Some Thoughts on Nudge Theory

PSI has been in the business of behavioral change ever since its inception, leveraging identified determinants of behavior to influence behavioral outcomes in our target audience. Hence why we entered the field of social marketing, because it taps into behavioral change theory. And it works.

More recently, there has been a dialogue in academia around “nudge theory” and behavioral economics, which is basically a new label for what PSI realized over 40 years ago. But since we rarely engage on these topics of “heuristics” or “nudge marketing,” likely because we feel we understand them completely already, I wanted to share a few notable observations on the discussions being had around nudge marketing, since I think the discussion has evolved to a point where we can start applying some of the lessons learned – particularly when it comes to influencing shoppers behavior.

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Origins of Nudge Theory:

So everyone is on the same page, nudge theory is all about encouraging individuals to make better choices (as understood in the context of public health, economic well being, etc.). The craze started around 2008, when former Obama administration regulatory affairs administrator Cass R. Sunstein and the University of Chicago professor Richard H. Thaler published their book “Nudge: Improving Decisions about Health, Wealth, and Happiness,” which was a popularization of the work done by Nobel Prize-winning psychologists Daniel Kahneman and Amos Tversky back in the 1970s (around the same time PSI adopted this thinking).

Thaler-Sunstein think of nudge theory as follows:

“…A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not…”

So you can see that nudge theory is not about enforcement but about persuasion. It’s about creating an environment, or offering subtle queues, that encourages individuals to make better decisions.

And if you think about it, that’s what social marketing is – the science of persuasion. For a fun video on the science of persuasion, check out the below from Dr. Robert Cialdini, Professor of Marketing and Psychology at Arizona State University:

In the video, you will see that the author writes about 6 key universal shortcuts that guide people’s behavior and that can be leveraged to influence the behavior of others:

  • Reciprocity – social obligation to give when you receive
  • Scarcity – people want more of what they can have less of
  • Authority – people follow advice of experts
  • Consistency – people usually stick to things after a small commitment has been made
  • Liking – people prefer to say yes to those people they like.
  • Consensus – people look to the action and behavior of others to determine their own.

Now these fundamental channels for persuasion can easily be used by marketers to influence people’s decisions, and they have been for years. And the video does a good job of highlighting some of these campaigns, such as the one done for the British Airways Concord Flight and how waiters can increase their tips.

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Nudge Theory and Behavioral Economics

You may ask why the need for nudging at all. That is, couldn’t we simply tell people what they need to know and hope that they make a rational decision with the information at hand? This is something that governments, donors, and even a few of our own PSI staff often suggest. But the problem is that behavioral economics shows that people are not rational when it comes to choices. If they were, we could simply state the facts and expect people to make better decisions.

The problem is that making decisions sucks. It’s frustrating for people and actually causes physical discomfort. So when it comes down to making decisions, they need to rely on shortcuts or quick tricks to help them make decisions quickly. This also applies to shopping, where we have to engage in an economic trade and could potentially lose out. Daniel McFadden, a Professor of Economics at Berkeley who recently published “The New Science of Pleasure,” (view it here) puts it this way:

“Trade is a contest, with a chance of coming out on the short end. Animals in “fight or flee” situations often find it safer to flee. Similarly, people in situations where trade is possible, or even promising, may find it safer to turn away. It takes trust to trade. McDonald’s is successful because it has created a brand people trust – they know what to expect. A “30-day free trial” or “satisfaction or your money back” or “bring us a better price and we will refund the difference” are offers by merchants intended to promote the idea that they can be trusted, and that the risk of an unsatisfactory trade is low.

Real estate agents take advantage of people’s discomfort with decision-making. Since buying a house is highly consequential and difficult to reverse, rational people should look at a great many options and think them through very carefully. A good agent will show you a few houses that are expensive and not very nice, and then one at almost the same price and far nicer. Many buyers will respond by stopping their search and jumping on this bargain. Our susceptibility to “bargains” is one of the cognitive devices we use to simplify choice situations, and one that companies are conscious of when they position their products.”

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Lessons from Nudge Theory

So you might be asking yourself, what does all of this have to do with selling condoms? Well, a lot actually. Because people rely on cognitive devices or shortcuts to simplify their decision making and behavioral choices, it’s important for social marketers to understand how to leverage these devices and shortcuts to improve our impact.

A few key takeaways from recent applications of, and discussions about, nudge theory:

Nudge marketing calls for applying just the right amount of pressure to persuade: not too little, not too much.

In one early test at a store in Virginia, grocery carts carried a strip of yellow duct tape that divided the baskets neatly in half; a flier instructed shoppers to put their fruits and vegetables in the front half of the cart. Average produce sales per customer jumped to $8.85 from $3.99.

Here in El Paso a few months ago, the researchers focused on the floor, laying down large plastic mats bearing huge green arrows that pointed shoppers to the produce aisle. The outcome surprised no one more than the grocer.

“In retail, the customer tends to go to the right,” said Tim Taylor, the produce director for Lowe’s, Pay and Save, a regional grocery chain that let the scientists in to experiment with their arrows and mirrors. “But I watched when the arrows were down, pointing left, and that’s where people went: left, 9 out of 10.”

With those same guinea-pig customers, the scientists tinkered again with the cart, creating a glossy placard that hung inside the baskets like the mirrors. In English and Spanish, the signs told shoppers how much produce the average customer was buying (five items a visit), and which fruits and vegetables were the biggest sellers (bananas, limes and avocados) — information that, in scientific parlance, conveys social norms, or acceptable behavior.

By the second week, produce sales had jumped 10 percent, with a whopping 91 percent rise for those participating in the government nutrition program called Women, Infants and Children. Lowe’s was so excited that it now plans to put the placards in every cart at its 22 stores in El Paso and nearby Las Cruces, N.M., and perhaps later at all 146 of its stores.

Nudge marketing calls for applying just the right amount of pressure to persuade: not too little, not too much. In the El Paso grocery trials, using both the green arrows on the floor with the green placards in the carts caused produce sales to fall.

“It nudged too hard,” Mr. Payne said.

(Excerpts from NYTimes, “Nudged to the Produce Aisle by a Look in the Mirror,” 8/27/13)

Social Networks Matter:

Economic demographer Hans Peter Kohler (2001) has investigated the effect of word-of-mouth communication from friends on choice of contraceptive. He studies Korean peasant women, who have access to relatively little public information on efficacy, costs, and side effects of new contraceptives. Choices within villages show little diversity, but there is substantial, persistent diversity across villages.

This pattern not explained by income, education, or price differences. Word of mouth communication from friends was found to be the important explanation of most women’s choices. Lack of inter-village mobility explained multiple equilibria, with persistent inter-village differences. Thus, some apparent taste heterogeneity is due to the boundedly rational practice of imitation in balkanized social networks.

The moral is that any complete measurement system for consumer behavior must account for social network effects. Suggestions for measurement are that stated perceptions and preferences should be conditioned on the behavior of members in an individual’s social network, and the distribution of consumption in social equilibrium should be modeled as the (often non-unique) solution to a game in which choices of peers matter.

(Excerpts from “The New Science of Pleasure,” by Daniel L. McFadden, January, 2013)

Grocers are Already Applying Nudge Theory to The Shopping Experience

THE SWEETEST ITEMS are sold at eye level, midway along aisles, where shoppers’ attention lingers longest.

THE ENDS OF AISLES are huge revenue generators, especially for soda, which makes 45 percent of its sales through racks there, according to the Coca-Cola Retailing Research Council.

IMPULSE PURCHASES (60 percent of purchases are unplanned) can be encouraged by placing items next to checkouts.

FREE-STANDING DISPLAYS are also effective toward the rear of the supermarket and on the left side of aisles. Research cited by the Coca-Cola council shows that shoppers move through the store counterclockwise, from the back to the front; in the aisles, they buy items mostly from shelves to their left.

SPRINKLING THE SAME PRODUCT throughout the store, rather than grouping it in one spot, will boost sales through repetitive exposure.

GROUPING THE INGREDIENTS for a meal in one spot can attract home cooks pressed for time.

POSTING HEALTH-RELATED INFORMATION — online, and on kiosks and shelf tags — can link groceries to good health in shoppers’ minds, even though only 23 percent of them say they always look for nutritional information on labels.

(Excerpts from NYTimes, “Nudged to the Produce Aisle by a Look in the Mirror,” 8/27/13)

Social marketers should leverage the identified cognitive devices (in addition to our internal behavioral determinants terminology) when thinking about new social marketing efforts and trade marketing efforts

(Excerpt from “Nudge Theory,” on http://www.businessballs.com, 2013-2014)

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