You want to create a new app, but don’t know how to code. What do you do?
Instead of teaching yourself Ruby, you’ll probably ask a developer to help you out.
Similarly, you wouldn’t create a clothing line without help from a designer, or build a house without consulting a carpenter.
But what about managers looking to motivate their employees?
When it comes to nudging other people towards a certain action – such as gaining motivation or changing a habit – many of us think we are experts in human behavior, because we have experience in being motivated or changing habits ourselves. But experience isn’t the same as expertise.
While we all have intuitions on what may or may not sway someone to boost their motivation, relying on intuition alone won’t produce the results they’re looking for – just as relying on intuition on how to code won’t actually create that app.
Instead, there’s an area with deep expertise on behavioral change: Behavioral economics, a field that merges psychology and economics to figure out why people behave in certain ways, in order to change it.
Just as carpentry helps people build a home, behavioral economics can help anyone who wants to change behavior – from marketers to managers – to drive the behavior of the people around them.
Here are a few ways behavioral economics can help improve a company’s productivity, creativity, and sales – and ultimately, their bottom line.
Behavioral Economics in Business
What does it mean for companies to use behavioral economics in the first place?
Behavioral economics can boost businesses in several ways, improving everything from employee motivation to email opt-in rates.
And here’s the kicker: Making impactful changes sometimes only requires a small ‘nudge’ (coined by behavioral economist and Nobel laureate Richard Thaler). No major budget or culture shift required (don’t get too happy, sometimes it requires much more).
What’s a ‘nudge’? It’s a small change that can drastically alter behavior. A classic example of a nudge is changing the default option on a 401(k) savings plan from ‘opt out’ to ‘opt in.’
What does this do? Harvard economics professor David Liabson found that implementing this small change changes 401(k) enrollment rates from 40% to 90%. (The option to ‘opt out’ was not removed completely – it was simply removed as the default choice!)
So, how exactly can companies incorporate behavioral economics? We’ll discuss how behavioral economics can help improve companies’:
- Internal efficiency
- Marketing efforts
- Product design
Behavioral Economics in Business Operations
As behavioral economist Dan Ariely told me, “hidden factors influence the way we work every day. Ever consider how your lunch options influence your productivity, or how your coworkers’ attitudes impact your creativity?”
Small changes to a company’s environment can help shape these hidden forces to boost productivity. “Behavioral economics can remove hiring and promotion biases, increase employee engagement, and reduce operating costs,” according to behavioral scientist Garrett Meccariello.
Let’s zero-in on how behavioral economics can improve employee engagement. Take General Electric – they wanted to nudge their employees to stop smoking cigarettes so they could be more productive and healthy.
How could they stop such addictive behavior? They conducted a field experiment, where they gave Group 1 of employees $250 to stop smoking for 6 months, Group 2 $400 to stop for 12 months, and Group 3 no incentive to stop.
Which group was most successful? Turns out, Groups 1 and 2 were three times more successful in quitting than Group 3. The effect even lasted after they stopped being paid! Soon after, GE used this approach for its then 152,000 employees.
But can every type of behavior be influenced by a cash reward?
Turns out, health related behaviors, such as smoking, are one of the only behavior types influenced by monetary incentives, according to a study by Prombrger et. al. Other types of behavior, such as creativity, can’t be bought.
In an experiment conducted by Kruglanski et al, two groups of students were assigned a creative task. Group 1 would receive a monetary reward, and Group 2 would receive no reward.
Not only was Group 2 more creative, but they also enjoyed the experiment more. This type of experiment has been replicated several times over, and researchers have consistently seen that money diminishes employees’ creativity.
Which environmental changes encourage creativity? Social influences. Similar studies show that people are more likely to be creative if their team members encourage risk-taking and exhibit positive moods.
Businesses don’t need to make big changes such as increasing budget or changing company culture to improve employee behavior. Sometimes, all it takes is a science-backed nudge to boost employee productivity, and, in turn, the company’s bottom line.
Behavioral Economics in Marketing
Just as companies can use behavioral economics to improve internal operations, they can also use these principles to boost marketing efforts.
Why? Behavioral economics holds that people are irrational, which means consumers are biased in ways that influence what, and how much, they buy.
Consider this: Have you ever bought, say, a reusable water bottle once you saw a bunch of your friends with one? Or have you ever thought a $50 bottle of wine was a ‘good deal’ when comparing it to $60 and $70 bottles on a wine list?
That’s behavioral economics at work. Hidden factors cause consumers to think – and buy – in irrational ways.
With this in mind, marketers can use behavioral economics to encourage certain behaviors among their consumers (and possibly make more money).
Take Walt Disney World, which sold Kids Meals with soda and french fries as the default choice (meaning, parents had to explicitly ask to replace soda and french fries with healthier options). When Walt Disney World changed the default to juice and fresh produce, children consumed 21% fewer calories and 44% less fat when ordering Kids Meals.
And remember: Walt Disney didn’t remove soda or french fries from the menu – they simply changed the default choice with a subtle nudge.
Businesses can also use nudges to encourage consumers to spend more money. “Flight websites use eye-catching, expensive options as the default choice, such as paying for travel protection. This nudges consumers away from choosing the cheaper option,” says behavioral scientist Tobias Näsgårde.
Behavioral Economics in Products
Lastly, businesses can bake behavioral economics into the core of their products. Whether it’s creating a default choice to share your location services or tip your driver, companies can design their products to nudge users towards a specific behavior.
For example, Lemonade uses behavioral economics to make their insurance product more trustworthy, pushing both themselves and their consumers towards good behavior. Consumers don’t usually trust insurance companies – 1 in 4 people think it’s okay to defraud an insurance company, according to an Accenture survey.
By design, Prof. Ariely says that insurance companies bring out the worst in people: Every dollar an insurer pays in claims is a dollar less for their profit, which de-incentivizes them from helping their customers in their time of need.
Lemonade created a new business model- they take a flat fee, put the rest towards claims, and return the leftover money to a cause of their customers’ choosing, which realigns interests and fosters trust.
It’s no wonder Lemonade has seen unusually honest behavior from their users – customers often give back claims money they no longer need, which is typically unheard of in the insurance industry.
Netflix also uses behavioral economics principles to influence the way consumers use their product.
How? They present series and movie options in ways that nudge users towards consuming certain content.
For example, Netflix presents a Netflix-produced movie or show above the fold in huge letters – this default choice nudges its users towards consuming that content.
And when users scroll down, they see content grouped under a ‘Popular on Netflix’ category and a ‘Trending Now’ category, both which employ social proof to sway users towards clicking on those options.
All of this aligns with Netflix’s business objective of having users stay on the site for as long as possible. It’s no coincidence that Netflix also leverages the power of decision inertia: “When Netflix asks if you’d like to continue watching the show after you finish an episode, they know you’re likely to say yes. Behavioral economics says that once you start doing something, you tend to stick with it,” said behavioral scientist Angie Wang.
The rise of behavioral economics
If companies wish to boost their productivity, marketing efforts, product, and bottom line, it doesn’t doesn’t require a massive budget or dramatic shift in company culture. Sometimes, all it takes are science-backed nudges.
But how can companies tell if a change really works?
It simply requires a bit of testing. Using the 401(k) example, companies can give half of their employees the default option to “opt in,” and the other half the default option to “opt out,” and see which results in a higher opt in rate.
Now, I leave you with a challenge: Think about an issue you’re facing at work, whether it’s lack of engagement, your office’s overuse of plastic, or your marketing performance, and see how behavioral economics can help solve it.