What is a Nudge? How We Make Better Decisions Without Even Noticing

The first time I bumped into the concept of "nudging" was two years ago during a class on Behavioral Economics at University of Trento (Italy). Since then, I have always been fascinated by the power of this idea. Being an undergraduate student in Economics, I often came across utility theory, optimization and assumptions on rationality. The truth is, human beings are not as perfect as the neoclassic theory depicts them. 

As human beings, everyday of our lives involves establishing goals and keeping promises made in an earlier time. Everyday, we have to deal with several choices and take painless or challenging decisions. Everyday, we have to cope with circumstances that most of the time cannot be handled effortlessly. As human beings, we fail. It is impossible for us to consider all the alternatives we have in a peculiar situation, to compare them and to understand the consequences of our actions. We are not what the behavioral economist Thaler and the jurist Sunstein call Econs (better known as Homo Economicus). Behavioral economics considers what traditional economics denies: people are not perfect and most of the time cannot reach an optimal allocation by themselves.

We are humans, and it is precisely for this reason that sometimes, specifically in problematic situations, we would benefit from a little help from someone who knows more than we do. Let’s call this little help “nudge”, a little something that is so powerful that it can influence individuals' behavior in decision making, without removing the people’s freedom of choice. Typically, a nudge aims to improve people’s welfare by steering their choices.

Biases and heuristics are key to understand why nudging practices are so important. Heuristics comprise approaches to problem-solving that involve grounding decisions on mental shortcuts that are often based on past experience. Biases take place when individuals take into account a partial outlook without considering alternative perspectives. If you have never heard of biases and heuristics before, here you are some examples:

• If someone asks us: “When did George Washington become president?” we tend to base our response on the date 1776, because we know with certainty that the correct answer is after this reference year. 1776 is our anchor, and we estimate the true date starting from here. Such common heuristic that has an influence on decision-makers is called anchoring.
• We are also manipulated by samples that soak up first in our minds. For instance, if we hear on the news that an airplane caught fire and nobody survived, we change our mind for a while about the security of planes and probably we will not plan our next vacation in the Maldives. This is named the availability heuristics.

If to these we add inertia, loss aversion, excessive optimism, hard mentality and status quo bias, it is easy to conceive how nudges are meaningful to increase people’s welfare, as when heuristics play their part, people do make mistakes.

A central role in this framework is played by choice architects, which can be policymakers, marketing managers, politicians or any other individual who makes use of different tools in order to influence one’s choices, leveraging on biases and heuristics of human beings.

There are many strategies that choice architects can use to shape choices, but the most impactful among them in order to affect people’s behavior by nudging people is represented by Defaults. Defaults are settings that choice-makers elect when they want to avoid making an active choice. Their aim is to give recommendations, but most of the time they are passively accepted, mainly due to inertia. Consider the discrepancy between the number of organ donors in Germany and in Austria. In Germany no citizen is placed in the donor pool by default, and to become a donor they have to make an active choice. In neighbour Austria, however, the exact opposite happens. The result is that only 12% of Germans have opted to join the donor pool while about 99.98% of Austrians have stayed in the pool. This example shows the power of defaults to influence decisions. Of course, defaults can also affect negative effects on our satisfaction. One example is the kind of default that causes the inadvertent subscription to mailing lists and newsletters.

People usually think that having many alternatives from which to choose is better than having a smaller number of options. However, not always more is better! Many researches have shown that the presence of many options often inhibit the choice and people might decide not to choose. Such paradoxical behavior can be attributed to three main factors: information overload, non-defined preferences and negative emotions.  As a consequence, it is important for a choice architect to decide how many alternatives to present. Staging too many options could be dangerous for inexpert decision-makers, as they could choose a suboptimal alternative because of their impossibility to compare and distinguish all the consequences of each possibility. Psychologist Berry Schwartz, author of the book "The Paradox of Choice"  gave this powerful examples in its 2004 TED Talk:

“All of this choice has two effects, two negative effects on people. One effect, paradoxically, is that it produces paralysis, rather than liberation. With so many options to choose from, people find it very difficult to choose at all. I'll give you one very dramatic example of this: a study that was done of investments in voluntary retirement plans. A colleague of mine got access to investment records from Vanguard, the gigantic mutual-fund company of about a million employees and about 2,000 different workplaces. And what she found is that for every 10 mutual funds the employer offered, rate of participation went down two percent. You offer 50 funds -- 10 percent fewer employees participate than if you only offer five. Why? Because with 50 funds to choose from, it's so damn hard to decide which fund to choose, that you'll just put it off until tomorrow. And then tomorrow, and tomorrow, and tomorrow, and of course tomorrow never comes.” 

These are just some examples of the power exerted by the Nudge Theory, which has already influenced the attitude of many institutions in different countries. For instance, the formation of the British Behavioral Insight team called “Nudge Unit” at the British Cabinet Office can be tied back to nudging.  The topic is finding its way also in corporate culture and business management practices. Application fields of nudging practices include retirement plans, financial markets, savings, recycling, organs donation, tax compliance and fighting obesity, to name a few.  Public and private institutions can take advantage of the limits of human nature and drive people to make better choices, without imposing them top-down, through mechanisms that create benefits for those who are not able to do optimal choices, while reducing substantially the costs for those who really act in their interest.

Sources:

"The Paradox of Choice", Berry Schwartz, TED Talk 2004

Goldstein et al. (2008, December). Tool Kit: nudge your customers toward better choices. Harvard Business Review , p. 99-105.

Thaler , R., & Sunstein, C. (2009). Nudge -  Improving Decisions about Health, Wealth, and Happiness. Yale University Press