using-behavioural-economics

Choice Architecture

• Choice architecture refers to the intentional design of how choices are presented so as to to influence decision making

  • E.g. Salad bar placement at the beginning of buffets to encourage people to put fruit and vegetables on their plate

  • Supermarkets place more profitable products at eye level on the shelves

• Choice architecture aims to simplify the decision making process

  • E.g. Restaurants present information about food options in a particular format to encourage individuals to make a particular choice – often bundling items together

  • E.g. Tesco replaced confectionary usually found at the checkout till with healthier options so as to encourage people to make better food choices

Types of Choice Architecture

An Evaluation of Choice Architecture

• Choice Architecture is a powerful tool which can be used both for the benefit of firms and society, but it can also be abused 

Evaluating Choice Architecture

Nudge Theory

• Nudge theory is the practice of influencing choices that economic agents make, using small prompts to influence their behaviour

• Richard Thaler coined the phrase ‘nudge theory’ and argued that firms should use nudges in a responsible way to guide and influence decision-making

Examples of nudges

Diagram: Nudge Theory at SME

• The choice architecture above ‘nudges’ individuals towards selecting the monthly plan above the other plans available

Diagram: London Underground

• The baby on board badge is supplied by Transport for London to expectant mothers to wear when using public transport

  • Other commuters should see the badge and accommodate for the expectant mother by giving their seat to her 

• Dr David Halpern, from the UK Behavioural Insights team suggested the following EAST framework to nudge decision making

  • Easy: Simplify or make it straight forward

  • Attractive: Gain people’s attention, e.g through personalised messages, encourage people not to miss out on opportunities

  • Social: Individuals are influenced by what other people do rather than rules and regulations

  • Timely: identify when people are most responsive

An Evaluation of Nudge Theory

• Consumer nudges are designed to guide people towards certain decisions or actions while still allowing them to have freedom of choice

  • These interventions are typically based on behavioural economics principles and aim to nudge individuals towards decisions that are considered beneficial for themselves and society as a whole

• Consumer nudges should be designed with transparency, respect for individual autonomy, and clear societal benefits in mind

  • Ethical considerations should be taken into account to ensure that interventions are not manipulative or coercive

Diagram: Evaluating Nudge theory 

The advantages

• Cost effective

  • Relatively low-cost compared to other marketing measures

• Preserves freedom of choice

  • Steers individuals towards certain choices while still allowing them to retain their freedom of choice

• Improved public health

  • Nudges can be used effectively to encourage healthier behaviours such as exercising, eating nutritious food, or quitting smoking

• Better decision making

  • Helps individuals make better decisions by simplifying complex information, providing reminders, or structuring choices

• Environmental sustainability

  • By influencing individual choices in a subtle way, firms/governments can contribute to broader environmental goals without imposing strict regulations

The disadvantages

• Ethical concerns

  • Some critics argue that nudges can be manipulative, as they rely on influencing behaviour without individuals being fully aware of the intervention

  • This raises ethical concerns about autonomy, consent, and the potential for abuse by governments

• Lack of transparency

  • Nudges often operate behind the scenes, making it difficult for individuals to understand or question the influences shaping their choices

• Unintended consequences

  • As citizens become used to firms and government’s use of nudges, they may well begin looking for it and actively work against them, e.g. In the UK, more people now look for automatic inclusion in organ donor databases and quickly select the non-default option

• Variable success rates

  • Nudges may not be equally effective for all individuals due to differences in cognitive biases, cultural backgrounds, or personal circumstances

Examples of UK Government Nudge Theory in Action

• Nudge theory helps governments and other agencies shape economic decision-making 

• Examples of UK government nudge theory in action include

  • Workplace pension schemes 

  • Health checks 

  • Labels on food packaging 

Evaluating the UK Governments Use of Nudge