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M2M’s Impact On Behavioral Economics

Written by: Mike Ueland, VP Telit Wireless Solutions North America

Historically, M2M applications were developed to increase the productivity of industrial resources, whether the resource was a fleet of delivery trucks or a remote gas pipeline. However, recent reductions in the cost to deploy M2M technology are enabling more broad-based and consumer-focused applications that have the potential to make a big impact on choices we make in our daily lives that will have positive benefits to individuals and society. Many of these applications, such as pay-as-you-drive (PAYD) auto insurance and smart metering, are driven by the principles of behavioral economics, which is a new field of economic research that looks at how individuals make economic-related decisions.

In Nudge, a book by Richard Thaler and Cass Sunstein, the authors argue that many of our decisions can be influenced by how choices are presented. For example, the authors describe how the director of food service for a major city school system was able to influence what students ate simply by changing how food choices were presented in the cafeteria line, such as putting fruit before the desserts or moving carrot sticks to eye level. The school district found that it could increase or decrease the consumption of many food items by as much as 25% without making any changes to the menu. Thaler and Sunstein call the director of food service a "choice architect" because of the significant role she has in influencing choices made in the cafeteria line. Further, as a choice architect, the food service director can influence outcomes based on specific objectives - meaning she could arrange food choices in a way that students would select healthier options. Thaler calls this practice "libertarian paternalism," which is giving people the complete freedom of choice, but steering or "nudging" people toward decisions benefiting both themselves and society based on how choices are presented.

USE M2M TO INFLUENCE CUSTOMER BEHAVIOR
So, how does libertarian paternalism apply to M2M? There are several new applications being developed and deployed that use the principles of behavioral economics to provide incentives for people to "do the right thing." One example is PAYD. Progressive Insurance took the lead in introducing PAYD into the U.S. market by way of its MyRate program. The MyRate program was launched in 2008 and is currently being rolled out on a state-by-state basis. MyRate participants receive discounts on their auto insurance rates based on their driving behavior. The program is completely optional, meaning Progressive customers sign up for MyRate on a voluntary basis, opting to receive and self-install in their cars a small, compact M2M device called the Intelliport. Developed by Xirgo Technologies, the Intelliport device can be self-installed by the consumer into the vehicle's OBD (on-board diagnostics) II port. The device captures driving data, including distance, time, sudden acceleration, and braking from the vehicle's on-board computer and sends it back to Progressive's operations center over a GSM/GPRS (global system for mobile communications/general packet radio service) cellular network via a Telit module. Users receive an initial discount for participating in the program and further discounts based on their good driving behavior.

The benefits to implementing such a program are obvious: reduction in rates for safe drivers, potential for lower accident-related claims, and incentives for safe drivers to switch to Progressive from competitive carriers. However, there are several other possible societal benefits born from customers' heightened awareness of driving habits and resulting change in behavior, such as the reduction of overall trips driven that could potentially result in less traffic, fewer accidents, lower car emissions, longer vehicle life, and less road maintenance. Because this is a new program and currently limited in its scope, it is unclear what benefits will be realized by the insurance provider, the consumer, or society in general. But, PAYD is just one example of how M2M technology built around behavioral economics can be effectively used to "nudge" user decision making toward more positive outcomes for both personal and public interests. PAYD is just one of a number of market-based, incentive systems that will be enabled by M2M technologies in the future. Other applications include congestion-based tolls to reduce traffic and pollution. Demand response programs in the utility sector encourage people to shift electric power usage to nonpeak periods, which reduces the need for utilities to build additional power plants.

Like PAYD, emerging M2M innovations will enable companies to use choice architecture to implement demand-based pricing models that can influence real behavioral changes, and in turn, result in more positive individual and societal outcomes.