Nudge Behavioral Economics

1. An Introduction toAn Introduction to
NUDGENUDGE
Improving Decisions AboutImproving Decisions About
Health,Health, Wealth,Wealth, andand HappinessHappiness
byby Richard H.ThalerRichard H.Thaler && Cass R. SunsteinCass R. Sunstein
ProfessorProfessor Puttu Guru PrasadPuttu Guru Prasad VVITVVIT

2. PGPPGP

3. PGPPGP
Thaler's 'Nudge Theory' Came
From Flies In Men's Urinals

4. An introduction to
Nudge•US economist Thaler wonUS economist Thaler won the
Nobel prizeNobel prize for his
contributions in the field of
behavioural economics,behavioural economics,
showing how human traitshuman traits
affect supposedly rationalrational
markets.

5. What is a nudge?
A nudgenudge is any aspect of the
design of a choicedesign of a choice (“choice(“choice
architecture”)architecture”) that altersalters
people’s behaviorpeople’s behavior in a
predictablepredictable way,
without forbiddingforbidding anything
or actually changingactually changing the
choice at all.at all.

6. Why do we need
nudges?

7. Tyranny of Choice!Tyranny of Choice!

9. The paradox of choice: Too many good
options?

10. TooToo many goodmany good options?options?

11. Decision Paralysis!

12. ONE BUSINESS
HAS FIGURED
OUT THE
SOLUTION!

13. KetchupKetchup
Mixed NutsMixed Nuts
Tomatoes: One ChoiceTomatoes: One Choice

14. One Choice- Mixed NutsOne Choice- Mixed Nuts

15. One Choice- TomatoOne Choice- Tomato
KetchupKetchup

17. Freedom of choice is best,
right?
•Many economistseconomists like to say
that we should present all
options to people, and letlet
them choosethem choose.
• The authors say this makes
the false assumptionfalse assumption that
almost all people, almost all
of the time, make choices
that are in their best interest

18. half- human/half-Vulcanhalf- human/half-Vulcan
SpockSpock
Fictional character in Star TrekFictional character in Star Trek
Star Ship: EnterpriseStar Ship: Enterprise

19. "Star Trek" T V Serial"Star Trek" T V Serial star ship USS EnterpriseUSS Enterprise mission
in space in the 23rd century. Captain James T. KirkCaptain James T. Kirk --
along with half- human/half-Vulcanhalf- human/half-Vulcan science officerscience officer
SpockSpock,

20. They are assuming that wewe are all like SpockSpock.
And like SpockSpock we always only choose the
most logical choicelogical choice.
However, while part of our mind really is likeis like
Spock,Spock,
we all have TWOTWO decision makers in our head whohead who
battlebattle it out for each decision –
our 1.SpockSpock (in scientific terms, our ReflectiveReflective
Cognitive SystemCognitive System) and but also
our 2.HomerHomer (Simpsons)(Simpsons) (Automatic CognitiveAutomatic Cognitive
System).System).

21. The Simpsons is an American animated sitcom created
by Matt Groening for the Fox Broadcasting Company. The
series is a satirical depiction of working-class lifeworking-class life,
epitomized by the Simpson family, which consists
of Homer,Homer, Marge, Bart, Lisa, and Maggie.

22. “Gut” basic feeling or
reaction without a logical
rationale
(Automatic Cognitive
System)
“Mind”
(Reflective Cognitive
System)
vs
.
Homer SimpsonHomer Simpson
Fictional characterFictional character
Star Trek TV SerialStar Trek TV Serial
Fictional characterFictional character
Mr. SpockMr. Spock

23. Here’s a classic example. Spock would
look at this image and see clearly that
the two tabletops are exactly the same
size. But most of us feel pretty sure
that the one on the left is longerleft is longer and
skinnier than the one on the right.

24. 1.There is no such
thing as a nudge‐
less choice.

25. So the conclusion the authors
draw from this is that
SOMETHINGSOMETHING is always
influencinginfluencing your choices.
People are influenced by smallsmall
factorsfactors in the design of an
experience, so even if you
don’t consciously design youryour
choice architecture,choice architecture, it is still
there, affecting the actions of
the choosers.

26. Choice architectureChoice architecture

28. Here’s another example.
In this cafeteria, SpockSpock
would only put food on
his tray that is good for
him, only taking as muchmuch
as he needsas he needs and only
what he can afford.

30. So say you are designing a cafeteria layoutcafeteria layout.
What should you do? Ignore the fact that the
layout affects what people buy?
Randomly rotate the placement of foodsRandomly rotate the placement of foods?
Set it up to sell the most of the expensive
stuff?
Or set it up so people choose more healthypeople choose more healthy
foods?

31. The book encourages that last option with what they
call “libertarian paternalism”“libertarian paternalism” --
Nudging the userNudging the user (through placement, in thisthrough placement, in this
exampleexample) to make the best choice for his well being –
WHAT OUR SPOCK WOULD WANTWHAT OUR SPOCK WOULD WANT, while not
restricting choice at all.
They are not banning junk food, just making it less
likely that someone will choose it on their own.

33. 2.When do we
especially need
nudges?

34. HomerHomer SpockSpock

35. When is our SpockSpock
particularly weakparticularly weak and
our Homer particularlyHomer particularly
strong.strong. This happens
predictably in the
following scenarios:

36. 3.When we see the
benefits now,
costs later.

37. D
DonutDonut

38. •I enjoyenjoy the benefit of this
donut now,donut now,
•I pay the costcost (to my
health, waistline) later.later.
•I enjoyenjoy coming home to a
cool housecool house because my AC
was running all day,
•I pay the costscosts (both bills
and environmental) later.later.

39. 4.When encountering
decisions we make
infrequently.

41. We get betterget better at
everything throughthrough
practice.practice.
If you had to optimize
your investments as
frequently you have tofrequently you have to
drive your car,drive your car, you’d
probably be better at it.

42. 5.When feedback is
not immediate.

44. Think of the impact digital camerasdigital cameras
had on hobby photography, largely
because you can see right away what
your picture looks like.
Making investment decisionsinvestment decisions is
kind of like the old film photography
model.
You rearrange some stuff, and hope
when you go back to see the results
you can remember what you did and
extrapolateextrapolate what worked and what
didn’t.

45. 6.When it is hard to
imagine the possible
outcomes.

47. Imagine ordering at a restaurant
from a menu in a language youlanguage you
do not understanddo not understand.
For many people, this is what it is
like to try to decide betweendecide between
investinginvesting in a “capital“capital
appreciation fund” vs aappreciation fund” vs a
“dynamic dividend fund.”“dynamic dividend fund.”
The language of the choicelanguage of the choice
selectionselection makes it very hard to
imagine what the options really
mean to you.

48. 7.Predicting
Homer’s
Actions

49. So we know that our gut,our gut,
our Homer,our Homer, has more
influence our decisions in
those types of situations.
Fortunately, he’s pretty
predictable,predictable, and
therefore relatively easy
to set up safeguardssafeguards
againstagainst..

50. 8.We have
predictable
mental biases.
1
.

51. 9.Anchoring Bias:
We are heavily
biased by
where we start.

52. Cch
ChicagoChicago

53. MilwaukeeMilwaukee

54. Say I told you, “the
population of Chicago is 3
million.
What is the population of
Milwaukee?”
You might guess
something like 1 million.

55. If I instead told you, “The
population of Green Bay is
100,000.
What is the population of
Milwaukee?”
Most people guessed around
300,000. (The actual
population is around
580,000.)

56. 10.Availability Bias:
We overestimate
the likelihood of
events we can
easily remember.
?

58. We are much more scared of vividvivid
and easily imagined threatsand easily imagined threats (like
plane crashes or tornadoes), than
we are of mundane but much more
common dangers (like asthmaasthma
attacksattacks).
We are 20x more likely to die of
asthma attack than tornado, so if
we were purely rational, we’d be
20x more scared of asthma than
tornadoes.

59. 11. Representativeness Bias:
We sometimes see patterns
where there are none.

60. Based on the beauty pageant
contestants you’ve seen in the media
lately, you might think that ALL ofALL of
them are dumb as a post. (That’sthem are dumb as a post. (That’s
not true.)not true.)

61. Another example: If you wore your
old hatold hat during two gamestwo games which
your team won, you might assume
that it’s a lucky hat,lucky hat, and that if youif you
don’t wear itdon’t wear it during the next game,
your team will losewill lose. (Sorry, there’s
no connection.)

62. 12.Unrealistic
Optimism:
Almost all of us think
we are better than
average.

63. score
here.
they
will
90%
predict

64. In one study the authors
conducted, 90% of their
students predicted they
would finish in the top 2
percentiles in their class.

65. 13.Loss Aversion:
We are happy
when we gain
something, but
twice as
unhappy when
we lose it.

67. It does seem that
someone who wearswears
this shirt might onlythis shirt might only
have been half ashave been half as
workedworked up about
getting the gun as he is
about losing it.
I will give up my Gun, When they pry
it from my cold , dead fingers

68. 14.Status Quo Bias:
We rarely overcome
inertia.

70. This XBox liveXBox live offer from
Microsoft is banking on people’s
personal inertia.inertia.
You get one month of the goldgold
service for $1service for $1, but then every
month after that it bills you
automatically at the full pricefull price.

71. 15.Framing Bias:
“10 out of 100“10 out of 100
die.”die.”vs.
“90 out of 100 are90 out of 100 are
cured.”cured.”

72. July ’08 NBC News/Wall Street
Journal poll:
Who would be the riskier choice for
president?
Who would be the safer choice for
president?
Barack Obama 55%
John McCain 35%
Barack Obama 41%
John McCain 46%

73. Both of these questions were
asked in the same poll atsame poll at
the same time of the samethe same time of the same
peoplepeople..
If the framing of the question
had no effecthad no effect on people, the
responses here should just
mirror each othermirror each other.

74. 16.Priming Bias:16.Priming Bias:
What we see orWhat we see or
hearhear
immediatelyimmediately
before a choicebefore a choice
affects how weaffects how we
behave.behave.

76. When a national survey
included this question, it
increased purchase rates byincreased purchase rates by
35%.35%. Remember the cafe
example from earlier. Just by
seeing the phrase “Have you“Have you
tried the carrot cake”tried the carrot cake” when
logging in to the wireless
network increasesincreases the
likelihood you’ll buy some.

77. 17.We predictably17.We predictably
succumb tosuccumb to
temptation.temptation.

78. Planner
I’m on a
diet.

79. Doer
Mmmmmm,
donut....
One
is ok.
Or
two.
Or
three.

80. The authors talk about the
Spock-HomerSpock-Homer empathyempathy
gap.gap.
Your plannerplanner does not
fully appreciate how
much your behaviors are
altered when you are
under the influence of
temptationtemptation.

81. • CAFETERIA LINE
IMAGE

82. But our HomerHomer is in there, reacting
instinctively to many things, like
which things are at the beginningbeginning
versus the end, and which things
are upup at eye level and which are
belowbelow.
In fact, in one study mentioned in
the book, the researchersresearchers were
able to increaseincrease or decreasedecrease
selectionselection of specific foods by
25%, just by rearrangingrearranging them.

83. AAutopilot

84. You also have a third system...
Mindless choosing:Mindless choosing: your autopilot
just continues doing what it’s used to
- driving the same route, or
continuing to eat when there’scontinuing to eat when there’s
food in front of you.food in front of you.
There was one study mentioned in the
book where participants were given very
stale popcornstale popcorn, either a large baglarge bag or a
small bagsmall bag, and then watched a moviewatched a movie.
Participants with the large bag ate 34%large bag ate 34%
more,more, just because it was there and they
were on autopilot.on autopilot.

85. 18.We18.We
predictablypredictably
follow the herdfollow the herd..

87. We like to conform. This is at the root
of speculativespeculative bubblesbubbles, internetinternet
memes, and fads.memes, and fads.
One phenomenon that drives us to
conform is the “spotlight effect,”“spotlight effect,”
which makes us feel like people are
paying closer attentioncloser attention to us--
especially when we’re not
conforming--than they really are.
(I have a feeling this dude with thedude with the
removerremover thinks everyone is paying
attention to him.)

89. One particularly interesting
ramificationramification of the herdherd behavior is
its effect on popularity lists.
One experiment offered different
groups of people the same set ofsame set of
downloadable mp3smp3s with visible
popularity data.
In the end,In the end, the most popular songs
for each group were not predictable
and were not similar from group to
group, except that they were luckyexcept that they were lucky
and pickedand picked by the first users of the
system.

90. 19.So how can
we help our
Spock defeat our
Homer?

94. This FlyFly is etchedetched on
the urinal as an
aiming incentiveaiming incentive,
and was proven to
reduce spillagespillage by
80%.

95. Another example is
a social program
that gives TeenTeen
momsmoms a dollar a
day every dayevery day that
they are notnot
pregnant.pregnant.

96. A Dollar a Day Not to Get PregnantA Dollar a Day Not to Get Pregnant

97. iNcentives
Understand “mappings”
Defaults
Give Feedback
Expect Error
Structure Complex
Choices

99. MIND MappingsMIND Mappings means
how we translate data
about an option into what it
actually means for us.
Like translating kilowattskilowatts of
energy into dollarsdollars on the
electricity bill, or translating
megapixelsmegapixels to maximum
print sizeprint size.

100. iNcentives
Understand
“mappings”
Defaults
Give Feedback
Expect Error
Structure Complex
Choices

102. Not new to us - defaults aredefaults are
POWERFULPOWERFUL because of the
Status QuoStatus Quo bias.
You can default to opt-in,opt-in,
opt-out,opt-out, or mandatorymandatory
choicechoice (which is like having
yes/no radio buttons with
nothing selected).

103. 20.Reca20.Reca
pp

104. NudgesNudges are about
designing choicesdesigning choices to
try to help peopletry to help people
make choices more
with their rationalrational
mind (their inner
SpockSpock) and less with
their gut.gut.( their inner( their inner
HomerHomer))

105. There are certain situations:
Benefits nowBenefits now, cost latercost later;
decisions we have to
make infrequently, places
where the feedbackfeedback isn’t
immediate or the outcome
is hard to imagineimagine, where
the HomerHomer in us has the
upper hand,

106. and we can use our
knowledge of ourknowledge of our
predictable psychologypredictable psychology in
these ways mentioned:
1.Incentives,1.Incentives,
2.2.UnderstandingUnderstanding
3.Mindmappingsmappings,
4.Defaults,4.Defaults,
5.5.Giving feedbackGiving feedback, and
6.Structuring complex choices6.Structuring complex choices
to nudge our Spocknudge our Spock to rebalancerebalance the
power.

107. Thank youThank you