Nudge Theory: Who’s Really in Control?

You’re incredibly gullible. You probably have absolutely no idea just how gullible you are.

There’s a theory – a concept in behavioral science and economics – which tells us that our decisions can be super easily influenced and manipulated through simple psychological triggers and tricks.

Isn’t that kind of nuts?

The Decoy Effect

For example – there’s something known as the decoy effect, popularized by the well-known behavioral economist Dan Ariely. This term describes the phenomenon whereby a person’s preference changes when faced with a choice between two options and a third that is asymmetrically dominated.

Asymmetri-what-imated?

Imagine you had to make a choice between a big cake (cake A) that costs $5 and a small cake (Cake B) that costs $2. There are two characteristics that you, as a potential cake buyer, have to weigh: size and price.

Cake A   (large)                     Cake B (small)

$5                                                         $2

Pretty simple choice at this point right? Gimme the bigger cake and make sure you look away while I stuff it all in my face hole.

But…maybe you have a different preference than I do. Suppose you wanted to save some money, or just didn’t feel like eating a big cake, and you chose cake B.

Now imagine that I introduced a third cake (cake C). Cake C costs $10 and it’s bigger than Cake B – but smaller than cake A.

Which one do you pick now?

Cake A   (large)                     Cake B (small)                      Cake C (medium)

$5                                                         $2                                                  $10

Did the introduction of Cake C make Cake A look more enticing? A is both bigger than Cake C and less expensive.

If you looked at those three choices and something inside of you went “oh yeah, cake A…duh” then you fell for the decoy effect. Just adding a third choice changed your preferences, which is exactly what corporations and marketing teams around the world are hoping for.

You might be looking at this and going, “ok, but that would never work – people can see right through this!”

Except…they don’t.

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Take a gander at the picture above, which is a menu of the subscription options at the Economist.

The first offer: an internet only subscription for $59.

Second: print-only for $125.

Third: print & web for $125 – the same price as a print-only.

Print and web for the same price as the print-only subscription. What? Does that make any sense?

Yup. Because humans tend to look at things on relative terms, we see the print-only subscription (which is asymmetrically dominated by the print & web offer) and judge it as a terrible offer in relation to the print & web offer.

Dan Ariely ran an experiment with some MIT students and presented them with this exact choice as laid out by the Economist. With all three choices, 84% chose the print+web subscription. No one chose the print-only subscription.

He then tried it again with another group of students, but this time he eliminated the print-only subscription, meaning the students only had to choose between the web-only offer and the print+web offer. This time only 32% chose the print+web offer, with the majority (68%) picking the web-only subscription.

 

nudge

Incredible. So, by adding this dominated option (the print-only offer) the Economist was able to drastically increase their revenue. Think of all those people who were essentially tricked into picking the more expensive option ($125 for print+web) that would have otherwise been happy with just the web-only option (at half the price). Once those people thought they were getting a deal (judged in relation to the weird print-only subscription) they were happy to switch over and give the economist $125. You see this all over the place.

Apple uses a similar approach when pricing their products.

nudge

Look at the difference in prices for the Apple iPod Touch. It’s not a linear rise. The 32gb version is $299 and the 128gb Touch is $499 (a difference of $200) but the 64gb version is less than the $399 you might expect it to be. Relatively, that 64gb version seems like a better deal.

It becomes easy to see how companies would want to use the psychological principles behind ideas like the decoy effect to influence customers into buying a version of a product that has better margins for them.

If this seems a bit shady…that’s because it is. Companies are creating an illusion of choice. On the bright side though, people do use similar types of tricks to do good for the world.

The Power of Defaults

How do you get people to eat healthier, save more for retirement, or even become an organ donor?

Easy, make it the default option.

Getting people to become an organ donor has actually proven to be trickier than we first thought. At face value, it seems simple. When you die, you donate your organs to someone who needs it, potentially saving their life. You’re dead, so it’s not like you really need your organs much anymore. Yet governments were finding it surprisingly hard to get anyone to opt-in to the program.

Research has shown that people are more likely to choose a socially-beneficial option (like registering as an organ donor) if it is presented as a default choice. Where, before, you would have to opt-into becoming an organ donor, what if when you got your driver’s license you were automatically enrolled into the organ donor program? Meaning, if you didn’t want to donate your organs (a social good), you would have to actively opt-out.

It worked. Like a freaking charm. The majority of people couldn’t be bothered to opt-out and as a result, stayed as organ donors. They weren’t opting-in before due to some clash with their personal beliefs, they were just hella lazy!

nudge

This approach worked across the board. If you opted people into retirement savings programs at work, they tended to stick with it – allowing them to save more than people who didn’t have similar initiatives.

These psychological tricks works because humans have many cognitive biases. Basically, there are some weird bugs in our programming that choice architects (this is a real occupation) can take advantage of in subtle ways.

Hopefully, now that you’re aware of a few of them you won’t be as susceptible!

To learn more about irrationality when it comes to behavioral finance, check out this course!

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