The final article in our series on the rise of the "intangibles" explores how behavioural economics could help businesses to making better decisions that can improve their balance sheet.
Nudge theory – the science behind subtly leading people into the ‘right’ decision – is everywhere, once you wake up to it. The UK’s political policy wonks both invented and perfected the art of nudging.
Nudging works on the principle that small actions can have a substantial impact on the way people behave – and it creates ‘choice architectures’ for these actions that encourage (but don’t force) people to make better decisions.
According to Richard Thaler, godfather of nudge theory and co-author of Nudge: Improving Decisions About Health, Wealth and Happiness, nudges are valuable because people behave in fundamentally irrational ways.
Social psychologist Daniel Kahneman is celebrated for establishing that our brains operate on two different systems of thought: System 1 provides the automatic reflex responses that remind us to duck if something is heading for us; while the more rational but slower System 2 controls conscious thought processes.
Nudging recognises that System 1 thinking often overrides the more rational process when making decisions, a concept that won Thaler the Nobel Prize for economics in 2017.
According to People Management magazine, workplace nudging can be seen most prominently in the area of pension saving – a relatively simple decision that can have huge ramifications for individuals. When Siemens, for example, wanted to boost the level of contribution among its 15,000 employees, it faced the natural negativity many people brought to discussions about finance.
“We found that when you tell people what they need to do in retirement, at best people ignore it, and at worst [they] actually rebel against the idea,” says Jeremy Beament, founder of consultancy Nudge Global, which worked with the engineering giant on its ensuing campaign. “What you don’t want to do is brainwash. [Nudging] is not brainwashing, it’s about enabling.”
The key, says Thaler, is to responsibly use “nudges”—subtle interventions that guide choices without restricting them. Over the years, insights from behavioural economics, psychology, and neuroscience have shown that strategically designed nudges can effectively influence behaviour and drive results in solving some of the most pressing issues for today’s companies, from talent management to customer retention.
A recent initiative at Virgin Atlantic illustrates how one such set of applied behavioural insights can have an outsized effect. The airline partnered with leading economists to devise a program to reduce fuel use by influencing the behaviour of its 335 flight captains.
Over a series of exercises, a control group was simply alerted that their fuel usage would be monitored; a second group received monthly reports of their usage; a third received both monthly reports and specific targets to achieve, garnering praise after success or encouragement after failure; and the last group received reports, targets, and were told that a charitable donation would be made for every target they hit.
The three experimental groups saved fuel beyond the control group and the two groups that received targeted goals, performed the best of all.
The exercise led to savings of 6,828 metric tons of fuel, which at the time amounted to more than 3.3 million pounds, with very little cost to the airline.
Many companies are already building robust nudge units to rapidly tackle various organizational and strategic challenges. Prominent examples are Swiss Re and AIG.
In a world where organizational agility is key to long-term performance, an entrepreneurial approach to problem solving—where teams rapidly and systematically test the impact of behavioural insights on their organization’s performance—will be increasingly crucial for maintaining competitiveness in the future.
For 21st century businesses, the intangible economy presents a real challenge but getting to grips with the behavioural risks associated with it will deliver tangible results.