272. iNcentives: The “N” in Behavioral NUDGES (Refreshed Episode)

Welcome to episode 272 of the Brainy Business Understanding the Psychology of why People Buy Today's episode is all about incentives. Ready? Let's get started. You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now here's your host, Melina Palmer. Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Today's episode is all about incentives, specifically as they pertain to the concept of nudges. This episode first aired as part of a seven part series I did on nudges back in 2019. Why seven parts, you may ask? Well, nudges is an acronym for the six types of nudges as introduced by Thaler and Sunstein Incentives, which is a bit of a fudge to make it work, but we all forgive them. Understanding, Mapping defaults, Give feedback, Expect error and structuring complex choices. I did one episode on each, plus an introductory episode to the concept of what nudges and choice architecture were to kick things off. So there we are with seven episodes. This episode on Incentives is being refreshed today to help get your brain buzzing on the idea before the wonderful Dr. U. Ignizi here on Friday to share about his new book which will have just come out today, called Mixed Signals How Incentives Really Work. It's all about what happens when we mix up our incentives and things don't work as intended, and what we can do to correct those errors before they happen. So starting with the concept of nudges and specifically digging in on incentives as it pertains to behavioral economics felt like the perfect way to get you ready and in the right mindset set for that episode coming out on Friday. If you aren't already subscribed to the Brainy Business podcast, take a moment to do so now so you can be sure to catch that episode when it comes out. Before we jump into the episode, I want to be sure you know that your free Incentives worksheet and links to past episodes and books and articles are all waiting for you in the show notes for this episode, which are found within the app you're listening to and@the brainybusiness.com 272 all right, let's talk about incentives. When you first hear the term incentive, you probably think about compensation plans or other incentives to buy. You know, those promos that include loss aversion and scarcity. But wait, there's more. And that can be part of it. But incentives in the context of nudges and choice architecture are much more complex. If you remember from last week, you are a choice architect if you present options to people and indirectly influence their choices. This is everything from where you place food in the line in the cafeteria, to an opt in form on a website, to doctors presenting treatment options to a patient. We are inundated with choices in our lives and because our brains are lazy, we don't put in all the effort required to make the best decision every time. Well structured choice architecture can influence the way someone makes a decision, the actual choice that they make. And bad choice architecture can compel people to avoid making any choice at all, which is ironically still a choice. A nudge is something that helps someone to make a choice. This is everything from the order things are appearing on a list to the wording used within them. And yes, incentives. You're probably familiar with the concept of supply and demand. As the price of something goes up, companies will produce more of it and demand will go down. Supply and demand fluctuate in predictable ways and are like two opposing forces in an intricate dance. When pricing an item, whether it's a product or service, the goal would be to find the perfect price where you have the greatest profit and the demand equals supply so you do not end up with extra items on hand. This is of course easier said than done, but proper incentives can help to encourage sales when you understand how they work. The tricky thing about incentives is that they're never one sided and our lazy brains don't tend to think about all the proper aspects of the choice presented. We don't realize who's receiving an incentive beyond ourselves, and we don't really think through all the incentives impacting each decision we make. And it's never as simple as do you want this yes or no? There is much more to it than that, and good choice architects understand how to structure the nudges and architecture to do what is best for their business. So how do you figure out what all the incentives are and how they work together or against each other? You can start by asking these questions. Who uses, who chooses, who pays and who profits? As I'm sure you can appreciate, those are not likely the same person, and each question can have multiple answers as the choices get more complex. Here's the plan for this episode and the rest of the series. I'm going to have one seemingly simple example that's going to be a constant throughout the series, which I'm going to introduce to you here in just A minute in each episode. My plan is to introduce the concept like incentives or defaults, and then revisit this example to show you all the aspects of its choice architecture. So we'll come back to this one example in all six of the episodes so you can see how it works within choice architecture. And then I'll provide several other examples of that particular nudge in action in varying situations and industries to help really round it out and give you some other areas to consider in case this one doesn't apply to your business and just the perfect way. Sound good? All right, so what is this seemingly simple example? Air conditioning. Last June, my husband and I bought a new house. The house was built with heating installed but not air conditioning, which isn't uncommon for the Seattle area. And according to the builder, a setup was within the house that would make it easy and more affordable to retrofit and add air conditioning whenever we were ready. Great. Sounds easy enough. While we really wanted air conditioning included in the house, when we bought it, it wasn't an option. So we decided to wait and see what things were like in the house for the first summer to determine if we really needed air conditioning since it's expensive and if it was worth the money to install it. Like I said, it's not like we're in Phoenix or Las Vegas or an area where air conditioning is mandatory in the house. We get hot days, but it doesn't usually get too bad. But let me tell you about this. Last summer it was hot. I went back to look at the historical weather data to make sure I don't exaggerate for you here. Over half of July and August was over 80 degrees. With the high at 96, there were several days in a row over 90 and without air conditioning. It was uncomfortable, to say the least in this house. And I don't have the benefit of going to an office during the day to enjoy their air conditioning. I get to just sit in the heat all day. I also discovered my office is on the sun facing side of the house. And while my lovely big window is really more of a Burden on those 95 degree days, suffice it to say, we already knew air conditioning was an important purchase and it was going to be making its way into the budget earlier than expected. Expected. There's no way we are going to go through another summer in this house without it. So yesterday we had someone come out to do our evaluation and estimate for the job. During this process, I learned that the cost of air conditioning is set up using a fairly standard Formula based on the square footage of the house and the number of vents and if there's anything crazy they need to do, like in a really old house that requires more labor. But in general there isn't really a choice to be had because they aren't going to underinstall. Since we're doing central air, it's not like I get to say I only want to pay for air conditioning for one part of the house or do the downstairs now and the upstairs later. It seems like a pretty simple black and white choice, right? Do you want air conditioning or not? Yes or no? Of course, it's not really that simple, which is why this air conditioning example will be featured throughout the series. So if we use our questions for the incentives aspect of nudging, we need to look at who uses, who chooses, who pays and who profits. And as a reminder, this is the foundation of the worksheet that's available for you@the brainybusiness.com 36 if you want to download that and follow along. So the person who uses is me, the homeowner. My family and I will use the air conditioning for years to come if we choose to buy it and suffer the heat on those few hot days if we don't. And I suppose we could consider the resale value and so there could be future users that are homeowners. But the benefit and to why I'm buying in in that case too is again for resale value. So it's about me using the air conditioning and its benefits. Who chooses is again, my husband and I. While this seems like a simple choice, there are actually a lot of variables to be considered. Way more options than meet the eye. My husband and I have the choice, the burden to decide if we want to cool our house and if so, we have many options to choose from. We could buy a lot of fans and put one in every room, but that would also increase our electricity bill. We could buy bags of ice to fill our bathtubs with. We could choose to stay in hotels on the days it will be really hot to take advantage of their air conditioning and spread out the cost if when we need it instead of paying up front for an air conditioning unit and once we decide we want air conditioning, There are multiple companies to choose from that all have their own pricing structures and units and processes that can add even more choices for your company. Think about if you would have said it's a very simple choice. It's a black and white, a yes or no. I want it or not. Not. Try to think a little bit deeper, like I've done here, and look at all the choices someone really has. It is often much more complex than the surface level. All right, let's move on. Who pays is again, my husband and I, and we pay on either side of the choice. We will either pay up front for air conditioning or pay on the hot days with sweat and complaining children. Okay, let's be real. I complained a lot this past summer too. So I guess my husband pays in living in a house with grumpy people. Now, who profits? This is the company who sells the air conditioning units. But there are different levels of profit there. I'm sure the guy who came out to bid the project probably gets some sort of commission for making the sale. The overall company is making a profit because they need to stay in business. And the companies they buy the part and basic units from will be making profits as well. And down the line for all the things they buy from suppliers and their suppliers. For simplicity sake, we will say the air conditioning installation company profits, the guy who made the sale profits, and their manufacturer profits. As I said, this is a pretty easy one on the surface, and it's similar to a lot of companies out there. So maybe you're already starting to see the parallels in your, your business. You can take a minute now if you want. You can pause, take some notes on your free worksheet to figure out for your business who pays, who chooses, uses and profits in your sales choice. Going back to our example, I know there's a markup on products like air conditioning, and I'm paying for the convenience of not having to invent and build air conditioning for my house. So I'm okay with paying the suppliers down the line if I decide to invest in air conditioning. It's the same for buying a laptop or cell phone or most products. You want to use an item, so you make a choice if you want to pay for it or not, and the entity who receives the money will get some sort of profit. It's basic capitalism. The air conditioning company can charge what they want, but because we don't allow for monopolies and there are other companies to choose from, if their price is crazy high, I can just go somewhere else and I have the choice to get nothing or use one of my other options. If they price too high, they will not have enough demand to stay in business. So there's an equilibrium there. But what happens when there are conflicting incentives? That is where we can really run into problems. Sticking with my air conditioning example, he made it Very simple in that there wasn't much of a choice other than get air conditioning or not because they didn't have levels or options available. If they asked me, I would recommend, for the sake of relativity and anchoring and adjustment, that they should have had a deluxe model that was more expensive with bells and whistles that most people don't need to help make the recommended unit look more appealing, which I've talked about in the Truth about pricing and unlocking the power of numbers, and there are links to all those episodes in the show notes, but they didn't have that. It was basically this is the price based on the size of your house. Do you want it or not? However, there was a choice that came up later in the conversation that he sort of glossed over, and it was actually a really big opportunity to look at the incentives involved. After we said, yes, we want to move forward, he casually asked if we wanted a WI FI enabled unit and said it was the same price. And you know, bless his heart, he was definitely not a salesperson. He said something like, well, you know, a lot of people don't like things like this and maybe you do or don't, and some people think it's strange but you can add it and it's the same cost or whatever. He didn't say any of the benefits of this or explain what WI FI enabled meant. Curious, my husband and I asked some clarifying questions and it turns out the WI FI enabled option was would allow me to reset the temperature from anywhere from my phone. And this is not just for the air conditioning. They would be retrofitting to include the heating as well. In our house, the thermostat panel is downstairs and our bedrooms are upstairs. Have you ever been cold in the middle of the night and wished you could turn up the heat, but had that internal debate as to whether it was worth getting out of your warm bed to walk downstairs and click the thermostat no more. Now you can stay in the comfort of your warm bedding to adjust the temperature instantly. Or if you wake up sweating and wonder how hot is it in here, no worries, just check your phone and click a button to turn down the temps. Or if you leave for vacation and have an overwhelmed brain, as I did recently, that means you forgot to turn down the thermostat before you left. You can now turn down the temperature from your phone on the road to save on your energy bill and not heat or cool an empty house. When finding this out, my main question was why would anyone not want this? We Clarified that it wasn't WI fi dependent, so it works without WI fi. It just has this option for when you need it and again, it's the same price as the one without wi fi. This got me thinking about what I would advise this company if they were a client of mine. You know I love questions, so I would start there first being which unit WI fi enabled or regular makes the most money for the company. It's unlikely that they are the exact same cost from their respective manufacturers. So if they're selling them for the same price, one of them is making more money than the other. I don't know which one it is, but presumably the basic model is cheaper because there's extra R and D that went into creating a WI fi enabled thermostat. There might be some more maintenance on the back end for the company as well on that unit. In that case, why is it the same cost to the consumer? And why wasn't that choice communicated better? Where was the nudge? The guy selling the unit to me was super wishy washy in his approach and kind of seemed to be talking us out of the wi fi enabled version. Which would make me wonder if his commission is different on the different models. And that's not uncommon. Say he makes $450 on the clothes if we get the basic model and only gets 250 if we get the WI fi enabled. Which one is he going to push to people? Clearly the basic model, but that's not disclosed to the consumer. And it doesn't matter which one is better for me because in that moment it's all about his commission, whether he intends it to be or not. And on a multi thousand dollar decision that we're going to be living with in this house every day for the next 10 to 20 years. Do I want my choice to have been influenced by a nudge from a guy who made an extra 200 bucks? No, but it happens all the time because of conflicting incentives. The advice I would give this company if they were my client would be to look at how they can align the incentives to find the win win win scenario. Let's say the company pays $100 for the basic model from the manufacturer and $300 for the Wi Fi En. For some reason they've structured the pricing so they are exactly the same cost to the consumer, which I think is a mistake on multiple levels. Doing a quick Internet search, the average cost of having central air conditioning installed in a home is $6,500. Does the extra 200 matter for Wi fi Enabled when all the benefits are considered? Probably not. And especially when the person providing the quote is not giving an itemized list of cost and tasks, they say it will be this much. Just like buying a car. If you remember from episode nine on Loss aversion, when a price for a car is quoted with all the bells and whistles included and then you give someone the option to remove items, they will end up having more features and pay more than if presented with a basic model and asked to add features they want. So if it was necessary to increase the price for the wi fi enabled model, it should be the default option. The price you start with and then let the person take away WI fi if they don't want it. This is your choice architecture and again as I said a little bit ago, I would also recommend they have a super duper deluxe version that's even more expensive to help make the choice easier by incorporating a second option. They are now making the question do you want the wi fi enabled unit or not? Versus do you want air conditioning or not? Which will increase the close ratio for the company. This simple nudge and shift in the architecture completely changes the question in the mind of the consumer. Now they can quibble over those couple of dollars instead of if they want to get nothing at all. Now let's say the cost of the WI fi enabled unit is the same or really close to the basic unit for the company. Does that mean the price needs to be the same to the end user? No. There's value in the benefits this unit provides. Sometimes as a company you need to take a step back to understand what is worth paying for. When all you look at is the cost, it's easy to base your pricing off of that, but it isn't the best way. The company should know and realize that the WI fi enabled unit is the best for the consumer. It has tons of benefits that are valuable when it's properly framed and those questions in the choice architecture can help you kind of dig and get to this. So the price you quote for the WI fi enabled unit could easily be higher to align incentives. If the guy making the quote is incentivized to install those units over the basic model, he will be more likely to explain the benefits to the consumer. And it's best for the company to provide talking points to make it easy to communicate and consistent across brand experiences. This can help create the win win win I was talking about. The customer's happy getting a unit with the great feature of Wi fi that will help them to see and experience the benefit every day. Win. The guy making the quotes will get a higher incentive for giving customers a feature they want, and his close ratio will likely improve as well. When the company benefits from more air conditioning units being sold and happier customers who know why their choice was a good one right away Win. Plus they're probably going to show off to their friends, which helps to increase referrals and get more people to come back and use the company, which is a double win One last point I will make before moving on to other examples and industries is the concept of salience. I have put great effort into avoiding using this word on the podcast up to this point because I don't think it's a term most people use on a regular basis. But in reality there isn't a better or more concise way to say this. So I'm going to do a brief definition for those of you who aren't familiar with the term, and I'm still going to try to use it sparingly. Salience, or saying something is salient, is the way an item stands out from other items. For our purposes, we can think of it as a level of awareness. To say the consequences of a choice are salient means that the chooser's aware of the consequences of each choice. When looking at incentives, it's important to always ask and try to understand if the person making the choice is aware of all the incentives, consequences and dynamics of each choice, is it salient to them? In many cases, with the way our brains can be lazy and gloss over information, the answer is probably no. This is where the choice architect can find some well placed points to include an explanation and relate the choice back to something more salient. In order to nudge the decision to relate this back to our air conditioning example, consider the way the pricing message is framed. If the average air conditioning unit costs $6,500 and you say it's going to be 6,500, do you want it? The customer gets some serious sticker shock and that high anchor can cause them to want to think about it more and delay the decision. Our human BR have a hard time understanding value and cost. Over time. We see the $6,500 price tag and what becomes salient has the most impact over our decision. We start to think of all the things we could get with that $6,000. We start to have loss aversion and anticipate a lot of regret. We think about the great vacation we could take and all the hours we had to work to save that much money. Money relating the full cost to its salience makes the conversation and decision about the wrong type of payment. Remember what I said about my husband paying in the complaints about the heat? What is the cost of each of those conversations? What is the cost or value of comfort? And while we logically know the cost of air conditioning is a one time expense for something that will last a long time, the subconscious doesn't really understand what that means or have an easy time doing those calculations. So it focuses on the immediate cost and what we could do with $6,500. So the question becomes how can you make the choice and its repercussions more salient for the chooser in a way that benefits you? As the company that's trying to sell this air conditioning unit, we need to break that down into smaller chunks the brain can relate to and make those numbers more salient. And other facts and details. If the average cost is $6500 and the item has a 10 year warranty, you know it will last you at least 10 years and honestly, probably a lot more. So if you break that down, you're already down to $650 per year and that's already easier to swallow. What if you break that down by month? Would you pay $54 a month to have the ability to temperature control your entire house? That seems like a much easier decision, right? Or we could break it down by week. Or saying it's less than $2 per day for the air conditioning unit. And when you're talking about retrofitting to include the wi fi enabled enabled controls for both heating and air conditioning, this can become a much more realistic number and benefit. But for our purposes, let's look at some more ways to break this down. Because not every day, week and month needs air conditioning. Like I said here in Washington, July and August are our big months where we need to worry about it getting too hot. So the choice could be presented as $325 for each of the hot melts months. But as you can see, that doesn't sound as good as the $54 per month and it still doesn't quite feel easy. Are there other ways to break this cost down? So it incentivizes the decision and nudges them toward a yes. Of course everyone gets to decide their ideal home temperature and that can vary. But the average temperature during the warm summer months is supposed to be 75 degrees inside. Seems high to me because I run cold, but I can appreciate the average and we'll use it in this example. So I looked at 2018 to get the number of days in July and August that were over 75 degrees here in my city and it was 46. That's 46 days where the average person would have benefited from air conditioning to keep their temperature regulated and be comfortable. Do you know what that breaks down to? About $14 a day. On those days when I was working at home and melting in 96 degree heat, would I have been willing to pay $14 to have it be a more reasonable temperature? No question. And those nights when the kids couldn't sleep because it was so hot and everyone was up more than we wanted? Absolutely. It becomes a much easier choice to make. It's become something my brain can relate to and quantify better and it feels silly not to do that. Right. This has made the cost and value more salient and makes it easier to make the choice to buy the thing I already know I want, which is a win across the board. Being in sales is basically being a full time choice architect. It's the burden of a salesperson and companies to structure choices in a way that their customers can quickly understand the value and make a choice. Understanding all the incentives involved and how they interact with each other can help ensure the choice that's best for everyone gets nudged. So it's the easiest option for the chooser to go with. And if you don't understand this, it's really easy to be nudging someone right out of a choice of using or buying your product. And I'll get to that in the upcoming examples. Now that we've covered all the angles of incentives for our air conditioning example, we're going to pause on that scenario until next week. Now let's talk about some other examples of incentives in choice architecture and nudging. I briefly mentioned the process of buying a car earlier in the episode, and it's a great example of incentives and salience. Let's say you're living in a downtown area where there are lots of taxis or Ubers or Lyfts available for you to take to go to work and for going out. You now have to decide if you want to buy a car or take taxis and public transportation. Buying a car is a big upfront expense, often made easier to swallow by getting a loan from a financial institution. But let's say for the sake of argument, you have $10,000 in cash and you're going to use it to buy your car car. Or you can leave it in the bank and have a taxi fund that will last you for quite some time. Most Humans have a hard time understanding the incentives in this Choice. Once the $10,000 is paid, you own the car and it has value and you're able to think of it as an investment. Concepts like depreciation may be underweighted and you may overvalue the benefits of convenience and customers comfort. You also likely will not be factoring in the cost of maintenance and gas because those are less salient. When making the buying choice, you're consumed with the shiny car your subconscious wants. Once you have the car, you don't think about how much it costs each time you drive it. Instead, that one time purchase is completely removed from the experience of the car, meaning the incentives are different. And this happens even if you did get a loan. Paying for the car is removed from the experience of using and driving it. Now think about the option of taking taxis and in this case I'm going to talk about the old school taxis where the meter's running while you sit at a light and watch your dollars slowly flying out of your wallet with each passing second. Tick, tick, tick. That's much more painful, right? The cost is salient with the experience and you feel it more. The cost of taking a taxi feels worse on the subconscious than buying the car. It's sort of a death by a thousand paper cut scenario. Even if you would only spend half the amount on taxis as you would on a car, and you could be earning interest on that money over time and it's compounding, it doesn't, it doesn't feel that way. And that can impact the choice a human person makes. Uber and Lyft have done a good job of incorporating this into their pricing model. You agree to the cost up front and then you don't have to look at it again. It's still immediate, but you don't have to experience it every second of the ride. You can walk outside and say it's pouring rain. It's worth spending 850 to hop in a new Uber and then be done with your decision. You know what it will cost and you can have that be salient and then go away. In contrast, you could look and see. Yikes, 30 bucks due to surge pricing. It's not that far. I guess I'll walk. The unknown of a taxi creates uncertainty that makes it harder to make the choice. Uber and Lyft are reliable and present that cost up front, making the choice easier to make, but still a different choice than buying a car. How can you use this concept of salience to your advantage? When nudging, think about what you want to bring your customers attention to versus what would be a negative experience? What if television cost viewers each minute they were watching? Instead of paying, say $13 a month for Netflix, you're now going to be charged for each minute you watch. And there's a running clock in the corner of the tv. TV on every show outlining that sitting and watching has cost you 35 cents so far this month. Or $3 and 50 cents. $3.56, $3.57. Do you think a lot less people would binge watch if the meter was running? Absolutely, and that's one reason they would never price it this way. They want you to watch. They make it easy and painless to pay. So the choice place to continue to watch is easy. Have you ever had to use a computer at a FedEx store or an Internet cafe where you're charged by the minute? It feels so stressful and you're almost panicked. Can I get through this before I'm charged for the next minute? What's the benefit of this? How would it be different if the clock wasn't ticking while I was working? If I was consulting to FedEx in this case, I would ask, what are you trying to accomplish? What's the true cost of someone using the computer a little longer? What if they paid up front? How might it change their behavior if they had a prepaid card or a credit system instead of tracking in dollars by the second? If they were more relaxed, would they buy more and have a better feel for the brand overall? Maybe. And what can you do to structure your incentives? What is salient and what isn't to help them make those choices to buy from you? That point about using a prepaid card made me think of a recent question I got from a listener who sent me an email. She asked about paying with points and how that might influence behavior, which was triggered after listening to the episode on loss aversion. In the context of incentives, the question would be how does buying behavior change when the unit of payment is something like points earned on a credit card versus dollars? I think there's definitely a change in behavior because of salience and not having an immediate tie back to the value of a point. Consumers don't really understand how much effort went into earning the points, not in the same way they do with dollars, because they know how much they earn per hour at their job, and they pay for all sorts of things with dollars or euros or whatever unit of payment you use. Since I know we have listeners here tuning in from around the world so if the value and cost to acquire a point is less salient, what does it really mean to say a flight costs 20,000 points or a new trinket is 3,000 points? In this case, it would be more about the overall balance of what exists currently in their account, and likely not about the cost to acquire those points or more points. This is the same in any unit of measure that isn't easily convertible in our brains. I've talked about calories in versus calories out and how that impacts behavior. For example, you may know that a bottle of soda has 250 calories, but what does that mean when it's framed in a way that makes the true cost salient? It makes the choice of drinking a soda easier to relate to. Saying the cost of drinking a soda is equivalent to running for an hour makes the cost feel more real in the moment when you're deciding if you want to drink a soda or not. Just hearing that may nudge you into making a different choice. This is where it's good for a health club or nutritionist or calorie counting app to bring attention to the cost of drinking a soda, but the company who makes and sells soda doesn't really want to make that salient again. That's why it's important to consider the questions of who uses, who chooses, who pays, and who profits. Speaking of athleticism and gyms, what if your gym charged you for every mile you went on the treadmill? Or every step you took on the Stairmaster? Or every pound of weight you lifted due to wear and tear on the item items? I'm guessing they would go out of business pretty fast. But do you enjoy seeing the calories burned tick up as you run? Incentives like this allow people to set targets and work harder. The stair Stepper at my gym lets you choose if you want it to. Just track your steps, which is grueling. And I spend the time checking the clock to see how many minutes I have left, slowly watching the second seconds tick by. Or I can have the setting where I choose which building I want to climb and it puts a picture on the screen. In case you didn't know, it's 40 floors to the top of the Great Pyramid at Giza. That ends up being about 700 steps. Seeing the pyramid and having a tracker of how many floors I've completed and how many are left to get to the top is much more motivating, even though it's all just happening in my silly brain. And I feel much more accomplished at the end to say I climbed to the top of the Statue of Liberty this morning than to say I went 275 steps on the StairMaster. It gives me incentive to walk more and be healthy when I can track in this way and help sort of distract my brain from the things it might focus on that might become more salient when I'm not really wanting to be at the gym. Are there other times you may want to bring attention to the cost of a choice? Of course, let's talk about energy usage. We talked about air conditioning a lot in this episode, and of course the cost of the unit is only part of the equation when it comes to actually using the thing. I now have to pay the increased energy bill each month, but how much does it cost to turn my thermostat down from 75 to 72? How much do I save if I let it go up to 77? Maybe they charge me more per kilowatt hour in a heat wave to use my air conditioning. What does that actually mean in the moment? Nothing. It isn't really salient, and I don't understand the consequence of the buttons I push on the thermostat and how each individual choice tied into the bill I receive a month or two later. It's all absorbed into this conglomerate, making it difficult to influence my behavior. Surge pricing may seem like a way to nudge people into using less energy, but because this isn't salient in the moment, it doesn't do as much as it could. What if the thermostat told you that turning the temperature down those 2 degrees will cost you $5 per hour and then said are you sure you want to do this? Would that impact your decision? Or what if your smart WI FI enabled system sent you an alert saying if you adjust your thermostat 1 degree, you could save $10 today. Would that nudge you into making the choice to adjust the temp? Is that enough of an incentive? Especially when you can just click a button on your phone and say, yes, do that. And then you can track the savings to quantify those green choices, which is doubly awesome. And as the company who is presenting this energy, you are tying yourself in with this benefit. There's a greater affinity the customer has for you and the company and they have more loyalty because they appreciate you making these efforts to help them to save money and energy and the planet. All great. I have one last example before I wrap up to touch a little more on competing incentives and how quickly this can get complex. Consider the US healthcare system. And as always, this is not about being political. It's my intention to be neutral. I'm not placing any blame or choosing a side. It's purely for the sake of examples, and this is one that we covered in my choice architecture class in school, which is why it's especially salient for me as I'm working on this episode. The user in this case is the individual who has the plan. That's easy, but think about who chooses. It may be the user, but in many cases it's their company. And the company has to make its decisions based on the entire organization, not necessarily the individual. That choice can determine which doctors they use, what's covered or not, and all sorts of decisions that will be made made down the line. Who pays this is the user and possibly their company, depending on the way the plan is set up. And how someone decides which plan to use can be based on something that seems important, like a low monthly payment or a low copay, when what they should really be looking at is maybe the deductible or something else that's less salient. The way the information is presented makes a difference in what they choose. And some studies have shown that the system is too complex for anyone to make the best choice, even when provided with lots of information up front on how the formatting and planning works. What about who profits? The insurance company and the doctors or other facilities? And are there incentives lined up in the same way? For the doctor to make money, the insurance company has to pay for the insurance company to make money. There's a balance between going to the doctor to stay well, but not having too many expensive procedures on the part of the user as well as the amount that the doctors are charging. And really you get into this issue where for one to win, the other has to lose, which can just create problems in any sort of choice architecture. Is there ever a way to find a win win scenario so everyone's incentives would be lined up? I'm sure if that had an easy answer, it would have been figured out already. But improvements can always be made. In the paper I wrote on this, I suggested that incentives could align with individuals who get a rebate or tax break or reduced deductible for each time they go to the doctor or have a prevention preventative screening to help catch diseases early, meaning less expensive procedures. Or because losses are twice as impactful as gains, the wrong choices could have a penalty like a negative incentive aligned with them to help people choose properly. Doctors could have some sort of incentive to have people come in and get their screenings like a higher percentage of patients who consider them their primary to get screening, flu shots, etc. Means more and better technology or equipment in their facilities. Noting that the ethics of this type of incentive would need to be monitored very closely. The insurance companies could be given better placement on the Affordable Care act website if their plans or offerings were simpler and easier to understand, meaning more people could choose them and then they would make more money. If more people are using their services, you know, trying to find a way to bring it all together that the benefits of what one wants align with someone else profiting and the user getting benefits, all of that together. Again, noting that this is a very, very, very complex situation and I by no means am saying that I have the answer here. It's just something to look at and a way that choice architecture can be implemented to help nudge and use incentives to benefit, even things as complex as health insurance. Think about your own business and what you are selling to your customers, whether it's a product or a service. What do they need to know and have salient to make a good choice? What incentive is their brain likely to focus on first? For better or worse? How can you nudge it so they look at something else? So what got your brain buzzing as you learned about incentives today? For me, I find incentives to be fascinating because there are so many layers to them. It's so important to look at the ripples of choices and incentives, all those little facets that may not come to mind but can actually be really, really important when decisions are made. People throw around incentives all the time with an it can't hurt attitude, and I hope this is one small step in the way of letting people know that they absolutely can hurt. There are countless examples of mishandled incentives causing way more problems than benefits provided. When UI is here on Friday, you're going to hear a lot about that, and I'm also linking in the show notes for some other examples in case you're ready to geek out on this, including episode 220 on the cobra Effect. My top recommended next episode because it's just so good and important to learn from. Plus my conversations with Kurt Nelson, Tim Houlihan and Gleb Sipursky, who all have talked about incentives when they've been on the show in various capacities. And of course, don't forget that your free incentives worksheet is also waiting for you in those show notes, along with related books and more. It's all there in the show notes@the brainybusiness.com272 and just like that, episode 272 on incentives is done. Join me Friday for a brand new episode with Dr. Ui Kneezi to continue our discussion on Incentives with his new book Mixed Signals. It's going to be a lot of fun, you don't want to miss it. Until until then, thanks again for listening and learning with me, and remember to be thoughtful. Thank you for listening to the Brainy Business Podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.