At Level Financial Technology, we’ve developed an industry-leading nudge management strategy and a ‘Nudge Management’ framework.

Nudge management at Level does not focus just on changing customer behaviour but on identifying and managing acceptable behavioural strategies.

Level’s nudge management strategy is not designed to manipulate the financial choices consumers make. Instead, it always begins and ends with the Choice Architecture Axiom; does the nudge attempt to reduce or eliminate available choices?

Definition

In our framework, we define a cognitive bias as “a procedural and systematic approach to framing information which influences judgement and decision-making.”

Cognitive biases deviate from rational objectivity and can result in faster and more efficient decision-making but also errors and flawed reasoning.”

Types of Cognitive Biases

At Level, we follow the reproducible research on cognitive biases, which implies that the number and type of biases will change as more research is conducted.

There are currently over 300 types of cognitive biases, and more are being recognised as culture and technology changes.

For example, the IKEA Effect (named after the Swedish furniture brand) is a cognitive bias where people place a disproportionately higher value on things they have created.

Another is the Google Effect (Digital Amnesia), where a customer is likely to forget information/facts that they can easily Google online and prefer to retain information that is unique and can’t easily be Googled.

Cognitive Biases, Logic and Rationality

Although cognitive biases deviate from logical reasoning, this itself is relative to culture.

Western or Aristotelian logic takes a specific view of judgement and decision-making which is deductive, inductive or abductive.

On the other hand, non-Western logic is often the logic of correlative duality, emphasising different judgements and decision-making and ultimately different behaviours.

Level does not hold a singular view of logic, leading to a one-sided interpretation of a cognitive bias deviating from a narrow view of rational objectivity. Instead, we recognise both formal and dialectical logic, which produces a range of judgements and decisions, resulting in a myriad of behaviours.

It is from this perspective that Level determines what is a cognitive bias based on different cultures and how it deviates from ‘rational objectivity.’

How Nudges affect Cognitive Biases

Level takes the view that nudges (prompts, cues or subtle suggestions) can affect a cognitive bias to modify or reinforce behaviour.

This is best illustrated by an example when considering financial behaviour.

Serial Position Effect (includes Primacy and Recency Effects) is a cognitive bias where customers tend to remember the first things in a series (Primacy Effect) and the last things in a series (Recency Effect) but often forget the items in the middle of the series.

Financial services firms have a statutory duty to disclose relevant information to their customers, and at Level, we understand that we can use the Serial Position Effect to nudge our customers to retain more of that information.

Therefore we would ensure that communication to customers should have the key takeaways at the beginning or introduction and at the end.

The middle should have procedural information. We would go further by ensuring that UX designers for our websites and apps focus more on inserting key points at the top and bottom of each page, section or journey.

Reminders should also be placed at these critical points. Not only will this apply to our customers but any communication to business clients and employees. By making these changes, we reinforce behaviour rather than modify it because most people tend to succumb to the Serial Position Effect.

We do not obscure, redact or minimise information that should be present or reduce them to ‘small print’. Instead, we merely position information we are obligated to disclose at key junctures where people are more likely to remember them.

In this example, a Space-Time nudge (position of information) is used on a cognitive bias (Serial Position effect) to reinforce behaviour (increased memory retention).

Behavioural Changes

Once nudges are successfully applied to cognitive biases, the result should be a behavioural change. At this stage, it is helpful to see how nudges affect cognitive biases by asking some pertinent questions.

Three questions will help here:

1. Is the behavioural change a modification of behaviour resulting in new behaviour or reinforcement of an existing natural behaviour?

2. Does the behavioural change result in clearly defined goals, and who benefits from such a change?

3. Does the behavioural change violate the choice architecture axiom because available choices have been reduced or eliminated?

If we return to the original question, several points need to be considered.

First, not all nudges acting on cognitive biases result in the same behavioural change; nudges can result in different behavioural changes through time and in other contexts.

Second, customer’s needs, circumstances and business priorities can and do change.

Accordingly, nudges, cognitive biases, and behavioural changes need to be regularly reviewed. Some nudges and cognitive biases will move down the priority rating, some may become ineffective, and others will cease to be relevant.

Even if a firm were to establish how particular nudges affected particular cognitive biases and produced a specific behavioural change, this would undoubtedly have to be reviewed periodically to stay relevant and useful.

About the Author

Dr. Jim Coke is a member of the Chartered Banker Institute and the Chief Behavioural Officer at Level Financial Technology Limited.

The views and opinions expressed in this article are those of the author. They do not necessarily reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.