Have you ever seen your retirement savings rate increase without actively making that choice? Have you chosen a salad at a restaurant after seeing the calorie count for the cheeseburger? Have you decreased your energy use at home after getting a letter about how much your neighbors use? If so—you’ve been nudged.
The concept of the nudge—a cost-effective, nano-size intervention by business or government that encourages a specific outcome—has been around since Richard H. Thaler and Cass B. Sunstein published Nudge: Improving Decisions about Health, Wealth, and Happiness in 2008. In the last decade, it has come to be one of the most well-known elements of the field of behavioral economics. But with the rise of artificial intelligence (AI) and the overwhelming prevalence of data, nudges can be better informed—and their impacts better measured—than ever before. To explore the unprecedented change that business and government can generate with nudges, and behavioral science more broadly, Deloitte welcomed some of the most preeminent thinkers in behavioral science to the third annual Nudgeapaolooza.
James Guszcza, chief data scientist at Deloitte, opened the discussion with a definition of a nudge as “human-centered design.” He emphasized the need to take into account human psychology when designing products, services, and programs—and particularly the importance of bringing behavioral insights to inform AI and digital technology. “Algorithms can point us in the right direction, but they are not a complete solution,” he said. “They must be followed by the right judgments, decisions, or behavior change. We don’t want to optimize an algorithmic output; we want to optimize the outcome.”
Ultimately, he said, there are a few ways that organizations can design “choice environments” to go with the grain of human psychology:
- First, they can create smart defaults, using inertia to help people make good choices. For instance, financial services organizations can offer customers a one-click savings option that automatically deposits the spare change of $0.24 on a $3.76 cup of coffee into their investment account.
- Second, they can leverage peer influence. Experiments have indicated that people are more likely to file their own taxes promptly after learning that that 90 percent of their neighbors pay their taxes on time.
- Finally, they can use commitment devices, such as offering people the opportunity to commit in advance to a date and time for something like getting a flu shot, which can boost the likelihood that they will. Wearable devices can facilitate these interventions, but it is the design of the engagement that makes them effective.
With that introduction, Guszcza turned over the stage to the first keynote speaker of the day: George Loewenstein, Herbert A. Simon University Professor of Economics and Psychology at Carnegie Mellon University. Loewenstein immediately challenged the audience to wonder: Are nudges enough? “I think nudges are fantastic,” he said. “They’re low-hanging fruit. But more generally, behavioral economics has a much broader role to play in public policy.”
To illustrate, he shared data on just some of the problems plaguing the US:
- The US savings rate is low relative to global peers and has been in decline since 1980.
- Credit card debt is going through the roof, and a generation is burdened by student debt.
- Most families have little or no retirement savings, with the median family holding $17K in retirement funds.
- The number of payday lenders has increased precipitously since 1990.
- The share of income going to top one percent of the population is at a level not seen since 1929.
- Income mobility is half what it is in Canada.
- The US has higher incarceration rates than nearly any other country in the world.
- Obesity is on the rise, with no state under a 20 percent obesity rate.
- Life expectancy has dropped for three years in a row.
Applying nudges to these challenges can move the needle to some degree and has had significant success in areas like retirement savings and flu vaccines. But by definition, a nudge is easy and cheap. It can achieve medium-size gains with nano-size investments. Is it possible, Loewenstein asked, that in some cases, nudges are not only limiting organizations’ view of what is possible with behavioral economics techniques, but even being used as a way to avoid painful but more effective decisions rooted in traditional economics?
He used climate change to demonstrate both points. In his opinion, he noted, the only solution to climate change is a carbon tax—and governments have not yet tapped the power of behavioral economics to make this traditional economic fix more palatable, in terms of the way it is framed and marketed. More important, however, governments must ensure that nudges in this space do not act as an excuse for avoiding a more substantial action. He shared the results of a poll of more than 1,200 people, in which 61 percent were supportive of a carbon tax when it was the first option presented to them for combating climate change. However, that number dropped to 45 percent when subjects were simultaneously offered the option of a tax and a default choice to use a green energy provider, and it dropped further to 43 percent when subjects learned first about the green energy provider and then the tax.
What, then, are some techniques from behavioral economics that can help consumers, employees, and citizens make decisions that create positive change? Stay tuned for more from Nudgeapalooza.