5. Environmental Decision Making in Small Companies: A Behavioral Economics Perspective

Small and medium-sized enterprises (SMEs) are often considered the backbone of the economy. Indeed, in most economies around the world, SMEs are the largest group of companies, and they are responsible for a substantial share of economic output and resource use. Sustainability-related decisions and the environmental management in SMEs are thus key factors to consider in order to increase the environmental sustainability in an economy. However, SMEs often do not have the capabilities and the knowledge that would be required to implement best practices in environmental management. Moreover, because of their smaller size, behavioral motivations and “biases” in decision making may be more important in SMEs than in larger companies. Such factors might be relevant for the effectiveness of public policy measures directed at SMEs, and they make SMEs potential targets for policy instruments from the behavioral economics toolkit, such as “nudges” or other measures. This chapter focuses on three elements of behavioral motivations and decision making that are relevant for SMEs – social preferences, present bias, and loss aversion – and discusses how they can affect environmental management and sustainability-related decisions in SMEs. The chapter finally considers to what extent behavioral economics approaches could be helpful for fostering more sustainable management practices in SMEs by addressing these behavioral elements of decision making in SMEs.