How Nudge Theory relates to decision making

Thaler and Sunstein’s ground breaking work  on ‘Nudge’ theory showed how Behavioural Economics could help people make smarter choices about everything from saving more to eating more healthily. But what is it?

Put simply, their evidence shows that telling people what to do (“You must pay this bill or else”) doesn’t work. Not only do people not do what you tell them to do, they actively rebel against it. But if you leave people to their own devices they do nothing.

So what do you do?

Nudge Theory shows how you can help people make their own smarter choices by the timing and way you present information to them. Here are three ways we are helping people help themselves through a nudge:

1) Situational bias

You’ve probably had this: you’ve never heard of an organisation before but then become aware of them and from that point onwards, they are everywhere – on billboards, the bus, the radio.

That is Situational Bias. They were always in your mind, just at the back but when you start to work with them, they come forward so are more likely to notice them from that point onwards.

We can use this to help employees engage with their finances.

You hold rich data about their people and as that data changes (they move home or have a change in pay), you can use that change as a hook to deliver the guidance they need in relation to that change. Because of Situational Bias, they are more likely to notice and action that ‘nudge’.

2) Confidence bias

The classic example of Confidence Bias is to put 100 people into a room and ask them whether they are above or below the average intelligence of the other 99 people. Typically, 85% will consider themselves to be above average intelligence.

That is human nature. We have to believe in ourselves to survive and prosper and we can use that confidence to do good.

Where we provide “People Like You” benchmarks, be it average mortgages, pension contributions, utility bills or debt repayments, people will aim above the benchmark on positive items such as savings and below the benchmark on negative items such as debt.

We have tracked data of employees increasing pension contributions by an average of nearly 5%, active benefit choices by over 10% and charitable Give As You Earn contributions by a whopping 30% as a result.

3) A reward

Weight Watchers are the market leader in providing rewarding ‘Nudges’ to people to get them to continue with a plan.

Generally, people will make the right choice upfront but then revert to type.

A great example is the well-publicised research which shows that when invited to a seminar and asked whether they preferred a piece of fruit or a cake, attendees that that chose in advance chose fruit and those that made a decision on the day went for the cake.

The way to retain a good choice is to provide the person with a reward for doing so.

Some of our clients have gone as far as offering prizes for those that complete action plans, but we have also found that simply by offering a few “wellbeing points” employees are over 70% more likely to stick to an action plan.

Although we want to do the right thing, we’re human after all and sometimes no matter who we are we need a ‘nudge’ to push us in the right direction.