Nudge theory suggests consumer behaviour can be influenced by small suggestions and positive reinforcements.
- For example, if you buy a coffee, and a barista offers a pastry as well- we are more likely to buy the pasty when it is offered as a suggestion.
- To encourage health eating, healthy options could be made more easily available, e.g school lunches could be carefully monitored – reducing number of unhealthy options.
- To discourage unhealthy eating, the amount of sugar can be included prominently on the packaging to make consumers think twice about purchasing.
- Changing the way a product / service is presented.
Nudge theory is related to the idea of choice architecture. If goods are presented in a different way, it can help ‘nudge’ people’s consumption to the desired option.
Examples of nudges
- Displaying social trust. One of the strongest nudges is to show feedback from peers. Positive reviews displayed prominently – play a significant role in encouraging people to buy. Companies may display favourable reviews next to their product. The government may also show examples of people who have benefited from certain schemes (or show images of people caught and then named and shamed for tax evasion / benefit fraud.)
- Specific messages. To reduce missed hospital appointments, most hospitals send SMS text reminders on the day. Studies suggest that changing the words of the SMS can influence how successful these text messages are. For example, if text messages mention the direct costs to the NHS for missing an appointment (£160) – it helped reduce missed appointments from 11.1% to 8.5%. (Behavioural insights Blog)
- Encouraging certain behaviours. A study found that if students are sent motivating text messages, attendance rates improved.
Source: Behavioural insights team Blog
Many firms use nudges to increase profit. For example:
- Banks encouraged the sale of payment protection insurance for pensions and other financial services. They were sold as an essential package for the product. But, in reality, the cost and profit margin for bank were never fully explained.
- Special offers. Some firms offer free subscription for a month. But, to get the free subscription it is necessary to give credit card details and pay for a month upfront. To gain free subscription it is necessary to ring and cancel before the end of the month. But, because of the inconvenience, many consumers may end up paying more than expected.
- Pushy sales people. If you try to cancel certain services, e.g. internet provider. To cancel you have to ring up and a dedicated salesperson will try and discourage consumption – through offering special discount for next three months. The strong sales pitch may nudge consumers into not changing.
- Special offer mortgage deals. In the early 2000s, many US consumers were offered special discounts on mortgages. It made mortgages very cheap for the first year or two – to encourage people to get the mortgage. But, after that introductory period, interest rates went up to normal levels – causing a big increase in the cost of mortgage payments. Many people defaulted on mortgages because they didn’t fully realise how much mortgage payments would rise after the end of introductory period. This proved a cause of the credit crunch.
Evaluation of nudges
There is a difference between nudging a certain behaviour and compelling a certain choice. A good nudge may be considered to be one which encourages a certain choice, but is still:
- Transparent – Make the nudge clear and obvious, not hiding costs / other options.
- Choice is retained – with consumer able to make final choice.
- Good reason to believe that the nudge is warranted, e.g. strong health costs of smoking / eating too much sugar.
- Good and bad nudges at NY Times