Nudging Rich and Nudging Poor

In the very short time since I moved to the USA, I was fortunate enough to have met a gentleman who works (worked) at the World Bank in research and applications of behavioural economics in development policies. It was very fortunate since we met because he was selling a car and my wife and I were buying one.

While we were waiting for the car to be inspected by a mechanic we had a wonderful chat on behavioural science and its applications. We shared perspectives, points of view, experiences and illustrations of behaviourally informed interventions.

For me this short chat was an eye opener on the differences in Nudging across countries.

When it comes to differences across countries, the first thing that comes to mind is Culture and subsequently, Cultural Differences.

Culture, however, is not the (main) cause for the differences that exist in applying behavioural science in rich and poor countries. (I’m oversimplifying, I know). The main cause is the (invisible) infrastructure that exists in rich countries and, quite often, lacks in poor ones.

In the Western World we have infrastructure that we take for granted and, to some extent, we have become blind when it comes to it. Many western-world nudges and behavioural design features are built on this (seemingly) invisible infrastructure.

The example of the Fly in the Urinal  nudge (Featured in the book Nudge and detailed in this article), it is a wonderful illustration on the how western-world nudges are built on the western-world infrastructure.

The Fly in the Urinal intervention is aimed at tackling a sanitation / health problem – spillage of urine in public toilets.

As you can imagine, sanitation and subsequent health related problems are not specific to the western world; such problems are present everywhere and the western world is (maybe) the least affected by them.

What is essential here is that the Fly in the Urinal intervention assumes that there is a sewerage system.

I know this sounds weird, but it is true. Moreover, I have to admit that I have never thought about this underlying pre-condition of the fly in the urinal intervention. I guess I’m not the only westerner Behavioural science guy who has taken this for granted.

Whereas for westerners the presence of sewerage systems is natural, according to the World Bank Report 2015,

 About one billion people defecate in the open. (see page 17)

For this behavioural problem which brings health problems, flies (in the urinal) will not work. (Flies will appear naturally, but they will only worsen the problem).

The design of behavioural interventions definitely is context dependent and infrastructure might play a bigger role than culture.

Smart, but Deceiving

Last weekend we went shopping (as usual for most people) and I noticed this very interesting, smart, but deceiving piece of merchandising.

Bottles of (allegedly) lemon juice are placed in the Fruits section and they are presented exactly in the same way as fruits are.

I don't fully know if that is actually lemon / lime juice, but I seriously doubt it since the area is not refrigerated. 

It's a piety that this knowledge is not used for better purposes.

Branding in Services Explained through Prospect Theory

Branding and brand building are important activities in marketers’ jobs and brands are important for consumers, too. Yet, there is, in my own view, a considerable fuzzy area on what exactly does branding mean and why consumers choose branded services (and products) over non-branded ones.

From the business’ point of view, brands are seen as identification means, differentiation means, assets etc. The process of branding (building a brand) is very well defined and structured in various stages.

From a consumers’ point of view, brands are cues for certain expectations, while the process of branding is a learning / memory process.    

Maybe one day I will write on memory and branding, but for now I want to focus on why people choose branded services over non-branded ones.

The key to this preference is in Prospect Theory (click here if you want to read about PT).

Let’s see the issue of choosing between a branded and non-branded service as a gamble (in prospect theory terms). For simplicity we will use the example of restaurant services.

A person has to choose between Restaurant B – a restaurant belonging to a well-established corporate chain – and Restaurant P – a privately owned, single location restaurant.

Eating at Restaurant P is seen as a gamble with the following probabilities and outcomes:

There is a 10% chance that the food & service will be great (+100).

There is a 80% chance that the food & service will be average / acceptable (+50)

There is a 10% chance that the food & service will be terrible (-100).

Eating at restaurant B is seen as a certainty (100%) for as the food and service will be average / acceptable (+50).

Eating at restaurant P can be translated as:

EV Restaurant P = W(0.1)*100 + W(0.8)*50 + W(0.1)*(-100*λ)

Based on prospect theory, we will consider:

W(0.1) = 0.17;

W(0.8) = 0.55;

λ = 2.1;

 EV Restaurant P = 0.17*100 + 0.55*50 + 0.17*(-100)*2.1 = 17 + 27.5 – 35.7 = 8.8.

Eating at restaurant B can be translated as:

EV Restaurant B 1*50 = 50

Basically, the choice between restaurants B and P is heavily tilted towards the branded one, even if the branded restaurant will deliver only average food and service, without any chance of the client getting great food & service.

The reason for which people prefer branded services is not that they want mediocrity or that they want to avoid getting great food and service; rather it is that (most) people want to avoid the risk of getting terrible food and service.

I am fully aware that what I presented here is an oversimplified situation. I am also aware of the fact that in making a choice between a branded and non-branded service there are more elements that come into play. Nonetheless, Prospect Theory has the power to fundamentally explain what is going on when we make these types of choices.

Thank you Rory Sutherland for the inspiration for this post.

Check out my new website: www.naumof.com

How (Not) To Design a Lottery

Early this year, the Romanian Government, through the Finance Ministry, decided to organize a lottery of receipts. The aim was to encourage Romanians to ask for the receipt at (small) shops, restaurants etc. The goal was to tackle tax evading done by small businesses.

Naturally, the rules of the lottery couldn’t focus only on small shops and restaurants (equal opportunity), therefore all receipts were accepted in the lottery.

About two weeks ago there was the first draw of the lottery… and here’s where things started to go bad.

As in any lottery there are two components: (1) the prize and (2) the probability of winning.

The prize of the lottery is 1.000.000 lei (local currency) which is approximately 220.000 Euros. That’s not bad, all in all.

The probability of winning is rather difficult to understand, but, in this case is rather simple. The lottery is organized each month and the random algorithm determines: (1) a day and (2) an amount. For example, the winning receipts are all receipts from February N^th that are of X lei (the decimals don’t count). X can be between 1 and 999 lei.

Applying a simplistic computation, the probability of winning the lottery is 30 (number of days in a month) * 1000 (approximation of the number of possible amounts on a receipt). This means that the chance of winning the lottery is 1 in 30.000.

This might look like a small chance, but in reality it isn’t (at least when it comes to lotteries). In a country of about 18.000.000 people it is very likely that there will be lots of winners… at there were… between 8 and 9 thousands people who registered with the tax authority to claim their prize in the two weeks after the first draw.

Just as a note, in this first draw receipts from 50 days were able to win, thus the chance of winning the lottery was 1 in 50.000.

Assuming that there will be a total of approx. 10.000 winners, this means that each of them will receive a prize of 100 Lei on which the state will take 16% tax, leaving each winner with 84 Lei (less than 20 Euros).

Personally, I don’t have any kind of (positive) expectations from governmental officials. However, I would have expected from people with an Economics degree (they work in the Ministry of Finance) to know how to compute probabilities and to know the Expected Utility Model. Moreover, the (former) Minister of Finance who promoted this lottery has a PhD. from Harvard University.

Here’s how a lottery should be organized:

You need a very large prize that comes with an extremely low (e.g. 1 in 20.000.000) probability of winning. The very large prize with a very low chance of winning creates appeal – it has a magnetic effect that draws people into the lottery in the illusory hope of having a life-changing sky-fallen amount of money.

You need a large number of small prizes with small (e.g. 1 in 10.000) probability of winning. These small, but rather likely wins create availability – hey, my cousin’s neighbour wan 200 Lei last month at the lottery. They also keep alive the hope of winning the large, but highly unlikely prize.

 Details matter much more than many of us think…

To Be Clear on Ambiguity

One recent trend in writing on applied behavioural science focuses on exceptions on the findings of behavioural science. Simply put, when what we know on Behavioural Science doesn’t work at all or as expected.

Here are some nice illustrations of this trend.

BE careful - A littleknowledge can be a dangerous thing By Crawford Hollingworth

Beyond WEIRD: Investigating Cultural Biases inBehavioural Science – webinar by Brainjuicer.

(Please Open them in new tabs and continue reading ;) )

                                                         

In a nutshell, the idea is that sometimes the effects discovered by behavioural science are very small or non-existent.

This, however, is not a surprise if one knows the fundamentals of behavioural science, namely the role of ambiguity (fuzziness).

Most of the times, people rely on contextual cues only if there isn’t clarity regarding the issue at hand. For example, anchoring works because people don’t know the exact value that has to be estimated. If I ask you what the number of cat breeds is, I bet none of you know the exact answer and this is only natural. In this case presenting anchors such as 30 or 3000 will influence your estimation simply because there is incredible fuzziness regarding how many breeds of man-exploiting cute furry creatures (cats) are out there.

Remaining in the area of anchoring: if we ask an illiterate five-year-old child from East Africa in what year did WWII end, then providing anchors will strongly influence the child’s answer (that is unless he simply says “I don’t know”). However, if we ask WWII veterans the same question, then providing anchors will have zero effect. Moreover, the veterans will be offended by the lack of knowledge of the people asking the question.

Similarly to anchoring, other contextual influences work ONLY (mostly) when there is ambiguity. For example, using mental accounting and default opt-ins for re-routing some of the tax return money into savings (mentioned in the article BE careful - A little knowledge can be a dangerous thing By Crawford Hollingworth) did not work because for the ones most in need (low income – less than 50.000 USD/year/household) there wasn’t any fuzziness on what to do with the money. Low income people are very well skilled in managing tight budgets and any sum of money is allocated (budgeted) well in advance.

I believe that if households with a larger income would get some money back and not expect it, the default opt in on savings would work quite well simply because there is some ambiguity on what to do with the (sky fallen) money.

On the social influences avenue, the most powerful social influence works because there is ambiguity. Social Proof (which is distinct from Social Pressure – what Solomon Asch investigated) works because we infer that others know something we don’t know. If we choose to buy the most popular internet subscription plan, we do so simply because we don’t know which plan best fits our needs.

On the other side of things, I know what shoe size I have (43) and I will never buy shoes of a different size (e.g. 42) regardless of how many other people buy 42 size shoes.

Here’s a wonderful illustration of how the context strongly influences judgment. It works because there is ambiguity… lots of it.  

Showing IKEA print to Art experts by lifehunterstv

Behavioural science is a gold mine for service design and customer experience – Interview with Nicolae Naumof on Adrian Swinscoe’s blog

Two weeks ago I gave this interview for Adrian Swinscoe’s blog. In it I explain my view on applying behavioural science in service design.

Naturally, I speak on what is behavioural science, what drives human behaviour and plead for a simple, two steps approach on applying behavioural science in service design: (1) Use the scientific literature on human behaviour to come up with behaviourally informed interventions and (2) test them, because no one knows the (absolutely) correct answer.

Interview can be listened here (30 mins or so): - open in new tab ;)

Interview and full transcript on: Adrian Swinscoe’s blog 

In a gold mine, you will not find gold bars …

More on applying behavioural science in service design www.Naumof.com

Goodbye My Love, Goodbye!

My dear,

We spent four and a half years together. With good times and bad ones. We shared joys and sorrows.

I came to you with great enthusiasm and high expectations. Some were fulfilled, others not.

The beginning of our relationship was both exciting and a bit difficult. Then, after about two years, I came to love you. I even wanted to make you (a small piece of you) my own. I actually thought that we could have a very long term relationship.

Yet, things didn’t work all that well between us. Maybe you didn’t love me (enough)? Maybe it simply wasn’t meant to be? Who knows?!

None of these matters now…

It’s time to say: “Goodbye!”

I will move on, not without a heavy heart. You will be (stay) the same and, I truly hope you will find others to love you, at least as much as I did.

Thank you for the times we had together!

I hope we will get to see each-other again, and, maybe, we will be together again, at least for some time…

Thank you, my dear The Netherlands! You were, for some years, My Home.

My dear readers,

I haven’t written personal posts on this blog for almost three years. I break this self-imposed rule to mark a rather painful moment in my life: Moving from the country in which I lived for almost five years and I called home for more than three years – The Netherlands.

In a few months my wife and I will move to the USA (Washington DC area).

                                                                                                                

What the future will bring, I am not sure. What I am sure of is that The Netherlands is a great country to live in, with great people (both literally and metaphorically) and living here was a life-changing experience for me.

I’ll be back (sooner or later).