Montevideo, Feb.25 (IPS) – Marta Gaara is a non-resident fellow at the Crisis Institute of the Americas, and as we saw across the United States and Mexico last week created by Winter Storm Uri, provides ample material for thought. This is especially evident from a distant point of view and when taking advantage of the fact that we are not directly influenced, as strong feelings and reactions that are often biased in our judgments are absent.
While prejudices make us competent decision-makers in our daily lives, when addressing complex problems with severe consequences, it is the effectiveness of decision-making that matters. Developing awareness of relevant decision biases and the means to neutralize them is increasingly a key efficiency in the energy industry as it is in the modern business world.
The power outages and shortages in Texas, which ironically is an energy hub, where many of our readers may live, have friends or colleagues, primarily arouse sympathy for those affected, as this situation highlights in a lively way something well understood: the central role that Power plays. Our modern life simply cannot tolerate power cuts, let alone being without electricity and heat for days.
But perhaps most importantly, we remember the essential features of a healthy energy system: abundance, security, and affordability. Abundance means having a pool of energy available in a way that does not restrict our activities and our development. Security means that the flow is not subject to interruptions in any way: technical, political, meteorological, etc.
For a system to be secure, both supply and infrastructure availability must be flexible, be it through intrinsic strength, diversification, redundancy, or intangible elements such as trust among participating peers.
Affordability means that economic access to energy is widely granted. It is of course a relative term, taking different meanings, whether it is applied to the context of the basic needs of people or the competitiveness of a business.
Another aspect that still needs the same attention as the other three aspects is environmental performance. When external factors, such as carbon dioxide emissions, are properly entered into energy prices, this characteristic must be taken into account in the discussion of affordability.
Last week’s crisis takes us back to the core issue of trade-offs that must be seen as part of any energy solution. Every society needs to find the right people to balance the often conflicting features of the system (for example, more redundancy might mean more cost).
This is the job of elected officials. But their work pretty much ends there. Once the preferences are defined, it becomes a technical task to oversee how the system is designed and the standards that are created and operated.
This is what technical operators and regulators do. The case in question shows (not exceptionally) that blame points to every moving target and reveals (possibly intentional) confusion about roles and responsibilities in energy management.
What is the clear separation of the roles that forces have to play is to explicitly state risk tolerance and policy objectives. Failure to do so inevitably pushes policy decisions into opaque space, as the industry and other lobbyists find it easier to force their way.
Setting these boundary conditions for designing the system in advance is not a natural exercise for politicians, because talking about trade-offs is not an easy task. The public expects to reduce settlement. In Spanish, there is an expression for the ideal product: “bueno, bonito y barato” (good, beautiful, and cheap) almost synonymous with utopia.
But ignoring the limits of reality when adopting a strategy may be more painful in the future than rolling up the sleeves and embarking on a conscientious discussion in the first place.
With the deployment of behavioral science to support complex human interactions ranging from market dynamics to policymaking and policy, energy professionals also need to think more about how cognitive biases affect our industry.
The conflict avoidance described above can be described by what is called the “ostrich bias” (disposing of uncomfortable information, similar to an ostrich digging its head in the sand as if it does not see a threat it will disappear).
There are several recurring decision-making processes and behavioral biases that can be observed regarding the Texas crisis, which appear to confuse stakeholders and public judgment. Not only the posts on social media, as expected, but also the corporate statements released by senior officials provide many examples.
Ignoring the information (the still slight share of wind energy in the Texas energy mix and the greater real-world effect from the disruption of natural gas supplies) in order to confirm one’s beliefs (in this case in favor of fossil fuels) is a biblical case.
Confirmation biases then go beyond energy options to validate perceptions of evil and heroic people according to one’s affiliations. Polarized societies fuel confirmation bias.
Another typical bias is outcome bias: judging a decision by its results rather than on its quality. If the decision not to equip certain equipment for the winter season is sound in terms of bearing risks and costs, then it remains intact when an undesirable or even severe event occurs, as this means that its probability has been evaluated but not considered a condition of the design.
Or the opposite decision, to spend more on flexibility, was the right one and had to be defended at the time of the investment with the same passion expressed today. Of course, there is always political credit to be gained when things go wrong, so failures are emphasized opportunistically rather than judged by the original decision criteria. Therefore, the resulting bias is also fed into public debate.
Thinking more broadly about decision biases, especially relevant in times of technology disruption and energy transition, is an entire category described in the context of probability theory. This theory asserts that it is natural to relate to the status quo, to justify the current system and not to dispose of assets whose value is depreciated.
Of course, financial write-offs are not without a certain embarrassment. ESG (Environmental, Social, and Governance) standards developed by regulators and institutional investors increasingly challenge this trend towards irrational choices and force decision-makers to carefully reassess portfolios and overcome inertia in order to fulfill their fiduciary duties. Larry Fink’s 2021 message from BlackRock to CEOs focuses, at its core, on an ostrich raising its head out of the sand.
It seems like a losing battle indicating the irrationality of human behavior, as this short energy crisis (in terms of comparison) is not the first of its kind and similar conclusions have been drawn in the past, but it can be said that there are better scientific resources to be exploited to meet the ancient challenges.
To counterbalance populism and tribal behavior, energy professionals in the public and private spheres must raise their awareness and increasingly benefit from neuroscience-based approaches. These approaches will provide deeper engagement across a complex set of stakeholders and more effective communication regarding realistic options available for solving critical problems – climate change at the top of the list – and an understanding of the underlying trade-offs.
Elections in several hemispheric countries, the stress from post-COVID economies, and largely uncertain energy markets create a challenging landscape that can be controlled through the exchange of tribal fires or can open up space for much-needed informed strategic dialogue and consensus building. .
Is there hope for honest public discussions leading to quality policy options? If not, we should not just expect blackouts, but much larger disruptions in the future.
Actions are cited
(1) (Gino, Francesca; Moore, Don A. Bazerman, Max H. (2009). Neither harm nor error: the result of a bias in moral judgments. (PDF). SSRN1099464. Take risks. Nothing can replace experience Working Paper No. 08-080.
(2) The theory of probability developed by Nobel Prize winners Daniel Kahneman and Amos Tversky, 1979
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