When a nudge is not enough
Nudges can help but we also need to look at the wider context of peoples' lives
Reading much of the popular literature on behavioural science, you would be forgiven for thinking we can generate a whole host of new behaviours by applying some simple nudges or defaults. Want to help people eat more healthily? No problem, we can use nudges on packaging. Get people fitter? Automated nudges based on your activity as revealed by your phone. The list goes on. But just how effective is this in reality?
I would argue that while these sorts of things can be a helpful part of an overall suite of interventions, they are not enough on their own. These approaches are not sufficient for building internalised-motivation which is still needed if behaviour change is to be sustained.
To illustrate this, I want to use an example from work we recently conducted for the Money and Pensions Service, where we came across a very interesting FCA study. They deployed nudges as a way to increase people’s credit card payments. In a study of over 40,000 newly-issued credit cards, the ‘automatic minimum payment’ option was removed during credit card activation – because consumers would often only pay the contractual minimum and therefore barely pay down their credit card debt.
This seems like a smart way to change behaviour – we have got used to a default which shapes our behaviour. Indeed, doing this had a significant effect, as one in five credit card holders went on to choose a higher automatic fixed payment instead of an automatic minimum payment. Job done?
Perhaps not. This nudge appeared to have the unintended consequence that consumers effectively forget about their credit card balance, and as a result tend made fewer or no manual ‘top-up’ payments. As a result, looking at this over a 6 month period, it was concluded that changing the minimum payment default had no effect on broader economic outcomes: ‘we observe no effects, on average, on spending, payments, outstanding debt or borrowing costs’.
It is clear from this example that there is a risk in not examining the wider context in which Nudges operate. If the FCA had only looked at the immediate outcome, the Nudge would have been hailed a success, because automatic fixed payments went up. But by stepping back and looking at the wider context in which it was operating, it was clear that there was no net difference to the overall amount paid.
A related study from 2017, by researchers from Harvard and Yale Universities and the National Bureau of Economic Research (in collaboration with the United States Military Academy), looked at the impact of a US Army programme to automatically enrol newly hired civilians into their ‘Thrift Savings Plan’ (at a default rate of 3% of income). In the similar manner to the FCA study, they found that, four years after hire, people automatically enrolled in the Thrift Savings Plan were borrowing more money for car loans (increased by 2% of income) and first mortgage balances (increased by 7.4% of income).
Perhaps we can consider people to be more active agents in their decision making than it often appears and, as such, automatic mental processing may well be a small part of the overall landscape of decision making. Nudges and defaults can be useful for helping people overcome initial inertia and make it easier to engage people in their financial wellbeing, they are unlikely to change behaviour in the long-term.
In order to sustain behaviour change over longer periods of time, financial wellbeing needs to align with individuals’ identity and sense of self. This is important for building self-motivation, that will in turn eventually encourage people to engage with and prioritise financial wellbeing.