Richard Thaler’s “Nudging“: A Great Concept for Conversion OptimizationJanuary 9, 2018
Note: This article is a translation of the german original, which can be found at GrowthUp.de.
Germans tend to say that “being wrong is human”. That is because human actions are led by emotions and impulses. Thus we often make decisions that impair our own wealth, or even that of society as a whole. But such behavior can be avoided, at least according to Nobel Prize laureate Richard Thaler. He believes that since humans want to make decisions that increase wealth, all they need is subtle guidance or “nudging” into the right direction.
Thaler’s solution is a passive (but nevertheless always present) choice architecture, minimizing the prospect of wrong decisions and the loss of wealth. Such libertarian paternalism and corresponding nudging form the basis of a modern decision theory which leaves behind the classic notion of a rational homo oeconomicus, pointing instead towards innate psychological behavioral patterns.
My professor the Nobel Prize laureate
When the Nobel Prize Committee announced the latest laureate for Economics a couple of months ago, I started listening immediately. Richard Thaler is a brilliant mind, as I had the pleasure of experiencing during my MBA at the Booth School of Business, University of Chicago in the late 2000s, when Prof. Thaler led a series of lectures about behavioral economics at the University’s London campus.
Back then, I was thrilled by the insights he provided. To this day, his book Nudge is a central piece of my private library. And it became even more relevant to me when I realized what a great fit Thaler’s framework is for day-to-day work in the field of conversion optimization. Today, I will show you how you too can use it in your daily work.
Firstly, every decision we make is linked to money. I don’t know one decision that is not somehow tied to revenues or costs. Every time someone makes a decision, money is changing hands – we either earn it or we spend it. Therefore, owners of online shops and other websites need to know how humans make decisions, how they think, and how they differentiate between following through with a checkout-process, or abandoning it halfway.
Behaviorism: homo oeconomicus is dead. Long live homo sapiens
Countless scientists have tried to make human decision-making more predictable. To this end, they build their economic models on the basis of a rational decision-maker: homo oeconomicus. This rational human was supposed to make sound decisions which would in turn lead to prosperity for him and his kin. But the reality looks vastly different than the models.
Countless bankrupt businesses, grotesque decisions by so-called “top managers”, large-scale waste of taxpayers’ money, unhealthy consumption of alcohol and tobacco – all these things don’t seem to be based on smart, rational decisions. Quite the opposite: they much rather show that humans tend to overlook important links, don’t always know what they are doing, and sometimes make wrong decisions, despite actually knowing better. But why is that?
The answer is: because we are homo sapiens
We can close the book on the homo oeconomicus and all the theories that come with it. This model does not explain why users abandon the website, increasing the exit rate rather than the conversion rate – and this model certainly does not tell us how to design our website to make it convert better.
We are dealing with an irrational homo sapiens. So as online marketers, we need to figure out how to deal with this inconsistent being (and how to reduce bounce rates and the number of aborted checkout-processes).
Kahnemann’s system 1 and system 2: how does homo sapiens decide?
Thaler places the irrational homo sapiens at the center of his studies, and in so doing references the work of Daniel Kahnemann and Amon Tversky, the Nobel Prize laureates of 2002, who have shown that humans think by using two systems.
System 1 is impulsive, instinctive and pretty basic. It does not require a heavy workload in order to solve a problem; rather, it draws on innate or trained behavioral patterns, and delivers a solution in almost every situation. But this solution might not withstand analysis regarding its plausibility or logic. System 1 is relatively fast, but not very smart.
We activate system 2 when we face complex or unexpected hurdles. Once in action, it requires great mental effort. This system works in a very precise, disciplined and critical manner, and double-checks every proposed solution before acting on it. It is very smart, but pretty lazy and extremely slow.
In everyday life and all the standard situations that come with it (like getting dressed, driving to work, shopping for groceries), we navigate by using system 1 and very rarely switch to system 2. So in most situations, we are a far cry from being rational and logical beings.
System 1 shields us from activating system 2 in random situations and thus overthinking everything. As a result, most people tend to rely on system 1 and live a relatively stress-free life. And yet our great faith in system 1 is the reason for all the bankruptcies, wasted money and other problems mentioned above.
So if we know that humans mostly use system 1, and that this system is susceptible to errors, why don’t we use this knowledge to help people avoid these traps as much as possible? That is exactly what Richard Thaler tries to do. He wants to build a choice architecture that is successful in minimizing the weaknesses of system 1. In so doing, he wants to empower people to make the right decisions that will improve their wealth.
A choice architecture is a succession of options that a person has when making decisions. Their order and availability is constructed in such a way that the decision-maker is guided through the process by an invisible hand, and thus arrives at the destination without having to switch to system 2. If done the right way, people will not feel like their right to free choices is being curtailed.
A great example is the way we withdraw money from ATMs. Back in the day, the machines often gave out the money before returning the bank card. This led to many people simply leaving the card in the machine, because their goal during the entire interaction was to obtain money. Once they had it, the interaction was over and the card forgotten. To counter this, the delivery of the money now requires the person to take out the card first. As a result, people are not prone to forgetting their bank cards in ATMs any more.
Such choice architectures are a strand of libertarian paternalism and nudging. Thaler does not want to limit the freedom of choice. But he intends to build structures that empower people to easily make the choices that they wanted to make anyway. He wants to lead them into the right direction – but the choice is still theirs.
As students of behavioral economics, we know that people tend to behave in different ways than proponents of homo oeconomicus suggest. They have feelings, are impressionable, follow the herd, and are sometimes lazy. This knowledge is of great importance when building a website with a suitable choice architecture. Having a firm grasp of the important behavioral patterns empowers us to build websites that make it easy for our users to reach their and our goals in a stress-free way.
Nudge in CRO
Once we understand how system 1 works, we can lead our users into a suitable choice architecture that reduces bounce rates and increases conversions. What we need to do is avoid all the traps to which system 1 is susceptible. To this end, we need to counter the most common human reflexes and channel the users’ impulsivity to our advantage.
Of course, the recent developments concerning personalization offer great possibilities in this regard. They enable us to decidedly target the users’ needs almost as much as we could when we meet him face-to-face in one of our stores.
But isn’t such manipulation plain wrong?
In the end, every type of paternalism is just that: paternalism. But Thaler insists that his libertarian approach honors the voluntary principles and only aims to lead the user into a direction that is favorable for him. Thaler has spent many years advising governments and always put great emphasis on these values.
But every system offers possibilities for misuse – no matter how well intended it might be. This is as true for political beliefs as it is for economic theories. Because in the end, the question remains: who decides what is good for the individual or even society as a whole? Especially when governments turn to nudging, societies need to watch carefully and make sure that it is used as a mean to actually improve the lives of a majority of citizens.
But respectable conversion optimization honors Thaler’s values. The system is based on non-obligatory principles because the user enters a website by his own choice – and often in order to solve a problem. With a nudge into the right direction, we can make sure that he picks us to solve his problem for him – no matter if we offer goods or services.
In the end, even the Google search is nothing but libertarian paternalism. We click on the first result because the engine tells us that it is the most suitable one for our particular needs. This might be toyed with by using negative SEO, but in principle it is a great invention that we do not want to miss in everyday life.
An example for nudge in CRO
The following is a great example of how to use nudge in conversion optimization. A jeweler runs an online shop selling watches, rings, necklaces, and earrings. Correspondingly, the navigation looks as follows:
Watches – Rings – Necklaces – Earrings
In shaping the website like this, he hopes for the user to quickly identify a product, put it in the basket and buy it.
But when a user enters the website of a jeweler, he is in a certain situation that we are unaware of. With the above navigation, he is offered a wide variety of choices and needs to figure out which one is the best fit for his situation. This will challenge him and he will turn to system 2. Within ten seconds, he will be stressed out and might very well leave the website.
The solution to this problem is the implementation of a situational navigation showing the most common reasons to buy jewelry:
First Date – Engagement – Wedding – Make Someone Happy – Say Sorry – New Arrivals & Trends
By using this structure, we send the user into a choice architecture that is solely centered around his situation and his needs. He thus realizes that this is the right place to solve his individual problem. We nudge him into the right funnel by giving him a selection of choices he can identify with. Thereby, we reduce the complexity of his situation and give him the chance to make much easier choices. He can stay in system 1 and continue browsing.
Formulas don’t solve problems
Richard Thaler’s insights show us one thing for sure: Formulas do not solve problems. Homo oeconimicus is a mythical creature that does not correspond with the overwhelming majority of humans. People are irrational beings and should be treated as such.
This means that we can go with less testing in conversion optimization – provided that we build on this kind of knowledge. We can start building personas and construct websites that will lead our target audience into the right direction. Then, we only need to offer quality goods and services to make sure that they will actually convert.
About the author: Christoph Michalak is the COO of the berlin-based Online Marketing Agency LEAP/ Digital Marketing. LEAP/ offers SEO, SEA and Conversion Optimization. Between 2008 and 2010, he successfully completed his MBA at the University of Chicago.