The Importance of Incentives and Choice Architecture

Today’s episode is all about iNcentives, specifically as they pertain to the concept of NUDGES. This episode first aired as part of a 7-part series I did on NUDGES back in 2019. Why seven parts? Well, “NUDGES” is an acronym for the six types of nudges as introduced by Thaler and Sunstein: iNcentives (which is a bit of a fudge to make it work, but we all forgive them), Understand Mapping, Defaults, Give Feedback, Expect Error and Structuring Complex Choices. That original series included one episode on each, plus an introductory episode into what nudges and choice architecture are to kick things off - so there you have it: seven episodes. 

This episode on incentives is being refreshed today to help get your brain buzzing on the idea before the wonderful Dr. Uri Gneezy is here on Friday to share about his new book (which just came out today) called Mixed Signals: How Incentives Really Work. It is all about what happens when we mix up our incentives so things don’t work as intended, and what we can do to correct those errors before they happen. 

Digging in on nudging incentives as it pertains to behavioral economics felt like the perfect way to get you ready and in the right mindset for that episode coming out on Friday. (If you haven’t already subscribed to the podcast, take a moment to do so now!)

• [00:38] Today’s episode is all about iNcentives, specifically as they pertain to the concept of NUDGES. This episode first aired as part of a 7-part series I did on NUDGES back in 2019.
• [03:20] We are inundated with choices in our lives and because our brains are lazy we don’t put in all the effort required to make the best decision every time. Well structured choice architecture can influence the way someone makes a decision and the choice they make. 
• [04:37] Proper incentives can help encourage sales when you understand how they work. 
• [05:11] Good choice architects understand how to structure the nudges and architecture to do what is best for their business. 
• [06:43] Melina’s example - air conditioning!
• [09:02] In general with air conditioning, it may feel like there isn’t really a choice to be had. It looks pretty easy on the surface... 
• [10:30] While air conditioning seems like a simple choice there were actually a lot of variables to be considered.  
• [13:05] Consider who pays, who chooses, who uses, and who profits.
• [14:06] What happens when there are conflicting incentives? That is where we can really run into problems.  
• [15:47] “Do you want the wi-fi enabled one?” 
• [19:11] Look at how you can align the incentives to find the win-win-win scenario.
• [21:45] When all you look at is the cost it is easy to base your pricing off of that – but that isn’t the best way.
• [23:52] Salience (or saying something is salient) is the way an item stands out from other items.
• [25:19] Our human brains have a hard time understanding value and cost over time. 
• [27:03] Breaking down a large payment by year, month, week, or even day can make it a choice easier (or harder!) to make. Context matters.
• [29:43] Being in sales is basically being a full time choice architect. It is the burden of a salesperson and company to structure choices in a way that customers can quickly understand the value and make a choice. 
• [32:02] Paying for the car is removed from the experience of you using and driving it. 
• [34:00] Think about what you want to bring your customers’ attention to (versus what would be a negative experience if you brought their attention to it). 
• [36:23] Points, foreign currency, and tokens are not the same in our mind as “real” money.  
• [38:04] It is important to consider the questions of who uses, who choses, who pays, who profits.
• [40:44] Surge pricing may seem like a way to nudge people into using less energy, but because this isn’t salient in the moment it doesn’t do as much as it could. Here’s something else that might work better…
• [41:55] The last example of competing incentives is the US healthcare system. 
• [44:20] Improvements can always be made. 
• [46:30] Melina’s closing thoughts
• [46:35] I find incentives fascinating because there are so many layers to them. It is so important to look at the ripples of choices and incentives, all those little facets that may not come to mind but can actually be really really important when decisions are made.

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Check out and get your copies of Melina’s Books.

Get the Books Mentioned on (or related to) this Episode:

• Mixed Signals, by Uri Gneezy
• Nudge, by Richard Thaler and Cass Sunstein
• Sludge, by Cass Sunstein
• What Your Customer Wants and Can't Tell You, by Melina Palmer
• The Why Axis, by Uri Gneezy and John List

Top Recommended Next Episode: The Cobra Effect (ep 220)

Already Heard That One? Try These: 

• Motivation and Incentives at Work with Kurt Nelson (ep 187)
• Secrets of Motivation and Incentives, Tim Houlihan Interview (ep 109)
• NUDGES & Choice Architecture (ep 35)
• Understanding Mapping: The "U" in NUDGES (ep 37)
• Defaults: The "D" in NUDGES (ep 38)
• Expect Error: The "E" in NUDGES (ep 39)
• Give Feedback: The "G" in NUDGES (ep 40)
• Structuring Complex Choices: The "S" in NUDGES (ep 41)
• Loss Aversion: Why Getting New Stuff Is Not The Same (ep 9)
• Scarcity (ep 270)
• Relativity (ep 12)
• Anchoring & Adjustment (ep 11)
• The Truth About Pricing (ep 5)
• Unlocking the Power of Numbers (ep 17)
• The Overwhelmed Brain and its Impact on Decision Making (ep 32)
• What is Value? (ep 234)
• Framing (ep 16)

Other Important Links: 

• Brainy Bites - Melina’s LinkedIn Newsletter 
• Nudge: Improving Decisions About Health, Wealth, and Happiness
• Choice Architecture