Nudging and behavioral economics: Defying human irrationalities

Let’s be honest: In real life we enjoy eating a piece of cake – sometimes even two or three – and avoid going for a jog. In our work environment, we occasionally postpone work that should really have been done today and sometimes we simply skip to compare accommodation prices for a business travel. The same is true with our colleagues, customers, and employees.

We have to face it: Human decision making is not as rational as classical economic theories like to state. And even though we know that, we often wonder why our well designed theories do not turn into the expected results.

This is why behavioral economics focuses on understanding decision processes - i.e., why certain short cuts are being used, and which unconscious (psychological) factors can create an advantage when it comes to guiding humans to their best behavior or to undertake a desired action. All of this without reducing options and without removing freedom of choice.

Debiasing and nudging are two methods within behavioral economics that can be applied to assist decision-making. Debiasing is a way to proactively make people aware of irrational distortions in their behavior (e.g. prejudices or biases) and helping them to make more rational, objective decisions.
Nudging, on the other hand, is the targeted change of habits, internalized processes, representations or formulations with the aim to discretely influence micro-decisions such as choosing healthier foods or selecting less expensive hotel accommodation.

Nudging and behavioral economics can be applied to various use cases, for example:

• Increase employee or visitor compliance to save costs, reduce risks and decrease reactance
• Nudge people to show more sustainable behavior at the workplace
• Increase diversity and recruiting quality by creating awareness for biases in the recruiting process
• Improve objective decision-making in finance functions (read the full article ‘Verhaltensökonomie in der Finanzfunktion’, engl.: ‘Behavioral economics in finance’)
• Support intended decisions and behaviors while avoiding employee or customer reactance
• Create personalized nudges for greater behavioral change impact
  
  

Moreover, apply behavioral economical insights to:

• Implement soft nudges instead of hard rules to trigger intended decisions and behavior while avoiding employee or customer reactance
• Create personalized nudges for greater behavioral change impact with the help of the Deloitte NeedSphere
   

Did you know that Barack Obama and David Cameron were avid fans of nudging?

During their times at the White House and Downing Street, both Prime Minister David Cameron and President employed nudge theory to improve domestic policies. In fact, David Cameron even installed a so-called “nudge unit” that worked on using behavioral economics to bring citizens to behave in a more socially adequate way. For that, the British Behavioral Insight Team – as the “nudge unit” is officially called – took direct advice from the Chicago Professor Richard Thaler who made the nudging theory popular and explored several ways to encourage citizens based on market incentives and choice architecture rather than regulations.

Our experts at the Deloitte Neuroscience Institute are experienced and trained in the effective use of behavioral economics and in the design and implementation of nudges to e.g., optimize your website conversions, increase compliance with company guidelines or establish more sustainable behavior in your organization. Explore how we used behavioral economics to reduce travel costs for one of our clients.