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A new breed of economist has argued that people often don’t behave rationally or in their own self-interest, as classical economics often claimed. A new branch of economics, behavioral economics, has emerged and ideas to help “nudge” people towards better decisions have come with it. These ideas are now being used to address all kinds of problems in business and government during the COVID-19 pandemic.
The most obvious current application is to encourage people to behave responsibly in order to slow the spread of COVID-19. One study has suggested what kind of hand-washing poster works best. Another showed that messages emphasizing our duty to protect friends, family, and fellow citizens work better than other kinds of moral arguments. Most of the studies are still preliminary. But the results could be key in getting people to act in their own self-interest without resorting to more drastic methods to do so.
Nudge theory could also be useful for businesses. A classic example in behavioral economics is that of making employees opt out of retirement savings plans rather than opt in. Employees save more when automatically signed up. It’s easy to see how similarly small tweaks could be made to help employees stay safe as they slowly return to work.
For example, the Behavioral Insights Team, a consultancy, recommended that food delivery apps make no-contact deliveries the default option. As countries reopen their economies, we’re sure to hear about more potential nudges to keep us healthy and productive while also preventing a second wave of infections.
Similar incentives are also in place for businesses as a whole. In Germany, the Kurzarbeit (short-time work) system encourages businesses to keep employees on their payrolls. Companies can reduce employee working hours without employees seeing a matching pay cut. The companies just have to declare they’re having financial problems for the government to cover a large part of employees’ lost wages. Although this costs the government money, it’s intended to benefit businesses and the economy as a whole. Businesses often want those employees to stay, but need to get past a short-term financial crunch. In the end, such programs should stabilize the economy and benefit the government in the long run.
While nudge theory is promising, there are plenty of places where no system for encouraging sensible behavior is in place. Marketers, for example, have mostly cut advertising budgets and focused on direct response campaigns in the face of the pandemic. Most marketing theory suggests the opposite would be more effective in a time of crisis.
The logic for such decisions, however, is easy to deduce. Long-term branding campaigns clash with the idea that companies need revenue right now. Marketing bosses are looking for quick wins and an immediate return on investment, even if overall returns will be less than usual from direct response campaigns.
You might ask why marketing spend is important right now. While there are certainly higher priorities, how companies spend their marketing budgets has broad consequences. The current kings of direct response marketing, Facebook and Google, have seen modest drops in revenue while other media outlets, such as newspapers, have seen huge drops even though demand for news is higher than ever.
Who should nudge who? In systems with a clear central authority, such as public health, nudge theory has obvious applications. The problem is that many others, such as marketing, don’t have a clear authority that would create incentives to lead marketing teams in the right direction. That authority should be long-term profit incentive. However, as behavioral economics has shown us, self-interest often isn’t enough to inspire rational, self-interested decisions.