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Nudge, Nudge, Wink, Wink

Optimize Blog - October 16, 2017 - 0 comments

One of the founding fathers of “nudge” theory has been awarded the 2017 Nobel prize for economics. Richard Thaler co-wrote a bestselling book on the nudge concept extolling the notion that people can be influenced by prompts to alter their behaviour.
The Nobel committee said the 72-year-old has provided a “more realistic analysis of how people think and behave when making economic decisions.” Nudging stems from the field of behavioural economics, examining how gut instincts can often overrule rational choices.
The US academic, who is a professor at the University of Chicago, has previously suggested that Brexit could be an example of behavioural economics in action where he argued British voters chose an economically irrational route when considering the options put to them by motivated politicians and the popular media. In an interview at the time he commented that “Most voters aren’t really thinking about it in a very analytical way.”
Thaler is a leading voice on how nudging can tackle problems in society, and unlike the field of classical economics – whereby decision-making is based on cold-headed logic – behavioural economics allows for irrational actions and attempts to understand why this might be the case. The concept can also be applied to individual situations, or more broadly to encompass the wider societal actions or trends in financial markets.
Thaler importantly didn’t contend that humans are randomly irrational. He observed that people are predictably irrational.
If irrational human behavior can be predicted, then it can be influenced, or nudged. Thaler coined the term “nudging” to describe easy interventions that change people’s decision-making. While he is famous for exploding the myth of rational decision-making, the irony is that insisting that human beings are not rational is by far the more rational approach to studying their behavior.
So what can we learn from this? Well in the workplace irrational thinking and decision making appears to be quite common and we often come across a decision being made that appears to defy logic. In strategy deliberations we also experience this and are reminded of the Toshiba Corporation quote that “It is human nature to make decisions based on emotion, rather than on fact. But nothing could be more illogical.” Good strategy is based on good analysis.
The two lessons for us are that humans place a large emphasis on emotion and instinct and also that because of this, they can be influenced. Instinct and intuition have a part to play of course, and many successful outcomes have been predicated on a ‘hunch’. However, good outcomes generally are derived from a sound understanding of the circumstances and when trying to influence those that are potentially making decisions based on instinct is the use of facts. Facts are not open to challenge so the better prepared we are with our facts, the more chance we will have to shape potential outcomes and to influence others.
Asked what he planned to do with his £840,000 prize money, Thaler joked that he intended to spend it “as irrationally as possible”………..

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