BE101x: Behavioural Economics in Action

Unit 1.2.3 Nudging and Behaviour Change

DILIP SOMAN: So what does this mean for various domains of business, for policy,
for well-being? There's a few implications that jump out. The first one that I want to
touch upon is from the world of marketing or business. If you look at the failure rates
of new products, they're stunningly high. Depending on what survey you look at, it
turns out anywhere between 90% and 99% of new products that are launched are not
successful.

Why does that happen? That often happens because of a failure to understand human
decision making at the last mile. We produce products that are technologically
superior. We produce products that offer cost savings, but we don't think too much
about the consumer who's going to make the final purchase. We don't think too much
about the way we display those products, the way we sell the products, and the way
we message the key benefits from that product.

Think about policy. One famous instrument that policymakers use is the notion of
disclosure. Disclosure simply says, give people information and that will help them
make better decisions. It turns out an understanding of behavioral economics shows
that that's the furthest thing from the truth.

If you've ever looked at the back of your credit card statement, if you've ever bought a
new medical prescription and looked at all of the disclosures that come with it, you
will know what happens. People look at the information, there's simply too much of it,
and they put it aside.

And so in fact, what the world needs, is not just a lot of information but a lot of
information that is presented appropriately to the appropriate audience. And that's a
theme we'll touch upon later in this course. The third point I want to touch upon is the
fact that we can use our knowledge about behavioral economics to help people help
themselves.

What does that mean? It means that we can close the gap between actions and
intentions by designing environments where in fact, we can push people towards
making the right choices. As well, we can design tools and technologies and products
and gadgets that would actually help people make better choices.

And so those are the two elements that we're going to focus on in this course. A, how
can I change the context to help people make better choices? B, how can I actually get
them more information, more insight, and more analytics to help them make those
better choices?

Now, before I end this segment, I want to talk about the other big element in this
course, which is the notion of changing the context to influence choice. Let's think
about a very, very simple example. Let's imagine that you are a policymaker or a
business person, and you want to do something to influence consumers choice.
You've got people that currently chose option A, and you want to move them towards
option B. What are the different tools you have at your disposal?
One tool that is popular with policymakers and governments is the notion of
restriction. I simply ban A. If I'm a business, I can simply withdraw product A from
the market. And when I do this, I leave people with no option but to choose product B.
That's a simple example. It's a domain that you've seen a lot of discussion and debate
about in the policy world. How good are restrictions in influencing customer behavior?
The challenge with the restrictions is that they often create backlash. You often hear
arguments about who is the government to decide what is good for me?

The second option that you have at your disposal is a carrot and stick option,
incentives. What you can do is you can create positive incentives, like a subsidy or
surplus or some kind of payment, for people that move from point A to point B. Or
you could create a negative incentive for people that choose to stay at point A. You
could tax them. Again, if you were a business person, there are different ways in
which you create those incentives. You could offer discounts or promotions or gifts
and so on and so forth.

Third option that you can use in pushing choice from point A to point B is advertising
or knowledge. Marketers do this all the time. If you are at point A, I'm going to give
you enough information about why you should be at point B. I'm going to convince
you that you need to be at point B. These are three fairly traditional approaches to
influencing behavior. In this course, we'll talk about a fourth.

We'll talk about the notion of choice architecture. How can I influence choice without
changing economic incentives, without imposing restrictions, and without advertising?
Simple example, defaults. If I know that people stick with the default, simply
changing the default in a given choice is going to change the percent of people
choosing that option. Or, the compromise effect. If I know that items displayed in the
middle are more likely to get chosen, can I take a preferred option and surround it by
an option that is weaker and cheaper, another one that is stronger and more expensive?
And the research would show that, in that case, choices are more likely to gravitate to
the one in the middle.

Final point. We talked about choice architecture, we talked about influence, we talked
about stealing people's choices, so what's the right option? Who decides what is right?
And again, there are multiple ways of thinking through that. We can think through a
parental body, a government, a policy board, a cooperative unit, a dieting society,
someone that we trust that tells us what the right choice is.

And in fact, when people sign up to loss weight for a program, they are essentially
trusting the administrators of the program to help them make the right choice. That's
one option. A second way to think about it is the majority. Can we actually think
about what the majority wants? Can we think about options that are socially more
desirable and steer people towards those choices? That's a second norm, a second way,
of thinking about who decides.

The third and most important point is you, the individual, decide what is right for you,
and then you compose a choice architecture. You compose a context in which your
own choices are now influenced by what you decide is right for you. Remember, we
said that there's a big gap between what people want to do and what they end up
doing, and choice architecture presents a fantastic opportunity to lock yourself into
the kind of behavior that you want to do.