We would all like to believe that the decisions we make as consumers and in a business setting are rational and predictable. However, as we’ve learnt over the years and thanks to research performed by behavioural economists, the reality is that when people make decisions quickly and under pressure, they do so based largely on intuition, emotions and unconscious biases and psychological fallacies. For businesses, this can result in people from all areas of an organization struggling to make decisions in general and then frequently making the wrong decisions. Since researchers now know that irrational decision making is commonplace, this type of behaviour tends to follow predictable patterns. In understanding these patterns, organizations and leadership teams can learn to create subtle “nudges” that encourage employees, customers and vendors to choose the most beneficial option. Nudges are essentially subtle interventions that guide choices without restricting them, resulting in a win-win scenario for businesses, employees and customers alike.
Using elements of economics and psychology, behavioural economists are able to identify the types of irrational factors that ultimately influence the decision-making process – including a person’s habits, emotions, amount of willpower, framing of alternatives and the ability and need to trust someone. Once you understand exactly how these factors drive behaviour, you can use this understanding to design interventions or nudges that lead employees, consumers and vendors to make better (i.e. safer, easier and more economical) choices – while still providing them with the option and freedom to make a decision that goes against the nudge. This type of intervention strategy works especially well when implementing a change management project. Gently nudging employees before, during and after a specific change management initiative can lead to better adoption of the changes. In order to be effective, the nudges must be used to create win-win situations for an organization and its employees – where there are real short-term and long-term benefits to a specific behaviour change.
Common examples of nudges include providing social cues that reflect how other people have acted in a similar situation, defining default choices and making processes easier to start and finish. Let’s look at an example of using nudge theory to manage change in your warehouse. Your business has decided its time to make the change to a more robust accounting ERP software solution with warehouse management functionality and to move away from QuickBooks. The company has been using QuickBooks for several years and so employees are familiar with the specific features and the way in which the system operates, and warehouse operations have largely been informal and manual. Employees find products based on their individual knowledge of the warehouse layout, items are typically not put away in the right spot, manual inventory counts happen on a weekly basis to determine what product is actually in stock, and frequently the wrong item is shipped to the customer. Manual workarounds and data entry has become commonplace and the time required to pick, pack and ship product is impeding sales. Before implementing a new solution and changing processes, slowly begin to nudge employees to adopt new practices. Consider sharing information on how similar companies have modernized their warehouse operations and provide details of how other businesses in the industry have been able to significantly decrease paper use, winning over environmentally friendly customers. Redesign your warehouse floor with bin and shelf locations and automate workflows with wireless barcode scanning. Print and display colourful floor maps, colour-code shelving displays and set-up electronic barcode scanners close to printers where employees would previously receive pick slips. All these subtle changes can have big impacts as employees begin to slowly adopt new procedures and rely on visual cues to find and retrieve inventory.
Can you think of other nudges that would benefit employees, customers and ultimately the business as a whole? Understanding how people make decisions and taking advantage of these insights can aid in designing appropriate nudges. For example, one of behavioural economics’ most powerful insights is around prospect theory and the idea that people make decisions based on the potential value of losses and gains with more weight being given to the loss. This can be applied to our example above by positioning the changes and new workflows as the obvious, default choice and describing the benefits of moving to a more automated system (such as less time spent walking to pick an order and fewer errors associated with manual picking resulting in happier customers) as something that will be lost if the company decides to stick with existing processes. This nudge focuses on the potential loss of productivity and efficiency as opposed to strictly listing the benefits of implementing new processes and technology. Other common examples of behavioural economics and unconscious biases that may impede the employee decision-making process include:
- Choice-Supportive Bias: where people will distort memories to make decisions seem good.
- Hyperbolic Discounting: in which people prefer and choose short-term benefits over long-term gains.
- Ambiguity Effect: where people prefer a known probability to an unknown one.
Even where the decision and benefits of a specific choice seem obvious, the use of nudge theory can help people get to a stage where they are confident in these decisions more quickly. Implementing small nudges as you guide employees to change will help make the transition easier and allow both parties to reap the benefits sooner.