Richard Thaler and Cass Sunstein Nudge Theory

Richard Thaler and Cass Sunstein Nudge Theory

What is nudge theory?

In 2008, a behavioral economics book called  Nudge was published by US academics Cass Sunstein and Richard Thaler. The authors demonstrate how to nudge people in a particular direction without restricting their freedom of choice.

Nudge theory is a gentle encouragement system based on behavioral knowledge of the decision-making process—the benefits of nudge remarkable power to change behaviors through cost-effective actions.

The theory is that by understanding how people think, we can use positive reinforcement to influence how they act and help them choose wisely for their good for society’s benefit.

The nudge theory is based on the fact that people are not rational beings. Instead, they are influenced by cognitive bias and mental shortcuts by our emotions and other factors, and the environment and setting where they are at the point of decision are made. People make inconsistent decisions. That’s the way it is.

Thaler and Sunstein’s nudge theory is about influencing behavior without sales coercion. The intervention must be easy to apply and cheap to avoid and should also have a positive intention.

A simple example; Restaurants will offer the chocolate mint or two with their bill and get higher tips as a result. Marketing messages include the word because. Because it gives your message a strong rationale.

The business principle is to conduct an audit of your processes to ensure that your customers are more amenable to your products or services.

Why is it so important for marketers and policymakers?

Because we learn from behavioral economists and the real drivers that influence consumers and design marketing actions built upon this proven approach of observing behavior.

Political theorists and people in policymaking positions were interested in the idea that behavioral economics could improve government effectiveness using indirect suggestions rather than legislation or enforcement.

Research indicates that people could be steered towards better decisions by presenting choices differently.

Politicians seized the theory that they could subtly encourage people to shift their behavior by influencing their decision making.

Many governments worldwide quickly set up nudge units designed to help people think more appropriately on improving their lifestyle choices such as health, nutrition, and exercise.

The tricks of behavioral psychology could nudge the public into doing the right economic thing. It is more subtle unless direct than classic and force change.

Politicians prefer to influences by subtle nudges rather than passed legislation, not a theory, which was first popularized in America in the early two thousand as a different approach to influencing how people thought about financial products such as pensions, savings, and health care.

This was intended to improve the quality of their later life rather than to enrich the financial industry.

It’s important to note academics initially developed that Nudge. It has a moral theory intended to improve society, not to be a commercial gain tool or to enable the government to control.

Nudge Theory Examples

Let’s look at some examples example of how a nudge might replace enforcement might be. Instead of putting up no littering signs and threatening to fine people in authority, places more litter bins in prominent, accessible places.

Rather than instructing or educating people, governments try to educate and inform them about better lifestyle choices.

For the government to improve home energy efficiency, they might show people how much less their neighbors spent on gas and electricity than they did, rather than badgering them about saving energy.

Governments can try to embarrass tax evaders into paying taxes by telling them what percentage of the population pay them voluntarily rather than pursuing them for unpaid taxes.

Nudge Theory Examples used by Opower

How can they encourage households to reduce their energy consumption? Opower did this simply by amending a letter informing them about their energy use, adding a comparison with their neighbor’s energy use.

If your energy use is lower, you are congratulated. It’s great with two smiling. If this is not the case, you are sent hints and tips that quickly improve using social norm drivers.

The Opower team has saved some $250 million and all without spending a dollar, so nudge can be used to save the planet.

Nudge Theory Examples in Healthcare

Another example, this time from the UK health care sector. How to encourage people to participate in the national organ donor program by adding a simple phrase on the government’s official website.

The phrasing questions. Each day, thousands of people who see this page decide to register.

Once more, social standards pressure worked its magic, with the test showing potential for 96,000 additional registrations and once more at zero cost.

And this is what nudge is all about a simple, effective, and low-cost technique to encourage the adoption of new behaviors.

As we have seen in our various examples, local authorities have been quick to grasp the potential of a nudge.

Since then, the nudge approach has developed very quickly, powered by the attraction of its effectiveness in modifying behaviors and its low-cost implementation.

Nudge Theory Examples in Marketing/Retail

Private companies are also beginning to discover nudge, which appears to be a clear way to improve ROI from their marketing strategies as illustrated by this small change, which has doubled the sales from a promotional Campbell Soup offer how to make this happen without any additional cost by communicating what nudges call an anchor to consumers at the moment of the decision.

With this sentence written on the promotional sign “limit of 12 cans per person “results with this anchor, sales went from 3.3 to 7 cans provider. It has activated the idea of a good deal more than the promotional offer alone.

Nudge Theory Principles

Selection of 15 nudge considerations that will have a positive impact on your prospects.

Anchoring and Adjustment

The first is anchoring and adjustment, where you use known things to estimate unknown things. Give your audience factual comparisons and references that are relevant to them.

Availability

This is where you use familiarity and perceived commonness, or, indeed, a rarity. And you can offer statistics that give an accurate scale of popularity frequency or rarity of the issue, and you can correct common faulty assumptions.

Representativeness

This is where you use assumptions based on stereotypes. Give the audience clarification of facts and figures to dispel false stereotypes and wrong assumptions and replace them with accurate comparisons.

Optimism and Overconfidence

This is where you use hopefulness and denial. Sometimes complacency. Allow flexibility for people to project people from the tendency to hope rather than to think things through. Clarify and emphasized timings, cost schedules, etcetera, and use feedback. Don’t assume that people correctly understand the things that you explain.

Loss Aversion

This is where the bio might consider false valuation based on possession. Focus on the gains and improvements and avoid presenting situations that take things away from other people. Clarify actual values of possessed items and clarify actual risks involved.

Status Quo, Bias, and Inertia

This is about the fear of change: laziness, the aversion to complexity at the small print, etcetera.

Use the status quo and defaults to help create a positive effect. Make it easy for people to make helpful choices. Make it difficult for people to use faulty thinking to make unhelpful decisions.

Framing

This is where the presentation or orientation of information alters its perceived nature.

Design your communications so that choices of positions and explained positively are relevant and clear to the audience.

Choose your words carefully understand and focus on what your communication means to other people rather than what it means to you.

Temptation

This is about greed, inability to delay gratification or the fear of missing out. They used short term easy gains as incentives to break the inertia.

Mindlessness.

This is about poor communication, negligence, and complacency. Clarify, educate, design, and prioritize communications so that important issues are clear and cannot be overlooked.

Self-Control Strategies.

These are habits and routines to counter weaknesses. Discover and understand the self-control strategies that your audience uses.

Construct offering so that they fit with people’s systems habits and their preferred way of doing things.

Conforming- Following The Herd.

This is that the mob effect affirmation, embarrassment or trends, and fashion. Consider the need for people to conform and avoid isolation or embarrassment.

Avoid positioning helpful choices in ways that seem nonconformists or which exposed or isolate people.

The Spotlight Effect.

This is the impact of self-consciousness causing anxiety and stress.

Build calmness and relaxation into communications and the processes and outcomes of positive choices.

Priming

Preparing people for change. Help people visualize positive actions and outcomes.

Encourage people to consider exploring assessment steps and strategies towards how they can do things differently.

Stimulus-Response.

This is about language and sign design—the signal matching the messages.

Design your communications properly. Understand the effects of design on thinking and use skilled designers to produce anything that conveys an important message

Feedback

This is about people during, after the thinking and decision-making process.

Build check-in and feedback into the choice process wherever possible and reflect people’s responses to them.

Design processes that offer feedback while people are engaging with

Nudge Sales Process Audit

• Create a map of your customer’s journey. Look for obvious and hidden external influences. This is a brilliant activity for thinking outside your own power of influence.
• Check for unhelpful nudges. These may have developed over the years and accidentally with the caveats that we have always done things like this.
• Check the customer objections. What might be preventing people from naturally shifting towards your product or service?
• Consult a focus group with the perceived objections as the focus group will have a specific criterion to give you feedback on.
• Remove the business created obstacles and explore new nudges to make it easier for your potential clients to engage with you and your products or services.
• Assess and test the effects of your new nudges and adapt as necessary. Add positive nudges to your standard operating procedures to ensure that the little things continually count.

The Nudge Theory in Practise