Free ebook on behavioral economics!

I wrote a short and easy to read ebook on behavioral economics! Get it for free here:

Butterfly Effect for Business

Advertisements

Nudge of the Week: Obvious Strategies

Economist Shengwu Li, currently at Harvard, has a new theory called “Obviously Strategyproof Mechanisms“.

The basic idea is this: there are many situations where “in theory” we expect different methods to result in identical outcomes. For example, if you want to auction off a car, theory says that having a so-called “English” auction (where the highest bidder wins) and a “second-price sealed bid” auction (where all the bids are secret, and the highest bidder wins and pays the second highest price) should both result in the same person winning.

But in practice, we don’t see this equivalence. What is the cause of this discrepancy? According to Professor Li, it is the fact that one strategy is “obviously better” better than the other.

What does an “obviously better” strategy mean? It means that the worst you can do under one strategy is still better than the best you can do under any other strategy.

Think about how the worst that your business has to offer is still better than the best alternatives for your customers.

Nudge of the Week: Visualize the Future, then Write It Down

The Olympics are starting soon, so let’s think about the training of elite athletes.

One common advice from athletes is that they visualize the future. They see themselves winning the gold, scoring the goal, or landing the jump.

Visualizing your own success is important. But even more important is to write it down, preferably on the specific date in a calendar. This way, you can now work backwards from your future goal, and understand all the specific steps you need to take starting from today.

Knowing exactly what you want, and what you need to do to get it, will put you on the path to success.

Nudge of the Week: Checklists

Pilots have been using “pre-flight” checklists for decades. Even highly experienced pilots will still defer to checklists because the checklist is more reliable than your memory.

Seeing the success of checklists for pilots, surgeons have recently taken to using checklists as well. And the results are staggering.

According to one study, the simple use of checklists cut patient mortality rates nearly in half.

Can you incorporate checklists into your business?

Nudge of the Week: People Solutions vs. Math Solutions

If you deal with people, sometimes what’s mathematically won’t be seen as being better overall.

Think of this question: how can you make a 3 hour train ride better?

A mathematical solution might be to spend a lot of money to make the trip a few minutes shorter.

A people solution might be to spend a fraction of that money to give people a more beautiful experience by using prettier cushions, cleaning up the graffiti, and maybe installing some charging outlets.

Think of it with respect to a restaurant. You can spend hundreds of dollars on a machine that makes your coffee a few seconds faster. Or you can have fresh flowers delivered once or twice a week.

People prefer beauty and comfort more than speed and power.

Nudge of the Week: Default Choices

People are unlikely to change default settings. So make sure the defaults are optimized for them.

There are good ways and bad ways of doing this. “Click here to NOT receive our weekly spam letter” is a bad way of doing this. It will be effective in the short run, but because people generally don’t like spam, your customers will hate you in the long run.

“Click here to NOT contribute to your retirement plan” is better, because people generally will be happy to have more money for their retirement.

Grocery stores do this with the familiar “Paper or plastic?” The default assumption is you are getting a bag. You have to opt-out of the bag otherwise.

Nudge of the Week: Out of Sight, Out of Mind

You can’t be tempted by something you can’t see. That’s why cakes and other desserts are displayed under bright lights.

So if you offer an option but keep it hidden, even very crudely, you will find people will do that thing less.

Google moved the candy in their New York office cafeteria from out in the open to opaque jars.¬†Within seven weeks, Googlers had¬†avoided 3.1 million calories of M&M’s alone.

So what unneccsary temptations can you hide this week? And what good things will you shine a bright light on?