Nudges: For Your Own Good?

Nudges are low-cost, low impact, often clever interventions by government, businesses and other organizations to “alert, remind or mildly warn” people when they are making decisions.[1]  Nudges can be subtle—sometimes too subtle—techniques to get people to make decisions either better for them or for the organization doing the nudging. As consumers, employees, voters and humans we need to understand how nudges work to maintain control of our decisions and our destinies.

Governments and some companies design nudges to improve people’s health, safety, finances, job performance and environmental footprint. Such interventions have been justified by the claim that, without them, people will tend to make decisions colored by cognitive biases, behavioral weaknesses (e.g. procrastination and inattention) or noise (distractions and inconsistencies), which they—and society—later regret. A ‘good’ nudge will be transparent, easy to opt-out of, good for our welfare and cost-effective based on hard evidence.[2] The policy of creating good nudges has been dubbed “Libertarian Paternalism.”

On the other hand, some organizations have also used nudges in advertising, e-commerce, social media campaigns, app design and more to increase profits, employee productivity and for other purposes, which may or may not contribute to the nudgee’s welfare. Such nudges may not be transparent or easy to opt-out of (TurboTax asks three times whether I wouldn’t really rather pay $45 for their audit defense product).

Organizations create nudges by leveraging many of the same biases and weaknesses that can cause bad decisions in the first place. They carefully engineer the choice architecture and framing of decisions that people face. This can include adjusting incentives (first month free!), setting defaults (opt-out vs. opt-in) and offering feedback (are you sure you want to cancel your subscription?). Here are some examples and the biases they exploit:

  • Save more tomorrow: Employees sign up to have the share of their paycheck that is allocated to retirement savings increase over time or when they get raises. This counters employees’ present-bias and acts as a commitment device.
  • Choice architecture/defaults: Google’s employee cafeteria makes smaller plates and healthier foods more visible and accessible to promote healthier diets and reduce medical bills. Netflix will pre-load the next episode of your show to encourage binging. Some countries make organ donation opt-out rather than opt-in have to increase participation rates. These nudges leverage people’s default bias.
  • Social influence: Startup Winii creates cohorts of millennial women who support each other in “crushing” their debt. After voting, citizens receive free “I voted!” stickers promoting their patriotism and civic-mindedness. These nudges use people’s bias to get on—and stay—on the bandwagon.
  • Gamification: Jet.com uses anchoring, loss aversion and Fear of Missing Out to encourage consumers to load up their shopping cart by 1) graphically showing prices fall (or rise) as goods are added (or removed) and 2) by offering free shipping when the total value exceeds $35.
  • Framing: Progressive insurance uses people’s overconfidence to nudge them to sign up for its Pay as You Drive automobile insurance. While the insurance premium is based on usage, it’s sold as being a benefit to good drivers [3] (and most of us think we’re above-average: the “Lake Wobegone Effect“).

Snapshot

  • Discomfort: Train and subway stations are playing classical music to deter loitering and crime. This leverages status-quo bias by making the environment less familiar and comfortable to those who spend a lot of time there.
  • Decoys: The Economist magazine offers three choices for subscriptions. Two are easily comparable, one is not. The publisher knows people will make the easy choice between the comparable alternatives and ignore the third, less profitable, option. This is a good example of leveraging System One thinking and the Decoy Effect[4]:
  • Awkwardness: Decision Fish’s financial wellness app includes a tool to help people budget according to their fundamental values and needs. For certain kinds of spending, it asks rather awkwardly, “could you spend less and still meet this need?” This is an example of disfluency, which we deliberately use to slow users down so they think carefully about an important decision.[5]

Could You Spend Less

Done right, nudges can be low-cost, low-impact ways to help people make better decisions for their benefit while they retain the liberty to chose what may not be best for them. On the other hand, nudges can have significant drawbacks. They may:

  • Distract from harder and more expensive but more sustainable systemic solutions like improving education and consumer protections
  • Tempt organizations with new power to potentially behave unethically insofar as people are treated like wallets or votes and not humans
  • Concentrate power among governmental and corporate elites with resources to develop the nudges
  • Magnify the influence of political and corporate leaders’ own biases and conflicts
  • Imply skepticism of democratic and free-market capitalist ideals. The presumption of poor decision-making can be used to justify not just paternalism but also authoritarianism
  • Treat everyone alike whereas people obviously have diverse needs and wants
  • And for all these drawbacks, generally have minor impacts of less than ten percent

Government intervention is more likely to amplify the cognitive biases of regulated individuals than to correct them. — Pierre Lemieux, The Economics of Political Balderdash

In sum, nudges are small adjustments in the context of our decision-making, created by organizations, to influence our choices and to promote certain agendas. Ideally, the goal is to improve the welfare of the nudgee. But several of the examples we provide show this is not always the case. Of course, nudges are nothing new: marketers, politicians and parents have used carefully designed techniques for generations. What is new are the advances in data-science, artificial intelligence, user experience design, psychology and behavioral economics that make nudges more effective and widespread. Will our capacity for empathy, humility, ethics and plain common-sense keep pace?

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References

[1] To No Avails

[2] Thaler, R. H., & Sunstein, C. R. Nudge: Improving Decisions About Health, Wealth, and Happiness.

[3] Progressive’s Snapshot: The behavioral economics of PAYD auto insurance

[4] Predictably Irrational: The Hidden Forces That Shape Our Decisions
by Dan Ariely

[5] Psychology Today. “Online Behavior and Disfluency: The Ugliness Payoff.” Psychology Today. n.d. Web. 13 Apr. 2017.