Nudging people with Behavioural Economics

Nudging people with Behavioural Economics

Classic economic theory says that people are rational and behave in ways that maximise their self-interest. Whilst this thinking is useful, it has pitfalls, often leading to wrong predictions and misguided decisions.

This is because the human behaviour economic model is based on three unrealistic traits; unbounded rationality, unbounded willpower, and unbounded selfishness.

Consider the following example based on a mid-1990s study of New York City taxi drivers. These drivers pay a fixed fee to rent their cabs for twelve hours and then keep all their revenues. They must decide how long to drive each day. The profit-maximising strategy is to work longer hours on good days - rainy days or days with a big event in town - and to quit early on bad days. Suppose, however, that they set a target earnings level for each day and treat shortfalls relative to that target as a loss. Then they will end up quitting early on good days because they have achieved their target and working longer on bad days when they haven't. The authors of the study found that this is precisely what they do, contrary to standard economic expectations.

Over the past few years the realisation that traditional economic theory frequently fails to predict correct outcomes has led to the emergence of a new approach called Behavioural Economics. This recognises that peoples’ decisions are greatly influenced by the attitudes, actions and behaviours of others; as individuals and collectively. Some economists have named these small but powerful influences ‘Nudges’. For example, nudges to the way people buy cars or donate to charities have considerable influence on individual behaviour. Here is a list of the most common Nudges identified by them:

Social Proof – the tendency of people to assume the actions of others as correct behaviour for a given situation

Loss Aversion – the tendency of people to strongly prefer avoiding losses to acquiring gains even if the gain is greater than the loss

Anchoring – the tendency of people to rely too heavily on a past reference or on one trait or one piece of information when making decisions

Choice Support – the tendency of people to remember their past choices as better than they actually were

Decoy Effect – the tendency of people to change their preference between two options when also presented with a third option

Distinction Bias – the tendency of people to view two options as more dissimilar when evaluating them at the same time then when evaluating them separately

Experimenter’s Bias – the tendency of people to believe information that agrees with their expectations and to disbelieve, ignore or downgrade information that conflicts with those expectations

Functional Fixedness – the tendency of people to limit their use of an object or product only to the way it has traditionally been used

Hyperbolic Discounting – the tendency of people to have a stronger preference for more immediate payoffs relative to later payoffs even if the latter offer greater benefit

Knowledge Bias – the tendency of people to choose an option they know best rather than the best option

Post Purchase Rationalisation – the tendency of people to persuade themselves through rational argument that their purchase was good value

Pseudocertainty effect – the tendency of people to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes

Zero Risk Bias – the tendency of people to reduce a small risk to zero over a greater reduction in a larger risk

Dunning-Kruger Effect – the tendency of people with limited skills or knowledge to adopt illusory superiority mistakenly rating their ability much higher than that of others

False Consensus – the tendency of people to overestimate how much other people agree with them

Latency Effect – the tendency of people to put undue weight on recent events and too little on far-off ones

Probability Bias – the tendency of people miscalculate probabilities and worry too much about unlikely events

Evidence Effect - the tendency of people to be strongly influenced by how the problem/information is presented to them

The key challenge is how to measure the impact of these Nudges on an individual’s decision-making and behaviour. Historically, market research has followed the classic economic view that peoples’ preferences and attitudes are the main, and often the only, forces in their decision-making. The focus of research was thus on the individual with the assumption that to know their preferences is to predict their behaviour. For research this has meant embracing everything from ethnography to neuroscience to better understand the content of people’s preferences and decisions.

However, as we have just seen, people experience a whole series of Nudges that sway behaviour independently of personal preference and attitudes, and very often unconsciously. They just do what everyone else does (or what they think everyone else does); they do what they did last time; they do whatever is easiest; they buy what is offered, not what they want; they follow the example of their best friend. Thus the context of the decision is equally important to its content.

Understanding these contexts is an enormous opportunity for the insight industry. It means new areas to examine and new techniques to do so.

We believe that online communities are perfect for this. They allow us to ask far more complex questions over a longer period of time than either traditional surveys or focus groups. They allow us to directly see the impact of Nudges on influencing behaviour, and more importantly, how this behaviour changes over time. They allow us to test various Nudges upon the community to measure their absolute and relative impact in a given situation. Finally they allow us to establish which Nudges become established as norms for a given group of consumers. If you can change a norm, you can change behaviour.

Overall, communities give us both the whole context of the decision making environment together with the content of people’s preferences and decisions. As such communities are perfect tools for effectively bringing Behavioural Economics into business planning and execution. With that knowledge business leaders and producers can create interventions that seek to shape Nudges and alter behaviour, be it fitting solar panels or eating ramen burgers.

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