Behavioral Insights: Sludge is the evil cousin of Nudge

Swiss Re Institute has just announced a new partnership with BEAR (Behavioral Economics in Action Research Centre at Rotman), focused on advancing real-world applications of behavioural economics, digital analytics, and customer-centric design approaches.

To learn more about the announcement, read the blog by Christoph Nabholz, Swiss Re Institute's Head of Life & Behavior R&D: Behavioral economics: Predicting the irrational in a data-driven world. Ahead of the announcement, the Institute's Behavioral Research Unit met (virtually, of course) with Dilip Soman, Canada Research Chair in Behavioral Science and Economics and Director at BEAR - and I greatly appreciated the opportunity of listening in. In this post I'd like to share some of Dilip Soman's insights - in particular around the term "sludge", as well as ethical aspects and the three-legged stool of success for businesses.

Behavioral insights help businesses make positive adjustments, behavior changes, through multiple approaches. They help companies design better products, processes and services. We're all different, or so we think. While today we know that we're far from rational first, we are somewhat predictable in our emotional responses. Behavioral science doesn't make assumptions, it tests and tests again. It learns and makes adjustments depending on results, test groups, location, etc. We know, for example, that some people are entirely flexible, they make behavioral adjustments quickly and easily - these are the Motivated Enthusiasts. There are, of course, the many others - those who say they'll do it tomorrow (called the Naive Intenders), and those who resist change at all cost (the Diehard Opponents). Behavioral science has been proven to be very effective across the globe. In fact, Swiss Re's Behavioral Research Unit has already done over 150 tests with clients, with every newly generated insight enhancing Swiss Re's capabilities, as well as those of our clients, to affect positive change with end-consumers.

SLUDGE: BEHAVIOR CHANGE IS A PLUMBING PROBLEM

In introducing the term, Soman said that you can think of "Sludge" as the evil cousin of "Nudge". We've all heard of nudges - but sludge? He suggested really looking at it in terms of plumbing, of sludge that is clogging up and choking up pipes. The sludge is, he said, what makes the nudge impossible.

"Nudges make things easy for end users. Essentially, nudges help consumers. Sludge, on the other hand, harms consumers by impeding decision making and action."

He explained that sludge is anything that impedes progress, that obstructs, that acts as a dividing fence. Essentially, sludge can be seen as in three different buckets:

•  Process sludge: Processes that are complex and needlessly complicated.
• Communication sludge: Bad communication, that is. Sludge is when people are, for example, not told what they can expect, when they're not given the right information, or too little or too much information. He highlighted the negative effect of unloading all information on a consumer in one go - when it would have been far better to share what's needed when it's needed.
• Emotional exclusion sludge: On this, Soman gave the example of embarrassment. In Canada the government offered low-income parents substantial amounts of money to support their children's education ... take-up of this initiative was a mere 16%. 84% didn't respond! The reason was the perceived embarrassment of having to receive aid. Another example came from Brazil, where people living in favelas had to self-report on the quality of their homes. The questionnaire asked them about heating and plumbing and some such. With everything you reported on negatively (i.e. that you don't have plumbing), you'd get higher subsidies. Some were worried that the questionnaire would lead to widespread abuse, people reporting in the negative to received highest possible subsidies ... what happened was the opposite - people lied in these questionnaires and reported that their homes were in better shape than they actually were. Long story short - Emotional barriers create sludge.

Overall: Nudges help people do things better and make things easier - nudges facilitate choice and action ... and sludge does the very opposite.

ETHICS IN BEHAVIORAL RESEARCH

Nudges can be used for good ... they can also be used for bad. Dilip Soman shared the example of how he effortlessly subscribed to the New York Times online - when that's not what he had wanted to do! Ethics - he said that:

"The concept of ethics is always conditioned on a goal of maximizing welfare."

Consequently, the idea of ethics is applied to the processes (such as experimentation), methods (e.g. incentives vs. choice architecture – meaning asking some questions) and outcomes of behavior change strategies. It should also be evaluated separately for the three. Nudging for good - what an important topic. He mentioned 7 principles:

• Principle of principle: There is always a natural choice architecture
• Principle of helping people: If person wants to accomplish a behavior (but fails to achieve it), interventions are more ethical (than if they didn't want it in the first place)
• Principal of no harm: If you do an experiment, then the worst outcome should be no worse from an individual's perspective. More ethical is an absolute gain context than an absolute loss
• Principle of belief: If a person thinks changes are irrelevant, then it might be more ethical to make those changes (if people don't mind design of a questionnaire this way or that way)
• Principle of evidence: Trials based on prior experiments (ladder of evidence) are more ethical
• Principle of relative ethics: What are the ethics of nudging versus other forms of behavior change? What are the ethics of nudging versus not-nudging?
• Principles of arm's length evaluation: Ethics boards, ombudsperson

One more thing from Dilip Soman's presentation I'd like to highlight in this post - it is the "three-legged stool of success" - he explained that the three legs are Expertise, Agility and Empiricism: "Expertise" refers to companies embracing Behavioral Science (and understanding of human psychology), Behavioral Engineering (choice architecture) and the empirical science (analytics, experimental design, and ability to analyze and interpret experiments); "Agility" means businesses need an organizational structure and processes that allow for quick feedback loops to be incorporated, and for the organization to be able to change course so that a test-learn-adapt strategy can be put in place. And finally "Empiricism" refers, he says, to a mindset that data (rather than theory or a pre-committed course of action) drive decision making in the organization.

I'm greatly looking forward to seeing the power of Swiss Re Institute's Behavioral Research Unit expand with our new BEAR partnership - fascinating times ahead!

If you'd like to dive a further into the world of behavioral research, below a few links to recommended books - among them also Soman's own "The Last Mile." Enjoy!

• The Last Mile: Creating Social and Economic Value from Behavioral Insights (by Dilip Soman)
• The Ethics of Influence: Government in the Age of Behavioral Science (by Cass R. Sunstein)
• Think Small and Reach Big (by Owain Service and Rory Gallagher)
• Misbehaving: The Making of Behavioral Economics (by Richard H. Thaler)