Module 3: Behavioural Economics and Decision-Making

- behavioural economics (BE) combines elements of microeconomics and psychology to understand how and
why people behave the way that they do in the real world.
- it argues that people are irrational in most of their decisions - human beings are subject to emotion and
impulsivity, and are in uenced by their environments and circumstances.
• di ers from neoclassical economics, which assumes that most people have well-de ned preferences and
make well-informed, self-interested decisions based on those preferences.
- thus, it studies the cognitive processes behind decision-making.

researchers say that we rely on 2 systems to make decisions:

system 1: intuitive thinking system 2: rational thinking

faster but less rational (used more often) slower but more rational

automatic e ortful

fast slow

subconscious conscious

stereotypical calculative

emotional logical

frequent infrequent

RATIONAL THINKING AND REFLEXIVE THINKING

1. rational thinking
• ability to think with reason and draw sensible conclusions from facts, logic and data.
• conscious e ort to overcome biases and emotions.
• relies on evidence and sound reasoning, rather than personal feelings or subjective beliefs.
2. re exive thinking
• form of critical thinking that re ects on experiences, learnings and knowledge.
• involves examining one’s own feelings, reactions and motives.
• improves decision-making and problem solving processes, by avoiding hasty and impulsive decisions.

NUDGE
- a nudge is a subtle change in the environment that encourages individuals to make certain choices, without
limiting their freedom of choice.
- it can take form of physical cues, social norms or defaults that guide people’s behaviour in a certain direction.
- nudge theory is based on indirect encouragement and enablement, avoiding direct instruction or enforcement.

features of nudge
1. maintains freedom of choice
• allow individuals to maintain autonomy of choice by subtly in uencing behaviour, without coercing or
mandating speci c actions.
2. transparent and e ective
• transparency ensures that individuals are aware of the in uence of nudges, allowing ethical implementation.
• e ectiveness ensures that nudges achieve their intending goals using insights from BE.
3. easy and simple
• nudges are to be straightforward and intuitive, requiring minimal cognitive e ort.
4. needs to be evidence-based
• leverage data to optimise e ectiveness and mitigate unintended consequences.
5. has to be tested
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 • nudges are evaluated for impact, feasibility, and scalability, providing valuable insights to re ne interventions
before broader implementation.
6. creative and lively
• this enhances engagement and memorability, thus capturing attention and fostering behavioural changes.

bene ts of nudge
1. encourage individuals to adopt healthier habits by subtly reminding them to prioritise their well-being through
reminders or convenient options.
2. guide individuals towards making sound nancial choices by simplifying complex information or setting
defaults that encourage saving or responsible spending.
3. help individuals become more mindful of their privacy by o ering clear consent options or reminders about
data-sharing practices, empowering them to make informed decisions.
4. prompt individuals to consider the broader impact of their choices on society, fostering a sense of social
responsibility and encouraging behaviours that contribute positively to the community.
5. steer individuals towards eco-friendly choices by highlighting the environmental impact of their actions or
providing incentives for sustainable behaviour, ultimately promoting conservation e orts and reducing
ecological footprint.
6. designed to be subtle and unobtrusive and to work with the natural inclinations of people, allowing them to
in uence behaviour without people even realising it, making it less likely that they will resist the change.
7. take advantage of cognitive biases that people naturally have.
8. make it easier for people to take a certain action, making it more likely that people will take action, even if they
had previously been unwilling to do so.
9. can be adapted to suit di erent situations and di erent people, so they can be tailored to the speci c needs
of a particular population.
10. less confrontational than traditional forms of communication such as lectures, billboards or advertisements,
and therefore, they are less likely to cause resistance or pushback.

factors considered while creating nudge

- psychological and social context
• psychology → understands individual thinking patterns (biases) and motivations to design nudges that
overcome biases and tap into motivations.
• social → considers social norms, expectations, and in uence to design nudges that leverage positive social
pressure and community responsibility.
- choice architecture
• refers to the social background against which decisions are made.
• always present in everyday life and plays a key role in determining which decisions are made.
• choice architects can in uence choice by varying the order in which choice alternatives are presented, the
selection of default options, or the framing of information.
• changing the physical environment can have a signi cant impact on one’s choice.
- libertarian paternalism
• refers to approaches that preserve freedom of choice while steering individuals to behave in a certain way.
• given that choices are not restricted, it can be considered a soft and nonintrusive type of paternalism.
- behavioural change
• nudges aim to Increase the appeal, ease, social acceptance, and timeliness (EAST framework) of the desired
behaviour.
• reduce barriers that hinder the desired behaviour.
• shift perceptions to make the desired behaviour more appealing.
• prompt action through gentle reminders or cues.

types of nudges
1. default rules
• most e ective nudges.
• set a standard option that individuals are automatically enrolled in unless they actively choose otherwise,
leveraging inertia to encourage certain behaviours.
2. simpli cation

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 • in part to promote take-up of existing programs.
• streamlining information or processes to make decision-making easier, reducing cognitive load and
increasing the likelihood of desired behaviours, such as simplifying forms or instructions for better
comprehension.
3. use of social norms
• emphasising what most people do.
• in uencing behaviour by appealing to the desire to conform or align with perceived societal standards.
4. increase in ease & convenience
• people often make the easy and convenient choice.
5. disclosure
• providing individuals with relevant information about products, services, or behaviors to enable informed
decision-making.
6. warning but creative, graphic
• using creative and graphic warnings aims to capture attention and convey the severity or consequences of
certain behaviours.
7. pre-commitment strategies
• involve individuals voluntarily committing to a course of action in advance, increasing accountability and
reducing the likelihood of deviating from their intended behaviour.
• motivates action and reduces procrastination.
8. reminders
• prompt individuals to perform desired behaviours by bringing attention to them at appropriate times or
intervals.
• timing greatly matters; making sure that people can act immediately on the information is critical.
9. eliciting implementation intention
• prompting individuals to plan out when, where, and how they will perform a desired behaviour, increasing the
likelihood of follow-through.
• people are more likely to engage in activity if someone elicits their implementation intentions.
10. informing people about nature & consequence
• providing information about the nature and consequences of behaviours helps individuals make more
informed choices.

nudges and social and environmental issues

- social issues
• increasing awareness about social issues and promote socially responsible consumption.
- environmental issues
• changing consumption habits based on how they directly a ect the environment.

nudge theory and pro-environmental behaviour

- pro-environmental behaviour (PEB) can be de ned as all possible actions aimed at avoiding harm to and/or
safeguarding the environment.
- thus, nudge theory is used to provide positive and gentle persuasion to encourage sustainable behaviour.
- 4 types:
• provision of information.
• changes in the physical environment.
• use of a green default option.
• use of social norms and regular feedback.

green nudge
GO EAST
- easy → people take the path of least resistance.
- attractive → humans are more likely to adopt a behaviour when it captures our attention
- social → human behaviour is hugely in uenced by what others around us are doing.
- timely → people are creatures of habit, so nudges are most e ective at moments of change in people’s lives.

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 process of nudging (6 Ds)
1. discover
• problem identi cation per user.
• usage of experimental psychology to understand individual behaviours and cognitive processes using
controlled experiments.
2. de ne
• problem around community.
• social psychology - in uencing individual choices within a community.
3. develop
• solutions for user in community.
• social and cognitive psychology used to develop potential nudge interventions that are likely to be e ective
for the target audience.
4. distinct
• identify relationship between community problem
• use business and strategy, to understand how addressing the individual problem contributes to solving the
broader community problem in a sustainable and ethical way.
5. demonstrate
• records user behaviour.
• experimental psychology uses rigorous research methods to collect data on how users behave with and
without the nudge to determine its impact on their choices.
6. deliver
• change in community and individual behaviour.
• to see positive changes in individual and broader community, may involve scaling up successful nudges or
re ning unsuccessful ones based on the data collected.

creating a nudge
1. choose your target behaviour
• be speci c
• look for quick wins
• aim for impact
2. understand your context
• consider factors that a ect human behaviours
• identify barriers to behaviour change
• identify drivers of behaviour change
• look for touch points for intervention
• reassess and nalise your target
3. design your nudge
• consider what will be most e ective
• choose a nudge that you can realistically put into action
• involve the right people
• build support
• recognise people who might be negatively a ected
4. test the e ectiveness of your nudge
• trial before a large-scale rollout
• measure outcomes
• compare outcomes
5. re ect and redesign

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