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Nudging explained

By | Behavioural Science

Excerpt: In this post, we will highlight the main concepts from the work of Nobel prize winner Richard Thaler as explained in his bestselling book ‘Nudge.’ We will explain what nudging is all about, how it related to behavioural economics and how you can use it to influence people and help them make better choices.

 

Nudging means

The term nudging seems to be popping up everywhere nowadays. People are being nudged, nudge units are set-up within governments, and nudging in marketing seems to pick up in popularity. But what is nudging all about? What does nudging mean? And from which underlying science does it derive? And especially how does it help people make better choices? Questions that will all be answered in this article. To make your reading life easier, we’ve divided the article into several subsections, which you can jump to easily:

Nudging Theory and Behavioural Economics
Making choices: Choice architecture
Making better and healthy choices
Recap

Nudging theory and Behavioural Economics

Nudging comes from the field of behavioural economics. Although behavioural economics is a science that is studied for almost forty years, it was the book ‘Nudge’ written by Richard H. Thaler and Cass R. Sunstein in 2008 that put nudging on the map. In Nudge, Thaler and Sunstein propose us a new take on decision making, one that takes our humanness and all the inconsistent decisions we make as a given.

nudging

Behavioural economists, as opposed to traditional economists, take human irrationality as a starting point. The basic assumptions of behavioural economics are that people are making choices with:

  • Limited rationality
  • Limited willpower
  • Bounded self-interest

Whereas traditional economics see people as rational beings, who make decisions and do cost/benefit analyses to make a choice that is always in their best interest not letting their emotions cloud their judgments, and always thinking about the future. Behavioural economists overthrow this, as it doesn’t fit the actual behaviour of people. You see people choose mortgages they shouldn’t be taking. You see people overspent on their credit cards. There are stock bubbles. Where’s the rationality in that? We are humans whose decisions are driven by cognitive bias and sub-conscious mental shortcuts, as we explain in this post on Daniel Kahneman whose research laid the foundation of all behavioural economics.

In the book ‘Nudge’ is also explained that being human, we all are susceptible to various biases that can lead us to blunder. Our mistakes make us poorer and less healthy; we often make bad decisions involving education, personal finance, health care, mortgages and credit cards, the family, and even the planet itself.

nudging

The main concept of the book is that if you know how people think, you can design choice environments that make it easier for people to choose what is best for themselves, their families, and their society. It’s all about choice architecture. An important concept that we’ll explain in the next paragraph.

But before we dive deeper into choice architecture, it’s good to know that there lies a very important concept underneath the nudging theory. A concept introduced in the book called Libertarian Paternalism.

  • Libertarian = An individual’s right to choose
  • Paternalism = Do what you can do to improve the welfare of people. Point people in the right direction.

The idea is to apply the techniques of the psychology of decision making and behavioural economics to improve decisions without limited choices. Or easier put, help people make better choices for themselves without restricting their freedom of choice. But by nudging them. Which brings us to the definition of a nudge. As Thaler describes it himself a nudge is any small feature in the environment that attracts our attention and alters our behaviour.

You can nudge for good, or you can nudge for evil. Their book strongly focuses on the first, as the subtitle of their book states: improving decisions about health, wealth, and happiness. And we as a company take a positive take on behavioural psychology ourselves as we strongly live by our mission to unlock the power of behavioural psychology to nudge people into making positive choices in work, life, and play. But how do you achieve this goal? That’s what the next section is all about: how to help people make better and healthy choices.

Making choices: choice architecture

If you want to help people making better decisions, you can achieve this with better choice architecture. But what is a choice architecture? Anyone who designs the environment in which people make choices is a choice architect. There’s choice architecture all around you. Think about menus, curriculums, or store layouts that decide how you walk inside a store (you probably all have been in an Ikea once, there it’s obvious how choice architects have designed the way you cruise the Scandinavian furniture epicenter).

A choice architect makes choices about how to present information or an environment for you.  Although nudging is all about maintaining people’s freedom of choice, choice architecture isn’t neutral. You can compare it to regular architecture; it’s not possible to design regular neutral architecture. Think about the design of the building you’re probably in right now: it’s not possible to have designed that building completely neutral. It had to have doors, stairs, etc.

The same goes for choice architecture, it affects how people make choices, and you have to make a choice yourself on how you present a choice. Richard Thaler often refers to the example of cafeteria meal planning. They found out that the way food was presented to kids in a school cafeteria effected what they would eat for lunch. The first choice presented to them was the prevalent choice. Someone responsible for the cafeteria then has several options:

  • Put the healthy options first, to promote more healthy eating behaviour
  • Put the unhealthy options first, to make kids more fat (could be he/she has a chubby kid and wants other kids to gain weight too, to stop the bullying)
  • Put the most profitable options first, to make the finance director happy
  • Present the food randomly, which is also a choice (confusing, but a choice)

The point is: you always have to make a choice. Choice architecture is not neutral. But some designs are better than others. Why not do it in a way that makes people feel better? That’s what nudging is all about, and which is the theme of the book ‘Nudge’ to help people towards making better choices.

Making better and healthy choices

In the book ‘Nudge’ they explain six principles of good choice architecture that will help people make better and healthy choices:

  • Incentives
    People make better decisions if you provide the right people with the right incentives. This goes beyond monetary and material incentives, but also includes psychological benefits (eg peace of mind).
  • Understand mappings
    A warm plea is made for more disclosure to help people make better decisions. In the book referred to as RECAP: Record, Evaluate, and Compare Alternative Prices. Make it easier for customers to compare what they are truly paying for, and ensure that all hidden fees are exposed.
  • Defaults
    Defaults what happens if we do nothing. Think about your screensaver. Even if you do nothing it will activate. Defaults are sticky, as inertia rules in all humans. We tend to stick to the automatic choice that’s made for us. We for example hardly ever change factory settings on our phone. In Nudge an example is given about joining a retirement savings plan. If the default is to join, most people do join. If you have to actively choose to join only 30% does so.
  • Give feedback
    A good way to help humans improve their decision making is to provide feedback. A good example is the Ambient Orb as developed by Clive Thompson that helped people save energy. Electricity isn’t visible, the ambient orb gives feedback on how well you’re doing by changing colour. Another example of giving feedback is paint that is pink when you apply it, but turns white within an hour. People often paint white ceilings white again, and it’s hard to see if you missed a spot. By making the paint pink, it gives you immediate feedback on what is left to paint.
ambient orb

nudging ambient orb

nudging paint

Magic white paint

  • Expect error
    Expect people to make mistakes and design for it. A very good example of libertarian paternalism that actually saves lives are the ‘look right’ signs in London streets. You can still watch the wrong way, but you’re directed to look the right way.
look right London

nudging look right

  • Structure complex choices
    When there’s an overload on choice, people tend to find ways to simplify them and break them down. Good choice architecture will find ways to make this more evident for people. An example cited was the choice of paint. Instead of using words like “Roasted Sesame Seed” or “Kansas Grain,” consider arranging similar colour themes next to each other. This could help people to choose the right shades and hues.

Recap

You could recap the Nudge theory like this:

  1. Humans are imperfect we can use all the help we can get
  2. It’s possible to improve choices without restricting options
  3. Don’t use bans and mandates, just nudge.

If you want to hear Richard Thaler explain the basic concept of nudging himself, take a look at this video. It’s 18 minutes.

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Kahneman fast and slow thinking explained

By | Behavioural Science

Excerpt: this is a reference page on which you can find the fundamentals of Kahneman’s breakthrough work on human decision making explained. It will address his discovery of fast and slow thinking, and the importance of our unconscious mind in making decisions and influencing behaviour.

 

Kahneman Fast and Slow thinking

On this page, we want to give you a quick guide to Daniel Kahneman’s groundbreaking work about decision making. Maybe you’ve already heard of system 1 and system 2. Or you’ve heard Kahneman was the first psychologist to win the Nobel prize for economics in 2002. Could be you’ve heard about cognitive biases and heuristics. Enough to be intrigued. He is one of our heroes and the godfather of behavioural economics. We’ll give you the highlights of Kahneman’s thinking which he published in his best-selling book ‘Thinking Fast and Slow.’

This isn’t so much an article, but more a reference page that you can consult whenever you want to know more or reread about Kahneman. To make your life a bit easier we have created page sections, so you can easily jump to a particular subject that is of particular interest to you. We also have included links into this page to more detailed information if you want to dive a bit deeper. The page sections:

System 1 and 2
The power of your subconscious mind
Heuristic: definition and meaning
Cognitive bias

System 1 and system 2

The groundbreaking research of Daniel Kahneman showed that our brain has two operating systems, which he called system 1 and system 2. These are the differences between the two systems of our brain:

System 1

  • FAST
  • DEFINING CHARACTERISTICS: unconscious, automatic, effortless
  • WITHOUT self-awareness or control “What you see is all there is.”
  • ROLE: Assesses the situation, delivers updates
  • Makes 97% of all our thinking

System 2

  • SLOW
  • DEFINING CHARACTERISTICS: deliberate and conscious, effortful, controlled mental process, rational thinking
  • WITH self-awareness or control, logical and skeptical
  • ROLE: seeks new/missing information, makes decisions
  • Makes 3% if all our thinking

system 1 and 2 Kahneman

Knowing this you could say that our system 2 is a slave to our system 1. Our system 1 sends suggestions to our system 2, who then turns them into beliefs. If you want to know more about the differences between system 1 and 2, we’ve made a more elaborate overview of the main characteristics of system 1 and 2. If you’d like to hear Daniel Kahneman himself explain the concept of system 1 and 2, this is a short but good video to watch. It is only 6.35 minutes long.

 

The power of your subconscious mind

By discovering not only the two operating systems of our brain but especially the bandwidth of each system was what made this research so significant. It was a breakthrough insight into the lack of reasoning in human decision-making. He showed how the two thought systems arrive at different results even given the same inputs. And foremost he revealed the power of the subconscious mind. Where we all tend to think we’re rational human beings that think about our decisions, and the things we do. Kahneman showed we’re (almost) completely irrational. But that’s a good thing. It’s our survival mechanism.

On average we all have about 35,000 decisions to make each day. These differ in difficulty and importance. It could be you taking a step to your left or right when talking, or deciding to take the stairs or elevator. But they all hit you on a daily basis. If you had to consciously process all these decisions your brain would crash. Your automatic system’s primary task is to protect your deliberate, system 2. It helps you prevent cognitive overload.

There are a few ways that our automatic system lightens the load on our deliberate system. First of all, it takes care of our more familiar tasks by turning them into autopilot routines, also known as habits. But what your system 1 is primarily doing without you even noticing it, is rapidly sifting through information and ideas. Prioritizing whatever seems relevant, and filtering out the rest by taking shortcuts. These shortcuts are also called heuristics. We’ll explain to you all about them in the next section.

For now the most important to remember is that we all have to accept that we are irrational human beings. Almost all of the time. Even if you think you’re not, you’re probably not rationally thinking. Somehow we can accept our irrationality, or at least understand it when it is explained to us. But we keep making the mistake when trying to influence someone, that we forget they are irrational too. We so often try to convince somebody with rational arguments or facts. We love to tell someone about the benefits of our products or services or ideas.

But understand that the decision of the person you’re trying to convince isn’t based on this rational information. It’s based on system 1 shortcuts. What the work of Kahneman shows is that people struggle with statistics or cannot reason probable outcomes of their decisions. A second very important insight from the work of Kahneman is that our decisions are driven by heuristics and biases. We’ll dive deeper into those in the next two sections.

Heuristic: definition and meaning

The shortcuts our system 1 makes Kahneman calls heuristics. The definition of a heuristic, as can be found on Wikipedia, is:

Any approach to problem-solving, learning, or discovery that employs a practical method, not guaranteed to be optimal, perfect, logical, or rational, but instead sufficient for reaching an immediate goal. Where finding an optimal solution is impossible or impractical, heuristic methods can be used to speed up the process of finding a satisfactory solution. Heuristics can be mental shortcuts that ease the cognitive load of making a decision.

If we bring it back to Kahneman’s thinking, a heuristic is simply put the shortcut our automatic (system 1) brain makes to save mental energy of our deliberate (system 2) brain. Our survival mechanism at play. You probably are already familiar with the way we describe the experience of heuristics. We sometimes refer to them as our gut feeling, a guestimate, our common sense or our intuition. We use heuristics for problem-solving that isn’t a routine or a habit. The way we ‘build’ heuristics is by reviewing the information at hand and connecting that information to our experience. Heuristics are strategies derived from previous experiences with similar problems. The most common heuristic is the trial and error heuristic. It is trying to solve a problem based on experience instead of theory.

Another example of a heuristic is the so-called availability heuristic. When making a decision, this heuristic provides us with a mental short-cut that relies on immediate cases that come to a given person’s mind. Or easier put: we value information that springs to mind quickly as being more significant. So, when you have to make a decision, we automatically think about related events or situations. As a result, we might judge that those events are more frequent or probable than others. You have a greater belief in this information. And we tend to overestimate the probability and likelihood of similar things happening in the future.

The problem with heuristics is that sometimes they are wrong. They are nothing more than mental shortcuts that usually involve focusing on one aspect of a complex problem and ignoring others. Therefore heuristics affect our decision-making and subsequently our and also our customer’s behaviour.

Cognitive bias

With all this in mind, you could say that Kahneman has discovered something very interesting about our cognitive abilities as human beings. It’s good to be clear about the meaning of cognition. If we look up the definition in the dictionary it says:

The mental action or process of acquiring knowledge and understanding through thought, experience, and the senses.

What Kahneman discovered is truly paradigm shifting, breakthrough thinking that can even hurt egos. We are far less rational and far less correct in our thinking than we’d like to think or give ourselves credit for. The side-effect of heuristics is that we all suffer from cognitive bias. A cognitive bias refers to a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion. Individuals create their own ‘subjective social reality’ from their perception of the input.

There are a lot of cognitive biases. If you look on Wikipedia, you can find an extensive list of cognitive biases. You can take a look there to or check out an overview we made of the most common cognitive biases. The most important thing to remember is that we all base our decisions on a heuristic. And we all are influenced by our cognitive biases. By being aware of the most common biases, you can anticipate on them.

 

Cognitive bias in recruitment

To give you an example that ties up all the concepts of Kahneman discussed in this post: think about recruitment. If you have to interview a person for a position in your team or organization, the chance of this person is getting hired is proven to be established in the first 10 minutes. What happens? A person steps into the room. Your system I makes a fast, mostly unconscious judgment based on heuristics that lead to certain biases in your judgment. The person is similar to you, your system I instantly like him or her (liking bias). The person wears glasses, your system I thinks he or she is smart (stereotyping bias). It all goes fast.

Your system I has sent these suggestions to your system II without you even noticing it. And your system II turns those into beliefs. The rest of the interview your system II looks for affirmation of the system I suggestions. Our brain simply loves consistency; it lowers our mental stress or cognitive overload. And there you go, you base your final judgment on the two operating systems of your brain helped by heuristics and skewed by cognitive bias. And we do this all day, in all kinds of situations.

 

To sum it up

By understanding Kahneman you can understand human decision-making. And if you understand human-decision making, you can understand human or customer behaviour. You can see how we are predictably irrational (Dan Ariely wrote a beautiful book with this title, which we can highly recommend). We just have to accept our own irrationality. And understand that if we want to convince someone or try to nudge them into certain behaviour, that they are just irrational too.

 

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