The Behavioural Economist’s Most Valuable Tool: Nudge
Neoclassical economics posits that economic agents are rational, that is, they are purely self-interested individuals, who, after analyzing all available sets of information and evaluating probabilities and risks in a mathematically articulate manner, base their decisions according to their well-defined utility functions. However, economic agents are principally and primarily people. They are humans whose decisions are highly affected by psychological, cognitive, and social factors, who have non-selfish, social motives as shown by their altruistic acts, and who usually forget, procrastinate, and make errors. Therefore, whereas neoclassical economics provides a view on ‘what needs to be done’ by perfectly rational people, as it treats people as if they were someone else, it falls short of explaining ‘what is actually being done’ by people.
In our previous articles, we have already demonstrated that people continue to stick with their current options, even if choosing an alternative could make them considerably better off. We have also described how heuristics – the decision making tricks people use – lead decision makers into making errors. It appears that people make suboptimal – and often irrational – decisions due to their lack of psychological and cognitive capabilities, creating a gap between normative behaviour prescribed by mainstream economics and actual human behaviour. Nudge, in its essence, is about identifying the ‘human’ factors that cause the deviation from the optimal outcome, and modifying the decision making environment by accounting for these factors so as to guide (or nudge) people towards options that are thought to be in their own best interest.
Applied Behavioural Economics: A Cafeteria Experiment
In certain decision-making environments people are least likely to make good choices for themselves. Problems arise when people need to make decisions that test their akrasia, i.e. self-control. These issues are most likely to arise when costs and benefits from engaging in a certain kind of behaviour are time spatial. As such, for sinful goods, such as smoking and unhealthy eating, the benefits are obtained now and the costs are incurred later. The behavioural problem with these goods lies in the fact that people might continue to consume them without having any warning signs for years, after which, modifying behaviour will either become too difficult or have a minimal impact. It is of no coincidence that the worldwide obesity rate has nearly tripled since 1975, being responsible for 4.7 million premature deaths each year. These numbers not only validate that people over consume sinful goods, but also suggest that they might benefit from a nudge to eat more healthily.
In a field experiment, researchers analyzed food choices of students. Unsurprisingly, they have observed that there is an excessive intake of saturated fat and sugar among students, along with low fruit and vegetable consumption, suggesting that there is a room for improvement. Utilizing the insights from food choice architecture – people have a tendency to choose products that are placed at their eye level and in the middle of the menu – researchers made modifications to the decision-making environment such that these tendencies will lead to an increase in healthy eating, rather than preventing it. As such, whereas chocolate cakes and fast grab-and-go foods were placed in the eye level initially, the researchers switched their placement with fruits, vegetables, and other nutrient rich meals, thereby changing the promoted choice of decision making environment. The results of this simple rearrangement were highly significant and successful with fruit and sugar consumption increasing and decreasing, respectively, by 46 and 15 percent.
This relatively simple example is of high importance in the sense that it captures the notion of nudging: organizing the context in which people make decisions so as to alter people’s behaviour in a predictable way without significantly changing economic incentives. The beauty of nudging lies in its flexibility. Instead of forcing people, nudges solely smooth out the process of people reaching the desired end state of themselves by aligning the choices with underlying psychological foibles that govern human behaviour.
The canteen example also hinted at some business implications that are, alas, very often overlooked by practitioners. In many cases, people’s choices are shaped by behavioural factors (e.g. framing, status quo bias, and availability bias) that are extensively used by nudges. This implies that for any decision making environment there exists a promoted choice or option, which can align or contradict with a given company’s products and services. It might be the case that the interplay of these psychological factors endorse choosing the competitors’ products, thereby necessitating a behavioural market analysis to counteract – and if necessary overrule – the current situation. As as a given arrangement of choices can make some options more or less likely to be chosen, with meticulous analysis, the decision making environment can be modified to promote a business’s products and services.
References and Further Readings
Thaler, R. H. and Sunstein, C. R. (2008). Nudge. London: Yale University Press
Olivier, M. M., Pearson, R., Ruparell, A., Horne, P. J., Viktor, S. and Erjavec, M. (2019). A low-cost behavioral nudge and choice architecture. International Journal of Behavioral Nutrition and Physical Activity 16(1), pp. 1-9.
Bhargava, S. and Loewenstein, G. (2015). Behavioral economics and public policy 102: Beyond nudging. American Economic Review 105(5), pp. 396-401.
Lefebvre, C. R. and Kotler, P. (2011). Design thinking, demarketing, and behavioral economics. In: G. Hastings, K. Angus, and C. Bryant eds.,The Sage Handbook of Social Marketing. California: Sage Publications.