A Nudge in the Right Direction

March 30, 2009

BY MICHAEL KRAUSS

Marketers dream of making small changes to their products and services that have big impact for their customers and their company’s bottom line.

Richard Thaler, professor of behavioral science and economics and director of the Center for Decision Research at the Booth School of Business at the University of Chicago, thinks marketers can do more than just dream.

“Marketing people know a lot in their gut,” Thaler says, “but they haven’t systematized it. They know that part of the reason people buy a [particular] car is that it helps establish their identity. It’s not a cold calculation. It’s a hot calculation. I don’t think that marketers know how to formally incorporate those ideas into a systematic analysis.”

Thaler’s new book with co-author and University of Chicago law professor Cass Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness, provides breakthrough insights for marketers that can lead to the design of more scientific and systematic marketing programs.

A nudge, according to Thaler, “is some small feature in the environment that attracts our attention and alters our behavior.” As marketers, we all constantly try to nudge our customers toward certain behaviors.

Thaler provides examples of opportunities for favorably nudging buyers, and describes ways to improve what he calls the choice architecture—the environment in which decisions are structured and buying choices are made. In the process, he illustrates how executives can assume greater responsibility for creating scenarios where both customers and organizations prosper. One of his favorite examples relates to improving unpleasant public bathroom facilities through a slight nudge.

“There was a sanitation problem at the men’s room at the Amsterdam International Airport,” Thaler says. “It turns out that men, when they are doing their business in the rest room, aren’t all that careful.

“You could post signs exhorting neatness and cleanliness, but those would not be clever nudges. Instead, airport management etched an image of a fly at the bottom of the urinals,” Thaler says. “By giving men something to aim at, it reduced spillage by 80%, creating a cleaner environment for travelers and reducing sanitation and maintenance costs,” Thaler adds. It also spawned an online business. Now everyone can buy the little fly decals online and add them to urinals instead of etching the porcelain.

The etched fly creates a context and gives the bathroom user a default option and a nudge as to where to aim.

“Anybody who designs an environment in which people choose is a choice architect,” Thaler says. He sees the role of choice architect as an increasingly important position in the years to come.

“If you’re working at a restaurant and your job is to write the menu, you are a choice architect. Even if the chef tells you what he’s cooking, you have to decide how to organize the menu,” he says.

“Should the cold appetizers and the hot appetizers be in separate categories? Should the items appear in order of price, or should the meat and fish dishes be separate? One conclusion from the study of the psychology of decision-making can be summarized as, ‘everything matters,’ ” Thaler says.

Grocery stores have been savvy choice architects for years by placing fast-moving, high-margin products at eye level. Thaler says snack makers like Nabisco practice smart choice architecture by offering 100-calorie snack packs with solid profit margins while nudging consumers to make healthier choices.

He sees an opportunity for better choice architecture in the marketing of financial services products, in helping employees decide how to invest their 401k dollars, in making healthcare decisions, in designing school lunch menus and even in how we manage organ donation programs.

He believes thousands of lives could be saved each year though better design of the choice architecture associated with organ donation. Today, prospective donors must opt-in to the donor program. He argues that lives could be saved if the default option for organ donation was automatic inclusion of all licensed drivers, and a requirement for those who desire not to serve as organ donors to actively opt-out.

Thaler and Sunstein are putting empirical evidence to work to demonstrate what many marketers have always known in their gut, which is if we can establish the environment in which a buyer makes decisions, we can influence that buyer for better or worse.
Thaler believes designing the context in which information about products or services is shared will grow increasingly important for marketers as more information is available online.

“As the world changes to having people shop online, where they can conveniently do [multiple] comparisons, the way you design and describe your product must change dramatically,” he says.

Thaler’s point is that online buyers have more information at their fingertips. They can compare 20 alternatives the way buyers once could compare only two. The person who designs the Web site that compares and contrasts that data—the choice architect—will have considerable power and influence. He will have the ability to nudge buyers in one direction or another based on how the data is presented.

Thaler believes an understanding of choice architecture “will change the way people think about their jobs.” Marketers should be first in line to make that change.

Michael Krauss is president of Market Strategy Group, based in Chicago, and can be reached at Michael.Krauss@Mkt-strat.com or news@ama.org.