ‘first-mover advantage.’ ” This is conferred upon the utilities by the nature of our regulatory construct — legally, they must prove their estimates are “just and reasonable.” Yet the utilities’ first-mover position provides it with a powerful informational advantage that can be difficult to overcome. Namely, stakeholders and the Commission will have a tendency to “anchor” to the utilities’ initial estimates.
The anchor bias is well-established in the field of behavioral economics, and is defined as a bias “towards the initial value.” As described by Tversky and Kahneman (1974):
In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased toward the initial values. We call this phenomenon anchoring.
As one expert notes, the way to avoid this bias is to “verify facts you’re given.” It is also critical to understand the facts not given in order to provide an unbiased determination of whether a request is really “just and reasonable.” We have to do our homework, and investigate both the assumptions behind the utility estimate as well as consider what the right fact-based solutions to a particular problem are. The best answer will protect consumers and confer benefits widely.
My suggestion — if stakeholders need an anchor (hey, we all need something to hold on to), the place to start is 0. Zero dollars, zero widgets, zero years. If a fact-based case can’t be made that doesn’t wither under scrutiny for greater than 0, well, we know what the right answer is.
