Nudge(on the architecture of choices)

MAURO MEANTI

HAWASSA UNIVERSITY, MARCH 2105

Based on the work of R.H Thaler and C.R. Sunstein : «Nudge»

Agenda Introducing the concept

Libertarian Paternalism

Human Biases and

Blunders

How do we work? Two

cognitive systems

Rules of Thumb

Overconfidence

Status Quo bias

Framing

Humans make mistakes

Self control strategies

Conformity strategies

When to Nudge

How to Nudge

Defaults

Expect Error

Give feedback

Understand mappings

Structure complex choices

Incentives

Examples

Caroline and the school cafeteria system

How do you present the

food?

Rearranging the way food is

presented changes the

consumption of a category by

25%

How do you use this power?

Make the children best off

Use a random criteria

Try to not to influence the choices

Maximise suppliers who bribe you

Maximise profits

Caroline is a choice architect

Organize the context in which

people make decisons

Who design the ballots

A doctor who describes alternatives

A parent describing educational choices

to her children

A real architect – designing spaces

Restroom designers

Libertarian Paternalism

Libertarian

Freedom of choice should never

be in doubt

Architects should preserve or

increment the number of choices

Paternalism

Architects can influence people’s

behaviors to make their lives

better (as judged by people

themselves)

Nudge

Alters people behavior in a

predictable way

Does not limit options

Does not significantly change the

economic incentives

The Homo Ecomomicus objections

Everyone will make the right

decisions for himself

In abstract, yes

Concretely, humans are

predictably wrong:

Planning fallacy

Status quo bias

Perception issues

The more the choices, the better

Choices are better than “one size fits all”

But people not always can make the right

choice (as in “better for themselves”)

Lack of experience

Lack of information

Lack of feedback

Influencing people choices is unavoidable

Influencing choices does not equal coercion

Freedom of choice is the ultimate safeguard

Biases and Blunders

Two cognitive systems

Automatic (Impulsive)

Uncontrolled

Effortless

Associative

Fast

Unconscious

Skilled

Reflective

Controlled

Effortful

Deductive

Slow

Self-aware

Rule-following

Are you awake?

A coffee and a book cost 1100 Birr in total.

The book cost 1000 Birr more than the coffee.

How much does the coffee cost?

If it takes 5 machines 5 minutes to make 5 coffee, how long would it

take 100 machines to make 100 coffee?

Rules of thumb

Heuristics

Anchoring

Availability

Representativeness

Rules of thumb: Anchoring

Heuristics

Anchoring

Availability

Representativeness

Anchoring

How many habitants in Awasa

Write down the 3 last digits of your phone number.

Now answer: When did Attila invaded Europe?

Answer two questions:

How happy are you?

Do you have a boy(girl)friend?

Anchors are nudges!

Suggest a starting point for people thought process: the more you ask for, the more

you tend to get

Give an offer of either: $100, $250, $1000, $5000

Give an offer of either: $50, $75, $100, $150

Rules of thumb: Availability

Heuristics

Anchoring

Availability

Representativeness

Availability

Availability of news:

homicides vs suicides

Availability of experience:

people buy flood insurances AFTER the flood

happens

Use availability to nudge!

Rules of thumb: Representativeness

Heuristics

Anchoring

Availability

Representativeness

Representativeness

When people are asked:

“ how likely A belongs to category B”

they answer based on their stereotype of B

Linda is 30, single, smart. She has a major in

statistics. As a student she was very

concerned with issues of discrimination and

social justice.

Ranks, in order of probability, amongst this

futures for Linda:

Bank teller

Bank teller active in the feminist movement

Other

London bombing mystery

Optimism and Overconfidence

Know yourself!

In which decile you expect to fall in

this class?

94% of professors believe they are above average www2.nea.org/he/heta06/iamages/2006pg7.pdf

At marriage, people gives themselves

~0% chances of divorcing

May make people fail sensible

preventive steps

Gains vs Losses

People are loss averse

Heads you win $X

Tail you lose $100

How much does X have to be for

you to take a bet?

Loss aversion produce inertia,

people want to stick to what they

have, even if a change would be

in their interest

Status quo Bias

Stick with the existing

Why students always sits the same place?

Half the participants a pension fund plan never change their asset allocation.

This is generated by lack of attention

This is why “free for three months” marketing promotions work

If renewal is automatic and cancelation requires an action…. Likelihood of renewal is much higher

The power of the default

Loss aversion + lack of attention imply that

the “default” option attracts a very high

market share

In addition, often the default option may be

seen as “endorsed” by the default setter

Framing

Formulation matters

Of 100 patients who have this

operation, 90 are alive after 5

years

Of 100 patients who have this

operation, 10 are dead after 5

years

The Automatic System gets VERY

scared (this also works with the

doctors themselves)

Framing is a nudge

(a) if you use energy conservation

methods, you will save $350

(b) if you don’t use energy conservation,

you will lose $350

Framing, exploited together with the loss

aversion, may be a powerful nudge

Humans are fallible

People choices are influenced in ways that are not

explained by the standard economic framework

People can be nudged

Rules of thumbs

Overconfidence

Loss aversion

Status quo bias

Framing

More human fallabilities

Temptation

You can be in two

states: cold and hot

Something is “tempting”

if we consume more of

it when we are hot vs

when we are cold

Sometimes is good,

often gives us troubles

There is a “hot-cold

empathy gap” since

we underestimate the

effect of arousal

Mindless choosing

The popcorn experiment

The experiment of tomato soup

Large packages are a form of choice architecture, they work as nudges

Lack of self-control and mindless choosing combined spell BIG issues. Obesity, smoking , alcoholism all derive from this combination

Same for economic matters – people lack of saving

Procrastination

We have all said “ I will do

it tomorrow”

Social Influences: we like to conform

Information and Peer Pressure

The Asch experiment:

You are given a very easy task

Everybody around you gives what seem to be the wrong answer

What will you say?

If the task is difficult, the conformity effect increases

Answers also become very sensitive to “confidently

expressed” nudges

Collective conservativism:

The tendency of groups to stick to established patterns even if new needs arise

Pluralistic ignorance:

Following a tradition not because we like it but merely because we think that most other people like it

The spotlight effect

People believe that others closely

pay attention to them

So they conform to what they think

people expect

Does conformity affect choices?

Socially

Music downloads

Elections

Instrumental usage of polls

US primaries

Economically

All the bubbles of the word are

driven by conformity thinking

Helped by media

Helped by speculators

How to use conformity for nudging

Tax Compliance (Minnesota)

4 different groups were told 4 different

stories:

1. Your taxes will go to fund good things

(education…)

2. You will be jailed if you do not pay

taxes

3. We will help you to file you tax return if

you are not sure how to do

4. More than 90% of your state co-citizens

already paid their taxes

Guess which one had an impact?

Energy Saving (California)

Tell users how much energy they consume against the average in their neighborhood

Above-average users decreased significantly but….

Below-average users increased significantly

Then they added a emotional nudge to the bill

And that corrected the negative impact

When to nudge

The Golden Rule:

Offer nudges that are most likely to help

and least likely to inflict harm

People will need nudges for decisions

that are difficult and rare, for which they

do not get prompt feedback and when is

difficult to translate the terms in

something easy to understand

Categories of difficult choices Benefit now – cost later

Smoking, drinking, eating chocolate cookies

Pay the price now, benefit later

Diet, exercise, brush teeth

Save money for retirement

Degree of difficulty

Pick a mortgage, chose an insurance

Frequency

Choose a college, find a spouse, buy a house

Feedback

You only get feedback on the options you select, not on the one you reject

Translating choices into experience

Easy for choosing an ice-cream or a movie

Hard for a retirement fund: too many variables involved

How to nudge?

First, a quick test

YELLOW

BLUE

ORANGE

PINK

GREEN

BLACK

YELLOW

BLUE

ORANGE

PINK

GREEN

BLACK

Automatic beats Reflective

GOSTOP

So, … how to nudge?

6 Principles

Defaults

Expect Error

Give feedback

Understand mappings

Structure complex choices

Incentives

Defaults: the path of least resistance

Inertia+Status quo bias

We expect a large number of people

to end up with the “do nothing”

option

If the default option comes with a

suggestion that is “normal” or

“recommended” will drive more

people to it

Examples and impact

Automatic renewal for magazine subscriptions

Downloading/installing software

Data usage consensus

Defaults are (almost) unavoidable

There is always the choice to force an

option to be chosen (required choice)

When choice is complicated and

difficult, this is not the right approach

Expect Error (and accommodate it)

Provide error tolerance

Insert your card / ticket

Automobiles

Gas tank cap

Headlights

Help avoiding errors

Take your pills

Attach your file

Right fuel?

Look to the right!

Give feedback

Tell people when they are

doing well

Digital Cameras fake “shutter

click”

Don’t overdo with warnings

Repeated and continuous

warnings tend to be ignored

Get creative with feedback

Painting a ceiling: the magic pink

paint that becomes white when

dry

Understand Mapping (1)

Mapping and Ice Cream

10 different fruit flavors

All made with fruit and water

Easy to map the relation between

choice and your experience

If you do not know how lychee

tastes, ask for a sample!

Mapping a disease treatment

Doctor diagnosis prostate cancer

Gives your three options

Surgery

Radiation

Watchful watching

Extremely difficult to map the relation

between the choice and the experience

Doctor may have a bias

Normally you are asked to chose in a split

second

Understand Mapping (2)

Other complex mapping

decisions

How many megapixels should my

camera have

Buy a cellular phone plan

Choose a credit card, or a

mortgage, or an insurance

How to make the mapping easier

Translate the megapixel in “largest print size”

Regulate complex plans via a RECAP policy

RECAP: Record, Evaluate, Compare Alternative Prices

Standardize by law all components of a complex decision (NOT THEIR COST)

Make them available in a spreadsheet format

Issue to each customer a yearly recap of her usage according to that format

That would make extremely easy to compare what the impact of choosing a different plan would be for any user

Structure Complex Choices

Strategies for choices Few, well-understood alternatives: chose

between three offices

Examine all attributes of each

Make trade-off when necessary

“Compensatory” strategy

Many alternatives: chose an apartment in a big city

First, do an elimination process

Second, move to a compensatory strategy

Elimination/simplification processes can be suboptimal, but they are necessary

A good choice architecture must provide a good structure for choice

Examples Small ice-cream cart

Order does not matter if you offer 3 flavors

Ice-cream shop

If you offer 20, you group: fruit, creams, chocolats

Paint store

Catalogs of thousand hues

Alphabetical?

Use the paint wheel

Easier if you see them

From big data: collaborative filtering

Use the judgment of people “similar to you” to help picking books/movies….

But sometimes an architect may want to nudge people in a different direction

Incentives

The Economy IS important

Four key questions per each

choice architecture:

Who uses it

Who choses

Who pays

Who profits

Conflicts of interest may affect the

way the market works

Friends out to lunch

Healthcare systems

Salience: make the incentive visible

Does the choosers notice the incentives they

faces?

Buying a car (or not)

People tend to compare only cost of operating

the car and cost of public transportation

They forget the opportunity cost of putting money

into the purchase

Saving energy:

A) increase the energy bill

B) show on the thermostat how much more $ you

are spending

6 principles

Defaults

Expect Error

Give feedback

Understand mappings

Structure complex

choices

Incentives

Using those nudges,

choice architects can

improve the outcomes

for their people

Example: donating organsExplicit vs Implicit Consent (Johnson/Goldstein research)

3 samples of population were asked the same question: do you want to be a donor or not

The first sample had a default of not being a donor, the second to be a donor, the third had no default

Changing and choosing was extremely simple, one click on a box

When participants had to “opt in”, the percentual of donors was 41%

When participants had top “opt out” the percentual of donors was 82%

When participants were forced to chose, the percentual of donors was 79%

The concrete steps needed fails allow the “status quo” resistance to prevail. Even if the step was a simple click

Germany (opt-in) has 12% of donors, Austria (opt opt-out) has 99% donors

Mandated choice

Some states introduced the concept of mandated

choice. If paired with exploiting the “social norm”

nudge it may prove very impactful

A program in the Philippines

For six months, the “would-be” non-smoker opens a bank account

and puts on it every month the money she normally spend in

cigarettes. The government matches part of the money

If she stops putting the money, the money in the deposit goes to

charity

After 6 months, she passes a medical test. If she is nicotine-free, she

gets her money back (plus the incentive), otherwise it goes to

charity

This program exploits the incentive nudge and the “aversion to

lose” fallacy

Example: Quit Smoking

The Globe

Is a globe wirelessly connected to

the home energy meter.

You keep it in the living room

It becomes red when the energy

consumption is above the

average

Can save up to 25% of the energy

bill

Is based on the feedback nudge

Energy Reports

Don’t only show your consumption but

compares it with the consumption of

the most efficient neighbors

Make the cost of the inefficiency

evident:

“THIS MONTH IT COSTS YOU $128”

Provides practical advice on how to

match the efficient neighbors

Uses social compliance, feedback

and loss-aversion

Examples: saving energy

Summing up

Small features of social situations can have massive effects

on people behaviors

Nudges are everywhere, even if we do not see them

Choice Architecture (both good an bad) is pervasive and

unavoidable

Choice Architects can preserve freedom of choice while

also nudging people in directions that will improve their lives