nudge 2.1 Introduction to Nudge Theory

An Introduction to NUDGE
Improving Decisions About
Health, Wealth, and Happiness
by Richard H.Thaler &
Cass R. Sunstein
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Professor Puttu Guru Prasad VIVA-VVIT
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The Management
Lessons from
the U.S
ECONOMIST
“THALER”

చిన్నగా తట్
ట డము)

An Introduction to NUDGE
Improving Decisions About
Health, Wealth, and Happiness
by Richard H.Thaler &
Cass R. Sunstein
baby elephant is called a calf
Elephant Mother
Customers
Companies

nudge 2.1 Introduction to Nudge Theory

Anintroduction to Nudge
•US economist Thaler won the
Nobel prize in 2017 for his
contributions in the field of
Behavioural Economics,
showing how human traits
affect supposedly rational
markets. TRAIT- A distinguishing feature of your personal nature

In its Nobel prize announcement, the
Royal Swedish Academy of Sciences
stated that his "contributions have
built a bridge between the economic
and psychological analyses of
individual decision-making.
His empirical findings and theoretical
insights have been instrumental in
creating the new and rapidly expanding
field of behavioral economics.

Thaler advocates for libertarian paternalism, which
describes public and private social policies that lead
people to make good and better decisions through
"nudges" without depriving them of the freedom to
choose or significantly changing their economic
incentives.
An example of this can be seen in Nudge through
defaults in organ donation.
In the United States, citizens must opt in to donate
their organs, while in Australia, citizens must opt out if
they do not wish to donate.
Consequently, Australia has much higher rates of
organ donation than does the United States.

Nobel Prize- 2017
Thaler was the 2017 recipient of the Nobel
Memorial Prize in Economics for "incorporating
psychologically realistic assumptions into
analyses of economic decision-making.
By exploring the consequences of limited
rationality, social preferences, and lack of self-
control.
He has shown how these human traits
systematically affect individual
decisions as well as market outcomes.

PGP
Push into action by pestering or annoying gently

Overview of Nudge
•An individual’s behavior is not always in alignment
with their intentions (termed as value-action gap).
•It is common knowledge that humans are not fully
rational beings; that is, people will often do
something that is not in their own self interest,
even when they are aware that their actions are not
in their best interest.
• As an example, when hungry, dieters often under-
estimate their ability to lose weight, and their
intentions to eat healthy can be temporarily
weakened until they are satiated.

Overview of Nudge
•A nudge makes it more likely that an
individual will make a particular choice,
or behave in a particular way, by altering
the environment so that automatic
cognitive processes (GUTs) are triggered
to favor the desired outcome.
• An example of this is when someone
sees a fast food sign and realizes they
are hungry. This causes them to stop
and get something to eat.

What is aNudge?
A nudge is any aspect of the design of a choice
(“choice architecture”) that alters people’s
behavior in a predictable way, without forbidding
anything or actually changing the choice at all.
Firms will use many elements of choice
architecture to encourage sales.
For example, if you walk around a supermarket, there
will be special offers and grouped items, encouraging
consumers to buy goods that they may not otherwise
buy.
In fact, supermarkets earn money from suppliers paying
money to have their goods in the best places. The
location within the supermarket can make a huge
difference to sales.

 Nudge theory is mainly concerned with the design of
choices, which influences the decisions we make.
 Nudge theory proposes that the designing of choices
should be based on how people actually think and decide
(instinctively and rather irrationally),
 Rather than how leaders and authorities traditionally (and
typically incorrectly) believe people think and decide
(logically and rationally).
 In this respect, among others, Nudge theory is a radically
different and more sophisticated approach to achieving
change in people than traditional methods of direct
instruction, enforcement, punishment, etc.
 The use of Nudge theory is based on indirect encouragement
and enablement. It avoids direct instruction or enforcement.
 Nudge theory is very relevant to leadership, motivation,
change management, and many aspects of personal/self-
development.

Here are some simple examples to illustrate the difference
between traditional enforced change and 'Nudge' techniques:
Enforced(Old) Rules Nudge(New) Techniques
Instructing a small child to tidy
his/her room.(NEAT)
Playing a 'room-tidying' game with
the child.
Erecting signs saying 'no littering'
and warning of fines.
Improving the availability and
visibility of litter bins.
Joining a gym. Using the stairs.
Counting calories. Smaller plate.
Weekly food shop budgeting. Use a basket instead of a trolley.
Direct, obvious Indirect, subtle
Sell, negotiate, push, pull Offer, wait, give space
Deadlines Open-ended
Instruction, direction Educate, inform
Persuasion, cajolement Example, evidence

Richard Thaler in his Book Nudge discusses
about 8 Cognitive Biases of Human beings
(Traits), and how they will "incorporating
psychologically realistic assumptions into
analyses of economic decision-making.
He has shown how these human traits
systematically affect individual decisions as well
as market outcomes.
By exploring the consequences of
1. Limited Rationality,
2. Social Preferences, and
3. Lack of Self-control.
Now we can discuss those 8 traits.

8 Cognitive Biases of Human Beings

Based on the beauty pageant contestants you’ve
seen in the media lately, you might think that ALL
of them are dumb as a post. (That’s not true.)

Established Brands Rely on the Conservatism Bias
Every year, 9 out of 10 new products fail. Consumers love and hate new things at the same
time. They are attracted to novelty, but at the same time, they prefer something they are
familiar with.
For example, shopping for a new car is a major decision. A bewildering variety of makes,
models, and dealers is available. Oddly enough, people tend to buy the same brand of car
repeatedly. Sometimes several generations in a family have always bought cars by Ford or
Chevrolet.
When new products and new services become available, people are very slow or refuse to
adopt them. While that’s a good thing for established auto makers, it makes it tough for
new brands to compete. Overcoming people’s tendency to stick with past choices can be
an almost insurmountable problem.
Chrysler Corporation once had multiple brands, including Plymouth and Desoto. Each make had a
loyal following. Over time, though, first Desoto and then Plymouth became associated with older
drivers.
Conservatism Bias
Despite efforts to update those brands to attract a younger demographic, that association kept new
owners from buying them. Now, both are long gone.

Applying the Nudge Principles,
we can motivate the customers
indirectly in our favour.

Cambridge Analytica, eager to sell
psychological profiles of American voters to
political campaigns, acquired the private
Facebook data of tens of millions of users — the
largest known leak in Facebook history.
The documents proved that the firm, where the
former Trump aide Stephen K. Bannon was a
board member, used data improperly obtained
from Facebook to build voter profiles.
The news put Cambridge under investigation
and thrust Facebook into its biggest crisis ever.
Applying the Nudge Principles, Cambridge Analytica
indirectly seduced the American People to vote in favor
of TRUMP.

The Facebook–Cambridge Analytica data scandal concerned the
obtaining of the personal data of millions of Facebook users without their
consent by British consulting firm Cambridge Analytica, predominantly to
be used for political advertising.
The data was collected through an app called "This Is Your Digital Life",
developed by data scientist Aleksandr Kogan and his company Global
Science Research in 2013.
The app consisted of a series of questions to build psychological profiles
on users, and collected the personal data of the users’ Facebook friends
via Facebook's Open Graph platform.
The app harvested the data of up to 87 million Facebook profiles.
Cambridge Analytica used the data to provide analytical assistance to
the 2016 presidential campaigns of Ted Cruz and Donald Trump. CA
influenced the US voters by nudging through FB in favor of TRUMP.
Cambridge Analytica was also widely accused of interfering with the
Brexit referendum, and in India also the agent of Cambridge Analytica,
Mr. Prasanth Kishore(PK) I-PAC, nudging the voters to franchise their
votes in favor of some political parties, in the way how Cambridge
Analytica influenced the American Voters and TRUMP won the elections
over Hillary Clinton.

The paradox of choice:
Too many goodoptions?

ONE BUSINESS HAS FIGURED
OUT THE SOLUTION!

Ketchup
Mixed Nuts
Tomatoes: One Choice

PGP
Thaler's 'Nudge Theory' Came
From Flies In Men's Urinals

Aiming To Reduce Cleaning Costs?
The picture of a fly in the urinals at
Schiphol Airport has been touted as a
simple, inexpensive way to reduce
cleaning costs. Where does it come
from, and how effective is it really?

The urinal fly was introduced to Schiphol in the
early 1990s, suggested by Jos van Bedaf,
manager of the cleaning department. This photo
was taken shortly before our photographer was
arrested for taking pictures in the airport’s
restrooms.

Advertising in
strongly positive
terms

This Fly is etched on the urinal as
an aiming incentive, and was
proven to reduce spillage by 80%.
 From the above discussion in the
Schiphol Airport with the Cleaning
Manager Jos Van Bedaft, Mr. Thaler
got the idea about the effectiveness
of Nudge and start writing the book
and got Nobel Prize in Behavioural
Economics.

Another example is a social
program that gives Teen moms
a dollar a day every day that
they are not pregnant.

A Dollar a Day Not to Get Pregnant

Freedom of choice is best, right?
•Many economists like to say that we
should present all options to people, and
let them choose.
• The authors say this makes the false
assumption that almost all people,
almost all of the time, make choices
that are in their best interest
Automatic Cognitive System (GUT) &
Reﬂective Cognitive System(MIND)

Generally all the human beings brain is divided into two systems, that is System 1
(Automatic Cognitive System), System 2 ( Reflective Cognitive System). 95% of the people
often use System 1 than System 2, because System 1 is very fast in taking the decisions.
System 1 depends on impulses, instincts, emotions, & reactions generated automatically.
But where as the System 2 is often used by 5% of the Human beings, with
conscious, accurate, effort, analytical and conceptual in thinking, that is why it is
slower in taking decision quickly.
In the below Nudge Case study, Richard Thaler chosen two famous characters to
represent two systems of the brain. System 1 is represented symbolically by Homer,
very famous cartoon character in “The Simpsons”, and System 2 represented by
Spock, well known character in scientific TV serial “Star Trek”.

Automatic
Cognitive
System
(GUT)
Impulsive
Reﬂective
Cognitive
System
(Thinking)
Mind
versus.
Spock half- human/half-Vulcan
Fictional character in Star Trek
Homer Simpson
Fictional character

Personality profiling tests provide a snapshot view of the preferred behavior that comes
subconsciously to most people. This is the behavior with which they are ‘comfortable’ and
can sustain for long periods of time. This behavior is social and intellectual – not physical.
Personality
Profiling
Tests/
Quizzes

Applying the Nudge Principles, Cambridge Analytica
indirectly seduced the American People to vote in favor of
TRUMP.

Spock half- human/half-Vulcan
Fictional character in Star Trek
Star Ship: Enterprise

"Star Trek" T V Serial star ship USS Enterprise mission in space in the
23rd century. Captain James T. Kirk -- along with half- human/half-
Vulcan science officer Spock,

They are assuming that we are all like Spock.
And like Spock we always only choose the most
logical choice.
However, while part of our mind really is like Spock,
we all have TWO decision makers in our head who
battle it out for each decision – (RCS & ACS)
our 1.Spock (MIND) (Reflective Cognitive System)
and but also
our 2.Homer (Simpsons) (Automatic Cognitive
System).(GUT)

The Simpsons is an American animated sitcom created by Matt
Groening for the Fox Broadcasting Company. The series is
a satirical depiction of working-class life, epitomized by
the Simpson family, which consists of Homer, Marge, Bart, Lisa,
and Maggie.

“Gut” basic feeling or reaction
without a logical rationale
(AutomaticCognitiveSystem)
“Mind”
(Reﬂective Cognitive System)
vs.
Homer Simpson
Fictional character
Star Trek TV Serial
Fictional character
Mr. Spock

Here’s a classic example. Spock would look at this
image and see clearly that the two tabletops are
exactly the same size. But most of us feel pretty sure
that the one on the left is longer and skinnier than
the one on the right.

1.There is no such thing as a
nudge‐less choice.

So the conclusion the authors draw from
this is that SOMETHING is always
influencing your choices.
People are influenced by small factors in
the design of an experience, (Just like how
Cambridge Analytica influenced the US
voters with favorable postings of Donald
Trump regularly in the FB) of so even if you
don’t consciously design your choice
architecture, it is still there, affecting the
actions of you by the influence of your peer
groups and team members.

Generally the customers prefer second best choice, that’s
why the store display the cheese in the following order

Here’s another example.
In this cafeteria, Spock
would only put food on
his tray that is good for
him, only taking as
much as he needs and
only what he can afford.

So say you are designing a cafeteria layout in an International
School. What should you do? Ignore the fact that the layout affects
what people buy? Randomly rotate the placement of foods? Set it up
to sell the most of the expensive stuff? Or set it up so people choose
more healthy foods? It happened in US, the Lady Principal requested
the Canteen management, to put healthy food with in the reach of
children and costly unhealthy snacks in the back shelves. Automatically
that increased the sales of Healthy food.

The book encourages that last option with what they call
“libertarian paternalism” - Nudging the user
(through placement, in this example) to make the best choice for
his well being –
WHAT OUR SPOCK WOULD WANT, while not restricting choice at
all. They are not banning junk food, just making it less likely that
someone will choose it on their own.

2.When we see the
beneﬁts now,
costs later.

•I enjoy the benefit of this
donut now,
•I pay the cost (to my health,
waistline) later.
•I enjoy coming home to a cool house
because my AC was running all day,
•I pay the costs (both bills and
environmental) later.

3.Availability Bias:
We overestimate the likelihood of
events we can easily remember.
?

We are much more scared of vivid and
easily imagined threats (like plane
crashes or tornadoes), than we are of
mundane but much more common
dangers (like asthma attacks).
We are 20 x fold more likely to die of
asthma attack than tornado, so if we were
purely rational, we’d be 20 x fold more
scared of asthma than tornadoes.

Another example: If you wore your old
hat during two games which your team
won, you might assume that it’s a lucky
hat, and that if you don’t wear it during
the next game, your team will lose.
(Sorry, there’s no connection.)

4.Framing Bias:
“10out of 100die.”
vs.
“90out of 100are cured.”

You also have a third system...
Mindless choosing: your autopilot just
continues doing what it’s used to - driving the
same route, or continuing to eat when
there’s food in front of you.
There was one study mentioned in the book
where participants were given very stale
popcorn, either a large bag or a small bag,
and then watched a movie. Participants with
the large bag ate 34% more, just because it
was there and they were on autopilot.

6.We
predictably
follow the herd.

7.So how can we
help our Spock
defeat our
Homer?

MIND Mappings means how we
translate data about an option into
what it actually means for us.
Mind Mapping technique is very
useful for the students to answer the
questions in the examinations.
Like translating kilowatts of energy into dollars on
the electricity bill, or translating concepts of
subject into application like electrical energy to fan
motor rotation or Fundamentals of Debit and
Credit to recording Accounting transactions.

Mind Mapping of Water as a Subject

Nudges are about
designing choices to
try to help people make
choices more with their
Rational mind (with their inner
Spock) and less with their
Gut.( with their inner Homer)

There are certain situations:
Benefits now, cost later;
Decisions we have to make
infrequently, Places where
the feedback isn’t immediate
or The outcome is hard to
imagine, where the Homer in
us has the upper hand,

and we can use our knowledge
of our predictable psychology
in these ways mentioned:
1.Incentives,
2.Understanding
3.Mindmappings,
4.Defaults,
5.Giving feedback, and
6.Structuring complex choices
to nudge our Spock to rebalance the power.

Encouraging certain behaviors.
A study found that if students are
sent motivating text messages,
attendance rates improved..

Thank you
Persistent Determination

nudge 2.1 Introduction to Nudge Theory

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nudge 2.1 Introduction to Nudge Theory