This year, Richard Thaler won the Nobel Prize for his influential research in behavioral economics.
His ideas helped to chip away at the dominant concept of homo economicus —a hypothetical decision maker featured in most economic models, who, as Thaler jokingly puts it, “can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi” and acts in a purely rational way to maximize his utility (Read the McKinsey interview with Professor Thaler here).
Thaler and other behavioral economists show that, in reality, people make decisions quickly under pressure, based largely on intuition, and unconsciously guided by biases and psychological fallacies.
So if people face so many pitfalls on their path to making reasonable decisions—whether they’re a consumer making a purchase or an employee meeting performance goals—how do you make it more likely that they’ll land on the most beneficial decision for them and for your organization? (See our recent article here.)
The key, says Thaler, is to responsibly use “nudges”—subtle interventions that guide choices without restricting them. Over the years, insights from behavioral economics, psychology, and neuroscience have shown that strategically designed nudges can effectively influence behavior and drive results in solving some of the most pressing issues for today’s companies, from talent management to customer retention.
A recent initiative at Virgin Atlantic illustrates how one such set of applied behavioral insights can have an outsized effect. The airline partnered with leading economists to devise a program to reduce fuel use by influencing the behavior of its 335 flight captains.
Over a series of exercises, a control group was simply alerted that their fuel usage would be monitored; a second group received monthly reports of their usage; a third received both monthly reports and specific targets to achieve, garnering praise after success or encouragement after failure; and the last group received reports, targets, and were told that a charitable donation would be made for every target they hit.
The three experimental groups saved fuel beyond the control group and the two groups that received targeted goals, performed the best of all.
The exercise led to savings of 6,828 metric tons of fuel, which at the time amounted to more than 3.3 million pounds, with very little cost to the airline.
Some leaders might find the prospect of running a similar program within their own organizations rather daunting. How do you decide which nudges to use and the best way to implement them? We helped a global insurance company face these very questions when our group of behavioral science experts worked side by side with the company’s team to build an in-house team of experts in behavioral science. At the end of the unit’s pilot exercise, the company not only saw significant improvements in its targeted area, but also observed an increase in satisfaction among the unit’s frontline employees – a full department involved in the pilot.
Rather than being seen as a tool on its own, behavioral science is rather a turbo-charger for efforts on cultural change and corporate transformation, or a support tool for more effective processes. And if there’s one thing we know, it’s that no matter whether an initiative is internal- or external-facing, it must, by its design, thoughtfully engage the active participation of employees. In doing so, a nudge pilot program can often be the first spark that fuels a broader transformation in the way an organization drives continuous improvement at all levels.
Many companies are already building robust nudge units to rapidly tackle various organizational and strategic challenges. Prominent examples are Swiss Re and AIG.
In a world where organizational agility is key to long-term performance, an entrepreneurial approach to problem solving—where teams rapidly and systematically test the impact of behavioral insights on their organization’s performance—will be increasingly crucial for maintaining competitiveness in the future.