Behavioral Economics in practice
So you’ve read our first post about behavioral economics and why it matters and wanted to learn more. We can’t blame you. Behavioral economics has been all the rage lately, and we have everyone in our families, colleagues, and neighbors asking us to tell more about it whenever they meet us. On October 9th, 2017, the winner of this year’s Nobel Prize in economics* was announced to be Professor Richard Thaler, who is considered by many to be one of the founding fathers of behavioral economics. This has capped what can only be described as a pretty-darn-exciting decade for behavioral economics where its influence grew and grew.
What really excites us, and apparently a lot of other people, is how the principles of behavioral economics are starting, more and more, to be used in practice – to drive positive behavior change that addresses real challenges. All over the world, behavioral scientists are coming out of the lab and helping governments, companies, and non-profits with their issues. And while it’s getting more and more common today, it hasn’t really been that long since it started.
How it all started
In 2008, Thaler and Cass Sunstein published the book “Nudge: Improving Decisions About Health, Wealth, and Happiness” which started the revolution. It used principles of behavioral science to show that you can influence people or “nudge” them towards a specific choice without restrictions, prohibitions or a change in costs. You do that by designing the choice architecture differently – the way in which options are presented. So for example, if we want to encourage people to choose more vegetarian, then featuring the vegetarian options on the menu in the middle and in a larger font is a nudge (in BE parlance we have just increased their salience). While removing all the meat options from the menu is not.
The book’s effect was far-reaching. “Nudge units” started popping up everywhere, most famously in the British government (The Behavioral Insight Team – today a social purpose multinational consultancy of around 100 employees) and in the Obama administration. Those units put the ideas of the book into practice, applying behavioral insights to encourage tax payment, organ donation, unbiased recruiting, pension saving and reduction of energy consumption.
It is easy to see why these ideas were so well received (not that we are biased). Nudges are cheaper than other traditional governmental tools (like tax cuts), and they are less inclined to evoke negative responses than, say prohibiting something altogether. Thaler and Sunstein were very clear that some ethical principles must be kept – nudges should be transparent, easily opted out of, and promote behavior that is in the best interest of the individual. We agree.
OK, but I am not in the public sector, is this still relevant for me?
Well, if your products or services are consumed by humans or if you are a human yourself, then yes. This is relevant for you.
Let’s start with the former. Let’s say you are in the business of designing or selling products or services. Perhaps you think that your company is very user-centric and you invest a lot in market research and in listening to what your consumers have to say. And that is great. But you’ve been listening at all you know that (repeat after me) – people are irrational. They are quirky. Which means that sometimes they have the intention to act one way (and that’s what they will say in the focus group or online survey), but then act in another (and that’s what they do in the store).
Luckily, companies are starting to realize this, and an increasing number of companies are taking in a behavioral science perspective to design better products, services, and processes. Want some examples? Read on.
Using behavioral insights to build trust
Trust is a big thing. Overall, to have a functioning society, we need trust. We need to trust the institutions, companies, and our neighbors, to act in our best interest and not screw us over. But trust is fleeting, and in today’s day and age, it’s getting rarer, especially when it comes to trusting big organizations.
Dan Ariely is a behavioral economist who has research trust extensively. Apparently, we want to think about ourselves as honorable, so when asked, we say we wouldn’t cheat. But when we have the opportunity to do so, we take it, because we want the benefits of whatever it is we will get more off if we cheat. Ariely’s research about dishonesty is pretty striking in showing how pervasive dishonest behavior is (and we recommend his documentary The (Honest) Truth About Dishonesty if you want to learn more). Actually, Impactually’s co-founder and Chief Behavioral Economist, Christina Gravert, found his research so interesting that the first experiment she ever ran was based on Dan’s work. She wanted to understand whether people who have to work for their money rather than win it based on a die roll, would be more likely to take a little (undeserved) extra when given the chance. Indeed they were.
But there is hope. Ariely found that simple behavioral interventions can help encourage trustworthiness. Reminding people about their moral standards brings their good intentions to the surface, and they are less likely to cheat. That’s the idea behind honor codes, and it works.
An insurance start-up company called Lemonade leveraged this powerful insight to design their claim process so that they are able to approve a claim in just 3 seconds. When filing a claim, Lemonade users sign an “honesty claim” in the very beginning, before they go on to describe what has been stolen from them and other details. Signing a form to attest the truth of your claim is nothing new in the insurance business, but doing it at the beginning of the form rather than in the end is. It is based on the behavioral insight that priming people about honesty will encourage honest behavior. Leveraging the behavioral economics perspective, Lemonade has already disrupted the billion dollar insurance business. So yeah, we would call that a pretty strong argument on how behavioral economics can be good for business.
So behavioral insights can help with some pretty big issues, like trust. How about some REALLY big issues? Like climate change?
You wouldn’t be too surprised to learn that behavioral insights have also helped there if you would reflect on the fact that a big part of climate change has to do with human behavior. Take flying for example. The entry of low-cost players to the flying industry has changed the industry, and we now fly more and more, which has a dire effect on carbon emissions. Is there anything to do about that? That’s what Virgin Atlantic asked themselves, and when a bunch of behavioral economists knocked on their door one day, the jumped on the opportunity to find out.
The economists studied 335 pilots across 40,000 flights and found that simple interventions based on behavioral insights can lead to major behavior change and significant savings in carbon emissions. Pilots were monitored for their fuel performance for 8 months and got personalized targets to increase their fuel efficiency. On average, this lead to 20% reduction in fuel resulting both in a reduction of carbon emissions (by 21,500 metric tons – that’s a lot), and more efficient operations with an estimated saving of $5.4 million on fuel costs. A great example of how behavioral insights can lead to positive impact on both the environment and business. People might still want to fly, but this way they are doing it more efficiently.
So behavioral science can address big issues and also drive business efficiency. Can it also help in creating a better workplace?
Absolutely. We know how much employee engagement matters today, with a new generation of millennials coming into the workforce with different expectations. Luckily, there is plenty of research on how to create work environments that help people thrive. And even better, companies are starting to take notice and apply this scientific knowledge for the benefit of their employees.
Google, for example, a company who has repeatedly been recognized as one of the best companies to work for, proudly talk about how they incorporate behavioral insights into their People Operations. Google has partnered with behavioral scientists to redesign many of their most important processes, from conducting better interviews in the hiring process, giving better feedback to managers, and improving team effectiveness.
OK, I’m convinced. Just one last thing – can behavioral insights also help me in my own private life
Absolutely. And there is so much to say about that that we might keep it for a future post. But we won’t leave you hanging. You might be trying to lose weight, quit smoking, go to the gym more often, or save some money. And had you been a rational person like economists claim, this may not have been a super difficult task. But we know that it is because our human nature comes in the way. That’s why two behavioral economists from Yale started a company called StickK that helps real, irrational human (i.e., all of us) achieve their goals.
The people who designed StickK know that people have good intentions, and sometimes they really want to make a positive change in their lives – but it’s just too hard. On StickK, users select a goal and commit to achieving it signing a commitment contract to forfeit a certain amount of money if they don’t. By the end of the period, if they achieved the goal they get their money back. If they don’t, the money goes to their predefined anti-charity, like the National Rifle Association (for gun violence activists) or The Clinton Foundation (for Republicans). StickK is based on several behavioral insights, like loss aversion and optimism bias. And it’s been proven to be a powerful tool. So hey, check it out if you’ve tried everything and your gym card still hasn’t been put to good use lately.
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I want to learn more!
We hear you. If you’ve already read our post about what behavioral economics is, then here’s a list of books, TED Talks and other online resources. Other interviews, articles and videos we have published elsewhere can be found here. You are also welcome to sign up to our newsletter, where we give you relevant news and links on behavioral economics.
I’m convinced that behavioral economics can do wonders for me. Now what?
Contact us and let’s talk about how we can help you get going.
* The official name is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The prize is often referred to as The Nobel Prize in Economics, and that is the name we chose to use throughout this article, for cognitive-load-reducing purposes.
Ariely, D. (2008). Predictably Irrational. New York: Harper Collins.
Gravert, C. (2013). How Luck and Performance Affect Stealing. Journal of Economic Behavior & Organization, 93, S301-304
Metcalfe R., Gosnell G., & List J. (2016). Virgin Atlantic Tested 3 Ways Change Employee Behavior. Harvard Business Review.
Thaler, R. H., & Sunstein, C. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven, CT: Yale University Press.
Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow: Using behavioral economics to increase employee saving. Journal of Political Economy, 112, S164-S187.
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