Do you know how Nudge Theory is used to drive organizational change? This theory was created by Richard Thaler, from the University of Chicago, based in the Behavioral Economics Daniel Kahneman, from the Princeton University and Amos Tversky (in memoriam). Many companies like Virgin Atlantic, McKinsey & Company and Deloitte are already using this theory to increase employee motivation and aid during periods of changes in the organizational culture. Do you want to know more about this topic? Read the full article.
In the economics courses offered at university or high school, it is usually said that humans are rational individuals, and many economic theories, such as the Law of Supply and Demand, come from this assumption. According to the Law of Demand, people want to buy more of a good or service when its price falls. This idea comes from the presumption that humans are rational. However, it has been observed that this law does not hold true for certain goods. Economists have observed people want to buy more of some luxury goods at higher prices. With this idea in mind, the Israeli psychologists Amos Tversky and Daniel Kahneman have conducted intense research showing the flaws of human rationality. This led to the creation of Behavioral Economics.
People have several cognitive biases that affect decision making. Some examples are decision fatigue, which occurs when the brain has a large load of decisions to make, decreasing the quality of each decision; and the confirmation bias, which is when people only consider information that confirms their beliefs. According to Richard Thaler, a Nobel prize winning professor from the University of Chicago, the key to overcome cognitive biases is to use “nudges” – clever interventions that guide choices without restricting them. In his book “Nudge – Improving Decisions About Health, Wealth and Happiness”, Thaler writes: “A choice architect has the responsibility for organizing the context in which people make decisions. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.”
Nudge has been a key component in driving organizational change in several companies. At Virgin Atlantic, for example, research was conducted to assess whether different behavioral interventions could decrease fuel consumption, with the idea of increasing the ESG (Environmental, Social and Governance) rating of the company. According to the researchers, the intervention was cost-effective, outperforming other carbon abatement technologies. The experiment involved a huge volume of data – 40,000 flights made by 335 captains in 2014.
The study consisted of sending pilots information about their fuel usage, with a variety of additional messages and incentives. Pilots have to take decisions on factors such as the amount of fuel they put on the plane, speed, altitude and route. Although pilots are sometimes forced to take choices that burn additional fuel, their decisions are still extremely significant.
The pilots were assigned to four separate research groups: a control group, who was only informed that they were being part of a study; a group who received monthly assessments of their fuel conservation performance; a group who got an explicit goal for cutting down fuel usage, which received either a praise when they succeeded or encouragement to do better if they didn’t; and in the last group, Virgin Atlantic made donations on behalf of the pilots if they met their goals.
All three experimental groups saved way beyond fuel than the control group. The groups who received targeted goals performed the best. The “prosocial” group and the other group who received monthly assessments of their performance performed equally. Overall, the experiment saved 6,828 metric tons of fuel for Virgin Atlantic, worth 3.3 million sterling pounds at the time.
Therefore, nudging is extremely effective in driving change management in companies, and it can be used in many different ways. One of them is to change employee perception. For example: it’s your sales employee’s annual performance review. You could say that 80% of the customers had a positive service experience, or you could say that 20% of them had a negative service experience. One statistic informs the other, but if you say that 80% of the customers had a positive experience, you set a welcoming tone. If you say that 20% had a negative service experience, you may demoralize the employee.
Nudging can also be used to increase motivation. If you want employees to increase sales, a possible motivational nudge is to set a sales goal and give employees a percentage of the amount above the sales goal. This is a practice already implemented in multiple companies.
Nudge theory is also helpful at times of changes in workplace culture. Encouraging employees to share their goals and ideas on the topic can help others accept the change. It is also possible to share other companies’ experiences to show employees how well an idea has worked, and how they could achieve the same results.
In conclusion, it can be seen that nudge theory is an extremely powerful and cost-effective tool that should be used by companies to drive organizational change, leading to long-lasting behaviour change.