442. The Power of NUDGES and Choice Architecture (Refreshed Episode)

Welcome to episode 442 of the Brainy Business Understanding the Psychology of why People Buy Today's episode is all about choice architecture and nudges. 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 an introduction to choice architecture and nudges. This episode originally aired in 2019 as number 35 on the podcast and it was the first in a seven part series on all the different types of nudges. I'm so delighted that I saved this episode to be refreshed today because it is the the perfect one to tee up my guest on this upcoming Friday's episode, Jason Vojovic. Jason will be here to talk about the history of how we became a consumer choice culture and all the amazing things that happened at the right time together serendipitously in the 1920s to make this possible. His book Booze Babe and the Little Black Dress is fascinating and it's all about consumer choice, which meant that this introduction to choice architecture was a great way to kick off the week. As you listen today, think about all the choices you have from where you live to the cars you drive to the clothes you wear and the books you read, podcasts you listen to and get ready to learn all about the history of what made that lifestyle possible. Don't forget that there are links for everything, including my top related past episodes and books waiting for you in the show notes for this episode link which are found within the app you're listening to and atthe brainy business.com 442. All right, let's talk about choice architecture and nudges. In its most core definition, a nudge is a gentle touch or tap, often a way to get attention or help you get back on track. And it's different than a shove or a push or something like that. The concept of a nudge in behavioral economics is very much the same. This is built on the work of Richard Thaler, who won the Nobel Prize in Economics for his work contributing to the field of behavioral economics back in 2017. Prior to that, he co wrote a book with Cass Sunstein titled Nudge Improving Decisions about Health, wealth and Happiness. There is of course a link in the show notes, but I'm doing this series on nudges to help you get acquainted with the concept and understand why this matters to you both personally and professionally. Before I tell you exactly what a nudge is or a choice architect, I want to give you an example situation to introduce you to the concepts and why they're just so important. Many of us may think that if left to their own devices, children would always pick candy and soda and ice cream and all the other bad food options made available to them over healthy treats. They would bypass those healthy snacks, fruits, veggies and meats and make a beeline to the desserts, right? If that's the case, the order that the food appears in a school cafeteria should have no impact on what kids order. In this scenario, we would expect kids to arrive at the line, scan their options, find the desserts, and skip everything else to load up on junk. Do you think that is what happens? In order to find out, a director of food services for a large city school system have the directors of dozens of school cafeterias change the way the food was displayed in the line. No change was made to the menus, just the order things were placed. In some schools, the desserts were first, in others they were last. And in some schools, the desserts were in a completely separate line from the other food. Beyond that, what was placed at eye level changed. Some schools placed french fries at eye level, while others were eye to eye with carrot sticks. In a world where we are all completely logical beings making fully formed decisions and completely vetted choices at every turn, the layout wouldn't matter. But as I have told you many, many, many, many, many times before, humans are not logical. And that means did matter a lot. Rearranging where items were located impacted their consumption by 25%. And that has an even bigger swing because making it more prominent could increase consumption by 25%. But moving the same item to be less visible would decrease consumption by 25%. Now that you know this control exists, how would you place the items? There's more than one option available to you, of course, and the motivation makes a difference. I'm going to paraphrase an excerpt from Nudge to outline this concept, starting with five suggested ways to influence what the kids eat. Arrange the food to make the students best off all things considered. 2. Choose the food order at random. 3. Try to arrange the food to get the kids to pick the same foods they would choose on their own. 4. Maximize the sales of the items from the suppliers that are willing to offer the largest bribes. 5. Maximize profits. Period. Now take a second for yourself and Think about which one you would choose, and maybe a little bit about why, but just which one of those sounded best to you? Now let me tell you what Thaler says about each Option one, arranging the food to make the students best off has obvious appeal, yet it does seem a bit intrusive. And to provide an angle Thaler does not include at this point in the book who decides what makes them best off best, according to whom, by what standard, best by happiness in the moment, by healthy weights down the road. Not everyone would have the same opinion about what is best, so this is very difficult, if not impossible, to achieve. While option one is complex, Thaler points out that the alternatives are worse. Option two, arranging the food at random, could be considered fair minded and principled, and it is in one sense neutral. But if the orders are randomized across schools, then the children at some schools will have less healthy diets than those at other schools. Is this desirable? Should we choose that kind of neutrality if we can easily make most students better off, in part by improving their health? Option three might seem to be an honorable attempt to avoid intrusion, try to mimic what the children would choose for themselves. Maybe that is really the neutral choice, and maybe we should neutrally follow people's wishes, at least when dealing with older students. But a little thought reveals that this is a difficult option to implement. The experiment proves that what kids choose depends on the order in which items are displayed. What then are the true preferences of the children? What does it mean to say that we should try to figure out what the students would choose on their own? In a cafeteria, it's impossible to avoid some way of organizing food. Option four might appeal to a corrupt person on the job, and manipulating the order of the food items would put yet another weapon in the arsenal of available methods to exploit power. But we are honest people, so we don't truly consider this, even though it's important to note that it exists. Option five has some appeal, especially if we think the best cafeteria is the one that makes the most money. But should we really try to maximize profits if the result is to make children less healthy? Especially since we, in this hypothetical scenario work for the school district? What would you choose? How would you choose? This is the burden of the choice architect and what we have become in this scenario. Many of you are already choice architects, and you might not even realize it. If you design the ballot voters use to choose candidates, you're a choice architect. If you're a doctor and must describe the alternative treatments available to a patient, you're a choice architect. If you design the form that new employees fill out to enroll in the company healthcare plan, you're a choice architect. If you're a parent describing possible educational options to your son or daughter, you're a choice architect. If you're a salesperson. That's right, choice architect. Why did they choose the name choice Architecture or choice Architect? You may be wondering. It's because it turns out there are many parallels between choice architecture and more traditional forms of architecture. A crucial parallel is that there's no such thing as a neutral design. It does not exist. Consider the job of designing a new academic building. The architect is given some requirements. There must be room for 120 offices, 8 classrooms, 12 student meeting rooms, and so forth. The building must sit on a specified site. Hundreds of other constraints will be imposed, some legal, some esthetic, some practical. In the end, the architect must come up with an actual building with doors, stairs, windows, and hallways. As good architects know, seemingly arbitrary decisions such as where to locate the bathrooms will have subtle influences on how the people who use the building interact. Every trip to the bathroom creates an opportunity to run into colleagues. For better or for worse, a good building is not merely attractive, it also works. Small and apparently insignificant details can have major impacts on people's behavior. A good rule of thumb, as you've heard me say many, many times before, is to assume that everything matters. The insight that everything matters can be both paralyzing and empowering. Good architects realize that although they can't build the perfect building, they can make some design choices that will have beneficial effects. Open stairwells, for example, may produce more workspace interaction and more walking. And both of these are probably desirable. And just as a building architect must eventually build some particular building, a choice architect must choose a particular arrangement of the food options for lunch or whatever choice their facility facilitating. And by doing so, we can influence what people eat. We can nudge. So now that you understand more of what a choice architect is and the way these decisions work, what exactly is a nudge in this context? A nudge is any aspect of the choice architecture that alters people's behavior in a predictable way, which, without forbidding options or significantly changing their economic incentives to count as a mere nudge. The intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not. Some of the key takeaways from that paraphrased explanation are 1. Everything matters. 2. There are no neutral options. 3. You cannot avoid being a choice architect. Any format is influencing the choices, so it's best to be informed. 4. Nudges can help simplify complex choices and help illogical humans make good choices. And five Nudges are not mandates. They need to be easily avoidable to still count as a nudge. As you can likely tell from the explanation, choice architecture and nudges are very closely tied, but they're not the same thing. They work together on the path to decision. A choice architect is someone who indirectly influences the choices of other people. This means you set up the mechanism in which others will select their own choice, and the choice architecture is the mechanism you select. A nudge is something you would use to actually influence the decision in the way the choice architecture is set up to help the individual trying to make the decision to do the best job possible. I'm going to say all that again just to help it sink in a little bit. And don't forget to check out your free worksheet@the brainybusiness.com 35 to help with some of this. So a choice architect is someone who indirectly influences the choices of other people. The mechanism you set up to help others select their own choice is the choice architecture. A nudge is something you use to help influence the decision to be the best possible one for those using the choice architecture to make a choice now let me give you an example of what I'm talking about here. Let's say you are working in the HR department and are in charge of the retirement plan. Your company offers this as a benefit to employees with a matching contribution up to 10%, and they would like you to get as many people as possible to enroll. Saving for retirement and getting what is essentially free money is a benefit to employees. But only 35% are enrolled in the program, and many of these individuals are not maximizing the benefits of the 10% match. You've done a survey and people know on a conscious level that contributing to their retirement is a good thing. But they often forget or say they don't have time. They'll do it tomorrow or next week, and that day never seems to come. How can you help them to do what everyone knows is in their best interest? When left to their own devices, humans tend to be lazy and have a bias toward keeping the status quo. We often do nothing. In fact, one study found that 86% of people who said they were planning to change their retirement allocations in the next few months had done nothing four months later. Would they appreciate help in completing this seemingly simple task? Probably. And the way you can help them is by putting on your choice architecture hat and giving a little nudge. Perhaps you put together a form that all employees need to complete. Note the form is mandatory, a contribution to retirement is not. So how do you structure the choices on the form? Which comes first? It's important to note that the first item in the list will have the most weight in the brain. So it's best to put the recommendation at the beginning and to consider a default. Remember, defaults from episode 20? They are one way to nudge and we will get into them more in this series. Next, I would ask you to think about what's the question you ask on the form. Remember, everything matters and the way you format the question or the prompt is no different. For example, let's say you want to try and be as neutral as possible, even though we know neutrality does not really exist. And you were to say, in regards to a retirement allocation, I would like to. And then list out the options. It will have a different impact than wording the question as how much would you like to contribute toward your retirement? Which assumes that they actually want to contribute and puts the question in there that they're saying how much versus do you want to? And this would be different than saying Experts recommend contributing 15% of your salary to a 401k. How much would you like to allocate? Do you hear the difference? And did you notice the other behavioral economics concepts at play here? Choice architecture and nudges are complex, which is why they've come up a little later in the mix of episodes. This example includes framing in the way the question's worded, priming by assuming they want to contribute, which you know based on your research and reminding them of that fact. And the last option includes anchoring and adjustment by putting out the number that nudge, that anchor of 15%. Without that number, people who are not contributing anything are starting from a place of zero and working their way into contributing and then moving up. They're likely to come in with a lower allocation than what the expert opinion of 15% is. And actually, actually probably less than they can afford or what they would be happy with in retirement. Looking at the two differences, just by changing, putting in that anchor or not, the wording of the question could cause a completely different choice for the individual. They might look and say in the anchored choice, well, you know, 15% is a bit much for me right now, but I can do 10. If they didn't have a suggested amount, they might say, well, I guess I can start contributing, but I don't know if I'll need that emergency fund liquid and I'll just start at 3% as a note, this is loss aversion and fear of regret starting to take over the decision and make somebody step back from what they can, could or should maybe do. And remember this, all of this, all these different aspects, the ripples, the different points, all the considerations is just in the phrasing of the question. Now, what are the options you include in your choice architecture? How do you word them? Do you simply have two checkboxes that say yes or no and then align to write in the amount they want to contribute? What's the default? If they do nothing, like let's say they didn't fill out the form at all, they opted out of this seemingly mandatory form. Do they stay at their individual status quo, let's say that's no contribution, or do they get the recommended expert opinion and start contributing at 15%? The default is something you can set. And that latter option might be a bit extreme, but it is an option. You could choose whatever you want the default to be to help nudge them to make their own choice. But no, if you did set a default that's very high like that, they could rebel and go completely in the other direction to sort of prove a point, which would be negative as well. So a lot of contributing factors that you need to weigh in on and really think about before you set up this form. Now let's talk about the choices. Maybe you decide instead of just going with the seemingly neutral yes or no, maybe you list the choices as Yes, I want to contribute the recommended 15%. Next choice being yes, I want to contribute. But let's start at 10%. Option three is yes, I want to contribute 5%, yes, I want to contribute some other amount, and finally, no, I do not wish to contribute at this time. You can also get into some language to make it even more nudgy. I've made up that terminology just now, but I kind of like it. But you also need to make sure you avoid creating an overwhelmed brain scenario like we talked about in episode 32. Perhaps you noticed the suggestive nudgey wording in the first option. Yes, I want to contribute the recommended 15%. This reminds them that there is a recommendation from outside experts and keeps that at the top of their mind. I also structured this list so it uses four yeses, assuming that they want to contribute, and only one no option which still says at this time. So no, I don't want to contribute at this time. So it's priming them to think they will contribute at some point and reminding them that it's a really good idea and that most people do or should contribute to their retirement. We could get more extreme in the language, something you might have noticed in online opt in opt out forms these days, which is another form of choice architecture. Some have options like yes, sign me up and no, I do not care about healthy meals or no I do not like to be informed or no I do not care about my future self or some other very strong verbiage that you need to click on and sort of own in order to decline their offer whether you really want it or not. This is a really fine line and there are some ways to do this well, some incorporate humor without causing the person to get irked and choose their option just to spite you. I am going to get into this concept a little bit more throughout the series on nudges, but just want to bring it to your attention here. You may remember a ridiculous loss aversion example I shared in episode nine and I've linked to a blog post I wrote about it so you can actually see it as well there in the show notes it was for exercise DVDs and the pop up was trying to encourage the purchaser to add on more products. The options provided there were and this is in their choice architecture. Their two choices were yes, add the total body fat burning DVD series to my order for the one time investment of only $25 or no thanks, I'm not interested in quickly obtaining my dream body. I understand this is my only opportunity to get access to this information and I'm okay with missing out. I understand that after declining this offer it may never be available again at any price. Even if I wish to pay more. I will pass on this forever. This one never gets less extreme every time I read it and it's really wordy. Like I said, go check out the example so you can see it and what it actually looks like. But this choice architecture is perhaps a bit extreme and it does show an option of a way you could go though. I would recommend staying away from this level. But the premise is right to help prime them into the choice that you think is best for them. In this case. I also sort of question their motives that they're just trying to sell more more DVDs versus actually caring about me and if they're going to be that forceful, do they really care? Does it actually work? You know, you start asking all these questions as the consumer and again might spite them and say no matter what you're offering, I don't want it because you seem so judgy or harsh or whatever it is. And in this case, you know, you might go back and completely opt out of everything, go backwards and change all of your choices. When used subtly, nudges are very effective. If we go back to our HR example where you're working on your form to get more people to opt into the retirement plan, you could have your choices include something like, yes, I care about my future self and will contribute 15%. Or you could have the no option, say, no, I don't care about my future self and so I don't want to contribute. You could also say, yes, I care about my family's future. You know, there are a bunch of options you have. And so taking the time to really play around with the verbiage, maybe create some of those really extreme examples that, you know, you wouldn't want to use, but might help people in the right direction with a little bit of a nudge to get an idea of where the balance is. If you were to try and use the worksheets provided for you through the the series, but trying to make the most extreme in either scenario, what would be nudging them toward not doing the thing that you think is best or that you know is best for them? What would be nudging them in that direction? What might be more of a push or a shove? You know, how can you really fluctuate around there to help to get to the decisions? And. And what list? If you were to list out everything, what would that look like? If you were to then cut it down to only three choices, what does that look like? Really play around with it and see how you can help with your choice architecture and nudges. But again, remember, it needs to be very easy to opt out and say no, thank you for whatever reason they want to. Even if you know, quote unquote, it's the best choice for someone, they get to make the choice that's on them. In this case, it's the same form. They just check a different box. There's not a bunch of hoops or things they have to jump through in order to not get the thing that you're recommending for them. People still need to have free choice. They still have all the information in our scenario and some might say more useful information if you let them know that the recommended contribution is 15 a detail they may not otherwise have and which can help them in the moment to make the best choice for them. Choice architecture is used in all sorts of decisions, from retirement plans to choosing a flight for your next trip, what you order for dinner, whether you take the escalator or the stairs, what books you buy from Amazon, what apartment you choose or mortgage you get, what treatment plan you undergo for an illness, and so much more. So much more. Proper choice architecture and nudges can increase profitability on restaurant menus, help people to save more for retirement, decrease infection rates and deaths at hospitals, increase organ donations, get more money for public parks, help people to use less energy, make cars safer, help you remember to take your card out of the atmosphere, and so much more in this upcoming series of episodes I'm going to be outlining choice architecture and the different types of nudges. The intent is to spend a little time at the beginning of each episode introducing the concept, the specific type of nudge that I'm talking about. But the bulk of each will be giving you practical examples of how to use that particular aspect of nudging or choice architecture. Remember, this is a complex and advanced topic. I had an entire course in my master's program that was exclusively on choice architecture. There is a lot going on here, which is why I think it will be helpful to break it all down this way for you into these little bite sized chunks. Thaler and Sunstein broke nudges down for us into six categories which sort of spell the word nudges. They took some liberty with the categories, but I can appreciate a good mnemonic device so I'm going to keep with the same categories. So here they are, the categories you can expect over the coming series. The first is incentives. It's the N in nudges. Incentives, how to use them, when to use them, and why. Next is understanding mapping. This gets into how you make sure the individuals tasked with making the choice know the pros and cons. Defaults. We've talked about this before, but there's more to it in this context of nudges. So it will get an additional episode with examples of how to use status quo bias and inertia to your advantage and using defaults in choice architecture. Then our G is for give feedback. Providing feedback as close to the action as possible is useful when nudging positive behavior. Next, we expect error. We've addressed this several times on the podcast and in this episode I'm going to talk about the different types of error and how they impact choices and finally structuring complex choices. When there are a lot of variables, there's more room for error and you increase the chances of overwhelm how do you structure, categorize and simplify complex choices like what apartments to rent or airlines to fly on and things like that to help people make better decisions? I'll tell you all about that in the episode on Structuring Complex Choices. So there you have them, the six categories of nudges and a guide for the upcoming series. There might also be a wrap up episode at the end, but you know we'll cross that bridge when we come to it. If you have specific examples you want me to address in the episodes, please let me know. If you send an email to melinathebrainybusiness.com or come find me on social media. I'm on Facebook, Twitter, Instagram and everywhere else as the brainy biz B I Z One last question you might have is if nudges can be used outside of choice architecture, or if you can have choice architecture without a nudge. The answer depends on your definition of a choice and a nudge. You see, even if you do not put effort into creating a nudge, it doesn't mean that one does not exist. As I've shared on this and several other episodes, there's always a default. Whether you think about it or not. Something has to come first on the list of choices, and that's inadvertently nudging someone to choose it. Even if you put things in alphabetical order, or if you were to put, you know, an incumbent first on a ballot or whatever it is, you're still putting it first, which weights it more in the mind of the person who's looking at it. So it's better to really think about the way these are going to be placed. And that's why it's important to be thoughtful about everything you put into your messaging. Even seemingly simple choices can have huge impacts. Remember, putting the dessert in a separate line encouraged kids to make healthy food choices and order 25% less dessert. Putting the carrots at eye level increased their likelihood to be ordered by 25%. What would randomness have done? You're a choice architect whether you realize it or not and honestly whether you want to be or not. So it's best to understand the concepts. Don't you owe it to the people you're presenting choices to to understand these concepts and really think about them in the way you present information? Wouldn't you want someone in your same position to help you make the best possible choice, to do the work and incorporate what they know and understand to nudge you into the best course of action while still keeping your free choice? So what got your brain buzzing as you learned about choice architecture and nudges today? For me, it's always great to introduce people to these concepts because choice architecture and the different types of nudges are so foundational in behavioral economics. Understanding that how we present choices impacts the decisions that people make is really what the field is all about. I guess that's why Richard Thaler won a Nobel Prize for the work, huh? And while our brains have always been wired for choice, we didn't always have as many options for the things we buy. That really started in the 1920s. And as I mentioned at the top of the show, the reason I refreshed this episode today was to lead us into this upcoming Friday's conversation with Jason Vojovic where we discuss the history of consumer choice in that decade and insights from his fantastic book Booze, Babe and the Little Black How Innovators of the Roaring Twenties Created the Consumer Revolution. I didn't know all the amazing insights and aspects that came together in this one decade to make so much of what we take for granted today possible. Trust me, it's fascinating and you don't want to miss this conversation. So if you aren't already subscribed to the Brainy Business podcast, now is a great time to do so. As we close out the show, don't forget about those show notes with links to my top related past episodes and books and more. It's all waiting for you in the app you're listening to and atthe brainy business.com442 and just like that, episode 442 on Choice Architecture and Nudges is done. Join me Friday for a brand new episode with J. Jason Vojovic to discuss the history of consumer choice in America and beyond. It's going to be a lot of fun. You don't want to miss it. 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.