The Use Of Nudge Theory To Influence Consumers

NUDGE THEORY INTRODUCTION

How many times have you actually bothered to untick the option of adding insurance to your air tickets while booking your flight? And how many times have you selected the option of adding insurance to the air tickets yourself? According to a recent study, the number of people opting for insurance for their air tickets has increased by more than twice from the time it was being selected as a default option. It was just a slight “nudge” which made the difference between the two scenarios. What exactly is a nudge? A Nudge is a gentle indication to a consumer which pushes them to choose a particular option. They are gentle and easy to execute, and they cannot block off all the other options. Therefore, the goal is to promote a consumer to take the option you want him to take and get the traffic moving in the right direction, but at the same time, it ensures that the other options are not eliminated altogether. Mainstream economics has been using a number of assumptions which serve as a benchmark to predict behaviour. These are the notions that have been brainstormed into our minds since our childhood.

However, we are far away from the reality when we study these concepts. This is because these mainstream economic concepts assume people to be an economic man with the notion that each one of us fits within the textbook picture of human beings offered by economists. Thus, this economic man always takes actions to maximise his long-term best interest, has stable preferences and is a consistent rational actor. However, the truth is that these traditional economic incentives prove ineffective. Behavioural economics is different from traditional neoclassical economics as it focuses on the limitations of human rationality. It identifies humans as homo sapiens and not homo economicus. This branch of economics is heavily based and informed by literature in psychology and neuroscience.

Nudging In Today’s World

Prof. Richard Thaler believed that nuanced changes in the “choice architecture” of the society can result in desired changes in the behaviour of humans. This “nudge theory” has been welcomed by a number of politicians and policy-making bodies, especially in the west. Thus, nudging emerged as an avant-garde appetite for low-cost solutions for the policy-making bodies. It offered an easy way out to reform the society without taking the help of large spending programmes. This theory was embraced not only by the countries but also by the international bodies such as the UN and World Bank. In fact, the nudge theory has found great application in politics as well. It is being used in such a way that it exploits human weaknesses for human benefit. To prove my point, in almost all the offices, pensions have become an opt-out instead of an opt-in which exploits the human tendency of inertia in order to reach a desirable end.

The recent policy implemented in the country which ensures that all Cigarette packets mention that Smoking is Injurious to Health is nothing but a nudge as well to ensure that the consumers take steps for the benefit of the society. The nudge theory is not only limited to the policy-making bodies but has gone rampant in the marketplace as well. In fact, the “To Do Reminder” applications on our phone is nothing but a nudge. How many times do we find an Uber message on our phone encouraging us to use the UberPool cars instead of booking a private one for ourselves? Well, this again is a nudge which is being used by the businesses to not only protect the environment but at the same time sometimes to satisfy their profitability needs as well. Thus, in the above cases, no one is being deprived of freedom. They still have the liberty to decide for themselves.

However, they are being influenced to opt for a choice that is desirable for our society. Let us now discuss how humans deviate from rationality and how they are guided by ideas of behavioural economics (nudge): Time-Inconsistent Preferences A number of times we see that the most optimal choice we make at one point of time no longer remains an optimal choice at another point in time. Thus our “rationality” is not constant and differs from time to time depending on the situation. To cite an example with which each one of us can relate, let us consider this situation: When a Mathematics teacher was deciding upon the date of the examination, she had put forward two options in front of the students. Option1 was to sit for the examination after 25 days without sacrificing a chocolate. The next was to sit for the examination after 26 days but whoever chose this option would have to pay a fine of 2 chocolates. It was seen that most of the students opted for Option 1 in the above case as they were not willing to sacrifice a couple of chocolates for an extension of a day. However, when the same was offered to the students a day before the examination, most of them were ready to sacrifice their chocolates for a day’s extension. This example questions the rationality of “economic humans” while making decisions.

A study of human behaviour shows that people prefer immediate gratification over long-term welfare. This leads to preference reversal, a very famous example of which is hyperbolic discounting. People are being offered a nudge by being asked to buy now and pay later. We have seen a number of offers being introduced by various FMCG companies wherein the consumers are allowed to pay for the product a month after the purchase date. This is nothing but a nudge which pushes the consumer to consume that commodity and satisfy his immediate need at the cost of his future welfare. In fact, it has been seen that this has increased the sales of mobile phone companies by a huge margin. Status Quo Bias Status quo bias is very evidently seen in a number of cases in our lives when people prefer things to stay the same due to inertia and lack of initiative. Even when a negligible transition cost is involved and the decision is very important, a number of times people tend to stick to the general norm. In fact, the status quo bias is believed to be one of the reasons due to which Article 377 had been in our Constitution for so many decades. This is how the graph of Status Quo Bias looks: In the above graph, we can clearly see the Negative X increases at an increasing rate whereas the Positive X increases at a decreasing rate.

As a result of this, the negative X value always surpasses that of the Positive X value. This is why we prefer to stay with our present status quo. Now, let us link this to the scrapping of Article 377 from our Constitution. Though there was always a need to bring about this change in policy, one of the primary reasons why this did not happen was because of our Status Quo Bias and inertia. It was only after the recent upsurge of the people against this policy that there was an emergence of a Delta Y in the value of Positive X and the Supreme Court finally had to do away with this Article. This is because until now, the positive value of X was less than it’s negative value. One of the nudges used by the restaurants with respect to this inertia of the consumers is placing the mineral water bottle on the table even before the consumer asks for it. It was seen that the consumers in the budget restaurants mostly asked for house water and a very few of them actually asked the waiters to bring them a bottle of mineral water. However, when the restaurants started placing the bottles of mineral water on the table before the consumers asked for it, a large number of consumers (due to the status quo bias and inertia) consumed the mineral water instead of going out of the way and asking the waiter to replace it with regular drinking water.

Framing effects

Framing effect is a type of cognitive bias wherein the decision a person takes is largely affected by the way the information is presented. It is, therefore, a representation of the same information in alternative ways such that it significantly alters the ultimate decision of the consumer. This is because, in the end, it is not what you say but how you say. If you communicate a message in different ways, people receive it in different ways. Let us take an example to understand this concept in a better manner. A library was being shut down in the United States of America in the late 20th century. A few citizens wondered how they could stop that library from being shut down. They came up with an idea of organising a book burning day. They decided to burn all the books in the library on that day in order to mark the end. However, suddenly people outraged against this act and started coming out on the streets and saying that this should not be done keeping in mind the welfare of the society. Therefore, this group of citizens manipulated the fact that people had a hostile reaction towards the burning of books and they framed the situation as if shutting down the library was the same as burning the books. Therefore, grossing or phrasing information mildly is a popular type of nudge which is being largely used by a number of sellers today. In fact, it is considered to be a very important part of the marketing activities used by the firms today.

Bounded Rationality

This is a concept which says that when an individual makes a decision, his/her rationality is limited by the tractability of the decision problem, the cognitive limitations of their minds and the finite amount of time they have for the decision to be made.

Thus, according to this concept, any individual who intends to make rational choices is bound by making satisficing, instead of optimal, choices in complex situations. To give a very small example of how humans deviate from rationality, we see that when a consumer goes to a supermarket and decides to buy a packet of chips, he buys the best packet he is aware of. However, due to his bounded knowledge, he might be missing out on a better quality of chips which is available at an even lower cost. A nudge can be used in such cases to ensure that the consumer makes the right choice. For example, the hospitals have started providing the patients with simple checklists and brochures with concise treatment information in order to avoid irrational decisions taken by the patients which can be detrimental to their health. The objective of this step is to reduce the complicated treatment information to simple checklists keeping in mind the bounded rationality of homo sapiens.

Nudge Theory In India

The Nudge Theory has gained immense popularity across the globe and is being used by a number of policymakers. India also has a Nudge Unit which was set up under NITI AAYOG. This unit has been working on a number of policies in order to improve the current status of Indian societies which includes increasing the turnout during elections, efficient cleanliness drive and better compliance with traffic regulations. This step has highly been acclaimed by the citizens and is considered to be a step ahead which could bring about major changes in the effectiveness of the policies taken out by the Government of India. The Nudge Theory becomes of extreme importance while implementing policies in a country like India. This is because of the diversity in the country and the age-old cultural and social mentality which influences the actions of a vast majority of the citizens. The decision making of the people, as a result, deviates far from rationality. Thus, the policies should take into account the implications of social context prevalent in the country. The Swacch Bharat Abhiyan launched by our Prime Minister Modi is considered to be a step majorly driven by the concept of Nudge theory. The Government had been building a number of toilets in rural areas, however, they were not being used much by the people due to the lack of cleanliness awareness among the people. Thus, Swacch Bharat Abhiyan not only aimed at the cleanliness of our country but at the same time promoted the use of toilets and discouraged open defecation by the people in the rural areas.

CONCLUSION

However, nudges can be good or bad. According to Professor Richard Thaler, three principles should guide the use of Nudge. Firstly, there should be a certain degree of transparency in order to ensure that this nudge is not misleading. There should also be a fair and easy opt out of the nudge. This is because the objective of a nudge is to encourage a particular choice, but at the same time give the consumers freedom of choice. Moreover, Professor Thaler believes that his theory should only be used for the welfare of the society which is one of the main reasons why he named his book, “ Nudge: Improving Decisions about Health, Wealth and Happiness. ” The nudge theory has also faced a lot of criticism as it psychologically manipulates the voters instead of providing them with proper education about choices. Moreover, nudge does not turn out to be a miracle cure for all the challenges faced by the Governments and the businesses. This is because some problems are too big to be cured with a “slight push. ” Some of them need a push or a shove.