Behavioural Economics in Action (HL IB Economics)

Revision Note

Choice Architecture

  • Choice architecture refers to the intentional design of how choices are presented so as to to influence decision making

    • E.g. Salad bar placement at the beginning of buffets to encourage people to put fruit and veg on their plate

    • Supermarkets placing more profitable products at eye level on the shelves
       

  • Choice architecture aims to simplify the decision making process

    • E.g. Restaurants present information about food options in a particular format to encourage individuals to make a particular choice - often bundling items together

    • E.g. Tesco replaced confectionary usually found at the checkout till with healthier options so as to encourage people to make better food choices

Types of Choice Architecture


Type of Choice


How does it work?

Default Choice 

  • Occurs when an individual is automatically signed up to a particular choice

  • This reduces choice as it means a decision is already made even if no action has been taken

  • Research has shown that individuals rarely change from the default choice

    • E.g. Driver licence agencies select 'organ donation' as the default choice when offering driver's new licences

    • When signing up for an online service, the default choice for receiving promotional emails may be set to "opt-in," 

Restricted Choice

  • Occurs when the choices available to individuals are limited which helps individuals make more rational decisions

    • E.g. In a cafeteria, if unhealthy food options like sugary drinks are removed and replaced with healthier choices like water, consumers will be more likely to purchase them

Mandated Choices

  • Mandated choices require individuals to make a specific decision or take a particular action by imposing a requirement or obligation

  • Mandated choices can be used to ensure compliance with regulations or societal norms, making it necessary for individuals to make certain decisions

    • E.g. Some countries mandate car insurance which requires all vehicle owners to make an active decision to choose and purchase car insurance rather than leaving it as an optional choice

An Evaluation of Choice Architecture

  • When evaluating Choice Architecture, it is useful to consider the advantages and disadvantages
     

The Advantages and Disadvantages of Choice Architecture


Advantages


Disadvantages

  • Influences Behaviour

    Choice architecture can be used to nudge individuals towards making choices that are in their best interest or align with desired outcomes

  • Manipulation


    It can be seen as a form of manipulation as it attempts to influence people's decisions without their explicit consent which may infringe on the principle of free choice

  • Simplifies Decision-Making


    Well-designed choice architecture can simplify complex decisions by providing clear and understandable options

  • Ethical Concerns


    Individuals may not be aware that their choices are being influenced, or they may not fully understand the consequences of their decisions due to the way choices are presented

  • Improved Outcomes


    Effective choice architecture can lead to improved outcomes such as encourage healthier eating habits and combatting issues like obesity

  • Potential for Bias


    Choice architecture is susceptible to biases inherent in the design process and may be used by companies to increase profits

  • Enhance Decision Quality


    By structuring choices carefully, it can provide guidance, reduce biases, and increase the likelihood of individuals making choices they would consider to be better

  • Unintended Consequences


    Changes in the presentation of choices can have unforeseen effects and the outcomes may not align with the original goals

Nudge Theory

  • Nudge theory is the practice of influencing choices that economic agents make, using small prompts to influence their behaviour

  • Richard Thaler coined the phrase ‘nudge theory’ and argued that firms should use nudges in a responsible way to guide and influence decision making
     

Examples of Nudges

ibdp-economics-example-1-of-nudging

Save My Exams Choice Architecture nudges users to select the £5 a month option
 

  • The choice architecture above ‘nudges’ individuals towards selecting the monthly plan above the other plans available

ibdp-economics-example-2-of-nudging

Source: Transport for London
 

  • The baby on board badge is supplied by Transport for London to expectant mothers to wear when using public transport

    • Other commuters should see the badge and accommodate for the expectant mother by giving their seat to her 

 

  • Dr David Halpern, from the UK Behavioural Insights team suggested the following EAST framework to nudge decision making

    • Easy – Simplify or make it straight forward

    • Attractive – Gain people's attention e.g personalised messages, encourage people not to miss out on opportunities

    • Social – Individuals are influenced by what other people do rather than rules and regulations

    • Timely – identify when people are most responsive

An Evaluation of Nudge Theory

  • Consumer nudges are designed to guide people towards certain decisions or actions while still allowing them to have freedom of choice

    • These interventions are typically based on behavioural economics principles and aim to nudge individuals towards decisions that are considered beneficial for themselves and society as a whole

  • Consumer nudges should be designed with transparency, respect for individual autonomy, and clear societal benefits in mind

    • Ethical considerations should be taken into account to ensure that interventions are not manipulative or coercive
        

An Evaluation of Using Nudge to Influence Behaviour
 

ibdp-economics-an-evaluation-of-nudge-theory

The advantages and disadvantages of using nudge to influence behaviour 

The Advantages

  • Cost effective

    • Relatively low-cost compared to other marketing measures
       

  • Preserves freedom of choice

    • Steers individuals towards certain choices while still allowing them to retain their freedom of choice
       

  • Improved public health

    • Nudges can be used effectively to encourage healthier behaviours such as exercising, eating nutritious food, or quitting smoking
       

  • Better decision making

    • Helps individuals make better decisions by simplifying complex information, providing reminders, or structuring choices
       

  • Environmental sustainability

    • By influencing individual choices in a subtle way, firms/governments can contribute to broader environmental goals without imposing strict regulations
       

The Disadvantages

  • Ethical concerns

    • Some critics argue that nudges can be manipulative, as they rely on influencing behaviour without individuals being fully aware of the intervention

    • This raises ethical concerns about autonomy, consent, and the potential for abuse by governments
       

  • Lack of transparency

    • Nudges often operate behind the scenes, making it difficult for individuals to understand or question the influences shaping their choices
       

  • Unintended consequences

    • As citizens become used to firms/government's using nudge, they may well begin looking for it and actively work against the nudges e.g. In the UK more people now look for automatic inclusion in organ donor databases and quickly select the non-default option
       

  • Variable success rates

    • Nudges may not be equally effective for all individuals due to differences in cognitive biases, cultural backgrounds, or personal circumstances

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