Kahneman’s Insights for Climate Risks: Lessons from Bounded Rationality, Heuristics and Biases

Abstract

Daniel Kahneman’s pioneering research in behavioral economics has profoundly influenced the field of environmental economics, shaping what is now known as behavioral-environmental economics. This paper provides a scoping review of how Kahneman’s theories have been applied by environmental economists to individual decision-making for climate change risks. We focus on deviations from rational behavior that impact climate adaptation decisions, such as loss aversion, the underweighting of low-probability events and the influence of heuristic-driven System 1 thinking over analytical System 2 reasoning. Our review outlines diversity in methodologies, including household surveys and economic experiments, used to analyze actions like investments in climate resilience and the purchase of disaster insurance. We synthesize these findings showing how Kahneman’s legacy explains suboptimal preparedness behaviors and discuss policy strategies derived from these insights, such as risk communication, nudges, and financial incentives for disaster preparedness. We conclude by proposing an agenda for future research to more systematically assess Kahneman’s ideas across various climate risk contexts and to deepen the application of Kahneman’s theories in tackling broader, wicked environmental problems that require changing human behaviors.