Behavioural Economics and Nudges are big business — but do we understand them?
Behavioural economics has, in the past 10 years, become something of a darling of econ-consultancy. Richard Thaler and Cass Sunstein’s 2008 book ‘Nudge,’ has catapulted behavioural science to the attention of regulators in the US, the UK and beyond. Cheap, powerful and hard to object to (supposedly), nudges boast being able to increase saving, improve our diets and reduce paperwork. It was only natural that business would want a piece of the action too…
What are Nudges?
First, though, it’s important to understand what nudges are. Sometimes this is a much harder question than most people think (trust me!), but a simple definition might be:
“nudges are a small change in the way a decision is framed which can have a significant and predictable impact of what option is chosen.”
For example, when choosing from a list of options, on average the option that is pre-selected (the default option) will be chosen most often. If we change the default, we can change the outcome.
Nudges in the Wild
Now that we’ve established what a nudge is we can start think about how and where nudges are used. Given that nudges can cost very little to implement (say, changing what option is pre-selected) and could be rather innocuous in nature (changing the colour or size of some text), this seems like a winning combination for businesses. What’s more, nudges have a reputation for improving outcomes, thanks in no small part to the enthusiastic work of Thaler, Sunstein and co. Cheap, low-risk and with a good reputation, it’s hard to see why businesses wouldn’t be interested in nudges.
However, like it or not businesses aren’t out to improve outcomes — they’re out to make money. Furthermore, when we think about why nudges work, aren’t they just tricks or manipulations, preying on our cognitive weaknesses? Maybe, and maybe not (I did say it was complicated!). For example, some people do think nudges are always manipulative, while others think nudges can’t be manipulative. For this latter group, businesses literally can’t use nudges because nudges should help people, not manipulate them into buying things.
If you’re confused, don’t worry. The main reason for bringing this up is this: some things are nudges, some things aren’t nudges, and even the experts disagree on the difference. When talking about nudges, try and remember that! Right now, when I say nudge I mean anything that fits into my definition above. A nudge is simple, significant and predictable. I’m also going to focus on some specific examples of where nudges and behavioural economics can be used in business, but this will certainly not be a complete list.
Behavioural audits apply behavioural insights using an auditing structure. Where a regular audit checks everything complies with various rules and regulations, a behavioural audit identifies the behavioural pitfalls and opportunities. In theory, anything could be behaviourally audited, be it a website, a sales script, a store front, and so on. For example, the Future Economies research Centre at Manchester Metropolitan University has worked with clients to behaviourally audited their websites and with finance firms to behavioural audit financial documentation. Cass Sunstein has recently contributed to this area too, discussing the potential power of ‘Sludge Audits,’ to reduce paperwork.
How do we do a behavioural audit, and what value does it add? The first step is usually to start with some sort of framework, one that captures all the details involved in the thing that’s being audited, and all the behavioural phenomena which might be present. However, not only do circumstances vary across clients, they also vary across environments and types of decisions (for example, online versus over the phone). Therefore, whatever framework is built needs to respond to the context it’s applied. Lastly, the wheat must be separated from the chaff. Having a lot of red on a website might be off-putting for a client, but if the company colour scheme is red — unless they’re planning a whole re-brand — this is probably a low behavioural priority.
Being able to distinguish the behavioural pitfalls and opportunities which are important in a given context is where the value is generated in a behavioural audit.
Pareto and Rent-Seeking Nudges
If we know what some of the behavioural problems are, what are the solutions. Nudging is often the go-to fix, but we should always be careful about how we nudge. Consider some examples:
- A website that saves your credit card and billing information so that you can buy a product with a single click.
- An offer that says, “buy TODAY!” rather than, “offer ends in 30 days’ time.”
- Making the default interest rate for new customers the lowest rate offered.
Are any of these nudges deceptive or manipulating? Are any of them helpful? Is one any better or worse than another?
By now we’re all familiar with one-click purchasing on websites such as Amazon, and services now exist which auto-fill passwords for us, because — let’s be honest — it’s annoying to fill in the details every time. This is a nudge — we’ve removed friction (sometimes called sludge) which makes it easier for us to buy things, and so makes it more likely that we will — but it’s also making our lives more convenient. This sort of nudge is what Jodi Beggs has called a Pareto nudge: a nudge that benefits both the customer and the business (there will be some situations where this is not the case, for example, someone who is very bad with budgeting would probably suffer under this nudge. This person shouldn’t be discounted, but an unspoken law of nudging is they focus on the average — how would this effect the average person).
The second nudge is maybe a bit more deceptive. Certainly, when the two ways of phrasing the offer are presented side-by-side, we realise someone chose to emphasise the short rather than the long-term. But equally, isn’t it also completely true, plainly what the business wants and not depriving the customer of anything (if they wanted the product, wouldn’t they always buy it now even if they could wait 30 days?)? This nudge falls into that realm of constructed outrage — often, this sort of nudge will be completely unintentional, and some would therefore argue, not really a nudge (I told you it’s complicated!). For example, do supermarkets who use the end of aisles to promote offers do so to nudge us, or is that just a good business practice they learnt and we’re retroactively describing it as a nudge? Which came first, the chicken or the egg…
Finally, defaulting new customers into a purposefully low interest rate product is probably the most offensive nudge provided. This is what Beggs has described as a rent-seeking nudge: a nudge that only benefits the business. If nudges are ever to be embroiled in a scandal of some kind, this will be it; a business (or industry) purposely setting a bad product as the default option for their own benefit. At best, there might be calls for more nudge awareness in the industry. At worst, if the industry knew about nudging, this might applied behavioural science on its head.
Nudges are everywhere, they’re all different, with some being meticulously designed and some being completely accidental. If we forget that one size does not fit all contexts, which is to say, if we forget to think about how we’re nudging when we think about whether we can (or should) nudge, we run the risk of implementing nudges which are harmful for the customer and the business.
Another consequence of the ubiquity of nudges and nudge opportunities is that businesses can’t NOT use nudges. We also can’t regulate nudges away, or ban them, or restrict them behind some adjudication panel. Nor should we, necessarily, want to. Behavioural audits can be valuable for improving communication and functionality, and nudges done well can have genuine benefits for people, from saving to convenience.
But equally, nudges aren’t magic bullets. It’s irresponsible for behavioural consultants to sell the benefits of nudges without appreciating the risks they entail. Nudges can be used by bad actors, or by dumb actors who don’t appreciate what they’re doing. Furthermore, nudges aren’t a replacement for best practice. Thaler and Sunstein have been known to joke that we can’t use nudges to stop murder. We also shouldn’t use nudges to push dodgy products or aggressive selling techniques.
Stuart Mills is a PhD Researcher at Manchester Metropolitan University. His work focuses on applied behavioural economics, private-sector nudging and customer metacognition.