BEHAVIOURAL
PHENOMENA AND PRINCIPLES
ACTIVE CHOICE AND ENHANCED ACTIVE CHOICE
THE IDEA IN BRIEF:
Highlighting the fact that a decision needs to be made increases
the attention paid to the decision-making process. This is especially useful
for choices which are typically passive (e.g. Getting a flu shot, renewing a
health club plan, donating organs). Enhanced active choice refers to the
presentation of options that highlight the cost of making a “no” choice.
ILLUSTRATIVE EXAMPLES:
Rather than waiting for individuals to stop by a clinic to get a
flu shot, they could be actively asked whether they intend to get one (active
choice). Alternately, the could be presented with two options – a) yes, I will
get a flu shot and protect me and my family, or b) no, I am willing to expose
me and my family to the risk of disease. The likelihood of getting a flu shot
should increase with active choice, and further increase with enhanced active
choice.
REFERENCES:
Keller, P. A., Harlam, B., Loewenstein, G., & Volpp, K. G.
(2011). Enhanced active choice: A new method to motivate behavior change.
Journal of Consumer Psychology, 21(4), 376–383.
ANCHORING
THE IDEA IN BRIEF:
Numerical judgments tend to be influenced by prominent numbers
that are available in the context. These prominent numbers – called anchors –
need not even be relevant to the judgment.
ILLUSTRATIVE EXAMPLES:
Two groups of people were asked to estimate the population of
Perth, Australia. Before estimating, one group was asked whether they thought the
population was greater or less than 50,000. The second group was asked whether
they thought the population was greater or less than 10,000,000. The actual
estimates provided by the second group were significantly higher.
Similarly, shoppers who encounter high price items early in
their shopping trip are more likely to purchase cheaper items later.
REFERENCES:
Tversky, A., & Kahneman, D. (1974). Judgment under
uncertainty: Heuristics and biases. science, 185(4157), 1124–1131.
ASYMMETRIC DOMINANCE/DECOY
THE IDEA IN BRIEF:
Consider two options that vary on two attributes. A is better
than B on attribute one, but not as good on attribute two. Adding s third
option, B*, that is worse than B on both attributes shifts choices towards B.
B* can be called a decoy because it is not really preferred, but shifts choices
among the other two.
ILLUSTRATIVE EXAMPLES:
A consumer can not choose between two headphones. A has a sound
quality index of 100 and a comfort rating of 50. B has a sound quality index of
50 and a comfort rating of 100. The addition of a third headphone B* with 40
sound quality index and a 90 comfort rating will increase his likelihood of
choosing B.
REFERENCES:
Huber, J., Payne, J. W., & Puto, C. (1982). Adding
asymmetrically dominated alternatives: Violations of regularity and the
similarity hypothesis. Journal of consumer research, 9(1), 90–98.
AUTOMATIC ENROLMENT
THE IDEA IN BRIEF:
Automatically enrolling people in benefit programs or provident
funds but giving them the option of withdrawing increases the likelihood that
they will continue to participate.
ILLUSTRATIVE EXAMPLES:
Company A requires all employees who want to participate in
their benefits program to sign a form and send it to the human resources
department. Company B automatically enrolls all employees into an identical
benefits program, but allows them to withdraw with no penalties by signing a
form and sending it to the human resources department. In the long run, company
B has a significantly higher participation rate in its benefits programs.
REFERENCES:
Madrian, B. C., & Shea, D. F. (2001). The power of
suggestion: Inertia in 401 (k) participation and savings behavior. The
Quarterly Journal of Economics, 116(4), 1149–1187.
CHANNEL FACTORS
THE IDEA IN BRIEF:
Features of the physical space and surroundings in a task
oriented environment can either facilitate or hinder the achievement of the
task. Eliminating features that hinder the task will increase the likelihood of
completion.
ILLUSTRATIVE EXAMPLES:
Two groups of low-income consumers heard a (identical) seminar
about the importance of opening bank accounts. At the end of the seminar, one
group was given the forms needed to open bank accounts, while the second was
given forms as well as a map and directions to the bank. Significantly more
people from the second group opened bank accounts.
REFERENCES:
Mullainathan, S., & Shafir, E. (2009). Savings policy and
decision-making in low-income households. In M. Barr & R. Blank (Eds.),
Insufficient funds: Savings, assets, credit, and banking among low-income
households. Russell Sage Foundation Press (pp. 121–145).
CHOOSING VS. REJECTING
THE IDEA IN BRIEF:
The manner in which people are asked to choose between two
options can change the information they use in making the decision. In
particular, asking people to choose between A and B results on their focusing
on reasons to choose (positive aspects, while asking them to reject A or B
results on them focusing on reasons to reject. (Negative aspects).
ILLUSTRATIVE EXAMPLES:
A manager is looking to hire one of two job candidates. Mr. A is
average on all four relevant attributes, white Ms. B is outstanding on two and
weak on the other two. When the manager chooses between the two, B tends to be
preferred over A (there are more reasons to choose B). When the manager is
rejecting one of the two, B tends to get rejected more often (there are more
reasons to reject B).
REFERENCES:
Shafir, E. (1993). Choosing versus rejecting: Why some options
are both better and worse than others. Memory & Cognition, 21(4), 546–556.
COMPROMISE EFFECT
THE IDEA IN BRIEF:
When people choose between three options that vary along two
dimensions, the option in the middle (which is average on both dimensions)
tends to get chosen more often. Conversely, the likelihood of choice of an
option can be increased by making it the “compromise” option. This effect is
particularly strong for options where it is difficult to evaluate quality.
ILLUSTRATIVE EXAMPLES:
1) A gas station sold 89 and 91 octane
petrol. The sales of 91 went up after they now introduced a 94 octane grade,
because 91 now became the “compromise” option.
2) In most coffee shops offering three sizes
of beverages, the medium is the most popular size.
REFERENCES:
Simonson, I. (1989). Choice Based on Reasons: The Case of
Attraction and Compromise Effects. Journal of Consumer Research, 16(2),
158–174.
CONSTRUAL LEVELS
THE IDEA IN BRIEF:
When events are to happen in the future, people view them in
them of their higher level benefits. When the same event is to happen now, it
is viewed in terms of concrete details. For events that have high levels of
abstract benefits but involve a lot of concrete detail (effort), this results
in a diminished attractiveness of the event as it comes closer in time.
ILLUSTRATIVE EXAMPLES:
Neel was intrigued by the possibility of learning a new language
and enrolled for Japanese classes that would happen in two months. After two
months passed, the inconvenience of taking public transit, purchasing books,
and giving up on leisure activities seemed too much, and he decided to cancel
his registration.
REFERENCES:
Trope, Y., & Liberman, N. (2003). Temporal construal.
Psychological Review, 110(3), 403–421.
DECISION POINTS
THE IDEA IN BRIEF:
People often start consumption episodes with a decision to
consume, but then passively continue consumption ‘till they hit a constraint.
Inserting an opportunity to pause and think about the consumption in an active
manner (a decision point) will increase vigilance and hence, the likelihood
that consumption stops. Decision points could take the form of reminders, small
transaction costs, or physical partitions.
ILLUSTRATIVE EXAMPLES:
Mr. X is given a large bucket of popcorn. Mr. Y has the same
quantity of popcorn in four equal bags. Assuming that they are both conscious
of the need to control consumption, Mr. Y will consume less than Mr. X.
REFERENCES:
Soman, D., Xu, J., & Cheema, A. (2010). A theory of decision
points. Rotman Magazine, Winter, 64–68.
DEFAULTS: OPT-IN VS. OPT-OUT
THE IDEA IN BRIEF:
The default choice in any decision task refers to the outcome
that would happen if the individual did not make a choice. If the likelihood
that people will choose not to choose is high, making a desired outcome the
default will increase the likelihood of it being chosen.
ILLUSTRATIVE EXAMPLES:
1) In Canada, citizens wishing to donate
organs must follow a procedure to get registered. Is France, the assumption is
that everybody will donate organs, but citizens wishing to not donate can
follow a procedure to get de-registered. Organ donation rates are significantly
higher in France than in Canada.
2) In country A, credit card applicants must
sign a consent allowing for their mailing address to be shared on a mailing
list. In country B, applicants need to sign to prevent their addresses from
being on a mailing list. The average citizen in country A receives a lot less
junk mail than in country B.
REFERENCES:
Johnson, E. J., & Goldstein, D. (2003). Do Defaults Save
Lives? Science , 302 (5649 ), 1338–1339.
EARMARKING
THE IDEA IN BRIEF:
Money that is designated toward a particular cause is more
likely to be spent on that cause. Earmarking can be achieved by physically
segregating money.
ILLUSTRATIVE EXAMPLES:
Labourers in India were given a savings target rs. 40 per pay
period. Some of them were encouraged to earmark rs. 40 by putting it in a
separate envelope. These labourers were more likely to save.
REFERENCES:
Soman, D., & Cheema, A. (2011). Earmarking and
Partitioning : Increasing Saving by Low-Income Households. Journal of Marketing
Research, 48(Special), S14–22.
FRAMING: GAIN VS. LOSS (LOSS AVERSION)
THE IDEA IN BRIEF:
Presenting the same outcome as a loss has a greater
psychological effect than presenting it as a gain.
ILLUSTRATIVE EXAMPLES:
1) When a 3% credit surcharge was framed as
a cash discount, the price difference between paying by credit cards and cash
was seen as more acceptable.
2) In one neighbourhood, employees of a
utility company tried to convince households to purchase energy—efficient
appliances cy saying “If you use these appliances, you will save $10 per
month.” In a second neighbourhood, this statement was changed to “If you fail to
use these appliances, you will lose $10 per month.” The likelihood of
purchasing was significantly greater in the second neighbourhood.
REFERENCES:
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An
Analysis of Decision under Risk. Econometrica, 47(2), 263–291.
FRAMING: PENNIES A DAY
THE IDEA IN BRIEF:
Presenting a large dollar amount as an equivalent number of
dollars per day could increase the acceptability of this expense. However, this
effect reverses if the per day expense is very large.
ILLUSTRATIVE EXAMPLES:
A charity asked individuals to donate $350 towards a certain
cause. Subsequently, they changed their request and framed the money as “less
than a dollar a day”. Donations increased significantly.
REFERENCES:
Gourville, J. T. (1998). Pennies-a-day: The effect of temporal
reframing on transaction evaluation. Journal of Consumer Research, 24(4),
395–403.
GOAL VISIBILITY
THE IDEA IN BRIEF:
When people are in the middle of a goal-oriented task, they work
harder towards accomplishing the goal when it is in sight. Consequently,
reminding people of their goal or making the goal more salient or visual
increases motivation.
ILLUSTRATIVE EXAMPLES:
1) Competitive swimmers swim faster on laps
in which they face the end point of the race, and slower when they are swimming
away from the endpoint.
2) Putting photographs of children on
savings envelopes increased the saving rate of parents who were waving for
their children’s education.
REFERENCES:
Cheema, A., & Bagchi, R. (2011). The Effect of Goal
Visualization on Goal Pursuit : Implications for Individuals and Managers.
Journal of Marketing, 75(2), 109–123.
HEDONIC EDITING
THE IDEA IN BRIEF:
People either integrate or segregate monetary outcomes in order
to maximise their psychological impact. In particular:
• A single loss is preferred to
multiple losses
• Multiple gains are preferred to a
single gain.
• In situations where there is a
large loss and a small gain, the gain should be separated from the loss (the
silver lining principle)
ILLUSTRATIVE EXAMPLES:
A tire shop that charged $200 for tire replacement offered a $10
discount. This small benefit was lost in the context of the large price tag. A
second tire shop instead mailed their patrons a $10 gift certificate two weeks
after getting their tires replaced. By separating this small gain, they made
its psychological value much higher.
REFERENCES:
Thaler, R. H. (1999). Mental accounting matters. Journal of
Behavioral Decision Making, 12(3), 183–206.
MINDSET: CHOICE VS. EVALUATION
THE IDEA IN BRIEF:
A mindset refers to the style with which the human brain
processes information. When a person has made a large number of choices, they
are more likely to view incoming (unrelated) information as a choice problem.
ILLUSTRATIVE EXAMPLES:
One group of people were asked “which of the following is more
prototypical of birds?” by making choices between a large numbers of pairs of
birds (e.g. “Crow or penguin?”). a second group was asked to evaluate (not
choose) the prototypicality of a large number of birds on a scale. Both groups
were shown purchase opportunities where they could choose Product A, product,
or to not choose at all. People who had chosen amongst birds were more likely to
choose, and hence make a purchase, than people who merely evaluated.
REFERENCES:
Xu, A. J., & Wyer, R. S. (2008). The Comparative Mind-Set
From Animal Comparisons to Increased Purchase Intentions. Psychological
Science, 19(9), 859–864.
MINDSET: DELIBERATIVE VS. IMPLEMENTAL
THE IDEA IN BRIEF:
A mindset refers to the style with which the human brain
processes information. When a person has approached a large number of events
with a view to getting them done (rather than merely thinking about them), they
are more likely to get the next event done.
ILLUSTRATIVE EXAMPLES:
Ms. A and Ms. B both faced a job that was due in three weeks and
were asked when they planned to start working on it. Prior to this, Ms. A was
asked about the value of five other jobs she had done, while Ms. B was asked
how she accomplished five other jobs that she had done. Ms. B was more likely
so start working on the new job sooner.
REFERENCES:
Gollwitzer, P. M. (1999). Implementation intentions: strong
effects of simple plans. American Psychologist, 54(7), 493–503.
PAIN OF PAYMENT AND PAYMENT TRANSPARENCY
THE IDEA IN BRIEF:
In addition to the negativity of paying a certain amount, the
manner in which the payment is made can create further negativity. Certain
methods of payment that are extremely transparent (e.g. Cash or cheque) feel
more painful than others that are not as transparent (e.g. Electronic or direct
debit). The pain of payment determines the willingness to spend.
ILLUSTRATIVE EXAMPLES:
1) When a Laundromat shifted from accepting
cash to accepting prepaid cards, the number of people running multiple loads of
laundry increased.
2) When a cafeteria in Hong Kong moved from
accepting cash to accepting the Octopus (a prepaid electronic card) the sales of
desserts and beverages increased.
REFERENCES:
Soman, D. (2001). Effects of payment mechanism on spending
behavior : The role of rehearsal and immediacy of payments. Journal of Consumer
Research, 27(4), 460–474.
PARTITIONING/BRACKETING
THE IDEA IN BRIEF:
Partitioning multiple objects into separate categories increases
the nature of the choice process between those alternatives.
ILLUSTRATIVE EXAMPLES:
A mutual fund company sorted their offering of mutual funds
along the country of origin. As a result, their customers diversified by trying
to purchase funds from different countries. When the same set of mutual funds
was sorted by the industry type, diversification by country decreased, while
diversification by industry increased.
REFERENCES:
Fox, C. R., Ratner, R. K., & Lieb, D. S. (2005). How
subjective grouping of options influences choice and allocation:
diversification bias and the phenomenon of partition dependence. Journal of
Experimental Psychology: General, 134(4), 538–551.
PAYMENT DEPRECIATION
THE IDEA IN BRIEF:
The pain of payment decreases as time passes from the payment.
As a result, the strength of the sunk cost effect (a pressure to consume events
that have been prepaid for) decreases with time.
ILLUSTRATIVE EXAMPLES:
The attendance rates at a physical fitness centre gradually
decline from the time of making n annual membership payment. On the other hand,
patrons that make monthly payments show a more stable attendance rate as a
function of time.
REFERENCES:
Gourville, J. T., & Soman, D. (1998). Payment depreciation:
The behavioral effects of temporally separating payments from consumption.
Journal of Consumer Research, 25(2), 160–174.
PEER PROGRAMS AND SOCIAL COMPARISONS
THE IDEA IN BRIEF:
Making a commitment in the presence of peers increases the
likelihood that the commitment will be followed by appropriate action. Also,
the presence of peers who have high levels of accomplishment increase the
motivation to similarly increase accomplishment.
ILLUSTRATIVE EXAMPLES:
1) Members of a self help group savings
program increase their savings rate when their peers routinely met to discuss
progress and outcomes.
2) Households in the UK were sent letters
encouraging them to pay taxes on time. When these letters included a statement
of peer performance (e.g. “9/10 people in the UK pay their takes on time”) the
letters were more effective.
REFERENCES:
Kast, F., Meier, S., and Pomeranz, D. (2012). Under-savers
anonymous: Evidence on self-help groups and peer pressure as a savings
commitment device, Discussion Paper series, Forschungsinstitut zur Zukunft der
Arbeit, No. 6311, http://nbnresolving.de/urn:nbn:de:101:1-201204239864
PERCEIVED PROGRESS
THE IDEA IN BRIEF:
People in a goal-oriented task are more motivated to accomplish
the task when they receive feedback about the progress they have made. Their
motivation is driven not only by actual levels of progress, but also by their
perception of progress.
ILLUSTRATIVE EXAMPLES:
1) People waiting in a long queue were more
likely to continue waiting when the queue took the form of a line that moved as
some people were being served, rather than a take-a-number-and-wait queue.
2) Two groups of people were given 400 lines
of text to proofread. The first group received 20 pages of 20 lines each; the
second group received 40 pages of 10 lines each. Members of the second group
found themselves flipping through pages faster, had a greater perception of
progress, and were hence more likely to finish the task.
REFERENCES:
Zhou, R., & Soman, D. (2003). Looking back: Exploring the
psychology of queuing and the effect of the number of people behind. Journal of
Consumer Research, 29(4), 517–530.
PRECOMMITMENT
THE IDEA IN BRIEF:
When people view events that are in the future, they are more
likely to be rational and wise about their choices. When the same events are in
the present, people act impulsively and make foolish choices. Therefore, the
best way of nudging people to make wise choices is to ask them to commit to making
those choices for the future.
ILLUSTRATIVE EXAMPLES:
Employees in an organization were asked if they would like to
increase their savings rate in the future. Most agreed, and committed to
setting aside a proportion of their future salary increase into a separate
savings account. These people who were asked to save more saved significantly
more than people who worked with a traditional financial advisor.
REFERENCES:
Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow:
Using Behavioral Economics to Increase Employee Saving. Journal of Political
Economy, 112(1), S164–S187.
THE IDEA IN BRIEF:
Any intervention that increases one’s identity as a virtuous
person increases the likelihood that they will make virtuous choices. However,
it is important that the intervention happens before the choices have to be
made.
ILLUSTRATIVE EXAMPLES:
People often misreport (cheat) in domains ranging from tax forms
to insurance claims. In most of these situations, people have to sign and
declare that the contents of the form are true – but the declaration is made at
the end of the form, after all the reporting has been done. When the
declaration is made prior to the reporting, the extent of misreporting and
cheating significantly declines.
REFERENCES:
Shu, L. L., Mazar, N., Gino, F., Ariely, D., & Bazerman, M.
H. (2012). Signing at the beginning makes ethics salient and decreases
dishonest self-reports in comparison to signing at the end. Proceedings of the
National Academy of Sciences, 109(38), 15197–15200.
SINGLE STAGE VS. MULTIPLE STAGE DECISIONS
THE IDEA IN BRIEF:
Presenting the same choice as a multiple stage decision rather
than a single stage decision can change the outcome of the choice task.
ILLUSTRATIVE EXAMPLES:
1) One group of people (A) were told they
would play in a lottery which offered a 25% chance of going to the second
round. At this round, they were asked to choose between:
Option 1A: Get $300 for sure
Option 2A: 80% chance of winning $450, else nothing
A second group (B) was offered a choice between two gambles:
Option 1B: 25% chance of winning $300, else nothing
Option 2B: 20% chance of winning $450, else nothing
Option 1A is identical to 1B, and 2A is identical to 2B. Yet
people in group A prefer 1A over 2A (there is an illusion of certainty) while
people in group B prefer 2B to 1A (now $450 appears larger than $300, while the
difference between 20% and 25% doesn’t seem as large). Hence, presenting a
gamble as a two stage decision could create an illusion of certainty and change
choice.
2) A group of friends are deciding which
restaurant to go to for dinner. In one version, they are asked to choose
between Chinese, Italian, or Thai cuisines. In a second version, they are first
asked if they would like Chinese, and if not, whether they would like Thai or
Italian. The likelihood of choosing Chinese is significantly greater in the
second version.
REFERENCES:
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An
Analysis of Decision under Risk. Econometrica, 47(2), 263–291.
SUNK COST EFFECT
THE IDEA IN BRIEF:
People who have prepaid for a consumption opportunity are driven
to consume so that they can satisfactorily close their mental account without a
loss. The drive to consume will be greater when the amount prepaid is higher.
ILLUSTRATIVE EXAMPLES:
Jack and Jill both had rink side seats for a basketball game. On
the day of the game, there was a heavy snowstorm and the game was being shown
on TV. Jill decided to stay home, while Jack braved the treacherous conditions
to attend the game. Jill had received her ticket as a gift, while Jack had paid
$100 for it.
REFERENCES:
Thaler, R. H. (1999). Mental accounting matters. Journal of
Behavioral Decision Making, 12(3), 183–206.
TEMPTATION BUNDLING
THE IDEA IN BRIEF:
Creating a mechanism where people can only consume an indulgence
while they consume a virtuous product will increase the likelihood that the
virtuous product is consumed.
ILLUSTRATIVE EXAMPLES:
Two groups of people were encouraged to exercise more often. One
of the groups was allowed to watch their favourite TV show only in the gym
room, while the other had no such constraint. People in the first group
exercised more because they could bundle their temptation along with the exercise.
REFERENCES:
Milkman, K., Minson, J., & Volpp, K. (2013). Holding the
Hunger Games Hostage at the Gym: An Evaluation of Temptation Bundling. The
Wharton School Research Paper No. 45. Available at SSRN:
http://ssrn.com/abstract=2183859
TRANSACTION DECOUPLING
THE IDEA IN BRIEF:
The strength of the sunk cost effect can be weakened if the
physical form of a transaction makes it difficult to associate a price tag with
every unit of consumption.
ILLUSTRATIVE EXAMPLES:
Jack and Jill both had season tickets for their favourite
basketball team. While they paid the same amount, the physical formats of the
season tickets were different. Jack’s tickets took the form of a booklet of
coupons – one coupon for each game. Jill’s ticket took the form of a membership
card which she showed every time she entered the stadium. On the day of one of
the games, there was a heavy snowstorm and the game was being shown on TV. Jill
decided to stay home, while Jack braved the treacherous conditions to attend
the game. The physical format of his ticket made it easier to realize that he
would be “wasting” money by not attending.
REFERENCES:
Soman, D., & Gourville, J. T. (2001). Transaction
decoupling: How Price bundling affects the decision to consume. Journal of
Marketing Research, 38(1), 30–44.
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