Nudge
I absolutely loved this book: Nudge by Thaler and Sunstein. The book has a very active website as well and a great blog.
The authors make (and build on) the following claims:
- Seemingly small features of social situations can have a massive effect on people’s behaviors — Everything matters
- Nudges are everywhere
- Libertarian Paternalism is not an oxymoron!
The sheer complexity of modern life + the pace of technological and global change => Rigid mandates, dogmatic laissez-faire and “just maximize choices” mantras are undermined.
Here are some of my notes/take-ways from the book — sometimes even shamelessly verbatim and some other sources (in no special order):
[Note that the book is a must read and discusses lots of these concepts and beyond in a much more detailed and coherent manner — consider the following just my ramblings to myself of the first few chapters!]
Choice Architect has the responsibility for organizing the context in which people/choosers make decisions.
Corollary: There is no such thing as a neutral design. Everything matters!
The authors develop the concept of Libertarian Paternalism based on some of the above concepts.
Econs are capable of making unbiased forecasts (no systematic bias), not necessarily make perfect forecasts (This is the rationality argument).
Humans on the other hand are slaves to their biases (Prospect theory). Status quo bias (inertia) is ubiquitous.
Various Heuristics (Rules of thumb) that can lead to systematic biases:
- Anchoring and insufficient adjustment
- Anchoring can even affect your thinking (”Dating heuristic”)
- Availability bias (Vividness, Recency and Salience). Explains:
- Risk related behavior such as over buying of insurance for natural disasters is greatly influenced by recent events
- Representativeness
- Conjunction bias (It is more likely for Linda to be a bank teller rather than a bank teller and a feminist!)
- Misperception of Chance (Myth of the “hot hand”)
- Overconfidence bias
- Loss Aversion, which in turn leads to
- Status Quo bias (Also, due to lack of attention, the “yeah, whatever” heuristic) — Never underestimate the power of inertia
- Endowment effect
- All this implies that “Defaults are really sticky“
- In addition, usually cost aversion < loss aversion
- Framing
- Effects are framing are pervasive (even experts are susceptible) and robust (learning does not help!)
- Concreteness bias — people take the frame as given, thus choices partly depend on the way in which problems are stated.
- Inter-temporal choices (hyperbolic discounting) and dynamic inconsistencies
- Mindless choosing (such as eating!)
- Context influences choice
- Temptation
- To improve the behavior, make losses salient & vivid.
- Mindless choosing (such as eating!)
- Mental accounting
- Topical
- “House” money
- Fallacy of a single factor model
- The tendency to think (usually after the fact) that an outcome was entirely predictable, when in fact it could have been a mere coincidence — misperception of chance.
Nudging Strategies:
- Framing (losses hurt more!)
- Make losses more salient
- Vividness and Salience — Always
- Make the problem salient
- Bring it closer to home!
- Social nudge [I totally loved the chapter on “following the herd” in the book, where the author develops the concept of social nudge]
- Confirming groups — the power of social influences
- Collective conservatism: The tendency of groups to stick to older more established patterns even as circumstances change
- Pluralistic ignorance: We may follow a practice not because we like it, but merely because we think that most people like it!
- Spotlight effect: The belief that others are closely paying attention to what you are doing!
- Remember: Choice architects can use social nudge to shift behaviors.
- Use social norms to nudge people (the group “average” exerts a significant influence)
- Escalation of commitment (make them signal to others about their commitment)
- People underestimate the importance of exogenous variables on their (or others) successes.
- People overestimate the effect of exogenous variables on their failures!
- Use Positive injunctive norms (rather than negative informational ones) to nudge people
- Priming (Using Recency bias)
- Mere-measurement effect can be a nudge
- Asking to recall something => nudge
- Channel factors: Facilitating certain behavior by removing some obstacles or by subtle escalation of commitment
When to nudge:
- Temporal separation between benefits (Now) and costs (Later)
- Difficult decisions
- Infrequent decisions
- Lack of feedback (Long term processes)
- Unclear mapping between gains/losses and actions
For irrational customers to be protected there has to be competition in the marketplace. (Smart by “Shel Silverstein” )
Choice Architecture:
- N — iNcentives
- Who pays/buys
- Who chooses
- Who uses
- Who profits
- Increase salience of the costs and welfare for choosers
- U — Understand mappings between choice and welfare
- D — Defaults are
- ubiquitous
- powerful
- Required choice or mandated choice is not always possible or needed or even desired for by the customers!
- G — Give feedback
- E — Expect error (Use a forcing function to avoid a post completion error)
- S — Structure complex choices
Tags: Behavioral