Introducing Behavioral Economics and the power of nudging
Updated: Feb 11, 2021
What does behavioral economics refer to?
Behavioral Economics (BE) is considered a recent field in economics many do not know about. Even though we are often told that the consumer is fully rational, BE came along to reflect on how our emotions and perceptions can influence our decision-making process. One of its main objectives is to verify whether those decisions, that come from shortcuts taken by our brain, are considered irrational or not.
What does nudge mean?
Nudge is a concept in behavioral economics that proposes positive reinforcement and indirect suggestions as ways to influence people’s behavior and decision-making. It is just an intervention that gently steers individuals towards a desired action. Nudges aim to influence the choices we make, without taking away the power of discretion. Nudges are beneficial as we do not always think and decide logically and consciously by weighing up all the costs and benefits. Most decisions are made instinctively and unconsciously. In a world filled with information, it is impractical to consider everything as well as consistently make informed decisions without forgoing some aspects. So, nudging is a good and efficient way to try to influence people's behavior – to get the reaction wanted. And this can be potentially applied to every aspect of life.
In addition, people can often get uncertain about themselves and their decisions when given too many options. According to researchers at Cornell University (Wansink & Sobal, 2007) a normal person is estimated to make around 35000 choices on an average day. If we do not count the sleeping time it is around one every two seconds. Most of them are not rational and even not relevant. They consume precious energies, and they are a waste of attention and focus which cannot be devoted to more important tasks due to distractions.
For that reason, nudges and choice architecture offer a simpler way. Without putting a spin on everything through drastic changes in policies and expensive reforms, and without depriving you of your freedom of choice, nudges lead you to a better path, sometimes without you even noticing it.
Nudge in the public sector
Many governments around the world are using nudge units to design environments and help humans make better decisions in order to improve outcomes in areas ranging from tax compliance to retirement saving plans and health insurance.
Nudge in the private sector
The applications of nudge principles in the marketing departments are becoming more common in the last years. Currently, Nudge Units from emerging behavioral consulting companies are also helping other firms promote change and get new objectives such as higher productivity, marketing tools, and better sales amongst others. Since most nudge initiatives do not require a heavy budget to be implemented, their applications will be able to make BE enter more sectors and consolidate its presence in the consulting world.
NUDGE IN ACTION: Reducing food waste in the catering industry
Nowadays, food waste has a huge impact on the environment with roughly 1.3 billion tons of food per year being lost or wasted. It is important to find ways to take action at all stages of the production chain. While waste is an inevitable consequence of the huge choice of products that supermarkets stock, it is the final consumer who usually takes all the blame.
In 2013, a social experiment by Aalborg University, Roskilde University, and University of Southern Denmark consisted of seeing if smaller plates lead to less food waste (Hansen 2013).
Two groups of business leaders that took part in a congress in Denmark, ate at two different floors, the first one with normal size plates (27cm) and the second with slightly smaller plates (24cm). All food waste was collected in different trash bags and weighted in bulk.
Results and effects:
The results were impressive. Smaller plates appeared to have reduced food waste by 26% compared to normal size plates.
This led to other actions, particularly one multi-stakeholder non-profit, ReFED (Rethink Food Waste through Economics and Data) which takes a data-driven approach to move the food system from acting on instinct in order to solve the United States of America food waste problem. One of the goals is, for instance, financing all-you-can-eat dining establishments to obtain smaller-sized plates and minimize consumer food waste.
This is a clear case of nudging because smaller plates do not limit the amount of food a person can eat. The smaller plates gave the impression that people were filling their plates with food as they would normally do in an all-you-can-eat buffet but with less quantity. This action reduced the waste without imposing anything but influenced the behavior of the congressman.
Main challenges to adoption of smaller plates:
Changing the way the buffet and catering industries operate is not an easy task. They are the industries most restive to introduce innovation and only large corporations relying on large economies of scale translate ideas into actual modifications and investments in the field. We saw touch screen panels to make orders and apps for delivery but not much has changed over the years in the way food is consumed. Current behavior created negative externalities for the environment in terms of excessive waste and abuse of disposable items. However, the main obstacles to the introduction of smaller plates are essentially two:
First, we have the switching costs faced by the company when purchasing new plates. We may consider that their size and price may result proportionally more costly than normal plates. In addition, the material should be fully recyclable otherwise a saving in waste would be compensated by more pollution externalities of disposable plastic items. The supply of such items is not abundant, and it might require payment of a premium. What is more, it commonly happens that a single person uses more than one plate per meal, undermining the whole operation.
Second, we must incorporate in the design the fact that customer satisfaction may be altered, and the experience of the service potentially impacted. For instance, people may be forced to reach the service tables more often and it may create confusion and a persistent crowd around them. In addition, there are types of food which do not fit such small plates. It may create involuntary spilling of food on the floor and so higher cleaning costs. Size of plates must be indeed tested ex-ante.
Although there are some negative sides, we should consider that saving an average of 30% of waste and overall decreasing the amount of food consumed for essentially the same price both increases profit margins and cuts expenses with huge reduction on externalities too.
Contexts of application:
Switching from normal to small size plates can be applied in a wide range of contexts that require aggregation of people: Conferences buffet, company and university canteens, parties and celebrations, weddings, buffet all you can eat. There are, in addition, numerous studies that support the use of small plates, little forks, and spoons in facing the problem of overweight. The consistent use of this format in the industry can considerably have a positive impact on the long-run health of customers and even households if applied at family unit level.
B. Wansink, J. S. (2007). Mindless eating: The 200 Daily food decisions we overlook. Environment and Behavior.
Hansen, P. &.-C. (2013). Smaller Plates, Less Food waste: A Choice Architectural Experiment in a Self-Service Eating Setting.
Pietro Fadda, Joana Alfaiate, Maria Sofia Murça, Xavier Borsot