Thursday, June 05, 2008

Incentive that works ...

I am reading this book called Nudge.

This book discusses about Economics of Behavior and how we Humans can be influenced to make decision by just a soft hint. Please review the book at the link mentioned above and if you get a chance, read it. It is a very well-written book where the simple decision making scenarios are discussed and how we can contribute to the process, by being, what the writers call as "Choice Architects" are explained.

The purpose of this blog is to write about an idea that I found very interesting in the book. For all of us who have used STD / ISD calls from Indian Phone Booth, know how the conversations go - depending upon how much the running meter shows. I know for sure, if I had a target of Rs 50, I would at the max let it go to Rs 55, or start cutting short my conversation, at Rs 45 if I had only 50 bucks with me. Now, if at home in absence of such a running meter, though we know that we need to control our talk time - we do not care much and make that one extra call every time. The reason is that the Phone Bill comes at the end of the month.

Yesterday, I was watching the local news and came to know of drought situation in California. Government is not doing mandatory rationing, but requesting users to reduce their water consumption. Users who have excess water usage will find a surcharge in their monthly bill. Now, will that really let users stop using water as they normally would? May be to some extent. What if there was a running meter of water consumption installed in each household?

Similarly, we all know our Power bills are at a rise and that excess use adds to the global warming. How often do we remember to turn off the room heater, if we are going out for few hours? What if the Thermostat displayed the cost of using each unit of energy? Users can set a target and as soon as they are close to the target, they can consciously reduce the consumption.

There are numerous such examples where sellers exploit this behavior and make users spend beyond their capacity. The concept of Nudge (soft hint) can be used in either way to influence the decision making.

This is a very strong concept, in retrospection looks so simple!

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