Nudge – Improving decisions

I was reading this book by Richard Thaler and Cass Sunstein entitled “Nudge” – in the book they evaluate choices, biases and the limits of human reasoning from several perspectives. They tell stories about how they trick themselves to becoming victims of the very limitations of thought that they are describing. This is telling, because the very fact that these educated, articulate professionals can trick themselves (even though they know what is happening) demonstrates how tough it is to think clearly. We fall prey to systematic errors of judgment all the time – however, one of the ways of addressing this issue is to improve our ability to identify when this is happening.

People and Choices

People are making choices all the time; what to eat for breakfast, what to wear, what watch to buy or where to invest money. The key thing to note is that while they may decide without coercion, they do not decide without influence. Depending on the context of the decision, they are almost always influenced noticeably, and often deliberately.

This leads neatly into defining a nudge – I shall quote the authors as follows:

“A nudge…is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding options or significantly changing their economic incentives.”

Nudge – by Richard H. Thaler and Cass R. Sunstein

The things that influence people are not always rational, and people are not always aware of what is influencing them. They give an example of black flies painted in the urinals in Amsterdam’s Schiphol Airport. Men using urinals often don’t aim well and make a mess. However, if you give them a target, even a painted fly, spillage plummets (in this case, by 80%). By contrast, introducing cameras in the bathrooms and a fine for spillage would not count as a ‘nudge’

As they go on, they explain that to get people to act better, you can make a law and punish them for not following it. Or you can design their choices to “nudge” them toward better decisions. They’re still free to do as they want, even to act self- destructively, but you’ve increased the odds that they will act sensibly (or how you prefer them to act) instead. This approach tries to care for people by guiding them, rather than regulating them. Being nudged can help, because under some circumstances, even when you know better, you don’t always act rationally.

Rules of thumb

They move on to explain how people apply “rules of thumb” which bring many biases into play, such as:

  • Anchoring – where in which a familiar fact influences your later reasoning. For example, if you first see a shirt that costs £1,000 – then see a second one that costs £100 – you’re prone to see the second shirt as cheap. This is a good one to keep in mind for watch buyers; where you see a steel version of a watch for £20,000, and the equivalent in white gold for £25,000 – it starts making the white gold version seem cheap. Of course, this is the reverse interpretation of the rule, but it is still the same principle.
  • Availability – where you judge risk based on how easily you can obtain related information. So if you’ve been through an earthquake, you’re more likely to buy earthquake insurance, even if you live in a place where earthquakes are highly unlikely. Same for watch insurance – if you’ve been mugged or robbed, you are more likely to have insurance, even if you have moved to a new place where mugging is unheard of.
  • Representativeness – where you judge a situation based on how similar it seems to past situations. People who are guided by representativeness see patterns that aren’t there (like gamblers who feel they are on a hot streak). This is quite prevalent in the watch world, especially when it comes to hype-watches. People see how certain models have rocketed, and then assume this will happen again based on certain signs they see in the market – which is of course a fallacy, because the market is highly irrational.
  • Optimism – since human beings tend to be overly optimistic. For instance, 90% of all drivers believe they have above- average skills. People also value gains and losses disproportionately. Once something is yours, you want to keep it. You don’t want to sustain a loss.
  • Status quo bias – this occurs because people like things to stay the same. To help them make productive choices that feel comfortable, do something as simple as setting their current situation as their default option (for example, this is why you are often lured in to sign up to certain things with an introductory offer, which then auto-renews at a higher price).
  • Social influences – these of course have a significant impact. You’re more likely to do something if you see it done often or if your peers do it. The desire to go along with the social climate is so strong that it can change your perception of reality; you might really see an object differently if your peers insist it looks a certain way. This is obviously the most prevalent and obvious one applicable to watch enthusiasts.

Think about these in the context of watch purchasing for a moment; they all have some sort of relevance, and everyone’s got a unique experience where some might apply more than others, so I won’t labour the point. That said, the final point around social influences deserves some additional attention, as this is one of the key contributors to ‘hype trains’. My only point here is to tune in to the signs of a hype train forming, and figure out whether you like the watch or not, BEFORE the hype becomes ‘real’ – because at that point, you will find it even harder to work out whether you truly like a watch, or are buying into the hype.

“Humans are easily nudged by other humans. Why? One reason is that we like to conform.”

Nudge – by Richard H. Thaler and Cass R. Sunstein

Decisions

The authors go on to articulate something basic – which is that people need help to make decisions in three categories. First, if the stakes are high (insurance), then if the situation is complex or infrequent (buying a property), and finally if human nature would lead them astray (saving money versus buying watches!). If the benefit is immediate (chocolate tastes good), but the risks or costs are delayed (you will get fat), getting advice about healthful choices can help. Some think the best choices come from having totally free options in a free market, but that’s not the case. People make bad decisions if they believe bad data, lack key facts or are misled by someone with selfish financial interests.

For watch buying, or indeed any other decisions, they suggest the “RECAP” (“Record, Evaluate and Compare Alternative Prices”) acronym is a helpful tactic you can use to evaluate complex decisions. I have discussed this in a previous post about the importance of data and how this informs decision-making. In this case, the framework would simply build on this and divide the complex decision into distinct elements or stages, and compare them by attributes (price to price, complication to complication etc).

Bear in mind that more options is not necessarily better. Sounds good, but it just isn’t true. People have trouble with decisions because the brain has two distinct systems. The first is the “automatic system” (intuitive) which provides immediate emotional responses. Answers come quickly, easily and often intuitively. You use this system when you know something really well, such as when you speak your native language, or when you act out of habit. The second is the “reflective system” (conscious) which requires conscious thought. An example would be the extra effort you might expend to learn and speak a foreign language. You can train your reflective system, but it moves more slowly and, at first, using it seems laborious.

Based on this model, people often display irrationality when the automatic system generates biased results and the reflective system is unable to correct it. For example, if you are faced with a large number of options to choose from, you might intuitively decide to stick with the ‘most known’ option, even if that’s not the best option, because this saves you from having to analyse all the available options. In this case, the issue is that people rely on the automatic system to make a decision that requires the use of the reflective system. Alternatively, in the same situation, people may try to analyze the options using the reflective system, but fail to do so correctly due to the large amount of information involved, which could also cause them to pick an option that isn’t the best one for them.

As an aside, this is probably why Rolex is so successful. Rolex mass-produces close to a million watches a year, but their defect-rate is rather low. Most who own a Rolex will tell you how reliably it serves them, but it does so along with the prestige and aura that comes with the brand. I would argue that if you asked a poor kid in Africa what the best watch is – they would say Rolex. Even people who don’t even care about watches will know Rolex. When you’re thinking of buying an employee a retirement gift, what is the easy choice? Thats right, Rolex. You may have many watches in your collection, but if you’re going away for a one-year expedition involving hiking, heights, water and extreme temperatures… aside from a G-Shock you would probably pick a Rolex. It is known for being well made, and reliable… I think they do simple things so well, but people just take it for granted. This is all to make the point that clearly, Rolex has shifted the luxury watch buying decision into the ‘automatic system’ described above – since it is almost unanimous that Rolex is a good choice, if you have no time to evaluate options.

An article by Richard Thaler points out how nudges can be used for both good, and bad purposes:

Yet, the same techniques for nudging can be used for less benevolent purposes. Take the enterprise of marketing goods and services. Firms may encourage buyers in order to maximize profits rather than to improve the buyers’ welfare (think of financier Bernie Madoff who defrauded thousands of investors).

A common example is when firms offer a rebate to customers who buy a product, but then require them to mail in a form, a copy of the receipt, the SKU bar code on the packaging, and so forth. These companies are only offering the illusion of a rebate to the many people like me who never get around to claiming it. Because of such thick sludge, redemption rates for rebates tend to be low, yet the lure of the rebate still can stimulate sales—call it “buy bait.”

“Nudge, not sludge” – Richard H. Thaler

I bet you already know the most analogous example in the watch world? The authorised dealer networks requiring you buy less desirable watches in order to improve your chances of getting a more desirable or rare watch from them; or attaining preferred client status. They don’t guarantee it, and there is no official policy, but we all know this is happening!

What does this mean for me?

The key takeaway here should be to become more conscious about the presence of a nudge, and the various shapes and forms it may take – as well as the nature of both positive and negative nudges. After you’ve identified it, it is worth questioning the intention of this nudge. Try and consider who benefits from the nudge, but remember that not all things are necessarily malicious, provided there is an alternative explanation for it. At this point you can either accept it, ask the responsible individual or company about it, call out its use, eliminate it, use personal de-biasing techniques to reduce its influence, or take it into account without directly addressing it.

Final thoughts

Using Instagram regularly exposes any watch enthusiast to constant nudges which brands cannot replicate. The level of trust shown between collectors sharing a hobby is a far cry from the mistrust they might feel towards a brand constantly trying to sell them something. Brands know this, and this is why content creators with an independent voice often grow their reach to the extent that brands want to tap into that – but then the creators find themselves selling their independence in order to generate additional revenue. The most well-known example is Hodinkee – when Ben Clymer started it, he was a guy who loved watches, and wanted to share his independent unbiased opinion. That independence coupled with the quality journalism and excellent aesthetics, is what led to their growth. Today, they’ve come a long way, and are now an authorised dealer for many brands. That’s not a bad thing at all, but it does mean that as a consumer, you need to treat what they say differently today – because they no longer exist to serve the consumer, but to nudge them into buying things which Ben (or Hodinkee) may not necessarily buy themselves, and are certainly not incentivised to criticise openly. As a consumer, that is the most valuable thing, so caveat emptor!

-F

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