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Choice Architectures

Research and diagnostic seriesBob Suh, Founder and CEO

August 2014

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This presentation is derived from the theories developed by

Daniel Kahneman, AmosTversky, Richard Thaler and Cass Sunstein

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When conditions change, default decisions can be mistakes

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Avoiding the certainty of releasing bad data can result in fraud

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Confusion over product differentiation causes products to lose

A&W third pounder fails because consumers think it is smaller than quarter pounder

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Decisions can be “nudged” to improve outcomes

1.Automatic

2.Reflective

2+2=?

32x11=?

Whenever multiplying by 11, add first 2 numbers and

insert sum between themRepeat insight

Lean back when you fear falling

Learn to lean forwardBalance retained

32x11=352

Repeat insight

Nudges

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We are piloting a series of heuristic algorithms

Belief Observation Reaction

ABC stock will go up 200%

ABC stock rises 210% Sell ABC

ABC stock declines 20% Switch to XYZ

Buy more ABC

All shares

Some shares

• How convicted are you in your beliefs?

• How do your beliefs influence what you observe?

• How does what you observe change your beliefs?

• How does what you observe change your actions?

• How does your action or inaction change your observed performance?

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Risk aversion drives many of our decisions

Value

GainsLosses

Take a risk on possible loss

versus accepting a certain loss

Choose certain cash

versus higher expected

value

Reference point or value function can change

They can also change the perception of gains and losses: for example, gaining $10,000 from nothing is much more significant than gaining $110,000 from $100,000

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Typical prospect theory behaviors

Value

GainsLosses

Short-term profit taking in favor of long-term investments

Not accepting a sunk cost or actual loss in favor of a delayed probable loss

Risk averse

Risk seeking

Hypothetical value function curve

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Prospect Analysis: Value Function

Value

GainsLosses

Mobile Q: at what level would you sell to cut losses?

Mobile Q: at what level would you sell to capture gains?

Mobile Q: What is your target price for IBM?• Group 1• Group 2• Group 3

Threshold for selling to

capture gains

Threshold for selling to cut losses

Bottom quartile

Top quartile

Median value

Bottom quartile

Top quartile

Median value

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Richard Thaler’s Nudges

1. Incentives: putting the right incentives on the right people.

2. Understanding mappings: helping customers understand the right categories and steps.

3. Defaults: helping customers avoid the “path of least resistance.”

4. Give feedback: provide customers data on how they are doing.

5. Expect error: anticipate common errors and make the process or product error-tolerant.

6. Structure complex choices: making complex choices easier to make through understandable structures.

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