5. Multi-criteria Decision Aid (MCDA)
7.9 Towards an Interpretive Model of Climate Change Response
their budgets. Another major reason advanced was the fact that green consumerism in South Africa is not yet at levels where customers were willing to pay a premium for such products or services. This in support of Orsato (2006), van Hoek (2001) and Polonsky (1994) assertions that customers should be willing to pay for the differentiated value for green marketing campaigns to make business sense. This is also in line with Reyers (2011) and colleagues‘ finding that companies are responding to climate change only where the business case prevails, unless there are other strategic decisions such as regulatory or social justifications. In such cases heuristically-determined hurdle-rates (Magni, 2009; Gigerenzer, 2006; Jagannathan & Meier, 2002, McDonald, 2000; Simon, 1955) and not the opportunity cost of capital are used to make such investment decisions.
Proposition 13:
Where it makes strategic business sense, companies that offer products and services with differentiated “green” value propositions can gain significant competitive advantage.
differently when they are losing rather than when they are winning (loss aversion- Benartzi &
Thaler, 1995; Kahneman et al., 1991) and, thirdly, the tendency for people to fail to update their choices and solutions in the face of new information (anchoring & adjustment- Slovic et al., 2002; Finuacane et al., 2000; or experienced utility – Kahneman et al., 1997; Kahneman &
Thaler, 2006), are all key reasons for marrying rational and boundedly rational models in climate change response decisions. The cognitive limits of decision makers in information- overload situations (Jones, 1999; Simon, 1955) is also a good reason for incorporating elements of bounded rationality into the framework. This study retains the basic architecture of rational models of decision making, but adds the assumptions of cognitive limitations to account for some of these observed anomalies. For example, most business executives in this study seemed rational in their selection of climate change initiatives, but tendencies of hyperbolic discounting (Lee & Swaminathan, 2000) were evident.
Proposition 2 offers a structured, analytical approach to incorporating all the different aspects to climate change decision making, which is the rational portion of the modelling process. An understanding of all the levers and drivers of climate change response is an important part of the process of creating and understanding the options available. AHP‘s ability for hierarchical structuring (Saaty, 2008; Saaty, 1980) of quantitative and logical complexity (Frior, 2009), making it possible to consider a variety of data, relations and criteria as found in climate change response (Hwang & Syamsuddin, 2010) problems. This holistic and comprehensive approach to corporate climate change response is unlike any approach proposed before.
Due to the presence of multiple criteria, preference information has to be incorporated into the climate change response problem to obtain a set of possible alternatives. The process of arriving at a decision on the type of criteria, the weighting of the criteria and ultimately the evaluation of the solution (Gigerenzer, 2007) is where rational models are challenged (Simon, 1955). It is also at that point that bounded rationality becomes useful, because deliberation of the type and weighting of criteria is not an exact science (Ellison, 2006; Simon, 1955). Equally important is the practical assessment of a company‘s key climate change response drivers, which should be performed with an understanding of propositions 1 and 3, where the severity of climate change induced risks is balanced against a diversity of interests of multiple stakeholders (Raymond & Brown, 2011; Cook et al., 2007), the resources and capabilities at an
organisation‘s disposal (Porter, 2008) and the synergies and interconnectedness (Wind, 1987) of the response system.
Propositions 4, 5, 11 and 13 are opportunities which also have to be assessed against an organisation‘s resources, capabilities, strategic direction (Porter, 2008) and planning horizon (Beale & Fernando, 2009; Berg & Gigerenzer, 2007). Subjective judgements (Magni, 2009) get in the way, and in some cases, considerations that cannot be reduced to numbers or financial figures (Meier-Rigald, 1991) have to be considered. The addition of the behavioural aspects to such decision making moves us closer towards a true reflection of how businesses make strategic decisions (Gigerenzer, 2007; Simon, 1976a) in general and specifically how businesses should select climate change response initiatives. The proposed framework argues that the process to arrive at a solution (procedural rationality – Simon, 1956) is just as important as the solution itself (goal rationality – Simon, 1976b) because procedural rationality considers uncertainty as impacting not only the outcome of a decision, but also the specifications of that outcome (Simon, 1976b).
Proposition 10 suggests that perfect rationality hypothesis explanations of the concept of market failures such as hidden costs, and market imperfections such as misplaced incentives and other barriers (Sutherland 2000) identified in this study, provide rational and compelling explanations for ‗no-regret‘ and energy efficiency gaps. The organisational and institutional behavioural explanations (Schleich & Gruber 2008; Shove 2005; DeCaino, 1998) proposed such as routinized behaviour and inertial tendencies for wanting things to stay the same (status quo biases) are unsatisfactory in explaining these paradoxes, which is summed up in proposition 8.
The idea that locked-in habits and routines (Schleich & Gruber, 2008) may serve to explain the no-regret paradox could not be proved in this study. Instead, both companies seemed keen to explore all available low-carbon options in order to be more climate friendly, barring the barriers to action as detailed in proposition 10.
The statement made by Pompian (2006:16), regarding people‘s wealth management habits is very relevant: ―People are neither perfectly rational nor perfectly irrational; they possess diverse combinations of rational and irrational characteristics, and benefit from different degrees of
enlightenment with respect to different issues‖. The same can be said of corporate climate change response.
This discussion leads to the construction of a response framework incorporating both rational and irrational concepts.
7.10 The Corporate Climate Change Response Framework