Economics 101 says humans are rational — at least at a collective level. We will buy and sell at a value that we can justify maximises our utility. Much of our economic theories stem from this core assumption. Assumptions that if you tax something, like cigarettes and alcohol then people will buy less of it. Or if you reduce taxes then the money saved by people will be reinvested in the economy generating more income for society than the taxes lost. Or that the value of something is independent of whether you own it or not.
Since the 70’s with the pioneering work of Tversky and Kahneman on how irrational people actually are, these core assumptions have been seriously challenged and shown repeatedly to be down right incorrect. People have many short circuits in the way we are made up which bias and colour the way we see the world and make our decision making at times anything but rational. Inspired as a student in the 70’s by the work of Tversky and Kahneman, Richard Thaler began to look into this in more detail, creating what became known as “Nudge Theory” or “Choice Architecture” and ultimately winning Thaler the Nobel Prize in economics in 2017
Thaler and other behavioral economists show that, in reality, people make decisions quickly under pressure, based largely on intuition, and unconsciously guided by biases and psychological fallacies…
The key, says Thaler, is to responsibly use “nudges” — subtle interventions that guide choices without restricting them.
In his seminal book “Nudge- Improving Decisions About Health, Wealth, and Happiness” Richard Thaler writes:
A choice architect has the responsibility for organizing the context in which people make decisions…
To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.
Humans prefer simplicity, have a limited attention span, and go out of their way to avoid hassles. Changing the context in which people make choices can make new and desired behaviors easier to adopt.
Why is it that there is a need for nudge theory and choice architecture? What is the root of the contradiction between our rational theoretical selves and the irrational actual selves? Since Tversky and Kahneman, research has begun to distinguish between two kinds of thinking writes Thaler:
…. one that is intuitive and automatic, and another that is reflective and rational. We will call the first the Automatic System and the second the Reflective System. (In the psychology literature, these two systems are sometimes referred to as System 1 and System 2, respectively.)
- The Automatic System is rapid and is or feels instinctive, and it does not involve what we usually associate with the word thinking. When you duck because a ball is thrown at you unexpectedly, or get nervous when your airplane hits turbulence, or smile when you see a cute puppy, you are using your Automatic System
- The Reflective System is more deliberate and self-conscious. We use the Reflective System when we are asked, “How much is 411 times 37?” Most people are also likely to use the Reflective System when deciding which route to take for a trip and whether to go to law school or business school
- One way to think about all this is that the Automatic System is your gut reaction and the Reflective System is your conscious thought. Gut feelings can be quite accurate, but we often make mistakes because we rely too much on our Automatic System
- The Automatic System can be trained with lots of repetition — but such training takes a lot of time and effort. One reason why teenagers are such risky drivers is that their Automatic Systems have not had much practice, and using the Reflective System is much slower.
Some examples of nudge theory
- fly sticker on urinals
- fruit and water placed in more prominant positions at food outlets
- organ donation being opt out rather than opt in
- Compulsory Superannuation
Or check out this study on Virgin Atlantic pilots looking to save fuel. They
teamed up with economists to try to “nudge” the company’s pilots to use less fuel, using a variety of behavioral interventions.
And it apparently worked. The intervention was so cost effective, the researchers say, that it “outperforms every other reported carbon abatement technology of which we are aware.”
Japanese train stations use many examples of nudge theory to improve the performance and safety of their highly efficient and patronised network. From blue lights which improve the mood of commuters and reduce suicide attempts; the door closing jingle designed to lighten the highly stressed peak hour commute; A high frequency tone at station entrances is used to reduce teenage loitering — the 17kHz frequency can only be heard by people under 25years.
Even train conductors have a behaviour hack to nudge them to safer outcomes:
Japanese train conductors, drivers, and platform attendants are mandated to use the “point and call” method — called shisa kanko — in executing tasks. By physically pointing at an object, and then verbalizing one’s intended action, a greater portion of the brain is engaged, providing improved situational awareness and accuracy. Studies have repeatedly shown that this technique reduces human error by as much as 85 percent. Pointing-and-calling is now a major workplace safety feature in industries throughout Japan.
Organ donation provides a particularly interesting example. Countries with opt out organ donation programs have over 90% participation compared to opt in countries with only 15% participation. What makes this even more fascinating is that surveys of people in the different programs do not see the default choice as one that was made for them — they appear to raionalise whatever the default is as what they have decided to do on their own free will.
Social media and websites abound with examples of nudges which prompt a desired behaviour. UXplanet highlights micro nudges as
a well-timed small animation that prompts the user to do a “small” task that they may have otherwise forgotten or not have taken notice of.
For instance on instagram, the comment box and tags only pop up on a post when someone pauses long enough to appear interested in the post.
These work best when…
- The task is small and the nudge is serving as a reminder.
- Discriminatory — it is well-timed and only shown when user has “expressed” interest. If it’s shown all the time, the nudges could become distracting, feel forced, or just annoying.
- The nudge is easily noticeable and not hidden.
Because biases appear to be so hardwired and inalterable, most of the attention paid to countering them hasn’t dealt with the problematic thoughts, judgments, or predictions themselves. Instead, it has been devoted to changing behavior, in the form of incentives or “nudges.”
For example, while present bias has so far proved intractable, employers have been able to nudge employees into contributing to retirement plans by making saving the default option; you have to actively take steps in order to not participate. That is, laziness or inertia can be more powerful than bias.
Procedures can also be organized in a way that dissuades or prevents people from acting on biased thoughts. A well-known example: the checklists for doctors and nurses put forward by Atul Gawande in his bookThe Checklist Manifesto.