What can Financial Service providers learn from 'nudge' theory?
'Nudging' for Behaviour Change
It’s one of the most popular terms in business at the moment, but how much do you know about “nudge” theory?
Behavioural scientists use “nudges” as a way of encouraging people to make changes to their choices and behaviours through simple, unforced, subtle influences.
This behaviour change strategy was pioneered en masse in the United Kingdom in 2010, when then-Prime Minister David Cameron set up the first Behavioural Insights Team (BIT). The group of psychologists, scientists and researchers commonly became known as the “Nudge Unit”.
The BIT’s Director of International Programs, Dr Rory Gallagher, has recently been involved in establishing an Australian office and kindly presented a keynote address at the 2017 FSC Leaders Summit in Sydney.
Dr Gallagher and the BIT managed to make significant positive changes in the United Kingdom by implementing subtle, strategic nudges. One of the successful improvements it has achieved is boosting savings in the UK’s voluntary workplace pensions.
“The classic economics model would say those people will act in their own best interests - and we can leave them to save,” Dr Gallagher said.
“But we all know that’s not the case.”
The BIT convinced the Government to make the pensions “opt-out” rather than “opt-in”. This subtle change reversed a downward trend that had started last decade.
“Already, we’ve seen five million additional savers and there’ll be eight to nine million when this is rolled out entirely.”
“This has incredible impact, especially when you compare that to tax incentives, which are hugely inefficient in terms of increasing savings.”
Keep Communication Simple
Simplicity in communication is at the core of successful nudges.
When a 100 page “Pension Wake-up Pack”, designed to encourage UK citizens to consider switching pension plans, didn’t result in improved engagement, the BIT saw great potential for improvement.
It instead created a simple, jargon-free, one page summary.
Randomised control trials saw a tenfold increase in inquiries from respondents receiving the single page, compared to those receiving the original bulky pack.
The BIT found even one sentence can be enough to trigger significant behavioural changes.
For example, a letter from the Government to tardy taxpayers included a single line which said more than nine out of 10 people in that city paid their taxes on time.
“We saw up to five percent increases, resulting in hundreds of millions of pounds being brought forward, literally just by changing wording in a letter,” Dr Gallagher said.
The line in the tax letter exemplifies what’s known as “social proof” - a psychological phenomenon where consumers will adjust behaviour to conform to what is suggested to be correct behaviour.
Dr Gallagher says the technique has proven effective “in pretty much every area we’ve worked in” - but is “wholly underutilised”.
Nudge potential for Financial Services
The essence of nudge theory is its focus on small and incremental moves.
Dr Gallagher said there is immense potential for Financial Service providers to implement ethical nudges within their businesses in Australia to increase engagement with consumers.
He praised the likes of the new Australian super fund Grow, which allows its members to “round up” smaller purchases when buying something, by sending the change in the dollar of their purchase to their superannuation account.
Nudging you to read more...
For more information on the fascinating work the international Behavioural Insights Team is doing, see here.
For information on the Australian Behavioural Insights Team, see here.
This conversation was part of the 2017 FSC Leaders Summit in Sydney.