Nudging Consumers Toward Better Decisions

April 27, 2016

 

 

Product information saturates every purchase in the 21st century. There is so much information that it becomes white noise. But professors at Duke University's Fuqua School of Business have developed a set of principles to present information in a clearer and more streamlined way to help consumers make smarter decisions for their wallets and the environment.

Behavioral economics — the blending of psychology with economics to study decision-making — includes the concept of nudging, using information to guide consumers in their decisions. But the information overload prompted Professor Rick Larrick and his colleagues to study how simplified information could be more effective.

"Because people want information, I'm optimistic that if we give people less but the right information, they can recognize what's good for them," Larrick said.

The principles are known by the acronym CORE:

  • Calculations made for consumers that they won't do alone
  • Objectives as a translation of obscure information into a form people care about
  • Relative comparisons of information to make it easier to grasp
  • Expansion of consumption metrics over a product's lifetime

Some examples:

Calculations - Gallons per mile

We think of a vehicle's efficiency in terms of miles per gallon of fuel.

"We think we know what it means but we're tempted to do what ends up being bad math with it," Larrick said. He proposed a standard — now federally mandated on all new car stickers — that fuel use should be presented as gallons used per 100 miles. That's because although the difference between vehicles that get 20 miles per gallon and 50 seems large, in fact the gas consumption difference between 10 mpg and 20 is much larger.

The correct calculation requires dividing a distance, such as a 100 miles, by MPG to get the right answer. An MPG improvement from 10 to 20 saves five gallons every 100 miles; the improvement from 20 to 50 saves only three.

"You can't expect people to do this calculation, you have to do it for them," Larrick said. "Moving people from vehicles with MPGs in the teens to the 20s is the important place to focus consumers."

Objectives - Translating calorie counts

Information that is commonly available to consumer can also be pretty obscure, such as grams of sodium or calories. Seeing them in terms of a personal, important objective helps consumers make sense of them. For example, the calorie counts on nutrition labels don't instantly reflect how high-calorie foods can affect health over time. Larrick said there's a move toward replacing that figure with the number of minutes of exercise needed to burn off the calories in the product.

"It becomes very tangible and people know what that will look like in their everyday life," he said. "Maybe they will turn down a few extra chips or a dessert if they realize the exercise they'll have to do to burn off those calories."

Relative - Home electricity

Monthly utility bills often contain hard to interpret units of energy, such as kilowatt hours or therms. A meaningful comparison can make unfamiliar numbers easier to use and understand. Power bills show how many kilowatt hours a home uses, but Larrick said some companies are helping reduce consumption by also including on bills the amount of energy used by neighboring homes.

"When you find out that you've been using a lot more energy than your neighbor, it becomes very motivating to figure out what you are doing wrong and what you can do to improve," Larrick said.

Expansive - Lifetime energy use

When appliances list the amount of energy they use in an hour, it's usually just pennies. An efficient appliance that uses a few less pennies might not seem worth the higher purchase price. But when those costs are multiplied for a year, or for the lifetime of the appliance, consumers notice, Larrick said.

"Research indicates that if you give people these lifetime costs, it really does pull them then toward considering the more efficient appliance," he said. "This overcomes a basic human tendency, which is that we don't like spending more out of our pocket right now, and anything saved in the future is too far away to get our attention."

Larrick said these principles are just as useful in the workplace.

"Our focus has mainly been policy and consumers, but there are basic principles here that could be applied even by employers with their employees," he said. "If you want them to make better energy decisions or better financial decisions, there are ways of simplifying those decisions."

Contact Info

Gregory Phillips
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.7801
Email: gregory.phillips@duke.edu

Erin Medlyn
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.8090
Email: erin.medlyn@duke.edu