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Nobel Prize winning economist Richard Thaler’s nudge theory has helped workers beef up their retirement accounts to the tune of nearly $30 billion, gotten people to eat more fruits and vegetables, and even helped men improve their aim into urinals.
Nudge theory is based on the idea that small tweaks in “choice architecture” — in other words, how choices are presented to consumers — can help steer people toward decisions that will benefit them. A classic example is the Save More Tomorrow program, which exploits people’s natural tendency to put off saving for retirement and save far too little.
The program gives “workers the option of committing themselves now to increasing their savings rate later,” Thaler and co-author Shlomo Benartzi wrote. Participants start by putting a small percentage of their paycheck (say 3%) into a 401(k), then automatically increase their savings rate every time they get a raise. The program quadrupled savings rates at the three firms where it was first tried in the late 1990s and early 2000s. One reason for its success: people’s innate inertia. Few participants opted out, so the majority stayed enrolled in the program.
Thaler often tells his fans to “nudge for good,” which begs the question: what is nudging for bad? And what happens when behavioral insights are harnessed to help a company’s bottom line?
How Uber drivers are nudged to keep driving
Uber drivers have seen this firsthand. Working with teams of scientists, the company has developed nudge techniques that push drivers to work longer hours, “sometimes at hours and locations that are less lucrative for them,” according to a New York Times story that exposed how Uber and other gig economy companies use behavioral science to maximize workers’ output.
Uber uses an algorithm similar to Netflix’s autoplay feature, which automatically queues up the next episode of whatever series you’re watching. Drivers are shown their next possible fare before they’re even done dropping off their current rider, the Times reported.
“We show drivers areas of high demand or incentivize them to drive more,” an Uber spokesman told the Times. “But any driver can stop work literally at the tap of a button — the decision whether or not to drive is 100 percent theirs.” (The company did not respond to MarketWatch’s request for comment.)
How ‘dark nudges’ manipulate gamblers (and subprime mortgage-holders)
British bookmakers aggressively advertise complex bets to gamblers. For instance, bets on whether a certain player will score first, versus simpler bets on whether a team will win a match.
The complicated gambles earn higher profit margins for bookmakers than simple bets, and by marketing them heavily, they’re preying on a behavioral tic, postdoctoral researcher Philip Newall of Technical University Munich found in a recent study.
Soccer fans routinely overestimate the probability of complex bets, but not simple ones, Newhall found, so they’re far more likely to lose money on them.
Newhall calls this a “dark nudge” and says it’s an area that deserves more study. He sees dark nudges in “highly-complex and often poor value-for-money” products sold to consumers, such as subprime mortgages with ballooning interest rates or complex mobile phone contracts.
“If dark nudges exist and lead to large losses in welfare -- questions that still have not received the attention they deserve, in my opinion -- then it might be the case that we are missing out on large improvements in consumer welfare by not trying to reduce dark nudges,” Newhall told MarketWatch.
When nudges become ‘noodges’
Nudge theory is “another classic example of great academic research put into practice in a way that was never intended or foreseen, especially with the changes in technology that are around now,” says Joe Coughlin, director of the Massachusetts Institute of Technology AgeLab.
When nudge theory was first identified (Thaler and co-author Cass Sunstein’s influential “Nudge” book was published in 2008), nudges were “gentle little incentives here and there to get you to do the things you should do,” Coughlin said.
But since then marketers have embraced nudging as a way to get people to buy things, and the “Internet of Things” and big data now help them find new places where we never imagined we could be nudged, he said.
A few examples: your phone buzzes to wake you up, your coffee maker dings to tell you it’s time to make coffee, your dishwasher sings a tone to tell you it needs to be unloaded, and when you’re driving, Waze may suggest you visit a coffee shop where you once stopped.
“Suddenly all those gentle nudges empowered by new technology and relatively overzealous marketers have now turned into noodges,” Coughlin said, using a Yiddish term for nag.
He worries consumers will start to tune them all out, including the beneficial ones. “Then we will lose the value of nudging to do the good in society,” Coughlin said.
What Thaler himself says about what consumers can do
Thaler’s favorite nudge — and one that he says has saved his life several times — is the London street sign that reminds pedestrians which direction to look for oncoming double decker busses, he told Reddit users in 2015.
But he’s been frank about their less benevolent applications too. Proper nudging should be guided by three principles, Thaler has said. They should be transparent, easy to opt out of, and should improve the person’s welfare.
He’s called out merchants who violate those principles, including a British newspaper that automatically enrolled trial subscribers into long-term plans and made it hard to opt out, and an airline that prompted passengers to buy expensive trip insurance if they wanted to book their tickets online.
“Many companies are nudging purely for their own profit and not in customers’ best interests,” Thaler wrote in the New York Times in 2015. He urged consumers to be vigilant, read the fine print, and give their business to companies that nudge for good, not bad.
“As customers, we can help one another by resisting these come-ons. The more we turn down questionable offers like trip insurance and scrutinize ‘one month’ trials, the less incentive companies will have to use such schemes,” Thaler wrote. “Conversely, if customers reward firms that act in our best interests, more such outfits will survive and flourish, and the options available to us will improve.”
Who knows what’s best anyway?
Thaler and Sunstein have described nudging as “libertarian paternalism,” meaning that it helps people make better decisions without interfering with their freedom to choose.
But who’s to say what the “better decision” is, says philosophy professor Mark D. White of the College of Staten Island, City University of New York. The Save More Tomorrow program boosts retirement savings, but that may not necessarily be the wisest choice for every worker. Some could have other financial goals that conflict with retirement saving, like stockpiling cash for a new baby or house, he said.
“I just don’t like the presumptiveness of assuming that we know what’s in your best interests and we’re going to help you make decisions to get there,” said White, author of “The Manipulation of Choice: Ethics and Libertarian Paternalism.” “It may be completely benevolent, but they choose one decision for everyone, and it doesn’t take into account the complexity and multifaceted nature of our true interests.”