Behavioural economics: Consumer biases / nudge theory (HL only)
Introduction
This topic is new to the syllabus and recognises that the choices that consumers and producers choose is the outcome of complex decision making. Given the recent covid-19 related events this is also an excellent opportunity to have your classes discuss the extent to which their own governments used behavioural economics to enforce certain behaviours, rather than relying on making certain actions illegal. The final activity also asks your students to consider whether the use of nudge theory by democratic governments is a positive or negative step for our societies?
Enquiry question
To what extent are consumers in control of their decisions? Should we be concerned by the increasing use of behavioural economics by different businesses and democratic governments?
Lesson notes
Lesson time: 1 hour
Lesson objectives:
Biases - rule of thumb, anchoring and framing, availability
⦁ Bounded rationality
⦁ Bounded self-control
⦁ Bounded selfishness
⦁ Imperfect information
1. Place and scale - exemplification - begin the lesson with the beginning activity. You can even have a couple of volunteers gently nudge each other and then have them explain the purpose of the nudge. (10 minutes)
2. Processes - technical Vocabulary - the students can learn the key concepts through the class handout, the opening video and the two activities included. (30 minutes)
3. Discussion - Have students in groups discuss the final activity - is behavioural economics a force for good or bad? Is there a danger that it pushes our society closer towards totalitarianism, by allowing authorities to control our lives without mandating it, i.e. having citizens willing choosing to give up on their individual freedoms? (10 minutes).
Key terms:
Anchoring and framing - the anchoring effect happens when an individual must choose a number, but the number is influenced, or 'anchored,' by the person having just heard a different number. This then affects the decision-making process.
Bounded rationality - the idea that rationality is limited by the cognitive limitations of the mind and time available to make the decision. As a result decision makers act as satisficers, seeking a satisfactory solution rather than an optimal one.
Bounded self-control - assumes consumers are able to exercise self-control, but unable to do so with some decisions. For example some consumers continue to purchase goods and services even though they are aware of the law of diminishing marginal utility.
Bounded selfishness - most easily expressed as a concern for the well-being of others, e.g. giving to charities or helping a stranger, despite this expenditure offering no direct benefit to the consumer.
Imperfect information - a situation where either buyers and/or sellers lack the necessary information to make an informed decision about the price or quality of a product. This will be studied in more depth in the market failure course, available at Unit 2.11: Asymmetric information (HL only)
Opening question
What are nudges? Why as individuals do we 'nudge' a person to act a certain way?
One definition that I found describes as a benevolent nod to keep us on the rails we want to, without making the decisions for us. It can probably best be described as gentle persuasion rather than an obvious and overt action.
Activity 1
Start by watching the following short introductory video and then complete the activities which follow:
1. Briefly summarise the term nudge theory?
A concept in behavioural economics, which suggests that positive reinforcement and indirect suggestions as ways to influence the behaviour and decision making of groups or individuals.
2. Using the video or your own experiences identify some examples of producers nudging (influencing) consumer behaviour.
Examples include placing popular items at eye level close to the check out, making a certain position the default one unless the consumer actively chooses other wise e.g. your IB coordinator could increase the take up of their favourite subject by placing the option in a number of option boxes.
3. Why according to the video are many consumer choices the result of automatic programming?
Most consumers do not have the time or knowledge to make entirely rational choices and instead tend to operate on automatic programming. From a non academic point of view we are also 'creatures of habit'.
4. How is nudge theory used in the following policy decisions - organ donation, subscription to newsletters and organisations e.t.c.
Nudge theory is used to increase the take up of such options by making e.g. organ donation the default position, unless the patient actively chooses to opt out of the system. This 'subtle' change brought about a significant rise in patients donating their healthy organs.
5. Explain two of the ethical constraints identified in the video
The first identified was transparency - are consumers aware of the nudge? Secondly what are the consequences of the nudge psychologically, for example might their be spillover effects in terms of consumers regretting the choices they made later?
6. Why is the strand of economics sometimes called 'libertarian' and 'paternal'?
This is because it allows governments to influence behaviours without actually mandating them - an example being the wearing of face masks (generally made compulsory in Asian nations but remained a recommendation in many European ones).
Activity 2 - Applying nudge theory
Start by watching the following short video and use the information contained in it and what you have learnt in the subject so far to complete the activities that follow:
1. Explain how businesses might use anchoring to improve sales for a particular product?
By anchoring in a consumers conscious the notion that the product should be an automatic purchase and the only real choice becomes deciding which of the range of products to purchase. This can be seen in the language of successful sales people 'have you decided which of the two products you have decided to buy yet?'
2. Explain loss aversion and identify possible markets where this could be applied.
When businesses offer free trials which could apply to the markets for subscription services such as Netflix or magazines / newspapers.
3. Investigate the following businesses: Netflix, The Wall Street Times, Spike podcast and Guardian newspaper. How many of these businesses use 'loss aversion' tactics to increase sales?
All of the above use loss aversion tactics - the first two offer an initial 'trial' period where the product is available either free or at a discounted price to get consumers hooked on the purchase before charging the full price. The last two (Spike and Guardian) are available free for an unlimited time but consumers are then sent a message asking them to donate to ensure that the service continues to be offered.
4. What do economists mean by 'don't let Homer do nothing'?
By using plain speaking language to inform customers of their purchasing decisions e.g. electricity meters that tell you must money you have spent or phone apps that tell you how many calories you have burnt. These offer positive reinforcement that encourage desirable consumption habits.
Activity 3 - Discussion activity
The final video highlights some of the positives and negatives (for consumers and citizens). Use the information contained in the video and your wider knowledge to answer the question 'Behavioural economics - good or bad?'
As with many new discoveries there is scope for the theory to provide both positives and negatives. The video highlights successful campaigns by the UK government to encourage lower energy consumption while the beginning of the video highlights the vast level of consumer debt that many individuals have run up, in part a consequence of successful marketing teams which behavioural economists are now a part of. Finally, for those individuals concerned about an increasing loss of freedom in our lives, some might consider this to be simply a step too far.
Activities available as a PDF at: Behavioural economics