Are you being nudged?

A guide to ethical design using behavioural economic principles

For the last 6 months I have been exceptionally quiet, with reason! I have been privileged enough to join an organisation that has encouraged me to learn about two areas I have a huge interest in, and I believe are ultimately interconnected (be warned: my inner nerd is about to be unleashed):

The intersection of experience design and behavioural economics

When looking at experience design, we are interested in understanding people’s needs, desires and motivations to create products and services that add value to the end user. At their best, these experiences change people’s behaviour and ultimately how users live their lives. In the last decade, experience has become a key differentiator many companies rely on as their competitive advantage.

Behaviourial economics (BE) has a relatively short history. Less than 50 years ago there was a gaping hole in economic theory. Economists had based all their economic models on the assumption that human’s are rational beings that make rational decisions. Alas, behaviourists then added psychology to the mix. And things got a little more complex…Behavioural economics studies the psychology behind economic decision making of individuals. It explores why people sometimes make irrational decisions, and why their behaviour does not follow the predictions of economic models. The field has only recently been acknowledged as a main point of reference in the economic space.

So where is the intersection between these 2 worlds? One is generative, iterative and exploratory; the other is data-driven and seemingly scientific.

If we are able to see patterns in seemingly irrational human decision-making, we can design ecosystems, products and services that ‘nudge’ users into making better decisions. Just a disclaimer: The above statement assumes that the decision makers in our world WANT humans to achieve financial health and unconsciously make better decisions. This is not always the case. The foundational behavioural economic principles I’ll share with you shortly can also be used to manipulate and ultimately create more irrational behaviour. It is our responsibility as decision/policy makers in the financial services industry to constantly question whether the products and services we have a hand in creating are there to help or hinder humans.

Thaler, one of the grandfathers of BE (as well as a Nobel prize winner) and the author of ’Nudge’ suggests that behavioural economic principles can only be used ethically when the following is applied:

“Designs should be transparent and never misleading, easy to opt out of, and driven by the strong belief that the behaviour being encouraged will improve the welfare of those being nudged”

Behavioural economics is heavy. I am not going to be able to take you on a guided tour of this theory in one post. I can however, give you an idea of the basics. The main principles explore a number of reasons why people make irrational decisions and how user-centred design can nudge a user back onto the correct path. They are also good concepts to note and keep an eye out for as a consumer. The more you understand, the less likely you are to opt into ‘dark patterns’ or manipulative design.

BE principle: “The default effect”

Behavourial economic studies have shown that the majority of consumers have the tendency to accept the default option given in an interaction. This technique falls into choice architecture, which is the design of choices with the goal of influencing decision making.

A well-known example of this principle is used in the retirement fund space. In some cases you will find that when you join an organisation that offers a retirement plan, they will default your monthly contribution to a specific amount. This is the amount the majority of employees will choose. Generally, the default isn’t the lowest option. This is done intentionally. Not only does BE explain that humans will usually choose the default, another principle highlights that consumers often see their ‘future selves’ as strangers (Hyperbolic discounting). Why would you want to save for a stranger, older you? By defaulting to a higher contribution than the minimum, the plan is encouraging saving for the future.

Another well known example: Countries, such as Austria, that have a default opt-in organ donation policy at time of death, see about 90% of people opt-in to donate their organs. Countries such as the USA that has a default opt-out policy only sees about 15% of people willingly sign up. This is quite a controversial, complicated topic, with supporters on both sides, but simply put, it clearly illustrates the power of the default.

On a more manipulative note: watch out for this tactic with products and services that have add-on features. A good example of this are low cost airline add-on’s. On more than one occasion, while buying an airline ticket, I have noticed that the add-on features, such as extra luggage and travel insurance, are defaulted to opt you in for the extra add-on at a higher cost.

Behavioural economists believe that the default effect happens due to human laziness or the fact that people may perceive the default as the authoritative recommendation.

BE principle: “The power of now”

As I mentioned earlier, humans are wired to live in the present, not plan for the future. Our evolutionary survival hinged on our ability to deal with problems of the here and now, not our ability to stock-pile resources and make plans for some vague distant future. However, this becomes a problem when we are no longer cavemen, living to survive. Today, it is vital that we plan for the long game.

There are various external forces that prey on our natural inclination to live in the ‘here and now’. Nearly every retail store around offers an in-store account that allows customers to buy items they cannot necessarily afford. According to behavioural economics, putting barriers into a journey that you want a customer to think twice about works really well, as the interruption usually wards people off from making a potentially bad, on-the-spot decision. However, in most instances I see organisations removing friction in order to increase the chance that customers make potentially irrational decisions. Case in point — South African banks are offering pre-approved short term loans at ATMs. This means, that necessary friction points which would usually lead to declining follow-through, such as providing documentation or dealing with a bank rep before receiving the loan, are removed. It also means the likelihood of a customer understanding the consequences of taking out credit are reduced. Not good. Not good at all.

In his book ‘Nudge’, Thaler explains that in order to change behaviour for the better in the long term, we need to create very specific incentives in the short term to keep us motivated and in line with our ultimate goal. Sometimes these incentives are tangible: For instance, it is way easier to incentivise someone with a free smoothy for completing a few activities than it is to scare them into action by threatening diabetes 10 years from now. Not all short term rewards have to be monetary or tangible. Wunderlist, a great ‘to-do’ app, makes an incredible sound every time you tick off an item on your list. A friend recently described this as ‘the sound of achievement’. How does achievement sound? Wunderlist has figured it out. It seems like the tiniest way to incentivise someone, but it’s actually effective. Human’s are instinctively goal driven, even when the reward is seemingly non-existent. That is why gamification works!

BE principle: Anchoring

An anchor is a price point that gives you an idea of how much something should cost, as well as its perceived value. Once you have seen that price point, that is what you will compare all options to going forward. For example, if you are looking for a specific vehicle, the first price you are exposed to on your search will always be the one you refer back to when looking at other options.

Interestingly, studies have shown, that even if someone knows that they are being anchored, they cannot help but use that original price point as a comparison going forward. Anchoring also affects how much you are willing to spend on something. You may have a very specific budget you have to stick to for a specified item, however if you see an anchor priced above this, you are more likely to spend more than your budget permits.

One of the most common forms of anchoring retailers use is ‘on sale’ pricing. You may not necessarily need to buy a sale item - but the original price point becomes an anchor and convinces you that you’re ‘saving’ at the discounted price.

Anchoring can also be used to create perceived value. For instance, the price of the first Louise Vuitton product you see sets the standard for all your Louis Vuitton purchases going forward. It also gives you an initial sense of the worth or ‘value’ of the Louis Vuitton brand. Say the first anchor you are exposed to is an R18 000.00 LV purse. Going forward, that is the price point you will compare all other items to in the store when making a ‘rational’ purchase decision. Seems a bit non-sensical - but this is how we rationalise purchases.

A great tip: Always check the sort default on an e-commerce website. If items are sorted from most to least expensive, your anchor is going to be unnecessarily high (sneaky)!

The decoy effect

The outcome of someone’s decision can easily be influenced by the way sales options are presented to them. The decoy effect uses a combination of framing and choice architecture to ‘nudge’ users into making a certain decision.

The famous Economist study is a great example of this principle:

Two subscription options were presented to a group of students:
Option A - Online only subscription — $59
Option B - Print only subscription — $125

Unsurprisingly, only 32% chose B.

Then an extra option was added to the mix:
Option A - Online only subscription — $59
Option B - Print only subscription — $125
Option C - Online and Print — $125

This time, 85% of the students opted for the more expensive option C.

Why? Although it seems useless to offer 2 asymmetrical options at the same price, adding an option reframed the offering and changed the consumers’ reference point. An extra price point has given the participant more to base their decision on. When the extra option is added, suddenly the better alternative seems like option C. In most cases, retailers and marketers add a ‘decoy’ item to the mix to make consumers think that the more expensive option is actually a great deal.

The decoy effect also ties to the principle of loss aversion: Humans make irrational decisions in order to avert loss. We don’t like to lose. When presented with the 2 choices above, the range in the price difference is large enough to justify choosing the cheaper option (hence we win). When option C is added, we have more to lose by picking option B and this changes the whole dynamic.

You may think this is a silly example that you would never fall for. But keep your eyes out for it. Apple, McDonalds and various other retailers currently use this sales strategy.

There are so many interesting BE principles, that I could pretty much go on and on about. But I think you get the point. Humans are not always rational. And if our world is designed in such a way that promotes bad decision making, chances are we will be nudged in the wrong direction. But this news should not worry you. Knowledge is power. The more you understand the psychology behind irrational decision making, the more you are able to pushback on obvious strategies used in the market place to deceive consumers. Educate yourself, pushback on dark design patterns & if you’re a designer or decision maker, make sure you are contributing to positive consumer decision making or at least advocating for the well-being of the consumer whenever you get the chance.