NUDGING AHEAD I

NUDGING
AHEAD
With nudging a key factor in the
world of behavioural science,
David Craik considers how it can
be utilised in the world of finance
n 2008 US academics Richard H Thaler and Cass R
Sunstein wrote a book called Nudge – improving
decisions about health, wealth and happiness.
According to Thaler, professor of Behavioural Science &
Economics at the University of Chicago Booth School of
Business, a nudge was and is anything that influences a
person’s choice and helps to make their life better.
In the text he defined it thus: “Any aspect of the choice
architecture that alters people’s behaviour in a predictable
way without forbidding any options or significantly
changing their economic incentives. To count as a mere
nudge, the intervention must be easy and cheap to avoid.
Nudges are not mandates. Putting fruit at eye level counts as
a nudge. Banning junk food does not.”
The concept has been warmly embraced by the UK
government, which in 2010 set up the Behavioural Insights
Team, or Nudge Unit, to look at how behavioural sciences
could help public policy. The unit was spun out of the
government in 2014 and has been credited with increasing
the number of organ donors through new messaging on the
DVLA website, encouraging more people to save on their
energy bills by switching provider and ramping up the
number of black and minority ethnic police applicants.
It has also been praised for increasing income tax
payments by sending out simple reminder letters informing
people that their neighbours had already paid.
In the workplace, tech giant Google has tried to improve
employee health by making the salad bar in its staff canteen
more prominent, while office supplies firm Office Depot
attempted to make its supply chain more sustainable by
nudging suppliers and customers to look at its Green Book
catalogues, website and environmentally friendly stores.
I
TAKING THE INITIATIVE
Life insurance and pensions provider Friends Life has
reduced the “confusing” number of fund choices available
to its clients to nudge them towards better outcomes for
their retirement. It has also used behavioural finance peer
comparison techniques to help employees see the
advantages of giving more emphasis to their benefits
packages and choosing the best options for their career.
“Finding out that you are not in line with your peers sparks
a reaction,” says Neil Hawkins, financial education director at
Friends Life. In an article on the company website he writes:
“When employees don’t see the full picture, it can be
dangerous to your business. When staff feel under-rewarded,
they look around. A benefits package not explained could be
causing needless attrition [costly to you].”
Most of these initiatives are born in a company’s HR,
marketing or sustainability departments. But what of the
finance department – are CFOs using these techniques to
nudge an improvement in the financial performance and
behaviour of organisations? Rebecca Morland, senior client
partner in the financial officer practice at Korn Ferry, says in
her experience nudging is not something that has been
widely discussed among CFOs. Rick Payne of ICAEW’s
finance direction programme is also “not aware of CFOs
focusing on this area explicitly”.
Steven Ehrenhalt, global finance transformation leader
and Deloitte Consulting LLP principal goes further:
“Behavioural economics gives a CFO the opportunity to
influence how decisions are made in an organisation but it
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NUDGING IN BUSINESS
“Nudging is a relatively cheap
way of sweating your assets
better. Early adopters are
embracing it but other CFOs
still see it as a bit wacky”
just hasn’t happened yet. Most CFOs don’t see the need for
change. They think they don’t need any help when it comes
to making decisions,” he says.
He believes this is a huge missed opportunity, given the
rise of CFOs in becoming the “de facto number two” in most
organisations since the downturn. “The regulatory changes
in different sectors and the 2008 crisis have catapulted the
CFO into a position where apart from funding the company
and reporting the numbers properly they are playing an
elevated role in improving the performance of the whole
organisation and challenging other departments,” he states.
“They are the keeper of the purse and are in a unique
position to influence what decisions are made.”
OTTO DETTMER / IKON
APPLYING THE TECHNIQUES
Ehrenhalt praises the work of academic author Chip Heath
and his book Decisive. Heath outlines a number of
behavioural economic techniques CFOs can use to help
their organisations make better decisions and make the best
use of capital. In an interview with Heath for Deloitte and
the Wall Street Journal’s CFO Journal, Ehrenhalt was given
examples. In the instance of an IT project, for example,
CFOs could ask for the IT directors “baseline proposal” or
alternatively state: “What would the IT plan look like if you
had only two-thirds the budget? What if you had 10% more
than you asked for?” According to Heath, by encouraging
people to think through both “buy up” and “buy down”
options, “richer information” will be supplied and a better
decision made.
Another technique offered by Heath is the vanishing
options test, where CFOs could ask of their managerial
colleagues: “If the options we’re considering were suddenly
off the table, what could we do instead?” Which, according
to Heath, leads to a “brilliant option they hadn’t even
considered before because they got stuck analysing and
debating the very first option that seemed credible”.
Ehrenhalt is sceptical this work will easily integrate
into the real world of business. “The corporate world
has been slow in picking this up. Businesses are more
focused on bright shiny objects like big data, robotics and
artificial intelligence,” he states. “I hope before I retire I
can get CFOs to see the tremendous opportunity in
behavioural economics.”
There is hope. According to Susie Logan, head of business
marketing at Standard Life and previous director of its new
marketing consultancy 56degrees, CFOs are driving their
pension managers and HR managers to improve employee
engagement with pensions and benefits: “FDs want to see a
return on the investment in these areas. They want to use
our nudging techniques to get more engagement,” she says.
Logan explains that the consultancy uses methods such
as hard behavioural finance techniques – using data gleaned
from the finance and other departments of a business to
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Behavioural Finance (David Craik) ; December 2015 ; Finance and Management 23
show how much employees are saving – and soft nudging
techniques including more positive and “less scary”
messaging around pensions.
“Making people feel worried about not saving enough for
their retirement gets their attention but is more likely to also
make them run away,” Logan explains. “Just a few
innovative clients are doing this [using soft nudging
techniques] but they want to scale up quickly.”
The same techniques have been applied to Standard Life
employees with messages informing them of upcoming
benefit windows. These include emails with positive
messages and computer screensavers.
CloudApps is a firm using a cloud-based platform to
nudge better behaviour in the workplace with a large
focus on sustainability, sales, customer service and
employee collaboration.
“It’s basic, not rocket science. With sustainability it is
reminding employees to switch their laptops off when they
are not using them,” says CFO Simon Corley. “With sales we
can increase productivity by up to 10% by identifying the
best practice of the best sales people and nudging the rest of
the workforce to follow this.”
Finance departments, he says, are also using the
techniques to improve the speed of making purchase orders
and regulatory compliance: “It is a relatively cheap way of
sweating your assets better. Early adopters are embracing it
but other CFOs still see it as a bit wacky,” Corley says.
“However over time this will become standard practice.”
Hawkins agrees: “We could see all companies create
behavioural science departments. We want employees to be
nudged into making the right decisions.”
MAKING BETTER CHOICES
Gerd Gigerenzer, director of the Max Planck Institute for
Human Development, does not believe nudging is the
answer to better performance and choices. In an interview
with the BBC he said: “I do not object against nudging per
se but against the philosophy underlying it, namely that
people are born more or less stupid.” He believes people
should instead be educated to become more “risk-savvy
and competent” to ensure they make better decisions.
Hawkins of Friends Life defends nudgers. “When we
try to communicate pension or rewards benefits to
people we get an immediate positive reaction. But in a
week’s time little action is taken because the importance
of what they heard has diminished. Behavioural finance
automates our communications and helps people make
better choices,” he says.
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