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Nudge theory: Thinking like a Nobel Prize winner

Insight

26 October 2017

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Nudge theory: Thinking like a Nobel Prize winner

This month the Nobel Prize in economics was awarded to Richard Thaler for his contributions to behavioural economics through ‘nudge theory’ and, although its application has mainly been in government policy, its use isn’t limited to that field...

What is a nudge?

Simply put, nudges aim to influence the choices we make, but without taking away the power to choose. Nudges are beneficial as we don’t always think and decide logically and consciously, weighing up all of the costs and benefits. Actually, the majority of our decisions are made instinctively and unconsciously.

Therefore, in order to drive a positive change in people’s behaviour, we need to tap in to that instinctive way of thinking.

The UK government has had a lot of practise at this. In fact, they even have a Behavioural Insights Team, also known as the Nudge Unit. One of their most successful pieces of work has been the workplace pension scheme, Nest. This scheme changed the workplace pension to something that you opt out of (as you are now automatically enrolled), rather than something you have to opt into. The thinking behind this is that most people want to put money aside for their retirement but didn’t opt in because setting up a pension is seen as too much time and effort. And it’s worked. Since autoenrollment began in 2012, active membership of private sector pension schemes has jumped from 2.7 million to 7.7 million in 2016. [1]

As mentioned already, nudges aren’t just applicable to behavioural economics. The psychology behind the theory can be applied to any situation where you’re looking to enable change in people and shift behaviour. It’s therefore a valuable piece of psychology to consider when designing a change programme.

How can you create nudges to enable change in your organisation?

Maintaining the freedom of choice is key with nudge theory. Rather than trying to change people’s behaviour through enforcement or punishment, encouragement, choice and enablement is at the centre of driving change.

Creating nudges is not a simple process. It’s important to observe people’s current behaviour before identifying which behaviours need changing. Once you’ve spent time considering that, you’ll be in a position to design your nudges, which largely fit into three categories:

  • Perception nudges – target the underlying perceptions of organisational behaviour to bring about a change in understanding, and therefore, a change in behaviour.

An example – we react differently to the same information depending on how it is framed. Food described as 99% fat free is perceived as more favourable than food described as 1% fat.[2]

  • Motivation nudges – these are needed when you want people to care about a change. One way of doing this is to reference other people’s behaviours to highlight what is acceptable and desirable.

An example – E.ON and First Utility use information collected from smart meters to tell their customers how their energy usage compares to their neighbours. Telling people that they use more energy than their neighbours has been found to motivate people to reduce their usage.[3]

  • Ability and simplicity nudges – are needed when people feel that it is too much effort to carry out a desired behaviour. It is important to enable people to change and make changes simple. The easier it is, the more likely people will carry it out.

An example – we can be deterred from taking action by seemingly small barriers. HMRC improved tax collection rates by making it easier for people to pay. Rather than sending people to a web page that contained the form they needed to complete, they sent them directly to the form. Doing this increased response rates from 19% to 23%.[4]

 So that’s it. To think like a Nobel prize winner and design your own nudges you’ll need to:

  1. Identify any behaviours you need to change
  2. Work out what people’s current behaviour is
  3. Decide which nudges to deploy
  4. Test and evaluate

  

[1] http://www.independent.co.uk/news/business/analysis-and-features/nudge-theory-richard-thaler-meaning-explanation-what-is-it-nobel-economics-prize-winner-2017-a7990461.html

[2] https://www.safalniveshak.com/latticework-mental-models-framing-effect/

[3] http://www.telegraph.co.uk/finance/personalfinance/energy-bills/11491757/Four-ways-your-energy-firm-nudges-you-to-be-more-green.html

[4] http://www.behaviouralinsights.co.uk/wp-content/uploads/2015/07/BIT-Publication-EAST_FA_WEB.pdf

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