Choice Architecture
Economist Richard Thaler and legal scholar Cass Sunstein coined the term “choice architecture” originally to influence consumer behaviour. In their 2008 book “Nudge: Improving Decisions about Health, Wealth and Happiness” Richard and Cass endorsed thoughtful design of choice architecture as a means to minimize biases and errors that arise as the result of bounded rationality.
Applications for Leadership
Although it was originally designed to influence consumer behaviour. But its applications have proven constructive for organizational leaders and managers who need to make and influence important decisions.
In our Training Program “Mastering Behavioural Decision Making” and through engaging case studies, discussion, and exercises, you’ll learn when and where flawed thinking can occur, how you can intervene, and how you can ultimately make and influence smarter decisions for your organization.
You will uncover the inner workings of human biases and judgment. And you’ll gain insights into how inherent bias or poorly structured information can affect business decisions. You will learn to recognize these hurdles so you can develop better decision-making outcomes and improve your bottom line.
Choice Architecture Elements
Research from the field of behavioural economics has shown that individuals tend to be subject to predictable biases that may lead to decision errors. The following sections describe these biases and describe the ways that they can be minimized by changing decision context through choice architecture.
1-Reducing choice overload
Classical economics predicts that providing more options will generally improve consumer utility, or at least leave it unchanged. However, each additional choice demands additional time and consideration to evaluate, potentially outweighing the benefits of greater choice. Behavioural economists have shown that in some instances presenting consumers with many choices can lead to reduced motivation to make a choice and decreased satisfaction with choices once they are made. This phenomenon is often referred to as choice overload, Over-choice or the tyranny of choice.
However, the importance of this effect appears to vary significantly across situations. Choice architects can reduce choice overload by either limiting alternatives or providing decision support tools.
Choice architects may choose to limit choice options; however, limits to choice may lead to reductions of consumer welfare. This is because, the greater the number of choices, the greater the likelihood that the choice set will include the optimal choice for any given consumer. As a result, the ideal number of alternatives will depend upon the cognitive effort required to evaluate each option and the heterogeneity of needs and preferences across consumers.[7] There are examples of consumers faring worse with many options rather than fewer in social-security investments and Medicare drug plans.
2- Defaults
A large body of research has shown that, all things being equal, consumers are more likely to choose default options. A default is defined as a choice frame in which one selection is pre-selected so that individuals must take active steps to select another option. Defaults can take many forms ranging from the automatic enrolment of college students in university health insurance plans to forms which default to a specific option unless changed.
Several mechanisms have been proposed to explain the influence of defaults. For example, individuals may interpret defaults as policymaker recommendations, cognitive biases related to loss aversion like the status quo bias or endowment effect might be at work, or consumers may fail to opt-out of the default due to associated effort. It is important to note that these mechanisms are not mutually exclusive and their relative influence will likely differ across decision contexts.
One of the most commonly cited studies on the power of defaults is the example of organ donation. One study found that donor registration rates were twice as high when potential donors had to opt out versus opt into donor registration.
3- Choice over time
Choices with outcomes that manifest in the future will be influenced by several biases. For example, individuals tend to be myopic, preferring positive outcomes in the present often at the expense of future outcomes. This may lead to behaviours like overeating or overspending in the short-term at the expense of longer term health and financial security outcomes. In addition, individual projections about the future tend to be inaccurate. When the future is uncertain they may overestimate the likelihood of salient or desirable outcomes, and are generally overly optimistic about the future, for example assuming that they will have more time and money in the future than they will in actuality.
However research indicates that there are several ways to structure choice architecture to compensate for or reduce these biases. For example, researchers demonstrated improved decision-making by drawing attention to the future outcomes of decisions or by emphasizing second best options.
4- Partitioning options and attributes
The ways in which options and attributes are grouped influence the choices that are made. Examples of such partitioning of options include the division of a household budget into categories (e.g. rent, food, utilities, transportation etc.), or categories of investments within a portfolio (e.g. real estate, stocks, bonds, etc.), while examples of partitioning attributes include the manner in which attributes are grouped together for example a label may group several related attributes together (e.g. convenient) or list them individually (e.g. short running time, little clean up, low maintenance). The number and type of these categories is important because individuals have a tendency to allocate scarce resources equally across them. People favour equal allocation of resources and costs across individuals (all else being equal), and are biased to assign equal probabilities to all events that could occur. As a result, aggregate consumption can be changed by the number and types of categorizations. For instance, car buyers can be nudged toward more responsible purchases by itemizing practical attributes (gas mileage, safety, warranty etc.) and aggregating less practical attributes (i.e. speed, radio, and design are grouped together as “stylishness”).
5- Avoiding attribute overload
Consumers would optimally consider all of a product’s attributes when deciding between options. However, due to cognitive constraints, consumers may face similar challenges in weighing many attributes to those of evaluating many choices. As a result, choice architects may choose to limit the number of attributes, weighing the cognitive effort required to consider multiple attributes against the value of improved information. This may present challenges if consumers care about different attributes, but online forms that allow consumers to sort by different attributes should minimize the cognitive effort to evaluate many options without losing choice.
6- Translating attributes
The presentation of information about attributes can also reduce the cognitive effort associated with processing and reduce errors. This can generally be accomplished by increasing evaluability and comparability of attributes. One example is to convert commonly used metrics into those that consumers can be assumed to care about. For example, choice architects might translate non-linear metrics (including monthly credit payments or miles per litter) into relevant linear metrics (in this case the payback period associated with a credit payment or the litters per 100 miles). Choice architects can also influence decisions by adding evaluative labels (e.g. good versus bad or high versus low) to numerical metrics, explicitly calculating consequences for instance by changing the scale of a metric (for instance listing monthly cost versus yearly cost).
Definitions
behavioural economics: Studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals and institutions and how those decisions vary from those implied by classical economic theory.
Predictable Biases are systematic patterns of deviation from norm and/or rationality in judgment. They are often studied in psychology, sociology and behavioural economics.
Utility: is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosophers such as Jeremy Bentham and John Stuart Mill
Choice overload: s a cognitive impairment in which people have a difficult time making a decision when faced with many options.
Myopic: In economics, hyperbolic discounting is a time-inconsistent model of delay discounting. It is one of the cornerstones of behavioural economics and its brain-basis is actively being studied by neuroeconomics researchers.
