Nudge theory argues positive reinforcement and indirect suggestion is an effective way to influence the behavior and decision making of individuals or groups. Nudge theory was an idea first popularized by behavioral economist Richard Thaler and political scientist Cass Sunstein. However, the pair based much of their theory on heuristic research conducted by psychologists Daniel Kahneman and Amos Tversky in the 1970s.
Aspect
Explanation
Concept Overview
Nudge Theory, also known as behavioral economics or choice architecture, is a concept in psychology and economics that explores how subtle changes in the way choices are presented can influence people’s decisions and behavior. It is based on the idea that individuals often make decisions that are not in their best interest due to cognitive biases and heuristics. Nudge Theory seeks to design choice environments that encourage people to make better choices without imposing restrictions or mandates. The term “nudge” refers to gently guiding individuals toward better decisions, like a gentle push in the right direction. The theory gained prominence through the work of Richard Thaler and Cass Sunstein in their book “Nudge: Improving Decisions About Health, Wealth, and Happiness.”
Key Principles
Nudge Theory is guided by several key principles: 1. Choice Architecture: The way choices are presented and the context in which decisions are made can significantly impact choices. 2. Behavioral Biases: Recognizing that individuals have cognitive biases, such as loss aversion and status quo bias, which influence decision-making. 3. Libertarian Paternalism: The idea of encouraging better decisions without restricting freedom or autonomy. 4. Defaults: Changing the default option can lead to significant shifts in behavior. 5. Feedback: Providing timely feedback can help individuals make more informed choices. 6. Salience: Making important information more salient or noticeable can influence decisions.
Examples
Examples of Nudge Theory applications include: 1. Opt-Out vs. Opt-In: Changing the default choice (e.g., organ donation) from opt-in to opt-out can significantly increase participation. 2. Healthier Eating: Placing healthier food options at eye level in cafeterias or supermarkets can encourage healthier food choices. 3. Savings and Retirement: Automatically enrolling employees in retirement savings plans with the option to opt-out can boost savings rates. 4. Energy Conservation: Providing real-time energy usage feedback can encourage consumers to reduce energy consumption. 5. Social Norms: Communicating that most people engage in desired behaviors (e.g., conserving water) can influence others to follow suit. 6. Timing of Messages: Sending reminders at strategic times can prompt individuals to take specific actions, like scheduling medical appointments.
Applications
Nudge Theory has practical applications in various areas: 1. Public Policy: Governments use nudge interventions to promote public health, environmental conservation, and financial well-being. 2. Marketing and Advertising: Businesses employ nudge techniques to influence consumer choices and preferences. 3. Healthcare: Hospitals and healthcare providers use nudges to encourage healthier behaviors and patient compliance. 4. Education: Educational institutions apply nudge strategies to improve student outcomes and attendance. 5. Finance: Financial institutions utilize nudges to promote responsible financial behaviors and savings. 6. Sustainability: Environmental organizations employ nudges to encourage sustainable practices.
Benefits and Impact
Nudge Theory offers several benefits and impacts: 1. Improved Decision-Making: Encourages individuals to make better choices aligned with their long-term interests. 2. Cost-Effective: Nudge interventions are often cost-effective compared to traditional regulatory approaches. 3. Personal Freedom: Maintains individual freedom and autonomy by not mandating choices. 4. Positive Social Outcomes: Leads to positive social outcomes, such as improved health and reduced environmental impact. 5. Policy Innovation: Provides policymakers with a new approach to addressing societal challenges. 6. Ethical Framework: Offers an ethical framework for influencing behavior without coercion.
Challenges and Critiques
Challenges in applying Nudge Theory include concerns about manipulation, potential unintended consequences, and ethical considerations related to influencing behavior. Critics argue that it may not address deeper structural issues that lead to poor choices and that it relies on assumptions about rationality. However, proponents emphasize the role of choice architecture in helping individuals overcome cognitive biases and make decisions that benefit them in the long run.
In their subsequent 2008 book about health and wealth-based decision making, Thaler and Sunstein defined a nudge as:
“Any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.”
Nudge theory was initially developed as an ethical construct designed to improve societies.
However, it is now used in any situation where an individual or group seeks to influence other individuals or groups.
Although it has obvious implications for consumer psychology, the theory can also be used in the parenting of a child or the management of global populations.
In business, nudge theory is especially useful in leadership, motivation, change management, and personal or professional development.
Nudge theory compared to traditional approaches
Central to nudge theory is the idea that one can influence the likelihood of an individual choosing one option over another by shaping their environment.
This environment is also known as choice architecture, which describes the various ways choices are presented and how they impact decision-making.
Here, the theory suggests an individual can be helped to think appropriately and make better decisions by being offered choices designed to enable those outcomes.
Although nudge theory is used to push an individual toward a desired outcome, they must maintain freedom of choice and feel in control of the decision-making process.
This style contrasts with more traditional means of instituting change, where instruction, enforcement, or even punishment are used to coerce people to do something against their will.
To that end, nudge theory is much more effective in altering behavior because it encourages positive choices over restricting undesirable behavior with sanctions.
What’s more, nudge theory respects that each individual is comprised of certain attitudes, knowledge, and capabilities that influence their behavior.
Differences between traditional (enforced) change and nudge theory
Consider the following differences between traditional (enforced) change and nudge theory techniques to put the above into perspective:
Simplicity
Enforced change is drastic, direct, and requires conscious, determined effort by the person or group subject to the change.
Nudge techniques are more simple for individuals to imagine doing because they are far less threatening and disruptive.
Non-confrontational
Enforced change is usually confrontational and provokes resistance.
Nudge techniques, on the other hand, are indirect, tactical, and less confrontational.
In some cases, they may be pleasurable or cooperative in nature.
When and How to Apply Nudge Theory
Nudge Theory can be applied in various contexts:
Public Policy: Governments use nudges to promote public health, encourage savings, or improve energy conservation.
Marketing: Marketers employ nudges to influence consumer purchasing decisions, such as highlighting recommended products or showing scarcity.
Organizational Behavior: Companies use nudges to enhance employee well-being, productivity, and compliance with policies.
Education: Educators can apply nudges to improve student outcomes by subtly altering the learning environment or providing timely feedback.
To implement Nudge Theory effectively:
Understand Behavior: Analyze the specific behavior you want to influence and the factors contributing to it.
Design Nudges: Develop nudges that align with behavioral insights and desired outcomes.
Test and Iterate: Pilot nudges to gauge their effectiveness and make refinements based on feedback.
Ethical Considerations: Ensure nudges are transparent, respect autonomy, and are in the best interests of individuals.
Data-Driven: Use data to personalize nudges and measure their impact.
Benefits of Nudge Theory
Nudge Theory offers several benefits:
Improved Decision-Making: Nudges can lead to better choices in various domains, from health and finance to sustainability.
Cost-Effective: Nudges are often cost-effective interventions compared to traditional regulatory or educational approaches.
Autonomy: Nudges preserve individual freedom by not mandating behavior but influencing choices.
Behavioral Insights: They leverage insights from behavioral economics to understand and address human biases and irrationality.
Versatility: Nudges can be applied across diverse fields and are adaptable to various contexts.
Potential Drawbacks of Nudge Theory
While Nudge Theory has many advantages, it also has potential drawbacks:
Manipulation Concerns: Some critics argue that nudges can manipulate individuals without their informed consent.
Effect Size: The impact of nudges may be limited, especially for complex or deeply ingrained behaviors.
Ethical Issues: Ethical considerations arise when deciding which behaviors to nudge and how to do so responsibly.
Examples of nudge theory in action
One of the archetypal examples of nudge theory in action can be seen in Amsterdam’s Schiphol Airport. I
In the men’s bathrooms, an image of a housefly is displayed on each urinal to encourage travelers to improve their aim. This increases visual amenity and more importantly for the airport, reduces cleaning costs.
Other examples can be categorized according to three, broad nudge categories:
Default options
Or decisions an individual automatically makes if they do nothing.
For example, more consumers chose the renewable energy option for electricity when it was offered by default.
In the United Kingdom, organ donation rates increased simply by making individuals organ donors by default and requiring them to opt-out if desired.
Health and wellness
In the workplace, employers can use nudges to encourage employees to make healthier choices.
For example, providing healthy food options in the cafeteria, placing fruit baskets near the office entrance, or installing standing desks can all nudge employees towards healthier behaviors.
Environmental conservation
Governments and businesses can use nudges to encourage people to reduce their environmental impact.
For example, providing clear and concise information about the environmental benefits of recycling, or offering incentives for using reusable bags, can nudge people towards more sustainable behaviors.
Social-proof heuristics
Describing the tendency for individuals to make decisions based on the actions of those around them.
Governments have increased the number of citizens filing their taxes by sending reminders to laggards notifying them that most other people had already paid.
Salient options
By highlighting the importance or prevalence of the desired option it is more likely to be chosen.
Various studies have proven that healthy food in supermarkets was more likely to be bought the nearer it was to the cash register.
Savings and investment
Financial institutions can use nudges to encourage customers to save and invest more money.
For example, framing savings as a “default” option, such as enrolling customers in automatic savings plans, can increase the likelihood that they will save money.
Public safety
Law enforcement agencies can use nudges to promote public safety and reduce crime.
For example, placing mirrors in areas with high crime rates can nudge people towards self-awareness and deter potential criminals, or providing clear and visible signs and cues can nudge people towards safer behaviors.
Does nudging really work?
A recent research paper called “The effectiveness of nudging: A meta-analysis of choice architecture interventions across behavioral domains” found that, in many instances, nudging doesn’t prove to be effective.
And in many other cases, the cognitive psychologists involved with nudging fall themselves into biases when picking those nudged, from cherry-picking to attributing positive responses to nudges that, after all, have no statistical significance.
Key takeaways
Nudge theory argues positive reinforcement and indirect suggestion is an effective way to influence the behavior and decision making of individuals or groups. It was first popularised by behavioral economist Richard Thaler and political scientist Cass Sunstein.
Nudge theory suggests decision-making can be influenced by considering choice architecture, or the various ways choices are presented to enable better outcomes for the individual.
Nudge theory has limitless applications since it can be used by any entity wanting to influence another entity toward achieving a desired outcome. Broadly speaking, this process can be facilitated by three types of nudge categories: default options, social-proof heuristics, and salient options.
Scenario: Google’s employee cafeterias employ nudge techniques to encourage healthier eating. They place fruits and vegetables at eye level and make them more accessible, resulting in increased consumption of healthier food options.
2. LinkedIn’s Profile Completion Nudge:
Scenario: LinkedIn encourages users to complete their profiles by using nudges like progress bars and prompts. These nudges increase user engagement and help LinkedIn gather more data for personalized recommendations.
3. Online Retailer Checkout Nudges:
Scenario: Many e-commerce websites use nudges during the checkout process, such as highlighting the most popular payment method or displaying trust badges. These nudges increase the likelihood of completing the purchase.
4. Automatic Enrollment in Workplace Savings Plans:
Scenario: Many employers use automatic enrollment in retirement savings plans, nudging employees to participate by making it the default option. Employees must actively opt out if they choose not to participate.
5. LinkedIn’s “People You May Know” Feature:
Scenario: LinkedIn’s feature suggesting connections with people you may know is a nudge to encourage networking and expanding one’s professional connections. It prompts users to connect with others in their industry.
6. Amazon’s “Frequently Bought Together” Nudge:
Scenario: Amazon suggests complementary products on product pages, nudging customers to add more items to their shopping carts. This technique increases the average order value for the company.
7. Travel Booking Websites and Scarcity Nudges:
Scenario: Travel booking websites often use scarcity nudges, indicating limited availability or high demand for hotel rooms or flights. This nudges customers to make quicker booking decisions.
8. Uber’s Surge Pricing Notifications:
Scenario: During high-demand periods, Uber uses surge pricing, which notifies users of increased fares due to demand. This nudge encourages users to wait or seek alternative transportation options.
9. Subscription Renewal Reminders:
Scenario: Subscription-based businesses send renewal reminders to customers, nudging them to continue their subscriptions. These reminders often include incentives or discounts to encourage renewal.
10. LinkedIn’s Job Posting Nudge: – Scenario: LinkedIn sends job posting notifications to users based on their profile information and job preferences, nudging them to explore new job opportunities.
Key Highlights
Definition of Nudge: Nudge theory suggests that positive reinforcement and indirect suggestions can predictably influence behavior and decisions without removing options or altering economic incentives.
Founders: The theory was popularized by behavioral economist Richard Thaler and political scientist Cass Sunstein, building on the work of psychologists Daniel Kahneman and Amos Tversky.
Nudge vs. Enforcement: Nudges gently guide behavior by shaping the environment, respecting individual choice, and avoiding confrontation, in contrast to traditional methods that enforce change through instruction, enforcement, or punishment.
Choice Architecture: Nudge theory focuses on choice architecture, which shapes decisions. It guides individuals towards positive decisions while maintaining their freedom of choice.
Applications: Nudge theory has diverse applications, including consumer psychology, parenting, population management, leadership, motivation, change management, and personal/professional development.
Examples: Nudge theory is applied through techniques like default options (organ donation), health and wellness nudges (healthy food options in workplaces), environmental conservation (promoting sustainable behaviors), social-proof heuristics (influencing decisions based on others’ actions), and salient options (highlighting desired choices).
Effectiveness: While nudge theory holds potential, recent research has shown mixed effectiveness in some instances. Critics argue that biases can influence the selection of those to be nudged, and positive responses to nudges may lack statistical significance.
Broad Implications: Nudge theory is flexible and can be used by any entity wanting to influence others toward desired outcomes, making it relevant to various scenarios and contexts.
Choice Over Coercion: Nudge theory emphasizes positive choices over restricting undesirable behavior with sanctions, respecting an individual’s attitudes, knowledge, and capabilities.
Behavioral Change: Nudge theory acknowledges that individuals can be prompted to make better decisions by providing choices designed to facilitate those outcomes.
Related Frameworks
Description
When to Apply
Behavioral Economics
– Behavioral Economics combines insights from psychology and economics to understand how individuals make decisions. – It explores cognitive biases, heuristics, and other psychological factors that influence behavior and decision-making.
– When designing interventions or policies to influence behavior change, understanding the psychological factors that drive decision-making and leveraging insights to design effective nudges.
Choice Architecture
– Choice Architecture refers to the design of environments in which people make decisions. – It involves structuring choices and presenting information in ways that influence decisions without restricting freedom of choice.
– When designing user interfaces, websites, or physical spaces where choices are made, applying principles of choice architecture to frame options and guide decision-making towards desired outcomes.
Defaults
– Defaults are pre-selected options that individuals automatically receive if they do not make an active choice. – They have a powerful influence on behavior because people tend to stick with default options due to inertia or cognitive ease.
– When designing forms, applications, or decision processes, setting default options strategically to encourage desirable behaviors or outcomes, and understanding the impact of default settings on user behavior.
Social Proof
– Social Proof is the phenomenon where people mimic the actions of others in uncertain or ambiguous situations. – It relies on the principle of conformity and suggests that individuals are more likely to adopt behaviors that they see others engaging in.
– When designing persuasive messages, marketing campaigns, or social interventions, incorporating social proof elements such as testimonials, reviews, or social media cues to influence behavior by signaling what others are doing or endorsing.
Loss Aversion
– Loss Aversion is the tendency for individuals to prefer avoiding losses over acquiring equivalent gains. – It suggests that people are more motivated by the fear of losing something they already have than by the prospect of gaining something of equal value.
– When designing incentives, rewards, or interventions to encourage behavior change, framing messages or incentives in terms of potential losses rather than gains to increase motivation and compliance with desired behaviors.
Feedback Loops
– Feedback Loops provide individuals with information about their actions and their consequences, allowing them to adjust their behavior accordingly. – They can be positive (reinforcing desired behavior) or negative (correcting undesirable behavior).
– When designing systems, applications, or interventions, incorporating feedback mechanisms to provide users with real-time information about their actions and outcomes, and using feedback loops to reinforce desired behaviors or correct deviations from desired outcomes.
Choice Overload
– Choice Overload occurs when individuals are presented with too many options, leading to decision paralysis or suboptimal choices. – It highlights the importance of simplifying choices and reducing cognitive burden to facilitate decision-making.
– When designing product catalogs, menus, or decision interfaces, limiting the number of options presented to users to prevent choice overload and increase the likelihood of decision-making and action.
Temporal Discounting
– Temporal Discounting is the tendency for individuals to devalue future rewards in favor of immediate gratification. – It reflects the preference for smaller, immediate rewards over larger, delayed rewards and can influence decision-making and behavior.
– When designing incentives or interventions to promote long-term behavior change, understanding and mitigating the effects of temporal discounting by providing immediate rewards or feedback, or by reframing long-term benefits in more immediate or tangible terms.
Personalization
– Personalization involves tailoring interventions or experiences to individual preferences, characteristics, or behaviors. – It enhances relevance, engagement, and effectiveness by addressing specific needs and motivations of users.
– When designing digital experiences, marketing campaigns, or health interventions, leveraging data and technology to personalize content, recommendations, or feedback based on user preferences, behaviors, or demographics to increase engagement and impact.
Incentives and Rewards
– Incentives and Rewards are tangible or intangible benefits offered to individuals to motivate or reinforce desired behaviors. – They can include monetary rewards, discounts, recognition, or privileges that incentivize specific actions or outcomes.
– When designing behavior change programs, loyalty programs, or gamified experiences, incorporating incentives and rewards to motivate desired behaviors, reinforce positive actions, and increase engagement and compliance with program objectives.
Choice Reversal
– Choice Reversal involves allowing individuals to reverse or change their decisions after they have been made. – It provides a safety net for individuals who may regret their choices and encourages experimentation and risk-taking.
– When designing decision processes, forms, or interfaces, incorporating mechanisms for individuals to reverse or modify their choices after they have been made, reducing anxiety and hesitation associated with decision-making, and promoting exploration and learning through trial and error.
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.
Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).
Ergodicity is one of the most important concepts in statistics. Ergodicity is a mathematical concept suggesting that a point of a moving system will eventually visit all parts of the space the system moves in. On the opposite side, non-ergodic means that a system doesn’t visit all the possible parts, as there are absorbing barriers
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Metaphorical thinking describes a mental process in which comparisons are made between qualities of objects usually considered to be separate classifications. Metaphorical thinking is a mental process connecting two different universes of meaning and is the result of the mind looking for similarities.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Google effect is a tendency for individuals to forget information that is readily available through search engines. During the Google effect – sometimes called digital amnesia – individuals have an excessive reliance on digital information as a form of memory recall.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
Single-attribute choices – such as choosing the apartment with the lowest rent – are relatively simple. However, most of the decisions consumers make are based on multiple attributes which complicate the decision-making process. The compromise effect states that a consumer is more likely to choose the middle option of a set of products over more extreme options.
In business, the butterfly effect describes the phenomenon where the simplest actions yield the largest rewards. The butterfly effect was coined by meteorologist Edward Lorenz in 1960 and as a result, it is most often associated with weather in pop culture. Lorenz noted that the small action of a butterfly fluttering its wings had the potential to cause progressively larger actions resulting in a typhoon.
The IKEA effect is a cognitive bias that describes consumers’ tendency to value something more if they have made it themselves. That is why brands often use the IKEA effect to have customizations for final products, as they help the consumer relate to it more and therefore appending to it more value.
The overview effect is a cognitive shift reported by some astronauts when they look back at the Earth from space. The shift occurs because of the impressive visual spectacle of the Earth and tends to be characterized by a state of awe and increased self-transcendence.
The house money effect was first described by researchers Richard Thaler and Eric Johnson in a 1990 study entitled Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. The house money effect is a cognitive bias where investors take higher risks on reinvested capital than they would on an initial investment.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.
The decoy effect is a psychological phenomenon where inferior – or decoy – options influence consumer preferences. Businesses use the decoy effect to nudge potential customers toward the desired target product. The decoy effect is staged by placing a competitorproduct and a decoy product, which is primarily used to nudge the customer toward the target product.
Commitment bias describes the tendency of an individual to remain committed to past behaviors – even if they result in undesirable outcomes. The bias is particularly pronounced when such behaviors are performed publicly. Commitment bias is also known as escalation of commitment.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.
Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.
A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.
Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.
Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.
Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.
Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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