Last week, the WSJ ran an article on the increasing use of insights from behavioral economics by businesses and organizations. Organizations are using these insights to ‘nudge‘ customers and clients toward specific behaviors–e.g. using less energy, opting in to the home delivery of prescription drugs, etc.
The essence of behavioral economics is that humans fail to meet the assumptions made by economists in important ways. As a result, economic models of human behavior often fall short in their predictions of what people “should” do. By understanding the limitations that actual people have in terms of their knowledge, computational ability, and emotions organizations can design products, services, and processes that lead or ‘nudge’ actors towards better choices. The article mentions a few examples, such as using peer pressure (people do not like being outliers, or being left behind by trends) and short circuiting the inertia of past choices (once we make a choice it tends to stick, regardless of how suboptimal it may be), that have been shown to significantly alter behavior.
One theme that I have heard again and again from some critics is that businesses are using strategies that are underhanded or manipulative in order to get customers to spend money in ways that run against their interests. No doubt, some may use nudge strategies to take advantage of others, but using a behavioral approach does not necessarily imply that a business is simply trying to manipulate customers into making choices that run counter to their interests–in fact, I would argue the opposite is true. Continue reading