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A Nobel Prize winner’s guide to behavioural economics

Richard Thaler, the man behind the highly influential “nudge theory,” has been awarded the Nobel Prize for Economics. Thaler helped popularise the field of behavioural economics by exploring how human beings are innately irrational, but predictably so; a departure from the previously accepted idea that people behave rationally (the so-called theoretical species “homo economimus”). In a 1980 paper, Thaler wrote that “in certain well defined situations, many consumers act in ways that are inconsistent with economic theory.”

Thaler’s book ‘Nudge: Improving Decisions About Health, Wealth & Happiness’ lays out the notion that people can be encouraged (or “nudged”) to make better choices in a way that is not prescriptive or overtly enforced. This has, in turn, informed UK policy-making, leading to the creation of the “Nudge Unit” under former prime minister David Cameron, with the aim of fostering healthier behaviour regarding alcohol intake, smoking, and obesity. The nudge unit played a part in current PM Theresa May’s announcement that organ donation in the UK will be “opt-out” moving forward, as opposed to vice-versa.

“The significance of behavioural economics is still debated. Some critics say there are too many biases and heuristics involved,” writes The New Yorker’s John Cassidy. “But if behavioural economics doesn’t overcome every shortcoming of traditional economics, it at least acknowledges these shortcomings, and grapples with them in ways that have yielded important insights in areas ranging from finance to international development to sports.”

Naturally, Thaler’s brand of behavioural economics, and nudge theory in particular, have had an undeniable impact on modern advertising.

As innately irrational human beings, consumers are prone to making illogical or short-sighted decisions, even when presented with clear facts. This can be due to habit, or a shortage of time in decision-making.

Take junk food, for example. A consumer might be more inclined to buy fast food for lunch because it’s an ingrained habit, even though they know there are healthier options available. While PSAs and marketing have their place in promoting healthy eating, research has found that simply positioning healthy food at eye-level on shelves had a significant impact on purchasing behaviour. Consumers didn’t feel they were being preached at, the food was just made easily available — as convenient as so-called convenience food.

In sales, commonly practised nudge techniques tap into our “social norming” (we think that if other people are signing up to a service, it’s for a good reason) and “loss aversion” (aka good old-fashioned FOMO).

Nudge theory has even had a positive effect when it comes to helping people exercise control over their social conduct. To combat anti-social behaviour in a borough of Southeast London, where shop fronts were continually being damaged, Ogilvy worked with street artists to adorn windows with images of babies — causing even the meanest vandal think twice. And one of the most universal annoyances in bathroom maintenance — spillage around urinals — can be solved simply by adding something for users to aim at!

While none of us like to think we can be so easily influenced, the beauty of Thaler’s nudge is in its simplicity. Rather than being forced to modify our behaviour and adopt new habit (something which always feels like hard work) our journey is unobtrusively reshaped, so that the smarter, healthier decision is the one directly in front of us. This places immense power in the hands of advertisers — use it wisely!

As for Thaler, he’s no different to any other human being. When asked how he intends to spend the Nobel Prize money of 9 million Swedish krona, he said: “as irrationally as possible.”

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