Behavioural science interventions or nudges are used by financial services institutions around the world to encourage people to make choices that will have a positive impact on their lives. These subtle nudges are intended to change natural behaviours for the good of the individual and wider society. Lorna Waldron, Head of Marketing and Client Success at Moneythor explores the ethical side of nudging in the financial services sector.
In the financial services industry, behavioural science interventions and nudges have proven to be impactful in changing banking customers behaviours and helping them to manage their finances more effectively. Whether it is motivating individuals to set up savings goals, nudging them to create budgets or providing options when they are about to get into cash flow difficulties, behavioural science insights can transform the way people view and handle their finances.
While these interventions are intended to be used to improve people’s lives and to optimise their decision-making processes, in some circumstances behavioural science tactics can appear unethical. Organisations and governments can take advantage of the knowledge of an individual’s biases and nudge them to make decisions that are not in their best interest but in fact, in the best interest of the organisation.
Whatever the organisation, there is a responsibility and ethical code that must be followed to ensure that interventions and nudges are applied in a way that supports individuals and leads to a positive outcome for them. Richard Thaler, known as the Father of behavioural science, suggests that in order for nudges and interventions to be ethical they should be transparent, decisions should be easy to opt out of and nudges should only be used for good.
Thaler’s 3 recommendations for ethical nudging:
Nudges should be transparent
One of the key issues that arises around nudging and ethics is the question of transparency and the fine line between encouraging people to change behaviours and manipulating people to do so. Being transparent with people helps to reduce these ethical issues by making people aware that they are being nudged and continuing to give them the freedom to make informed choices.
Consider a bank encouraging customers to set up a savings account for emergency funds with a personalised and affordable monthly plan set. The bank nudges the customer to set up the account and provides a default savings amount based on their current finances with the below information:
“Based on your current monthly income and expenditure summarised below, you may be able to save £100 a week by making small lifestyle changes now that will have a big impact on your future.”
By being clear and transparent about the default amount and the reasoning behind it, this type of nudge avoids any manipulative connotations while remaining effective. It also clearly states the benefits of the nudge removing any uncertainty around why the individual is seeing this intervention.
Being honest about the nudges we are designing will help to reduce distrust amongst customers and still effectively encourage them to change behaviours.
Nudges should be used for good
A crucial element to ethical nudging is that it should always be done with the individual’s best interests in mind. Any nudge or intervention that is applied should be done to improve the wellbeing of the individual and should not have negative implications for them.
If we look at the savings example again:
“Based on your current monthly income and expenditure summarised below, you may be able to save $100 a week by making small lifestyle changes now that will have a big impact on your future.”
Encouraging customers to start saving a certain amount a week is an intervention that is done with the customer’s best interest in mind. It suggests that saving will boost their financial wellness and help to plan effectively for the future. It also provides a default amount the bank knows the person can afford, so does not put them under any undue financial distress.
Starting saving has long-term beneficial implications and improves the overall wellbeing of the individual. Added to that, ethical nudges like the above example support people and improve their lives which leads to increased engagement and loyalty amongst customers.
Decisions should be easy to opt out of
The concepts of autonomy and freedom of choice are two key facets that must be considered when designing nudges. While it can be beneficial to prompt individuals to change their actions, it should at all times be their choice to do so. When a person is forced to change their behaviour, the intervention is no longer considered a nudge but an order.
People must have the authority to demand, within reason, that they make choices for themselves. For example, if a nudge goes against a person’s beliefs, they must be able to go against its influence and avoid the behaviour change.
If we go back to the savings account option with the default amount, we can see the value of the opt out in action:
“Based on your current monthly income and expenditure summarised below, you may be able to save £100 a week by making small lifestyle changes now that will have a big impact on your future.
Is £100 too much? Don’t worry, you can select a different amount to save.”
While providing a default amount is a good way to challenge the lower amount that people may otherwise intuitively choose to save, it should not be forced upon them. There should always be a cheap and easy option for both making a different choice than the default amount or not saving at all.
Nudges and interventions are powerful tools for helping customers to optimise their decision-making processes. However, it is imperative that they are used in an ethical and non-manipulative way. By being transparent, giving people freedom of choice and nudging for the good of the individual, organisations can change behaviours and create real value for their customers and themselves.
Lorna Waldron is Head of Marketing and Client Success at Moneythor.
This article was first published on the Moneythor website. For further article on behavioural science in banking, please visit www.moneythor.com