Although we might all prefer to believe that we make choices rationally and logically, the truth is that most decisions are made instinctively and irrationally. It is why economists have so much trouble predicting market behavior – humans simply don’t behave in the rational ways expected by most economic models.
This can also create a dilemma for business leaders who want to get the most from their employees. If we can’t rely on our people acting according to logic, how can we create environments where they choose to work in the best way?
Traditionally, companies have relied on directive tactics like instructions, rewards, and penalties to encourage the kinds of behavior they wish to see from their employees. However, these methods can create resistance and confrontation – people, generally, dislike having their choices restricted or controlled.
More recently, Nudge theory has gained popularity in many different sectors, including in the world of business. Introduced in the 2008 book, Nudge: Improving Decisions about Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein, Nudge theory looks at how we can influence people’s choices by intentionally designing the environment within which they make decisions (the choice architecture).
Unlike traditional directive tactics, Nudge theory focuses on maintaining freedom of choice. It gently “nudges” people towards beneficial decisions, but it doesn’t force them to take a particular action.
Nudge theory is relevant to any situation in which people are making decisions. It is often used to influence societal behavior around big areas, such as health or the environment. It can be leveraged by marketing and sales teams to encourage customers to buy. And it can also be used by leaders, managers, and HR teams to create a workplace culture that encourages employees to perform at their best.
In this post, we’ll look at Nudge theory in a little more depth, explaining what it is and how understanding it can benefit businesses. In a future post, we’ll discuss how you can create customized Nudges for your team and how to use them to increase productivity.
What Is Nudge Theory?
Nudge theory was formulated by academics Richard Thaler and Cass Sunstein, who in turn drew heavily on the work of psychologists Daniel Kahneman and Amos Tversky.
Kahneman and Tversky’s work was in heuristics – the mental shortcuts our brains use to simplify our thinking process. Heuristics play a huge role in decision-making. When faced with a choice, our brains use heuristics to quickly come to a decision, even if it isn’t necessarily the most rational one.
For example, we tend to make guesses about how probable something is based on how similar it is to categories of information we’ve created from past experiences. Basically, we rely on stereotypes, even when we don’t have hard evidence to support them.
This is called the representative heuristic. It makes us assume that someone is smart because they wear glasses, or that something is high quality because it is expensive.
Another common type of heuristic is the availability heuristic. This makes us assume that something is more likely because we find it easier to access memories of it happening in the past.
Some events or information are quicker for our brains to recall than others – for example, if you remember an employee fumbling a presentation, you might be reluctant to let them take the lead again, even though they’ve given numerous successful presentations in the past.
A third heuristic identified by Kahneman and Tversky is the anchoring heuristic. This is when we give more weight to the first piece of information that we are given about something, even if that starting point isn’t actually based in evidence.
An example is believing something is a good price because it is on sale, even if we don’t know whether the original price was fair or not.
There are many other types of heuristics that can influence our decisions. These mental shortcuts help us make choices and solve problems quickly – but they can also mean we ignore the most beneficial option because our brains instinctively reach for a different choice.
Nudge theory takes this information about how people make decisions and uses it to design their choice architecture to nudge them towards a particular option.
A famous example is in the supermarket. Many of us know that the placement of products on the shelves isn’t accidental but carefully planned. By putting certain items at eye level, shops can encourage sales of those items. Similarly, listing a manufacturer’s suggested retail price that is slightly higher than the in-store price can make use of the anchoring heuristic to increase sales.
However, neither of these tactics forces us to choose a particular product. One of the key tenets of Nudge theory is that it leaves us with freedom of choice. We are influenced towards making the desired decision by the way it is presented, but we have the option to choose differently.
This is part of what separates Nudge theory from more traditional methods of controlling decision-making.
For example, a company that is working to reduce its paper waste could ban people from using the printers – a tactic that may work, but that is likely to lead to frustration, especially in the instances where paper copies of documents are actually necessary.
Or the company could place the printers further away from where people work, set them to default to double-sided printing, and add a “think before you print” message to the standard email signature.
The second option is an example of a nudge – it points people toward the preferred decision and makes it easier for them to make it but doesn’t force them into it.
Designing Choice Architecture
Integral to Nudge theory is the idea of choice architecture – the environment within which we make decisions. Essentially, we create nudges by designing this choice architecture intentionally, so people are drawn to making the “right” decision.
In the example above, the choice architecture was changed to a) make it more inconvenient to get to the printer, b) make it easier to reduce paper by printing on both sides, and c) bring people’s attention to the desired choice by making it a message that they see numerous times a day (and thus utilizing the availability heuristic).
Nudges can apply to virtual environments as well as physical ones. For example, online marketing teams are often adept at tweaking choice architecture to nudge people towards higher ticket items, upsell add-ons, or increase newsletter sign-ups.
They do this through the order in which information is presented, using visual cues such as different-sized texts, adding social proof like customer reviews, and removing friction from the buying process through tactics like opt-outs, subscriptions, and abandoned cart messages.
Of course, Nudge theory can also be used to persuade people away from a less desirable choice. This is the theory behind adding calories to restaurant menus, for example.
While nudges have been used in marketing and advertising for years, they have much wider applications across a business.
HR teams and managers can use nudges to encourage employee behavior, helping to create a workplace environment that encourages collaboration, connection, and creativity. Nudges can support company strategy, help integrate changes to corporate processes, and encourage uptake of new technologies.
Examples of nudges could include making people opt out of a pension scheme instead of opting in, adding bike racks to your parking lot to support a cycle-to-work scheme, or hanging quotes from appreciative customers around your product team’s office to promote a customer-led design process.
Businesses can also use Nudge theory to look at where their existing choice architecture inadvertently nudges people away from the behaviors they prefer to see.
An example is team-bonding. Most companies recognize that people work better when they feel connected with their team and have strong relationships with their colleagues.
But this desire may not be reflected in the office. If there’s no space where colleagues can gather together at lunchtime or desks are separated by cubicles, then you are unintentionally discouraging interaction and bonding between team members.
The same can be true for your online spaces. If you office Slack doesn’t include channels for non-work chat, then how can your employees get to know each other better?
You can likely see immediately how providing these spaces and letting people know they are there to be used will be more effective than forcing them to mingle.
Sunstein and Thaler refer to these barriers to desired behavior as “sludge“. When we design our choice architecture, we need to be aware of the need to remove sludge as well as the ways we can incorporate nudges.
For example, if you are struggling to recruit great candidates, you might look at your current application process and realize your application form is difficult to complete or requires more information than you really need for first-stage sifting.
Simplifying the form would therefore be a way of removing sludge, while including case studies from existing employees on your recruitment page would be a nudge – social proof that your company is a great place to work.
Behavioral nudges can be used in all sorts of ways to help people make desirable decisions. While already familiar to marketing teams, nudges have uses and benefits across companies to improve employee experience, support company strategy, and remove barriers to great performance.