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Nudge Theory

Management (RBI) General Management

Nudge Theory

Nudge theory –

Nudge theory is highly regarded by American scholars Richard H Thaler and Cass R Sunstein. They built most of their theory in the work of the ‘heuristics’ of Israeli-American psychologists Daniel Kahneman and Amos Tversky, who first appeared in the 1970s in psychiatric journals. The name and concept of 'Nudge' or 'Nudge theory' became popular with the 2008 book, 'Transform: Promoting Health, Wealth, and Happiness', which became a major seller worldwide. Kahneman's 2012 book, and best-selling, 'Thinking, Accelerating and Slowing down' contains much of the basic theory of Khaneman-Tversky that supports the Thaler-Sunstein 'Nudge' concept. Amos Tversky has been overlooked in Nudge's theoretical quotes since his death in 1996.

Here's Wikipedia's own definition of Nudge theory:

"Nudge theory (or Nudge) is a concept in behavioural science, political theory and economics, which argues that positive reinforcement and indirect suggestions (to try to achieve non-forced compliance) can influence the motives, incentives and decision making of groups and individuals alike, at least as effectively - if not more effectively - than direct instruction, legislation, or enforcement..." (Wikipedia, 2013-2014)

Nudge theory seeks to improve the understanding and management of the 'heuristic' effects on human behavior (US spelling: behavior), which is the basis for 'changing' people.

The key to ethics is to make decisions in existing decisions.

Nudge theory focuses on the design of the selection, which influences the decisions we make. Nudge theory suggests that the design of options should be based on the way people really think and decide (automatically and rather unreasonably), rather than leaders and officials traditionally (and often wrongly) believing that people think and decide (logically and logically).

In this, among other things, Nudge theory is a very different and more complex way of achieving change in people than traditional methods of direct teaching, coercion, punishment, etc.

The application of Nudge theory is based on indirect stimulation and empowerment. It avoids direct or indirect commands.

A Nudge is essentially an action that is indirect, subtle, open-ended, educational, backed up with evidence, optional, and open to discussion. The Nudge Theory provides a framework for this, but not strict guidance on how to achieve the result. In the context of Change Management, we can identify some basic principles to apply when “nudging” change.

Clearly define your changes
Consider changes from your employees’ point of view
Use evidence to show the best option
Present the Change as a choice
Listen to feedback
Limit obstacles
Keep the momentum up with short-term wins

6 Principles of Nudge

To circumvent this, public and private sector organisations could do well to develop positive choice architectures.

The mnemonic used in the development of good choice architectures is NUDGES, and it comprises six key principles:

iNcentives

Provide the right incentives for the right people to enable good decision making processes. This should go beyond monetary and material incentives to include other psychological benefits (eg peace of mind).

For governments, this should benefit the population rather than stakeholders with vested interests.

Understand mappings

This looks at how people can better relate to the consequences of different decision pathways. One such approach is termed RECAP: Record, Evaluate, and Compare Alternative Prices.

Citing the example of mobile phone markets, the authors suggested that governments should not regulate how much telcos charge for services. Instead, they should regulate their disclosure practices.

By doing so, they will make it easier for customers to compare what they are truly paying for, and ensure that all hidden fees are exposed.

Defaults

Defaults are “ubiquitous and powerful.” People often leave the default decision on if they are too lazy to make a decision.

Increasingly, online platforms like Facebook, LinkedIn, and Google are using defaults to nudge people to take action. Such defaults come in the form of pre-written scripts and prompts triggered by algorithms that are powered by Artificial Intelligence (AI) engines.

What about governments?

Well, policy makers can ensure that their default position would be one that benefits as many people as possible. This is preferred to giving their citizens a “zero” choice which opts out completely from beneficial programmes.

Give feedback

A good way to help humans (whom the authors term as people who don’t just decide based on reason and logic) improve their performance is to provide feedback.

An example is the development of a fake “shutter click” sound on digital cameras which lets people know that a photograph is taken. Or the flashing of an “in progress” screen showing movement when you’re waiting for an app to complete its action.

Expect error

To err is human and forgive divine. Unfortunately, few humans can follow instructions down to a T.

To allow for this, designs should be made such that people are forewarned before a more disastrous outcome happens. An example is the design of drug taking – once in the morning after breakfast for instance, is better than 3 times a day.

Structure complex choices

When choices become too abundant, people tend to find ways to simplify them and break them down. Good choice architecture will find ways to make this more evident for people.

An example cited was the choice of paint. Instead of using words like “Roasted Sesame Seed” or “Kansas Grain,” consider arranging similar colour themes next to each other. This could help people to choose the right shades and hues.

In 1979 Daniel Kahneman produced a significant paper with his long-time collaborator, the Israeli Amos Nathan Tversky (1937-96): 'Prospect Theory: An Analysis of Decision under Risk' (Daniel Kahneman and Amos Tversky; Econometrica, 47[2], pp. 263-291, March 1979.)

Kahneman and Tversky's 'Prospect theory', and the paper which described it, became regarded as fundamentally important contributions to the understanding of human thinking and decision-making, notably in behavioural economics. Accordingly, 'Prospect Theory', along with other heuristics work of Kahneman and Tversky, formed a substantial part of the development of the Thaler-Sunstein 'Nudge' theory.

About Prospect theory..

'Prospect theory' is defined (Wikipedia 2014) as follows: "Prospect theory is a behavioral economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics. The model is descriptive: it tries to model real-life choices, rather than optimal decisions. The theory was developed by Daniel Kahneman and Amos Tversky in 1979 as a psychologically more accurate description of decision making, comparing to the 'expected utility theory'. In the original formulation the term 'prospect' referred to a lottery. ('Expected utility theory' refers to 'Expected utility hypothesis' [earlier called 'moral expectation'], which is an early explanation of 'instinctive' decision-making [contrasted with 'mathematical expectation or logical decision-making], in economics, gambling, strategy/game theory, which can be traced to origins in the 1730s.)

The Choice Architect

'Choice architect' is Thaler-Sunstein terminology for someone (or a body) who leads or manages the application of 'Nudge' theory.

Thaler and Sunstein used the term 'choice architect' in referring to a leader or manager (or another person with such responsibility, and by extension a governing organization or leadership) who uses Nudge techniques in seeking to change a group's behaviour.

The terminology 'choice architect' emphasizes that change is enabled by designing choices for people, which encourage them to make decisions, ideally towards positive helpful outcomes.

Also, the judgment of 'positive outcomes' must be made by the people undergoing the change. That is to say, the leadership is not the final judge of whether a change in people is helpful and good - the people themselves must judge this.

The notion of a 'choice architect' connects strongly to the philosophy of Nudge theory. The 'choice architect' must act with great responsibility and integrity.

Nudge theory also correlates strongly with, and/or draws from, other positive theories entailing the improvement of people's situations, such as:

McGregor's XY Theory,
Facilitative decision-making,
'Clean Language',
NLP (neuro-linguistic programming)
Transactional Analysis
The Psychological Contract
and aspects of Cybernetics.

Heuristics Overview in Thaler-Sunstein 'Nudge' Theory
1. Anchoring and adjustment	Using a known/comparable fact and adjusting it to estimate or decide about something which is unknown.
2. Availability	How common or visible or familiar something is perceived to be. The greater the commonness/visibility/familiarity, then the greater the perceived frequency or incidence (which is often quite different to reality), and also the greater sense of trust in the validity of the thing or communication. This heuristic is greatly influenced by mass media. The tendency strongly influences perceived credibility. When we see/hear something lots, we question it less.
3. Representativeness	How similar something is thought to be in relation to a perceived stereotype or assumption. People use this heuristic frequently in making assumptions.
4. Optimism/over-confidence	The tendency to underestimate costs, timescales, challenges, and over-estimate rewards and the ease of unknown things.
5. Loss aversion	The tendency for people to value possessions far more than if the things were not yet possessed - creating resistance to giving any sort of concession or making a change. People do not like to lose possession of things, irrespective of their actual value/importance.
6. Status quo bias and inertia	The tendency for people to stay committed to current situations, for fear of changing to the unknown. Status quo bias is also caused by laziness, aversion to complexity, unnatural learning style demands, reading small print, etc.
7. Framing	Presentation or orientation of information that alters its perceived nature. This includes positive/negative accentuation, juxtaposition, association, or many other ways of distorting the attractiveness/unattractiveness of something.
8. Temptation	Greed, inability to delay gratification; urge to satisfy aspiration, ego, etc. People are naturally biased towards a short-term reward, and against long-term reward, or perceived low reward. Equates to the WIIFM factor ('What's in it for me?').
9. Mindlessness	The tendency for people to form views and decisions without concentrating, or even negligently - and the perceived 'free' or discount effect, which can encourage people to ignore real issues. See TANSTAAFL ('There ain't no such thing as a free lunch').
10. Self-control strategies	Tactics used by people to counter their own heuristic weaknesses, which then also become heuristics.
11. Conforming - following the herd	The mob effect, need for affirmation, avoiding risk/embarrassment, strength in numbers, following the crowd, fear of isolation, etc. There are many cultural factors that add to these effects, notably enabled and magnified by the internet and related technologies.
12. Spotlight effect	People tend to overestimate the visibility/significance of their own decisions and actions. This produces unhelpful pressures on thinking and can easily influence decision-making.
13. Priming	The manner in which people are 'primed' or softened/hardened before a situation or option is introduced - extends to enabling visualization of a viewpoint or feeling - relates to facilitative theory.
14. Language and signage design - 'stimulus response compatibility' - or 'choice architecture'	This is a major area overlapping several individual heuristics and refers to the degree to which something is designed in a way that helps us understand and make the best response to it. For example, 'go' is usually green, not red. Potentially includes feedback, which is shown separately because of its independent significance. (Not presented as a heuristic like the above by Thaler and Sunstein, but easier to appreciate in this grouping.)
15. Feedback	This is an aspect of 'choice architecture' but warrants a separate explanation due to its importance. People are open to influence from feedback or reflection while thinking and deciding, or have decided, prior to further decisions. It's a crucial element of Nudge theory and its extension/application. (Not presented as a heuristic like the above by Thaler and Sunstein, but easier to appreciate in this grouping.)

'Humans' and 'Econs'

These are two different characterizations of people, used by Thaler and Sunstein to illustrate two different types of thinking and decision-making.

Thaler and Sunstein illustrated the contrast between (irrational 'dumb', very common) human behaviour, and (rational 'smart', far less common) logical behaviour, by presenting two (notionally) different types of people, which they called 'human' and 'econ'.

Humans are (what we might consider) 'real' people, who make 'real' human decisions (or fail to make a decision), driven by a wide range of human considerations and factors such as inertia, optimism, denial, lethargy, the inability to delay gratification, false assumptions, and more (covered in the heuristics listing above and below in the detailed heuristics descriptions). This is a view of people/society from a 'reality' perspective.

Econs are an imaginary type of people - imagined to exist (instead of real people) by economists, politicians, academics, etc. Econs (are imagined) always to think logically and rationally, and are not influenced by the various heuristic factors such as inertia, optimism, denial, lethargy, the inability to delay gratification, false assumptions, and more (covered below), which generally cause 'humans' to behave in ways that are irrationally unhelpful, destructive, neglectful, etc. 'Econs' are a view of people and society from an unrealistic perspective.

Automatic vs Reflective Systems Of Thinking

According to Thaler-Sunstein Nudge theory (and previously developed equivalent Kahneman/Tversky theory):

'Humans' are characterized as thinking 'automatically'.
'Econs' are characterized as thinking 'reflectively'.

This difficulty is compounded in modern times because of the pressure and scale of populations, misinformation, and distraction:

People are often encouraged to think 'Automatically' (System One), when they should instead be thinking 'Reflectively' (System Two).
Decisions that people face in modern times can be very far-reaching, with very big implications, compared with past times.
Societies are bigger than ever and still growing fast.
Societies are organized and managed by corporations and governments on a much bigger scale than ever before.
So decisions by people nowadays can affect societies and the planet to a vast and unprecedented degree.

Nudge Theory Toolkit
	Nudge type	Brief description	Usage examples and guidance	Use with
1	Anchoring and adjustment	Using known things to estimate unknown things.	Give the audience factual comparisons and references that are relevant to them. Publicize statistics and facts about things which distort people's thinking and which are misleading influences.	Marketing - Training
2	Availability	Familiarity and perceived commonness or rarity.	Offer statistics which give true scale of popularity, frequency or rarity of issues. Correct common faulty assumptions.	Marketing - Training
3	Representativeness	Assumptions based on stereotypes.	Give the audience clarification of facts and figures to dispel false stereotypes and wrong assumptions and replace them with accurate comparisons.	Sales - Marketing - Training
4	Optimism/ over-confidence	Hopefulness and denial. Complacency.	Allow flexibility for people. Protect people from tendency to 'hope' rather than think. Clarify and emphasize timings, costs, schedules, etc. Use 'feedback'. Do not assume that people correctly understand things that you explain. Clarify understanding.	Empathy - The psychological contract - Leadership
5	Loss aversion	False valuation based on possession.	Focus on gains and improvements. Avoid presenting situations as 'taking' things from people. Clarify actual values of possessed things. Clarify actual risks.	Sales - Marketing - Leadership - Maslow's Hierarchy of Needs - NLP
6	Status quo bias and inertia	Fear of change. Laziness, aversion to complexity, 'smallprint', etc.	Use status quo and defaults to helpful positive effect. Make it easy for people to make helpful choices. Make it difficult for people to use faulty thinking and make unhelpful decisions. Using inertia and defaults to exploit people is unethical.	Empathy - Leadership - Transactional Analysis - NLP
7	Framing	Presentation or orientation of information that alters its perceived nature.	Design communications so that choices are positioned and explained positively - relevant and clear to audience. Use words carefully. Understand and focus on what your communications mean to people, rather than what they mean to you. Orient communications according to received meaning.	sales - marketing - Buying Facilitation- Erikson's life-stage theory - TA - NLP - body language
8	Temptation	Greed, inability to delay gratification, fear of missing out.	Use short-term easy gains as incentives to break inertia. Clarify long-term risks of unwise short-term, quick gratification decisions. Using temptation weaknesses to exploit people is unethical.	NLP - Psychological contract - Leadership - Buying Facilitation
9	Mindlessness	Poor concentration. Negligence. Complacency.	Clarify, educate, design and prioritize communications so that important issues are clear and cannot be overlooked. Avoid accidentally misleading people or hiding major considerations. Translate complexity into simplicity. Communicate in ways that people can understand. Use 'feedback'.	Writing - Marketing- Training - TA
10	Self-control strategies	Habits and routines to counter weaknesses.	Discover and understand the self-control strategies that your audiences use. Construct offerings so that they fit with people's systems, habits, and their preferred ways of doing things.	Cybernetics - NLP- Buying Facilitation
11	Conforming - following the herd	The mob effect. Affirmation. Embarrassment. Fashion. Lack of confidence.	Consider the need for people to conform and avoid isolation/embarrassment when you are 'framing' and offering reference facts. Avoid positioning helpful choices in ways that seem non-conformist or which expose or isolate people. Build people's confidence and self-belief so they become less dependent on conforming. Facilitate real clarity of understanding between groups to avoid/dispel false assumptions and reduce risks of people following a wrongly perceived group view	Leadership - Assertiveness - Meetings
12	Spotlight effect	Self-consciousness, causing anxiety and stress.	Build calmness and relaxation into communications and the processes and outcomes of positive choices. Avoid pressurizing people.	TA - NLP - Empathy
13	Priming	Preparing people for change.	Help people visualize positive actions and outcomes. Encourage people to consider, explore, and assess steps and strategies - how they can do things. Help people think and decide. Avoid thinking and deciding for people. Educate and inform people, especially as to relevant causes and effects. Give people tools and training, not answers. See Facilitation.	Buying Facilitation- Cybernetics - NLP - Training - Leadership
14	Stimulus response compatibility(overlays all heuristics)	Language and signage design - the signal matches the message.	Design communications properly.Understand the effects of design on thinking. Use skilled designers to produce anything that conveys important information.	Marketing and advertising - Writing - Body language - NLP - TA
15	Feedback(overlays all heuristics)	To people, during and after thinking and decisions.	Build checking and feedback into choice processes wherever possible. Reflect people's responses back to them. Design processes that offer feedback while people are engaging with them.	Empathy - NLP - TA - Buying Facilitation - Project management
above are 'Thaler-Sunstein heuristics' - below are 'supplementary heuristics'
16	Positioning	Location of intervention.	Understand how the positioning of things affects people's engagement with them. For example: a heading in a poster, a poster in a building, a drinks machine, signs, meeting places, things on shelves, anything that people engage with.	Marketing and advertising - Cybernetics
17	Limiting	Deadlines and availabilities.	Helpful options can be more appealing if they seem limited by time or availability. Avoid pushing or pressurizing people, which is the opposite of limiting and therefore potentially unattractive or off-putting.	Marketing and advertising - Negotiation
18	Sympathy	Ease of engaging and adopting.	Be empathic and 'in tune' with the audience. Imagine you are the audience when you design and style communications and interventions. Test communications and interventions on an audience sample and refine accordingly.	Empathy - Personal change - Benziger thinking styles
19	Accessibility	Efficiency, reach, penetration of intervention.	Find ways to increase the percentage of your audience who will see or experience the intervention and the number of times they see or experience it.	Marketing and advertising - Selling
20	Likeability	Integrity, trust and credibility of the 'choice architect' organization and its figureheads.	Avoid undermining your organizational integrity, and avoid associating the organization or intervention with figureheads of poor repute.	Leadership - Ethical management and leadership
21	Relevance	Personally meaningful.	Interventions and options must be as relevant as possible to the audience. Refer to and use with 'framing' and 'sympathy'. The nature of communications and options must be relevant. Create, translate or interpret interventions so that they are relevant to audiences.	Empathy - Kolb thinking styles - VAK learning styles
22	Mood	Attitude and feeling.	The intervention should prompt positive attitude and feelings, so that people feel enthused, inspired, happy, intrigued, helped, etc. Interventions must try to avoid producing a bad mood.	NLP - TA - Stories- Emotional intelligence - Body language
23	Fear	Thinking driven by risk or threat.	This 'nudge' is acceptable when used in genuinely helpful ways, for example reminding people that smoking and obesity is dangerous to health.	Leadership - Maslow - Herzberg
24	Facilitation	People are helped to understand and decide.	This is a deep and complex process, entailing repeated feedback according to individual actions and responses. A powerful concept in which crucially 'facilitative questioning' - or encouraging people to ask themselves - for example 'what's missing?' and 'how will you measure the results you are seeking?'	Buying Facilitation - Empathy - Love
25	Sensory	Sound, smell, visual and other sensory influences.	These types of 'nudges' are environmental and multi-sensory, beyond obvious language-based visual and audio communications, for example, music, smell, warmth, etc. Discover indirect sensory interventions that can influence given situations. Develop these interventions to 'nudge' people's feelings, actions and thinking to being more open to helpful options. At its simplest this might be playing music to relax people.