The Ritz Herald
© Igor Ovsyannykov

Can Behavioral Economics Be the Nudge We Were Looking for?


Guide to why using Choice Architecture & Mental Accounting can help you and everyone around you be safer

Published on June 10, 2020

On March 11th, the World Health Organization (WHO) announced an international health pandemic that has lasted for over three months. Scientists and professionals have been working around the clock to develop a vaccine to mitigate this deadly virus. Amid the struggles for the search of the vaccine, various measures have been put into place to curb and reduce the rate of infection. Some of these measures include; repetitive handwashing, social distancing, face masks, and hand gloves. Some social and economic measures have been put in place to curve this virus (i.e., travel ban, closure of schools, and restaurants, working from home, which is optional and unpaid leaves. There is no real point to compare this pandemic since this is the first time the world has gone into lockdown. This article will show how to use written history by Daniel Kahneman, Amos Tversky, and Richard Thaler about behavioral economics and psychology to mitigate this pandemic.

Mental accounting and self-control

Richard Thaler conducted a survey, in this survey he asked 5280 people; if you purchased tickets to an outdoor concert for $25 and it started to rain what would you do? An astonishing 77% of people answered they would leave, however when the same question was asked and the ticket price was $100, the majority of the people answered they would stay. This proves that we tend to change our mind depending on the marginal benefit we interpret as value versus being rational. Mental accounting and self-control have been explained by a Nobel Prize winner, Richard Thaler using the Nudge theory. Amazon is one of the retailers who is seeing massive gains during this time. From my analysis Amazon’s algorithm is using nudge theory. When purchasing an item, Amazon shows you a list of items to compliment your purchase. For example, if you are purchasing a bicycle it will recommend a helmet and a flashing light. This is a nudge towards people’s safety, perhaps the consumer up until this point never thought about safety when purchasing a bicycle, all they had in mind was exercising or their transportation needs. The concept of the nudge has been used during this pandemic, and it is expected to be used more after the lockdown in New York. A small change will change the way people behave economically during this pandemic. An excellent example of a nudge is the implementation of strict measures by the government and sensitizing them to the public. For example, the government set up a stay at a home policy, which is one of the ways of preventing the infection rate. In response, companies have supported the lockdown by providing affordable services such as unlimited data to stay connected while being at home. Therefore, this nudge has helped many New Yorkers stay at home. Another nudge that has been implemented by the government is putting a temporary loan and rent repayment program in place since most people lost their jobs, this nudge has successfully worked on the behavioral economics of New Yorkers since they can easily adhere to all government policies.

Social preferences

Social norms and behaviors of the people surrounding us affect how we live and how we make decisions. This pandemic has shown us that there is importance in being united; it has shown us that there is power in collective action. As compared to pre-COVID, where there was always the “I” norm, but the shift of culture, from “I” to “we”, is evident that it will have a permanent effect on New Yorker’s economic behavior. People have decided to adhere to the measures put in place by the government. A decrease in the spread of this virus will be noted if when all New Yorkers adhere to guidelines in place. According to various newspapers like the New York Times, 90 percent of New Yorkers believe that their routine will be interrupted, so they must live with the new social norms.

Choice architecture

Richard Thaler best described Choice architecture as going to a cafeteria and seeing several stations that you can get food from. As you walk in the first thing you run into is a salad bar and you have to walk around the salad bar to get to the burgers and fries; this is an example of how something that seemingly isn’t very important may influence what people eat, nudge people to eat something healthy. Some people may see this as forcing people to eat healthy, on the contrary, we can say we are just rearranging their choices from most beneficial to least beneficial. Some people may say this is manipulating people’s thoughts, for that I would like to quote Henry Ford “If I had asked people what they wanted, they would have said faster horses”, sometimes we do not know what is best for us. This goes hand to hand with mental accounting, we tend to act irrationally especially when money is involved therefore these nudges seem to help the fundamental cause of living a better life. Coronavirus will change how people choose to spend their money. Authors have shown clearly that there exists a choice of architecture; this is whereby one needs to select the most important things to purchase. A record of almost twenty-six million Americans have lost their jobs as reported in the New York time, and this, therefore, has forced the majority of New Yorkers to start learning new skills and to the extent of shifting careers. An excellent example of this is illustrated in Forbes magazine, where the sale of peloton bikes has increased by 66 %. LinkedIn has also reported that there is a triple increase in the traffic of people learning a new skill on LinkedIn. This will impact people’s expertise on how to survive after the lockdown is lifted. This pandemic is likely to have two different types of choice architecture, some consumers are likely to change their lifestyles, and some will remain unchanged. The emergence of this new behavior will have an impact on future brands. As the economy plans to open, most companies will have to set their products to fit the unique demands to prevent this virus. People will choose to spend their funds in places that have adhered to the laid regulations.

Present bias

The majority of New Yorkers are expected to spend more on the most essential necessitates. Interviews done by the New York Times show that a large population is purchasing groceries; grocery stocks have had an 80% increase in their sales since the pandemic began. Most families have decided to purchase groceries and cook at home, and this has reduced the rate at which restaurants are selling.

Affect heuristic

It is a situation where people use the importance attached to gains from a product or service. Things with more significant benefits influence the way people behave. It is evident from articles and the media that New Yorkers changed their economic behavior since the attack of this deadly virus. The government has put measures that have been tested and proved to mitigate the spread of the virus, some of those measures are repetitive hand washing, use of masks and hand gloves, social distancing, and the avoidance of handshake. Furthermore, the government has put strict rules as it plans to reopen some parts of its economy; these guidelines must be used before any company opens up. Such actions are installing door sanitizers, providing masks to regular cleaning of surfaces, and temperature measuring kits. It is expected that New Yorkers will follow these guidelines because they have attached an excellent benefit for following the directions.

Status quo bias and default options

Status Quo means that people do the same thing over and over or continue to use a decision that was made previously to deal with a current situation. It is a preference that may not be productive to New Yorkers with the increased spread of the virus. However, the Status Quo can be used to our advantage by encouraging health-enhancing behaviors. This concept can be used by applying nudges to persuade people to adapt to good practices to prevent the spread of the virus. An excellent example of this nudge is the use of sanitizing booths in all public places. Another example is the use of mobile apps to alert consumers when it is their turn to shop, this will come in handy while fighting this pandemic because it will help reduce the number of customers gathered in a particular place. Lastly, the government initiative to put strict measures on all business centers. The government now issues licenses to shops that should operate after they meet all the required regulations. This will, in turn, help reduce the transmission of this virus.

Contributing Writer