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How Does Organizational Culture Affect Change?

How Does Organizational Culture Affect Change?

Full article with thanks to https://change.walkme.com/how-does-organizational-culture-affect-change/

Culture is one among many factors that influence a company’s ability to change.

A few of these include:

  • Culture
  • Leadership
  • External circumstances, such as customer needs and desires

Among many other things.

When developing an organizational change project, change practitioners should examine all of these factors in detail.

Each factor will have a different weight, depending on the organization’s unique circumstances.

Let’s look at some of these factors in more detail.

Factors that Affect Organizational Change

From business processes to culture to finance, there are many things that can influence change projects … for better or for worse.

Change managers must review all of these before beginning a change project. 

Here are some of the most important:

  • Customer Needs – What do the customers actually want? If your products or services don’t meet their needs, for instance, it is time to evolve your product to meet those demands.
  • Competitor Pressure – If competitors are pushing forward, developing better products, and creating better value propositions, then it’s time to adapt.
  • Executive Leadership – Executive leadership can either spearhead change … or hold it back. When the time is right for change, it’s critical to obtain executive support early on. 
  • Budget – Budget is one of the biggest concerns for any business endeavor. It can influence change projects in general, as well as programs aimed at cultural change.
  • Tools and Technology – Technology can facilitate change, or even be the central focus of change. But it can also become a barrier to organizational change, especially when employees are reluctant or budgets are tight. 
  • Existing Business Processes – Inertia and clinging to the familiar can keep people locked into old processes for far too long. This, in turn, hurts a business’s adaptability and agility.
  • Culture – Culture also plays a pivotal role in any change project … people can either support change with enthusiasm, be apathetic, or actively resist change.

Though all of these factors play critical roles in any change project, culture remains a top focus for change managers.

How Does Organizational Culture Affect Change?

Some of the aforementioned factors that affect change are very black and white.

You either have the budget for change or you don’t.

Customers either need a new feature or they don’t.

When people become involved, though, the situation becomes more complex.

Employee support depends on:

  • What’s in it for them – that is, how they will benefit from a change
  • How much extra work is involved
  • How the end result will impact their jobs, their salaries, their long-term career prospects, and so forth
  • Their general attitudes towards change, new ideas, and new things

This last point is where culture comes in – because it can be viewed as the “central pillar” that strongly influences many of these other factors.

What Makes a “Good” Corporate Culture?

There is no such thing as a “good” corporate culture – any more than there is such a thing as a “good” flavor of ice cream.

It’s all relative.

One corporation may be competitive, driven, and fast-paced.

Another may be relaxed, social, and slow-paced.

However, today’s marketplace is continually changing. This means that corporations geared towards continual change will be more likely to survive and succeed in the coming years.

To see why, let’s set the stage by describing today’s economic climate:

  • Technology is causing massive, global disruption. New technological innovations, from the internet to the mobile phone, are fueling disruptive changes. A short time ago, both of these were barely conceivable – but today, businesses that aren’t using both are at a strong competitive disadvantage.
  • Innovative companies that can disrupt and transform are those most likely to succeed and dominate. Today’s top companies are all technology companies. Google, Apple, Amazon, Microsoft, Facebook – in just a few short years, they have eclipsed the former global leaders. This seismic shift demonstrates the massive power behind technology and innovation.
  • In such a fast-paced environment, speed and adaptability rule. Speed is “the ultimate weapon” according to DocuSign chairman Keith Krach. Organizations that are the fastest at innovating, producing, and releasing into the marketplace are those that can overtake their obsolete competitors.

Now, as mentioned, there is no such thing as a “good” or “bad” corporate culture.

However, it’s pretty clear that we live in an economy driven by technology, innovation, and speed.

And it should also be pretty clear which cultural attributes will positively influence cultural change.

Redesigning Your Corporate Culture for Continuous Change

Given the context illustrated above, change managers would be well-advised to inculcate attributes such as:

  • Innovation – Creating a culture of innovation means inviting participation from everyone. And it means using the right systems, mechanisms, and tools to boost innovation.
  • Agility – Agile software development has given rise to agile change management, agile management, and other agile disciplines. Inculcate these systems into your work environment and the culture will gradually shift to reflect those changes.
  • Openness to Change – Prudence is wise in some circumstances. But risk averse attitudes can easily prevent you from money-making investments – the kind that can help your company stay competitive and successful.
  • Speed – Acclimate employees to speed, so they become more alert and ready for spur-of-the-moment changes. A culture ready to act, react, and deliver will help contribute to an organization that is able to deliver products and services more quickly.
  • Digital Literacy – Digital literacy is a must in today’s world. Companies should create a “digital culture” that encourages digital fluency. And, as with the other characteristics mentioned here, the best way to cultivate this attribute is by introducing systems that cultivate it.
  • Lifelong Learning – It is becoming widely recognized that lifelong learning will become a prerequisite for the workforce of the future. Enterprises that integrate employee training solutions into their business will create a workforce that is more productive, relevant, engaged, and open to change.

It is worth noting that these characteristics don’t necessarily conflict with other attributes of corporate culture.

A company can still be social, relaxed, extra-competitive, and so forth.

However, in today’s economy, change is continual. 

The attributes covered above will contribute to corporate cultures that support, enable, and fuel that change.

Full article with thanks to https://change.walkme.com/how-does-organizational-culture-affect-change/

7 biggest challenges SMEs face – and how to overcome them

7 biggest challenges SMEs face – and how to overcome them

Full article with thanks to https://www.mckinsey.com/featured-insights/leadership/changing-change-management#


Simon Willmett outlines the seven main challenges facing every small business, and offers ways to overcome them.

Setting up a business is certainly not without its challenges and requires vast amounts of determination, patience and effort. With figures showing that SMEs account for 99.9pc of the 5.7 million businesses in the UK, standing out from the competition has never been more important. If companies don’t make the effort to distinguish themselves from their up and coming counterparts, they risk lagging behind.

According to research by Statista, 79pc of UK SMEs stated that their toughest challenge was attracting new customers. This is a problem that so many businesses struggle with, and this includes the big players too. However, larger companies with historic success behind them usually find it easier to attract new customers as they have a strong brand supporting them.

Smart branding is hugely important and with it comes greater recognition, increased business value and the ability to generate new customers at a faster pace. Attracting new customers while maintaining a high-quality service with existing customers can be tricky, but it’s vital in order to succeed in a competitive market.

Pro-activity is also crucial for any small business. This means making phone calls, attending relevant networking events and mastering the various marketing channels that your business has a presence on.

MAINTAINING PROFITABILITY
No matter what industry a business operates in, maintaining profitability is a challenge which every business has had to consider at some point. However, there are a number of things that can help:

  • Reduce costs
  • Increase turnover
  • Increase productivity and efficiency
  • Businesses should be looking at their suppliers, premises, production processes and finance facilities as the ones that were a good fit a year or two ago may no longer be the best solution.

Introducing initiatives such as remote working may enable a business to downsize and save overhead costs, at the same time as boosting employee efficiency.

RETAINING VALUABLE EMPLOYEES
Appreciation goes a long way. A failure to demonstrate the worth of employees and the work they do could lead to a business losing some of its most valuable assets. In fact, recent research found that half of employees would leave a position if they didn’t feel appreciated.

It’s also important to remember that salary is a big factor in employees feeling valued. As a business and its profits grow, so should the salary of its employees. These are the people who are driving the business forward and its success or failure relies heavily on how they perform. While paying employees more may cost a business in the short-term, the impact of rewarding them will help a business make more money in the long run.

SECURING FINANCE
Although business lending is now far more accessible than in previous years, accessing finance is still a concern. Many SMEs are turned away by their high street bank, but it’s important to remember that this isn’t the only option. Alternative lenders are there to help and come without the typical “tick box” mentality, meaning they can provide flexible and customised funding solutions. Whether a business is looking for a short-term business loan or more flexible credit with a longer term, there’s a broad range of funding options available.

INCREASING REVENUE
It’s common knowledge that every business struggles to drive, maintain and sustain growth. Last year alone, nearly six in 10 (59pc) SMEs found increasing revenue problematic.

While it’s impossible for businesses to control all the market forces they’re up against, there are a number of things to do that can help increase revenue. For example, if a business is operating within a market that is too small to generate the desired profit, offering additional products or services to increase people’s interest in the business might be something to consider.

Businesses might also want to consider adjusting their pricing strategy, especially if they are facing fierce market competition. Price is often the most important factor in any purchase for consumers and it is a difficult balance to strike. While dropping prices too much can harm a brand, raising them by a noticeable amount could also cause a negative reaction and encourage customers to look at competitors instead. The best approach to changing your prices is by doing it gradually as slight price adjustments are predominantly overlooked by consumers.

EMBRACING TECHNOLOGY
While most businesses have welcomed technological advancements of the past few decades, there are others who have buried their heads in the sand. Technology plays a key role in business and there are now software and apps available to make things easier and simpler for business owners and to alleviate some of the challenges they may regularly face. Some of these include accounting software packages, marketing tools to help distribute monthly newsletters and project management tools.

SOCIAL MEDIA
A mistake many businesses make is thinking that they have an online presence just because they have a website. There is so much more to be done beyond this and while a website was an essential a decade ago for any business serious about being successful, social media has proven to be a powerful tool in helping to maximise brand exposure.

Having an online presence means that businesses can engage with a far larger audience, which could increase profits if they’re able to capture the attention of the demographic they want to buy their products and services. Brand awareness should be a priority for all businesses and the best way to achieve this is by being present, informative and consistent.

All self-starters and entrepreneurs will undoubtedly agree that starting a business is hard and while the SME landscape is clearly a competitive one, with all this in mind, businesses should rest assured that there is help at hand.

Full article with thanks to https://www.mckinsey.com/featured-insights/leadership/changing-change-management#

How COVID-19 Is Accelerating Digital Transformation in the Workplace

How COVID-19 Is Accelerating Digital Transformation in the Workplace

Full article with thanks to https://blog.smarp.com/how-covid-19-is-accelerating-digital-transformation-in-the-workplace#A-Wake-Up-Call-for-Business-Leaders

The COVID-19 pandemic is disrupting the business world and companies have no choice but to review their strategies to overcome the crisis. 

he COVID-19 pandemic is disrupting the business world and companies have no choice but to review their strategies to overcome the crisis. 

The global COVID-19 lockdown has unprecedented impacts on our personal and professional lives. This chaotic situation is forcing companies across the globe to rethink their business strategies.

Most business leaders have decided to launch digital transformation initiatives to keep businesses running as smoothly as possible during the COVID-19 outbreak and to better prepare for the recovery phase.

However, driving change during these chaotic and unprecedented times is challenging for both business leaders and employees. 

A Wake-Up Call for Business Leaders to Embrace Digital Transformation 

You’ve probably seen the discussions going on on social media around the effect of the current pandemic on digital transformation.

One of the most popular circling around these days is this one:

Who led the digital transformation of your company?
A) CEO
B) CTO
C) COVID-19

This is not a joke but the new reality of digital transformation. This current situation is significantly influencing the way companies run their business and manage their people. Business continuity today seems impossible without the right technology in place. 

Even before this pandemic, 70% of companies had a digital transformation in place or were working on one. But COVID-19 is forcing companies to speed up and implement new digital transformation initiatives.

In such a rapidly evolving situation, it’s almost impossible to balance what’s best for your company, protect your employees, and still deliver a great experience to customers without the right strategy and tools.

Additionally, employers need to understand that it’s unlikely that things will get back to normal after the pandemic. Instead, we’re seeing the forced acceleration of previously slow-moving DX trends that are likely to shape the future.

Let’s now take a look into the reasons why companies are accelerating their digital transformation efforts during COVID-19. 

5 Reasons Why Businesses Are Accelerating their Digital Transformation Efforts Now

The benefits of having the right digital tools in place during a crisis such as COVID-19 are obvious and significant.

As the way we do business has drastically changed in the last few months, only the companies that adapt to these changes can succeed

Indeed, by embracing digital transformation, businesses can maintain their ability to ensure essential functions during and after the pandemic and here’s how:

1. Enhancing employee collaboration during the COVID-19 outbreak

Remote work has come, and it’s here to stay. Experts and business leaders agree that companies across the globe will keep supporting remote work even after this crisis is done.

This situation where employees are physically separated has completely changed the way our employees collaborate and work together

The key business impact trigger will be a result of the quarantines, travel restrictions, school closures and sick family members. However, many organizations have already realized that technology can help organizations better adapt to the current changing situation.

As companies are launching initiatives to enhance cross-functional collaboration during the outbreak, employees are no longer expected to work cut off from one another.

Indeed, remote teams are required to be more connected, to improve their communications, and to better align their strategies. Great collaboration results in improved efficiency and increased productivity, but only if you have the right tools in the first place.

This is why we are now witnessing many digital transformation projects and the implementation of new technologies as solutions to enable better team collaboration during the outbreak.

2. Ensuring the right flow of information

In times of crisis such as the coronavirus pandemic, your internal communication should be clear, transparent, and easy to understand. What’s more, it is extremely important to be able to reach the right employees at the right time with the right message. 

This is the time when employers, leaders and internal communicators should drastically improve their communication efforts

However, some companies have a complex internal communication ecosystem, and it often makes employees feel overwhelmed with too much or irrelevant information, confused and, often times, this results in important information being ignored by employees

In these difficult times, it is extremely important to improve communication and collaboration across the organization. Businesses can’t afford to have employees missing out on important information such as urgent company updates or the latest changes made to projects they’re working on.

That’s why improving their internal communication is the most important digital transformation project for most of them.

With the implementation of the right employee communication technology, leaders and IC professionals are able to ensure the right flow of information in the workplace. They are able to better filter their audiences, personalize messages, send push notifications to employees’ mobile phones, and ensure that all the information is available and findable in a matter of seconds. 

3. Maintaining employee productivity during the crisis

Most companies have made arrangements to accommodate remote working  already at the beginning of the coronavirus outbreak. Indeed, their priority was to protect their employees and help reduce the spread of the virus. 

Businesses are now looking for solutions to maintain employees’ productivity while working from home during the pandemic.

Many employers have realized the benefits of implementing new solutions that enable employees to stay productive and to successfully do their jobs and the ones that haven’t digitalized their internal processes earlier are now actively rethinking their strategies. They are in search for marketing, sales, development, internal communications, human resources and other tech solutions to ensure continuous business performance even during these unexpected circumstances. 

These digital technologies can help improve efficiency and productivity, and make organizations more resilient to operational disruptions.

Organizations that resist embracing digital products or channels risk being disrupted during and after the crisis.

4. Enabling leaders for success

During these times, it is crucial that business leaders and managers demonstrate good leadership skills in order to increase business resilience and prepare for rebound and future growth. 

However, many leaders are facing challenges that they have never experienced before. This is why digital transformation and technology departments are now working closely with leaders to help them streamline and continue effective workplace management

Here is what we can learn from a research by Perceptyx:

1. “Feeling supported by managers in making decisions about health and well-being” is a top differentiator for employees. Those who feel supported by their managers also feel that leadership is effectively leading their organization through the pandemic.

2. The difference is dramatic — in their data, 42% of employees strongly agree that leadership is effectively leading their organization through the crisis. But among employees who feel supported by their manager in making decisions about health and well-being, almost twice as many — 71% — believe that senior leadership is effectively leading.

The same research shows that communication shapes employee perceptions about the priority the organizations place on their safety.

Moreover, when employees are extremely satisfied with communications about the company’s response to coronavirus, 96% of them believe that their employer really puts their safety first. When communication is poor, only 30% of them believe so. 

It goes without saying that managers and leaders should have open discussions with employees regarding their concerns and anxieties, and express support for employees’ choices.

5. Planning for business continuity

Business leaders have to plan for post-pandemic recovery already now. They need to implement the right strategy and tools now to limit damages on their business. 

“The value of digital channels, products and operations is immediately obvious to companies everywhere right now,” says Sandy Shen, Senior Director Analyst at Gartner. 

“This is a wake-up call for organizations that have placed too much focus on daily operational needs at the expense of investing in digital business and long-term resilience. Businesses that can shift technology capacity and investments to digital platforms will mitigate the impact of the outbreak and keep their companies running smoothly now, and over the long term”, adds Sandy Shen.

As highlighted by Gartner in one of their latest research reports, Chief Information Officers play an important role in ensuring business continuity by planning and implementing the right digital transformation initiatives.

When traditional channels and operations are impacted by the outbreak, the value of digital channels, products and operations become immediately obvious and CIOs can present a more convincing business case”, say Sandy Shen, Owen Chen, Julian Sun, Lily Mok, Arnold Gao and Deacon D.K Wan Gartner Analysts.

Digital Transformation Is a Complex Process

A lot of research shows that the percentage of successfully implemented digital transformation and change management efforts is pretty low. 

But why? The thing is, digital transformation is a complex process.

DX includes several steps — from planning to preparation, implementation, training, and evaluation of the success of the strategy — and it involves several teams that need to align and coordinate their efforts. 

Read on: Change Management: Definition, Best Practices & Examples

In some companies, change is driven by the IT leadership team while in other businesses, it’s the IT, IC, HR, finance, operations, and change management teams that are in charge. 

No matter how many teams and functions are involved in the process, driving change — whether it’s the implementation of a new software or new ways of working —  is going to take you time.

According to Ashley Friedlein, founder of Econsultancy: 


“Digital transformation does not happen quickly. Some companies seem to expect it to happen over the course of a year. In my experience, particularly for larger organisations, closer to five years is more realistic. Even then, the task is never over”.


A survey by PMI highlights the main reasons why digital transformation projects fail and those include: 

  • Poor project management skills 
  • Poor communication in the workplace 
  •  A lack of clear objectives
  • Unfamiliar scope
  • Inability to cope with new technology, mainly due to a lack of preparation and training. 

It goes without saying that employers need to better understand how to communicate with their employees during the processes, how to close the skill gaps and how to better manage change in the workplace

Even though there is no secret recipe that fits all, there are some best practices without which DX projects are unlikely to be successfully implemented. 

DX During COVID-19: Case Study

It is essential that enterprise companies create the necessary operational resilience to survive this new reality. The COVID-19 pandemic has showcased the value of IT and digital transformation and organisations should use this time to accelerate the transition.

TechRadar recently presented the results of a research done by IDC about the impact of the pandemic on digital transformation.

They’ve conducted a survey in China about the opinions of 32 CXOs in 10 industries regarding the value of IT and digital transformation in the fight against the outbreak, the impact of the new coronavirus on corporate business and new digital transformation measures after the pandemic. 

They had some interesting findings. The top three negative impacts of COVID-19 in enterprises were highlighted as a significant decline in sales performance, inability to resume production and an inability to visit customers. 

However, the top three positive impacts cited were:

  • Improved corporate ability of long-distance collaborative work,
  • Gaining ability of online business development and lastly,
  • Wide recognition of the value of digital transformation and information technology among all employees. 

How to Communicate Change During the COVID-19 Outbreak

The pandemic is drastically changing the business world.

Companies have made remote work the new norm, they are rethinking their organizational structures, the unemployment rates are increasing at a skyrocketing rate due to the unprecedented wave of layoffs, and employees need to maintain their productivity levels while they’re coping with completely new ways of working.

Read on: The Ultimate COVID-19 Crisis Management Checklist for Employers

In these chaotic times, companies have no choice but to change the way they’re operating and they have to do it right now because let’s be honest — only businesses that are agile enough to adjust to the current situation will survive the crisis. 

When done right, a digital transformation strategy usually includes the following 7 steps as explained by Eastern Peak

  1. Assess the current state of digital across your organization
  2. Define your goals 
  3. Outline your digital transformation roadmap
  4. Choose the necessary tools and technologies
  5. Establish clear leadership
  6. Set a clear and realistic budget for your DX strategy
  7. Empower, educate and train your staff. 

We would even add one more step to the list above: step 8. Assess your digital transformation strategy and adjust it if needed.

The thing is, companies have to shorten or even skip some steps that are usually required when it comes to digital transformation.

This is why implementing change during COVID-19 is extremely challenging. Steps are skipped, and employees have to adapt to new ways of working and new technologies in no time. 

Alignment across the organization plays a critical role here. Making sure that everyone is on board and understand the changes you’re implementing, why these changes are implemented very fast, why they are needed, how they’re going to impact employees’ work and how they’re going to help the business overcome the crisis is extremely important.

So, how do you get there? 

The key here is your internal communication.

Proper employee communication is absolutely necessary to align your entire workplace, help employees understand the benefits behind digital transformation for both them personally and for the business overall, and drive successful digital transformation in your organization. 

Broadly speaking, you need to: 

  • Establish a pandemic communications program.
  • Have pre-approved message templates and scripts to ensure unified and aligned communication. 
  • Segment your audiences in order to deliver relevant and personalized messages. You should be able to target employees by their location, position, job function and other. 
  • Assign a spokesperson appropriate for the situation.
  • Communicate regularly, clearly and openly. 
  • Establish an internal pandemic channel with all the important resources in one place. 
  • Leverage emergency mass notification services.
  • Make it a two-way communication to enable your employees to speak up and to show them that you are listening to their concerns and questions.
  • Measure the impact of your internal communication efforts. 

Final Thoughts

In these times of crisis, companies have no choice but to review their short-term and long-term strategies. Remote work has become the new norm, and both team managers and employees have to cope with new ways of working.

During less tumultuous times, driving change takes time and effort. Remember, the implementation of a digital transformation strategy can take up to five years as explained earlier!

The key here is to communicate openly with your entire workforce. It’s the only way to ensure that 1. everyone is on board with the new strategy you’re implementing and 2. each employees knows how they can help the business survive the COVID-19 crisis.  

Full article with thanks to https://blog.smarp.com/how-covid-19-is-accelerating-digital-transformation-in-the-workplace#A-Wake-Up-Call-for-Business-Leaders

PEST (PESTLE/STEEPLE) Market Analysis Tool

PEST (PESTLE/STEEPLE) Market Analysis Tool

Full article with thanks to https://www.businessballs.com/strategy-innovation/pest-market-analysis-tool/

PEST market analysis tool

PEST analysis method and examples, with free PEST template

The PEST analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business. A PEST analysis is a business measurement tool. PEST is an acronym for Political, Economic, Social and Technological factors, which are used to assess the market for a business or organizational unit. The PEST analysis headings are a framework for reviewing a situation, and can also, like SWOT analysis , and Porter’s Five Forces model , be used to review a strategy or position, direction of a company, a marketing proposition, or idea. Completing a PEST analysis is very simple, and is a good subject for workshop sessions . PEST analysis also works well in brainstorming meetings. Use PEST analysis for business and strategic planning, marketing planning, business and product development and research reports. You can also use PEST analysis exercises for team building games . PEST analysis is similar to SWOT analysis – it’s simple, quick, and uses four key perspectives. As PEST factors are essentially external, completing a PEST analysis is helpful prior to completing a SWOT analysis (a SWOT analysis – Strengths, Weaknesses, Opportunities, Threats – is based broadly on half internal and half external factors).

PEST analysis template tool

PEST analysis template – doc format (thanks N Silva)

PEST analysis template – pdf format

PEST variations

The PEST model, like most very good simple concepts, has prompted several variations on the theme. For example, the PEST acronym is sometimes shown as STEP, which obviously represents the same factors. Stick with PEST – nearly everyone else does.

More confusingly (and some would say unnecessarily) PEST is also extended to seven or even more factors, by adding Ecological (or Environmental), Legislative (or Legal), and Industry Analysis, which produces the PESTELI model. Other variations on the theme include STEEP and PESTLE, which allow for a dedicated Ethical section. STEEPLED is another interpretation which includes pretty well everything except the kitchen sink: Political, Economic, Social and Technological – plus Ecological or Environmental, Ethical, Demographic and Legal.

It’s a matter of personal choice, but for most situations the original PEST analysis model arguably covers all of the ‘additional’ factors within the original four main sections. For example Ecological or Environmental factors can be positioned under any or all of the four main PEST headings, depending on their effect. Legislative factors would normally be covered under the Political heading since they will generally be politically motivated. Demographics usually are an aspect of the larger Social issue. Industry Analysis is effectively covered under the Economic heading. Ethical considerations would typically be included in the Social and/or Political areas, depending on the perspective and the effect. Thus we can often see these ‘additional’ factors as ‘sub-items’ or perspectives within the four main sections.

Keeping to four fundamental perspectives also imposes a discipline of considering strategic context and effect. Many potential ‘additional’ factors (ethical, legislative, environmental for example) will commonly be contributory causes which act on one or some of the main four headings, rather than be big strategic factors in their own right.

The shape and simplicity of a four-part model is also somehow more strategically appealing and easier to manipulate and convey.

Ultimately you must use what version works best for you, and importantly for others who need to understand you, which is another good reason perhaps for sticking with PEST, because everyone knows it, and you’ll not need to spend half the presentation explaining the meaning of STEEPLED or some other quirky interpretation.

If you have come across any other weird and wonderful extended interpretations of PEST I’d love to see them.

On which point (thanks D Taylor) I am informed of one such variation, which featured in some 2010 coursework: PEST LIED. The PEST element represents the usual factors – Political, Economic, Social and Technological. The LIED add-on stands for Legal, International, Environment and Demography. Suggestions of origin gratefully received, and any other variations of the PEST model.

PEST or SWOT

PEST analysis most commonly measures a market ; a SWOT analysis measures a business unit, a proposition or idea .

Generally speaking a SWOT analysis measures a business unit or proposition, whereas a PEST analysis measures the market potential and situation, particularly indicating growth or decline, and thereby market attractiveness, business potential, and suitability of access – market potential and ‘fit’ in other words. PEST analysis uses four perspectives, which give a logical structure, in this case organized by the PEST format, that helps understanding, presentation, discussion and decision-making. The four dimensions are an extension of a basic two heading list of pro’s and con’s ( free pro’s and con’s template here ).

PEST analysis can be used for marketing and business development assessment and decision-making, and the PEST template encourages proactive thinking, rather than relying on habitual or instinctive reactions.

Here the PEST analysis template is presented as a grid, comprising four sections, one for each of the PEST headings: Political, Economic, Social and Technological.

As previously explained, extended variations of PEST (eg., PESTELI and STEEP, etc) include other factors, such as Environmental, Ethical, Legal or Legislative, etc., however in most situations you will find that these ‘additional’ factors are actually contributory causes or detailed perspectives which then manifest or take effect in the form or one or several of the original four main PEST factors. For example, Ethical and Environmental factors will always tend to produce an effect in at least one of the main four headings (Political, Economic, Social, Technological), but it will tend not to work the other way. Hence why the basic PEST model is often the most powerful – it puts more pressure on strategic appreciation and analysis than a longer list of headings. When you next see a PESTELI or a STEEPLED analysis ask yourself (or the author): “Okay, I understand that customers tend to be more ethically minded now, but what does that mean in terms of the basic four PEST factors – what’s the effect going to be?…” or: “Okay we know that carbon emissions is an issue, but tell me where in the main four PEST factors will it impact..?

You will gather I am not a fan nor a particular advocate of extending the PEST model. It works great as it is – why make it more complicated and less specific? If you are worried about missing or forgetting a crucial point of ethics or legislation (or anything else) keep a reference list of these headings, and only build them into the model if you are sure that doing so will make it work better as a strategic tool.

The free PEST template below includes sample questions or prompts, whose answers are can be inserted into the relevant section of the PEST grid. The questions are examples of discussion points, and obviously can be altered depending on the subject of the PEST analysis, and how you want to use it. Make up your own PEST questions and prompts to suit the issue being analysed and the situation (ie., the people doing the work and the expectations of them). Like SWOT analysis, it is important to clearly identify the subject of a PEST analysis, because a PEST analysis is four-way perspective in relation to a particular business unit or proposition – if you blur the focus you will produce a blurred picture – so be clear about the market that you use PEST to analyse.

A market is defined by what is addressing it, be it a product, company, brand, business unit, proposition, idea, etc, so be clear about how you define the market being analysed, particularly if you use PEST analysis in workshops, team exercises or as a delegated task. The PEST subject should be a clear definition of the market being addressed, which might be from any of the following standpoints:

  • a company looking at its market
  • a product looking at its market
  • a brand in relation to its market
  • a local business unit
  • a strategic option, such as entering a new market or launching a new product
  • a potential acquisition
  • a potential partnership
  • an investment opportunity

Be sure to describe the subject for the PEST analysis clearly so that people contributing to the analysis, and those seeing the finished PEST analysis, properly understand the purpose of the PEST assessment and implications.

PEST analysis template

Other than the four main headings, the questions and issues in the template below are examples and not exhaustive – add your own and amend these prompts to suit your situation, the experience and skill level of whoever is completing the analysis, and what you aim to produce from the analysis.

Ensure you consider the additional PESTELI/STEEPLED headings, and any others you feel are relevant, but avoid building these into the final analysis model unless you gain some strategic planning or presentation benefit from doing so.

If helpful refer to a list of these other ‘headings’, for example: Ecological/ Environmental, Legislative/or Legal, Demographic, Ethical, Industry Analysis. Apply some strategic consideration and pressure to the points you list under these ‘additional’ headings. Ask yourself what the effects of each will be on the ‘big four’ (Political, Economic, Social, Technological). Often your answers will persuade you that the original four-part PEST model is best and that using a more complex series of headings makes it more difficult to complete the analysis fully and strategically.

The analysis can be converted into a more scientific measurement by scoring the items in each of the sections. There is are established good or bad reference points – these are for you to decide. Scoring is particularly beneficial if more than one market is being analysed, for the purpose of comparing which market or opportunity holds most potential and/or obstacles. This is useful when considering business development and investment options, ie, whether to develop market A or B; whether to concentrate on local distribution or export; whether to acquire company X or company Y, etc. If helpful when comparing more than one different market analysis, scoring can also be weighted according to the more or less significant factors.

(insert subject for PEST analysis – market, business, proposition, etc.)

politicalecological/environmental issuescurrent legislation home marketfuture legislationinternational legislationregulatory bodies and processesgovernment policiesgovernment term and changetrading policiesfunding, grants and initiativeshome market lobbying/pressure groupsinternational pressure groupswars and conflictseconomichome economy situationhome economy trendsoverseas economies and trendsgeneral taxation issuestaxation specific to product/servicesseasonality/weather issuesmarket and trade cyclesspecific industry factorsmarket routes and distribution trendscustomer/end-user driversinterest and exchange ratesinternational trade/monetary issues
sociallifestyle trendsdemographicsconsumer attitudes and opinionsmedia viewslaw changes affecting social factorsbrand, company, technology imageconsumer buying patternsfashion and role modelsmajor events and influencesbuying access and trendsethnic/religious factorsadvertising and publicityethical issuestechnologicalcompeting technology developmentresearch fundingassociated/dependent technologiesreplacement technology/solutionsmaturity of technologymanufacturing maturity and capacityinformation and communicationsconsumer buying mechanisms/technologytechnology legislationinnovation potentialtechnology access, licencing, patentsintellectual property issuesglobal communications

More on the difference and relationship between PEST and SWOT

PEST is useful before SWOT – not generally vice-versa – PEST definitely helps to identify SWOT factors. There is overlap between PEST and SWOT, in that similar factors would appear in each. That said, PEST and SWOT are certainly two different perspectives:

PEST assesses a market, including competitors, from the standpoint of a particular proposition or a business.

SWOT is an assessment of a business or a proposition, whether your own or a competitor’s.

Strategic planning is not a precise science – no tool is mandatory – it’s a matter of pragmatic choice as to what helps best to identify and explain the issues.

PEST becomes more useful and relevant the larger and more complex the business or proposition, but even for a very small local businesses a PEST analysis can still throw up one or two very significant issues that might otherwise be missed.

The four quadrants in PEST vary in significance depending on the type of business, eg., social factors are more obviously relevant to consumer businesses or a B2B business close to the consumer-end of the supply chain, whereas political factors are more obviously relevant to a global munitions supplier or aerosol propellant manufacturer.

All businesses benefit from a SWOT analysis, and all businesses benefit from completing a SWOT analysis of their main competitors, which interestingly can then provide some feed back into the economic aspects of the PEST analysis.

Full article with thanks to https://www.businessballs.com/strategy-innovation/pest-market-analysis-tool/

Nudge Theory

Nudge Theory

Full article with thanks to https://www.businessballs.com/improving-workplace-performance/nudge-theory/

Nudge theory is a flexible and modern concept for:

  • Understanding of how people think, make decisions, and behave,
  • Helping people improve their thinking and decisions,
  • Managing change of all sorts, and
  • Identifying and modifying existing unhelpful influences on people.

Nudge theory was named and populariozed by the 2008 book, ‘Nudge: Improving Decisions About Health, Wealth, and Happiness‘, written by American academics Richard H Thaler and Cass R Sunstein. The book is based strongly on the Nobel prize-winning work of the Israeli-American psychologists Daniel Kahneman and Amos Tversky.

This article:

Background – Thaler and Sunstein

‘Nudge’ theory was proposed originally in US ‘behavioral economics’, but it can be adapted and applied much more widely for enabling and encouraging change in people, groups, or yourself.

Nudge theory can also be used to explore, understand, and explain existing influences on how people behave, especially influences which are unhelpful, with a view to removing or altering them. There are lots of these unhelpful ‘nudges’ everywhere – notably in advertising and government; some accidental, many very deliberate.

Note: This article is not a reproduction or extraction of Thaler and Sunstein’s work – it is a summary, interpretation and extension of ‘Nudge’ theory, including the main terminology, expanded by supplementary methods, with helpful explanations, examples and connections, to related ideas and concepts of motivation and management.

Accordingly, if you seek to understand Thaler and Sunstein’s work first-hand, or to research and extract from the original Thaler-Sunstein source material, then you should obtain their book ‘Nudge’, and also explore Kahneman and Tversky’s earlier work. If you extract/quote from this article please clarify in the citation that the extract is taken from this article/webpage, (which is, therefore, a ‘secondary source’ in terms of the theories of Thaler, Sunstein, Kahneman and Tversky). Like any review this article is open to debate as to how precisely it interprets and represents the original (Thaler-Sunstein/Kahneman-Tversky) work, and this is especially so because of the adaptive and developmental nature of this article.

Introduction

Nudge theory is credited mainly to American academics Richard H Thaler and Cass R Sunstein. They built much of their theory on the ‘heuristics‘ work of Israeli-American psychologists Daniel Kahneman and Amos Tversky, which first emerged in the 1970s in psychological journals. The name and concept of ‘Nudge’ or ‘Nudge theory’ were popularized by the 2008 book, ‘Nudge: Improving Decisions About Health, Wealth, and Happiness‘, which became a major international best-seller. Kahneman’s 2012 book, also a best-seller, ‘Thinking, Fast and Slow‘ contains much of the fundamental Khaneman-Tversky theory which underpins the Thaler-Sunstein ‘Nudge’ concept. Amos Tversky is somewhat neglected in citations for Nudge theory because he died in 1996.

Nudge theory seeks to improve understanding and management of the ‘heuristic’ influences on human behaviour (US spelling: behavior), which is central to ‘changing’ people.

Central to behaviour is decision-making from the choices available.

Nudge theory is mainly concerned with the design of choices, which influences the decisions we make. Nudge theory proposes that the designing of choices should be based on how people actually think and decide (instinctively and rather irrationally), rather than how leaders and authorities traditionally (and typically incorrectly) believe people think and decide (logically and rationally).

In this respect, among others, Nudge theory is a radically different and more sophisticated approach to achieving change in people than traditional methods of direct instruction, enforcement, punishment, etc.

The use of Nudge theory is based on indirect encouragement and enablement. It avoids direct instruction or enforcement.

Here are some simple examples to illustrate the difference between traditional enforced change and ‘Nudge’ techniques:

Enforced ChangeNudge Techniques
Instructing a small child to tidy his/her room.Playing a ‘room-tidying’ game with the child.
Erecting signs saying ‘no littering’ and warning of fines.Improving the availability and visibility of litter bins.
Joining a gym.Using the stairs.
Counting calories.Smaller plate.
Weekly food shop budgeting.Use a basket instead of a trolley.

Nudge theory accepts that people have certain attitudes, knowledge, capabilities, etc., and allows for these factors (whereas autocratic methods ignore them). Nudge theory is based on understanding and allowing for the reality of situations and human tendencies (unlike traditional forcible instruction, which often ignores or discounts the reality of situations and people).

Fundamentally (and properly, according to its origins) Nudge theory operates by designing choices for people which encourage positive helpful decisions; for the people choosing, and ideally for the wider interests of society and environment, etc.

Additionally, Nudge theory offers a wonderful methodology for identifying, analysing and re-shaping existing choices and influences that people are given by governments, corporations, and other authorities. Given that so many of these choices and influences are extremely unhelpful for people, this is a major area of opportunity for the development and use of Nudge theory, even if it were not envisaged as such by its creators.

Nudge theory is very relevant to leadershipmotivation,  change management, and many aspects of personal/self-development.

Nudge theory also draws from and connects to many other models of motivation and management, for example:

Nudge theory seeks to minimize resistance and confrontation, which commonly arise from more forceful ‘directing’ and autocratic methods of ‘changing’ people/behaviour.

Note the differences:

Enforced ChangeNudge Techniques
‘Forcing’ methods drastic, direct, and require conscious determined effort (by the person/people being ‘changed’).Nudge methods are easier for people to imagine doing, and less threatening and disruptive to actually do.
‘Forcing’ methods are confrontational and liable to provoke resistance.Nudge methods are indirect, tactical, and less confrontational – nudge methods may be cooperative and pleasurable.

Significantly, and easily overlooked, Nudge theory can also be used to identify, explain, and modify existing heuristic effects on people and society groupings – especially where these effects are unhelpful or damaging to people/society.

Overview and Relevance

Nudge theory initially emerged in the early 2000s USA as a radical approach to influencing people’s interaction with financial systems, notably pensions, savings and healthcare – so as to improve quality of later life, (not to enrich financial corporations).

This last point is significant – Nudge was initially developed as an ethical concept, by academics, for the improvement of society, not as a mechanism for commercial exploitation, or government manipulation.

From these beginnings, the Nudge concept now offers vastly bigger implications and applications.

Nudge principles and techniques are now increasingly significant in communications, marketing, and the motivation of groups: in business, marketing, selling, organizational leadership, politics, economics, education, welfare; really in any situation where someone or a body of some sorts seeks to influence a person or a group of people, for example a customer group, or an entire society – or simply yourself, as an aid to improving personal health, wealth and well-being.

Nudge theory for example can help the parenting of a child; or at the other extreme could help a world government manage a global population.

Nudge has dramatically affected thinking and methods for motivating and changing people.

Nudge theory advocates change in groups through indirect methods, rather than by direct enforcement or instruction.

Central to the Nudge concept is that people can be helped to both think appropriately and make better decisions by being offered choices that have been designed to enable these outcomes.

Here is a simple table showing varying characterizations of, and differences between, traditional ‘directed’ change and Nudge-oriented interventions, in terms of keywords and tactical notions.

‘Nudge’ At A Glance
traditional ‘directed’ or ‘enforced’ interventionmodern ‘nudge’ intervention
Direct, obviousIndirect, subtle
Legislation, rules, lawsEnablement, facilitation
JudgmentalNon-judgmental
Enforcement, policingHelp, assistance
Spin, slant, emphasisTranslation, interpretation
Sell, negotiate, push, pullOffer, wait, give space
DeadlinesOpen-ended
BiasNeutrality
Controlled informationEnable understanding
Instruction, directionEducate, inform
Persuasion, cajolementExample, evidence
EncouragementReferencing peer activity
Justify, argueReferencing social norms
Non-compliance penaltiesSelf-discovery, heuristics
Enforced choices, imposedFree choice
Dichotomous optionsUnlimited options
Imposed actionOption of zero action
PressureNo pressure
Paternalistic, parent-to-childAdult, equal
Talk down toDiscuss with
Selective truthOpenness, nothing withheld

The roots of Nudge theory can be traced back to a wide variety of psychological models and philosophical concepts, especially the theories on thinking and decision-making of Kahneman, Tversky and others.

From a philosophical and motivational standpoint, Abraham Maslow understood and articulated the ethos and principles of Nudge theory in the 1950s and 60s, a half-century before it was named. Maslow’s famous Hierarchy of Needs model represents the most fundamental ‘heuristic’ tendencies of human thinking and decision-making.  Erik Erikson’s life change model is of similar significance, although neither Maslow or Erikson used the ‘heuristic’ in describing their concepts.

Nudge theory also correlates strongly with, and/or draws from, other positive theories entailing the improvement of people’s situations, such as:

Perhaps the most compelling early evidence that Nudge theory has become a very significant concept for managing change, people, and societies, is that governments – notably the US and UK – very quickly developed specialized ‘Nudge departments’ to use Nudge methods in helping to shift societal behaviours on a very big scale. The effectiveness of the methods are such that the UK government ‘Nudge Unit’ (officially called the ‘Behavioural Insights Team’) was privatised in 2013 (very little that has enormous potential is retained by the UK state in modern times..), with the official announcement: “Since the ‘Behavioural Insights Team’ was created in 2010, there has been considerable media interest in the team’s work. Often referring to the team as ‘the Nudge Unit’ (after the work of Professor Richard Thaler, co-author of Nudge and academic advisor to the team), much of the media interest has focused on the influence this team has had within Whitehall and overseas; and the methods and insights that the team has applied to public policy…” This quote was taken from the UK government ‘Behavioural Insights Team’ website, Mar 2014. It remains to be seen whether this particular ‘Nudge Unit’ will be able to uphold the  philosophy advocated by Nudge’s creators. Probably not, as the privatised company is selling its services to the corporate world and other governments, and will inevitably seek to maximise profits for its investors.

On which point, it’s important to note that anyone can use Nudge theory (see ‘Anyone can use Nudge theory’). It’s simple and easy if you read a little about it to understand how it works.

Definitions

The dictionary definition (OED – Oxford English Dictionary) of the word ‘nudge’ in its traditional sense is helpful in appreciating Thaler and Sunstein’s approach to the ‘Nudge’ concept:

Nudge [verb] –

  • “Prod (someone) gently with one’s elbow in order to attract attention.”
  • “Touch or push (something) gently or gradually.”
  • “Coax or gently encourage (someone) to do something.”

Nudge [noun] –

  • “A light touch or push.”

(Oxford English Dictionary)

Incidentally the origin of the word nudge is uncertain. It compares with Norwegian ‘nugga’ and ‘nyggja’, to push or rub, which suggests the word may have Norse or Viking origins in English.

Thaler and Sunstein don’t actually give a specific definition of ‘Nudge theory’ in their book, although a definition of a ‘nudge’ is given in the book and quoted by Wikipedia (2014):

“…A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not…” (This is the penultimate paragraph of the introductory chapter in Thaler and Sunstein’s ‘Nudge’ book, and refers to the book’s opening scenario of designing choices in a cafeteria queue. It’s the nearest thing to a definition of ‘Nudge’ by the authors that appears in the book.)

Here’s Wikipedia’s own definition of Nudge theory:

“Nudge theory (or Nudge) is a concept in behavioral science, political theory and economics, which argues that positive reinforcement and indirect suggestions (to try to achieve non-forced compliance) can influence the motives, incentives and decision making of groups and individuals alike, at least as effectively – if not more effectively – than direct instruction, legislation, or enforcement…” (Wikipedia, 2013-2014)

Here are further definitions (Businessballs 2014) which reflect an expanded view (of the potentially wider use) of Nudge theory. The expanded view of Nudge theory’s potential use (offered by this article/guide) is that:

  • Nudge theory can be applied far more widely than to ‘behavioral economics’. Nudge theory can be applied to virtually any type of human relationships where the alteration of people’s thinking and decision-making may be beneficial for those people, and to wider society and the planet as a whole.
  • Nudge theory also offers a basis for identifying and assessing many and various existing influences on people’s thinking and decision-making – either accidental or intentionally designed – especially influences which produce unhelpful thinking and decisions for the people concerned and wider society and the planet.

These wider applications invite correspondingly wider definitions of Nudge theory:

“Nudge theory, named and described in Thaler and Sunstein’s 2008 book ‘Nudge – Improving decisions about health, wealth and happiness‘, is an approach to understanding and changing people’s behavior/behaviour, by analysing, improving, designing, and offering free choices for people, so that their decisions are more likely to produce helpful outcomes for those people and society generally, and this particularly should be compared with outcomes typically arising from traditional enforced or directed change, and compared with carelessly or cynically designed indirect influences. Nudge theory was initially envisaged to apply chiefly to areas of economics and health, especially those managed by the state and local/ corporate authorities, but the ‘Nudge’ concept is actually much more widely applicable, to most human decision-making, and the ways that human-decision-making can be assisted. Note that Nudge theory can also be used to identify and modify or remove existing unhelpful ‘nudges’.” (A Chapman, Businessballs.com 2014)

And a shorter one:

“Nudge theory enables the analysis, improvement and design or re-design of influences on people’s thinking and decision-making, according to how people actually make decisions (instinctively), rather than according to how leaders and policy-makers tend to think that people make decisions (logically and obediently, like robots), extending to the appropriate use of these ‘thinking systems’ in given situations.” (A Chapman, Businessballs.com 2014)

I’m always open to better suggestions of definitions, and given that Nudge theory is quite new and still evolving I am sure some will emerge.

History and Origins

Nudge theory was named, defined (as ‘Nudge theory’) and popularized in the 2008 book, ‘Nudge: Improving Decisions About Health, Wealth, and Happiness‘, written by American academics Richard H Thaler and Cass R Sunstein.

The development of ‘Nudge’ theory – notably its principles – are attributed to the book’s authors properly with Daniel Kahneman, a significant collaborator of Thaler, a globally revered Nobel prizewinning psychologist with a specialism in ‘heuristics’ and thinking, and Kahneman’s own long-time collaborator, Israeli-American psychologist Amos Tversky. Tversky died in 1996, sadly before the Nobel economics prize was awarded in 2002 for his work with Kahneman, and this seems to have has reduced popular recognition of Tversky’s contribution to Nudge theory.

  • Richard H Thaler – born 1945 – US academic economist, author, Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business.
  • Cass Robert Sunstein – born 1954 – US economic law academic with additional interest in behavioral economics, taught for 27 years at the University of Chicago Law School, served in the White House Office of Information and Regulatory Affairs in the Obama administration, latterly Robert Walmsley University Professor and Felix Frankfurter Professor of Law at Harvard Law School.
  • Daniel Kahneman – born 1934 – Israeli-American psychologist; winner of the 2002 Nobel Memorial Prize in Economic Sciences. Specialist in the psychology of judgment and decision-making, behavioural economics and hedonic psychology (concerned with human/societal happiness and wellbeing). Co-developer with Amos Tversky of ‘Prospect theory’. At 2014 Daniel Kahneman is the Eugene Higgins Professor of Psychology Emeritus at Princeton University, and Professor of Psychology Public Affairs Emeritus at Princeton’s Woodrow Wilson School of Public and International Affairs.
  • Amos Nathan Tversky – (1937-1996) – Israeli psychologist and long-time collaborator of Daniel Kahneman in the study of behavioural economics, heuristics, decision-making. Co-developer with Daniel Kahneman of ‘Prospect theory’. Amusingly, as evidence of Tversky’s extraordinary brilliance, it is said that academic colleagues suggested a ‘Tversky Intelligence Test’ whereby “The faster you realized Tversky was smarter than you, the smarter you were.”

In the Nudge’ book, Thaler and Sunstein draw heavily on the earlier heuristic work of Kahneman and Tversky, which first emerged in the 1970s in university papers and psychological journals.

Kahneman’s 2012 book, also a best-seller, ‘Thinking, Fast and Slow‘, contains much of this fundamental theory which underpins the Thaler-Sunstein ‘Nudge’ concept. Significantly Kahneman dedicated this book to the memory of Amos Tversky.

In 1979 Daniel Kahneman produced a significant paper with his long-time collaborator, the Israeli Amos Nathan Tversky (1937-96): ‘Prospect Theory: An Analysis of Decision under Risk’ (Daniel Kahneman and Amos Tversky; Econometrica, 47[2], pp. 263-291, March 1979.)

Kahneman and Tversky’s ‘Prospect theory’, and the paper which described it, became regarded as fundamentally important contributions to the understanding of human thinking and decision-making, notably in behavioral economics. Accordingly, ‘Prospect Theory’, along with other heuristics work of Kahneman and Tversky, formed a substantial part of the development of the Thaler-Sunstein ‘Nudge’ theory.

About Prospect theory..

‘Prospect theory’ is defined (Wikipedia 2014) as follows: “Prospect theory is a behavioral economic theory that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are known. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics. The model is descriptive: it tries to model real-life choices, rather than optimal decisions. The theory was developed by Daniel Kahneman and Amos Tversky in 1979 as a psychologically more accurate description of decision making, comparing to the ‘expected utility theory’. In the original formulation the term ‘prospect’ referred to a lottery. (‘Expected utility theory’ refers to ‘Expected utility hypothesis’ [earlier called ‘moral expectation’], which is an early explanation of ‘instinctive’ decision-making [contrasted with ‘mathematical expectation or logical decision-making], in economics, gambling, strategy/game theory, which can be traced to origins in the 1730s.)

Thaler and Sunstein’s original ‘Nudge theory’ is chiefly concerned with ‘behavioral economics’ and ‘behavioral finance’ (UK-English: behavioural), being the primary interests of the book’s authors.

Kahneman and Tversky’s expertise, by contrast, is psychology with a broader approach to decision-making, so it is interesting (and a lesson in ‘nudging’) that Thaler and Sunstein’s more narrow economics angle succeeded in bringing the ideas of ‘Nudge’ – and heuristics especially – into the mainstream. This is perhaps due to the highly accessible ‘Nudge’ branding and packaging, together with a good marketing approach. People respond well to strongly promoted, accessibly-packaged concepts with catchy names, which equates to a series of ‘nudges’ (arguably one of ‘framing’, and then ‘following the herd’ when the book became a best-seller – during which promotional ‘accessibility’ is a major factor too).

Thaler and Sunstein’s focus (‘behavioral economics’ and ‘behavioral finance’) more specifically entailed the interaction between American citizens and US financial systems involving savings, pensions, debt/credit, and healthcare provision. Examples and references in other areas of behaviour and decision-making were offered in the book, but not to a great extent, and certainly not to the depth that the potential application of Nudge was explored and proposed in the financial and healthcare fields mentioned.

The book ‘Nudge’ is effectively in two quite different halves (although not indexed as such):

1. The first half offers very clear and entertaining explanation, supported by research and survey statistics, etc., of human decision-making, which the authors contend to be generally illogical, weak, harmful, and often self-destructive. Most of this explanation is underpinned by previous studies and scientific theory concerning ‘heuristics’, which in the authors’ context of human decision-making refers to the tendency for humans to think instinctively, emotionally, and subjectively, rather than logically, rationally and objectively. The authors list several types of heuristic tendencies in people, which equate to ‘Nudges’, on the basis that ‘heuristics’ are fundamental drivers of decisions.

2. The second half of the book analyses various theorized and potential effects of heuristics in the US sectors of:

  • consumer/societal finance (pensions, savings/investing, credit/borrowing, and social security);
  • healthcare (prescription drugs, organ donations);
  • the environment (carbon tax); and
  • marriage (the notion that it should be separated from the state)

As such basically the book’s first part offers the Nudge principles (rather like a toolkit), whereas the second part describes and offers ‘Nudge’ solutions to challenges in the US economy/society.

The ‘Nudge’ book is immensely appealing to non-technical audiences who are interested in the technical aspects of individual/group thinking and decision-making. Seen from another angle this is central to change managementmotivation, and managing people, potentially on a vast scale.

The book is particularly interesting (from a general decision-making perspective) in its first half, in which ‘heuristics’, and the ways that people think and decide, are explained in an entertaining and accessible way. (The second half of the book focuses on American socio-economics, which by implication is more specialized and narrowly appealing.)

The authors did not devise or discover all of the various heuristic tendencies they present, but they have very cleverly brought them together into a cohesive, comprehensible and useable set of principles, and this is arguably the most valuable aspect of the book (aside from bringing a helpful concept to a very big audience).

We could conceive/develop the main heuristic ‘Nudge’ principles as a sort of ‘toolkit’ of ideas/methods, by which people’s thinking and decision-making can be altered.

Such a ‘toolkit’, together with Thaler and Sunstein’s explanatory theory and philosophy, reminds all policy-makers, managers and communicators that people rarely think very rationally, and this is the essence of what is now called ‘Nudge theory’.

Nudge theory began to evolve from the moment the book was released.

The flexibility and adaptability of Nudge theory is a big part of its appeal to leaders everywhere.

During the 2010s Nudge theory was still evolving and expanding in terms of its techniques, definition, and (significantly) its applications.

Main Elements, Principles and Terminology

Sub-index:

Here are the original main technical and structural aspects of Nudge theory, defined by Thaler and Sunstein, in their 2008 book, ‘Nudge: Improving Decisions About Health, Wealth, and Happiness’.

Nudge theory has evolved significantly since these founding principles were established, and it will continue to grow considerably in future years.

Here are Thaler and Sunstein’s founding Nudge theory principles and terminology.

Please note again that much of the ‘heuristics’ theory described here is based on the work of Daniel Kahneman and Amos Tversky.

Philosophy

Nudge theory is a clever and potent concept, but like any clever concept it can be abused.

Having an ethical philosophy helps to encourage a responsible approach to using Nudge theory.

A guiding philosophy is certainly required for corporations and governmental authorities, which in modern times routinely exploit people’s heuristic weaknesses.

Thaler and Sunstein use the term ‘libertarian paternalism’ as a name for the underpinning philosophy that they advocate when considering and applying Nudge theory, and particularly the guiding ethos of leaders and managers who employ Nudge theory methods.

As such, ‘libertarian paternalism’ is the authors’ preferred term for the guiding ethos and values of Nudge theory; the ethical and philosophical basis governing its use, and by implication its development.

Thaler and Sunstein advocate the use of Nudge for the good of human society and the world we live in.

They acknowledge that Nudge theory unavoidably entails a degree paternalism, as arguably all leadership does.

But Thaler and Sunstein also emphasize the need for Nudge methods to be guided by a need to protect people’s freedom of choice; to have compassion for people and society, and to care for the environment and future of the planet.

Thaler and Sunstein reinforced their emphasis on free choice as follows:

“…when we use the term ‘libertarian’ to modify the word ‘paternalism’, we simply mean ‘liberty-preserving’…”

This is important, because ‘Nudge’ is a powerful concept. It was not designed to be used for unethical purposes, or to pursue aims which exploit people, or which do harm.

Nudge theory was designed to help society, not to enrich the already powerful and wealthy.

Paternalism refers to any leadership’s responsibility for people and planet.

Libertarian refers to the freedom that people should have in making their own choices, and the need to protect free will.

Thaler and Sunstein said of Nudge theory’s underpinning philosophy, in emphasizing the need to preserve free choice: “…Nudges are not mandates. Putting the fruit at eye-level counts as a nudge. Banning junk food does not…”

Here is an additional philosophical note about respectful relationships, cooperation, amenability.. specifically how followers feel about the leadership/authority that is applying the change ‘nudge’.

This is a further important additional philosophical aspect of Nudge theory. It is implied by and within Nudge theory but not featured in Thaler and Sunstein’s book. It concerns the relationship between leader and group (or other authority and audience), and is the vital consideration that:

In very many relationships between a leader/manager/authority and the people/groups/followers etc., whose change is sought, people are influenced (consciously or unconsciously) by their feelings towards the leader/authority (‘choice architect’) or whatever/whomever is perceived to be the ‘nudger’.

Basically people are more amenable (open and cooperative) to being ‘nudged’ if they have positive feelings towards (whomever/whatever is perceived to be) the ‘nudger’, than if these feelings are negative (fearful, distrustful, distasteful, etc).

Later in this article (see the Likeability/Credibility/Trust influence below) you will see that this ‘unofficial and unspoken’ philosophical aspect of Nudge theory can be a major reason for difficulties in applying Nudge theory successfully – and if we consider how people usually regard politicians, governments, corporations then it is easy to imagine that this factor can be hugely influential on people’s reactions to ‘nudges’.

Given that Nudge theory logically operates better where people have generally positive rather than negative feelings towards the ‘nudging’ authority, it follows that we must consider the factors that generate these feelings and define the relationships between authority and people.

Nudge theory philosophy can therefore be extended beyond ‘libertarian paternalism’, to acknowledge and include anything which determines how people feel about the ‘nudging’ authority. This varies according to situations, and to different degrees entails issues of ethics and integrityempathy and trust,  corporate governancethe psychological contract, and other major factors which form opinions and feelings in people (many of which are inter-connected and explained on this website).

The Choice Architect

‘Choice architect’ is Thaler-Sunstein terminology for someone (or a body) who leads or manages the application of ‘Nudge’ theory.

Thaler and Sunstein used the term ‘choice architect’ in referring to a leader or manager (or other person with such responsibility, and by extension a governing organization or leadership) who uses Nudge techniques in seeking to change a group’s behaviour.

The terminology ‘choice architect’ emphasizes that change is enabled by designing choices for people, which encourage them to make decisions, ideally towards positive helpful outcomes.

Also, the judgment of ‘positive outcomes’ must be made by the people undergoing the change. That is to say, the leadership is not the final judge of whether a change in people is helpful and good – the people themselves must judge this.

The notion of a ‘choice architect’ connects strongly to the philosophy of Nudge theory. The ‘choice architect’ must act with great responsibility and integrity.

Thaler and Sunstein do not specifically refer to the need for dedicated governance of the role, activities, and designs of the ‘choice architect’, but the need for this function to operate ethically and with proper accountability is strongly implied.

On this point, the style and reputation of ‘choice architect’, as perceived by the people being ‘nudged’, can be a major factor influencing the success of applying Nudge theory. In many situations where Nudge theory is used, or can be used, the people being ‘nudged’ will have feelings of one sort or another towards the ‘choice architect’ (or whatever/whomever is perceived as this authority). These feelings influence the people’s openness to cooperation and having a positive reaction to being ‘nudged’. (See the Likeability/Credibility/Trust influence below.)

Accordingly, these perceptions are an important aspect of the ‘choice architect’ role and responsibility, and (as with the philosophical considerations above), so an effective ‘choice architect’ must be defined more broadly than simply ‘the application of a Nudge process’; we must extend this to anything which determines how people feel towards the ‘nudging’ authority.

Again, (as with the philosophical considerations above) this perception of the style and reputation of the ‘choice architect’ potentially includes issues of ethics and integrity, and empathy and trust, etc., and other concepts which form opinions and feelings in people (many inter-connected and explained on this website).

These feelings also extend to prominent personalities/bodies perceived to be associated with the ‘nudging’ authority. (This is why corporations use famous ‘popular’ and relevant endorsees to support their brands.)

People naturally to focus on ‘famous’ (or infamous) people and personalities if they are seen to represent or be associated with the ‘nudging’ authority (for example political and corporate leaders). In such situations the style and reputation of these ‘figurehead’ characters in ‘choice architecture’ can be immensely significant in affecting how people feel towards the ‘nudging’ authority. For example a ‘nudge’ concerning well-being which is endorsed by the Dalai Lama is more likely to be received positively than if the same ‘nudge’ were endorsed by a poorly regarded politician or corporate leader. To an extent however this is dependent on the purpose of the nudge – a ‘nudge’ aimed at encouraging people to increase their physical fitness and exercise would be more positively and credibly received if endorsed by a popular sportsperson than the Dalai Lama. Relevance is therefore an important factor in considering this whole complex somewhat ‘unofficial’ area of Nudge theory (given that Thaler and Sunstein did not specifically cover it).

Thaler and Sunstein imply strongly that part of the ‘choice architect’ role is to consider existing ‘nudges’, as well as to design new nudges. It’s useful to note however that the ‘choice architect’ role could and should extend to a more active responsibility for identifying and modifying or removing unhelpful existing ‘nudges’. Of course where this equates to changing how the global advertising industry operates, or how the internet is designed and regulated, or how the free market is moderated, this is not a small task, but the process must begin with awareness and intent, and then there is at least a target and aim to improve things, until sufficient will at suitable levels of authority exists.

How People Think and Decide

Thaler and Sunstein’s book ‘Nudge’ is about 250 pages long. The first 100 or so pages explain convincingly how people think about choices and make decisions. These c.100 pages are the most significant section of the book in explaining why and how Nudge theory works in a general sense. The second half of the book explores the application of Nudge theory in relation to major challenges of USA behavioural economics (notably savings and investments, credit markets, and social security) and to USA society (notably prescription drugs, organ donation, the environment and carbon tax, and to marriage).

When reading this article please consider that the principles and techniques of Nudge theory can be applied far more widely than the original focus of Thaler and Sunstein’s book.

This review of Thaler and Sunstein’s Nudge theory is essentially concerned with the ‘how and why nudge theory works’. At the root of this is understanding how people assess choices and make decisions.

Thaler and Sunstein crucially assert (and offer research/evidence) that people’s decision-making thinking is generally not very clever or logical, and is commonly unhelpful or even harmful (to the people facing choices and making the decisions).

This is a fundamentally important assertion, supported by explanations of very many different irrational human tendencies, or ‘fallibilities’ as Thaler and Sunstein say; i.e., the reasons for human fallibilities in assessing situations and making decisions.

These human fallibilities are generally associated with natural human behaviour (hence the ‘human’ designation explained below) and are highly significant in either acting as ‘nudges’ or contributing to ‘nudge’ effects.

Thaler and Sunstein refer technically to this area of human fallibility as ‘heuristics’, which in the context of Nudge theory basically means the various internal references and responses which people use in assessing things, developing views, and making decisions.

Here is a brief summary of the fallibilities, or heuristic tendencies, identified by Thaler and Sunstein. Each one is expanded in more detail in the ‘heuristics‘ section below this listing. The numbering Thaler and Sunstein did not number these points. They are numbered here to help understanding.

Heuristics Overview

Each of these summarized heuristic elements is linked to a more detailed explanation. Note that much of this theory and terminology was first established by Kahneman and Tversky.

Thaler and Sunstein say that essentially these ‘heuristics’ equate to ‘nudges’.

Consider that to varying degrees these heuristics are already exploited (accidentally, carelessly, or very deliberately) by corporations, governments, other institutions, mass media, religions, leaders, bosses, parents, etc. Most of the people in authority using these devices will not know the term ‘heuristics’, but they nevertheless will be using these methods in different ways to influence people.

Heuristics Overview in Thaler-Sunstein ‘Nudge’ Theory
1. Anchoring and adjustmentUsing a known/comparable fact and adjusting it to estimate or decide about something which is unknown.
2. AvailabilityHow common or visible or familiar something is perceived to be. The greater the commonness/visibility/familiarity, then the greater the perceived frequency or incidence (which is often quite different to reality), and also the greater sense of trust in the validity of the thing or communication. This heuristic is greatly influenced by mass media. The tendency strongly influences perceived credibility. When we see/hear something lots, we question it less.
3. RepresentativenessHow similar something is thought to be in relation to a perceived stereotype or assumption. People use this heuristic frequently in making assumptions.
4. Optimism/over-confidenceThe tendency to under-estimate costs, timescales, challenges, and to over-estimate rewards and the ease of unknown things.
5. Loss aversionThe tendency for people to value possessions far more than if the things were not yet possessed – creating resistance to giving any sort of concession or making a change. People do not like to lose possession of things, irrespective of their actual value/importance.
6. Status quo bias and inertiaThe tendency for people to stay committed to current situations, for fear of changing to the unknown. Status quo bias is also caused by laziness, aversion to complexity, unnatural learning style demands, reading smallprint, etc.
7. FramingPresentation or orientation of information that alters its perceived nature. This includes positive/negative accentuation, juxtaposition, association, or many other ways of distorting the attractiveness/unattractiveness of something.
8. TemptationGreed, inability to delay gratification; urge to satisfy aspiration, ego, etc. People are naturally biased towards short-term reward, and against long-term reward, or perceived low reward. Equates to the WIIFM factor (‘What’s in it for me?’).
9. MindlessnessThe tendency for people to form views and decisions without concentrating, or even negligently – and the perceived ‘free’ or discount effect, which can encourage people to ignore real issues. See TANSTAAFL (‘There ain’t no such thing as a free lunch’).
10. Self-control strategiesTactics used by people to counter their own heuristic weaknesses, which then also become heuristics.
11. Conforming – following the herdThe mob effect, need for affirmation, avoiding risk/embarrassment, strength in numbers, following the crowd, fear of isolation, etc. There are many cultural factors which adds to these effects, notably enabled and magnified by the internet and related technologies.
12. Spotlight effectPeople tend to over-estimate the visibility/significance of their own decisions and actions. This produces unhelpful pressures on thinking and can easily influence decision-making.
13. PrimingThe manner in which people are ‘primed’ or softened/hardened before a situation or option is introduced – extends to enabling visualization of a viewpoint or feeling – relates to facilitative theory.
14. Language and signage design – ‘stimulus response compatibility’ – or ‘choice architecture’This is a major area overlapping several individual heuristics, and refers to the degree to which something is designed in a way that helps us understand and make the best response to it. For example, ‘go’ is usually green, not red. Potentially includes feedback, which is shown separately because of its independent significance. (Not presented as a heuristic like the above by Thaler and Sunstein, but easier to appreciate in this grouping.)
15. FeedbackThis is an aspect of ‘choice architecture’ but warrants separate explanation due to its importance. People are open to influence from feedback or reflection while thinking and deciding, or having decided, prior to further decisions. It’s a crucial element of Nudge theory and its extension/application. (Not presented as a heuristic like the above by Thaler and Sunstein, but easier to appreciate in this grouping.)

The above heuristics are fundamental to the understanding and application of Nudge theory. They are explained in more detail below in the main Heuristics section.

Additional heuristics, some of which overlap or are inferred by Thaler and Sunstein’s ‘nudges’, and/or which have been proposed by various theorists, are shown in the supplementary heuristics section.

‘Humans’ and ‘Econs’

These are two different characterizations of people, used by Thaler and Sunstein to illustrate two different types of thinking and decision-making.

Thaler and Sunstein illustrated the contrast between (irrational ‘dumb’, very common) human behaviour, and (rational ‘smart’, far less common) logical behaviour, by presenting two (notionally) different types of people, which they called ‘human’ and ‘econ’.

Humans are (what we might consider) ‘real’ people, who make ‘real’ human decisions (or fail to make a decision), driven by a wide range of human considerations and factors such as inertia, optimism, denial, lethargy, the inability to delay gratification, false assumptions, and more (covered in the heuristics listing above and below in the detailed heuristics descriptions). This is a view of people/society from a ‘reality’ perspective.

Econs are an imaginary type of people – imagined to exist (instead of real people) by economists, politicians, academics, etc. Econs (are imagined) always to think logically and rationally, and are not influenced by the various heuristic factors such as inertia, optimism, denial, lethargy, the inability to delay gratification, false assumptions, and more (covered below), which generally cause ‘humans’ to behave in ways that are irrationally unhelpful, destructive, neglectful, etc. ‘Econs’ are a view of people and society from an unrealistic perspective.

A crucial aspect of Nudge theory is recognizing that ‘econs’ do not really exist in terms of broad societal behaviour; whereas ‘humans’ definitely do.

When we accept this we begin to see why and how Nudge is a viable and necessary methodology, and why enforcement, as a strategy for shifting behaviour, tends to fail.

Thaler and Sunstein do not actually say that most politicians and corporate bosses believe that the world is populated by ‘econs’, but this is certainly implied.

There is a ‘flip-side’ to all this, namely that certain people in many corporations and governments understand extremely well that people often think and decide very instinctively and irrationally, and they exploit these weaknesses by using ‘nudge’ methods for cynical and unhelpful purposes.

A great benefit of Nudge theory is being able to see more clearly where and how this cynicism is at work, and potentially to confront and modify it.

Thaler and Sunstein explained that at the root of these two different ‘types of people’ are two different thinking/decision-making systems, which follows in the section dealing with automatic and reflective systems of thinking.

Automatic vs Reflective Systems Of Thinking

According to Thaler-Sunstein Nudge theory (and previously developed equivalent Kahneman/Tversky theory):

  • ‘Humans’ are characterized as thinking ‘automatically’.
  • ‘Econs’ are characterized as thinking ‘reflectively’.

This equates broadly to Daniel Kahneman’s earlier presentation of this concept, which dates from the 1970s, and which refers instead to:

  • ‘System One’ thinking – automatic, instinctive, quick, biased, inaccurate, irrational, etc.
  • ‘System Two’ thinking – thoughtful, reflective, calculated, slow, rational, logical, critical, etc.

The Thaler-Sunstein table contained the automatic/reflective headers and the first six pairs of characteristics beneath. It is extended here to add clarity and context.

‘Human’‘Econ’
Automatic systemReflective system
UncontrolledControlled
EffortlessEffortful
AssociativeDeductive
FastSlow
UnconsciousSelf-aware
SkilledRule-following
Other Describers
InstinctiveThinking
Primitive brainModern brain
Gut reactionConscious thought
In practiceIn theory
EmotionalClinical
SubjectiveObjective
The ‘automatic’ tendency in people is under-estimated by policy-makersThe ‘reflective’ tendency in people is over-estimated by policy-makers

Thaler and Sunstein suggest that people use reflective decision-making very commonly, even for very important situations, such as in electoral voting, investing, major purchases, life decisions, etc.

Note that ‘Automatic/System One’ thinking is not bad or stupid. On the contrary…

This is a significant point and easy to overlook or misunderstand.

‘Automatic/System One’ thinking is very useful in certain situations, but in other situations may be unhelpful, where a more careful rational (‘Reflective’) thinking is required.

The tendency for humans to behave and think like ‘Humans’ and not like robotic ‘Econs’ – i.e., to prefer and more often use Automatic/System One thinking rather than Reflective/System Two thinking – is a major factor in the success of humans as a species.

Early humans and tribal groups who were able to think quickly and instinctively had a big advantage compared to humans who could not. And so this capability/tendency became dominant in people via natural selection, (i.e., people possessing successful genetics/strategies – such as quick thinking – survived and competed more successfully than people/groups/tribes with weaker traits).

Daniel Kahneman emphasizes that ‘System One’ thinking (‘Automatic’ thinking of Humans’) is actually a higher form of human intelligence than ‘System Two’ thinking (‘Reflective’ thinking of ‘Econs’). This is because ‘System One’ thinking enables people to make very quick assessments, based on highly sophisticated (usually entirely unconscious and instinctive) mental analysis and reference to experience and knowledge. For many decision-making situations – particularly in pre-historic times when life was much simpler, and not full of cynical distractions such as advertising, mass media, and governments – the ability to make quick instinctive assessments and decisions was/is a valuable capability.

These two different methods of thinking and deciding are not bad or good in themselves. The point is that situations often demand one or the other, and people in modern times are not generally very good at using the right one, or balancing the use of both methods.

This difficulty is compounded in modern times because of the pressure and scale of populations, misinformation, and distraction:

  • People are often encouraged to think ‘Automatically’ (System One), when they should instead be thinking ‘Reflectively’ (System Two).
  • Decisions that people face in modern times can be very far-reaching, with very big implications, compared with past times.
  • Societies are bigger than ever and still growing fast.
  • Societies are organized and managed by corporations and governments on a much bigger scale than ever before.
  • So decisions by people nowadays can affect societies and the planet to a vast and unprecedented degree.

Heuristics

Human Thinking and Deciding Tendencies (‘heuristics’ = ‘nudges’)

Note: This section on heuristics, like the remainder of this article, is not a reproduction or extraction of Thaler and Sunstein’s work (nor of the Kahneman-Tversky theory which largely underpins it) – it is a summary and interpretation of the concept and terminology, expanded by explanations and extensions to related ideas and examples.

Accordingly if you seek to understand the Thaler-Sunstein/Kahneman-Tversky work first-hand, or to research and extract from the original source materials, then you should obtain the relevant original books/papers. If you extract/quote from this article please reference it appropriately, which in terms of Nudge theory, is a review and a secondary source.

‘Heuristics’ feature strongly in Nudge theory – in fact heuristics equate to ‘nudges’. Thaler and Sunstein use the phrase ‘rules of thumb’ to introduce and explain heuristics in the context of Nudge theory. (For quite separate interest see the ‘rule of thumb’ in cliché origins)

Note that the general dictionary meaning of ‘heuristics’ is broader and less specific to human thinking and deciding, compared with the more technical meaning of heuristics in psychology and Nudge theory, which refers more to the faulty thinking/deciding commonly arising from human weaknesses, habits, conditioning, etc.

The word heuristics basically means self-discovery (from Greek heuriskein, ‘find’), although in the context of Nudge theory, heuristics (which acts as a plural or singular term) more broadly refers to the various internal references and responses which people use in assessing things, developing views, and making decisions. By its internal nature, heuristic thinking tends to be personal, emotional, subjective, and instinctive.

The famous old Monty Hall ‘closed door’ probability problem is a fascinating example of faulty human heuristic thinking.

Heuristic thinking also tends to lead to assumptions, ‘knee-jerk’ reactions, habits, etc.

Thaler and Sunstein particularly refer to the heuristics research of Israeli psychologists Daniel Kahneman and Amos Tversky (mentioned above as key figures alongside Thaler and Sunstein in the development of Nudge theory itself) – specifically to their identification in 1974 of (initially three) ‘rules of thumb’, which people tend to use when considering and deciding about unknowns (covered in more detail next, along with several other heuristic tendencies):

  • ‘Anchoring and Adjustment’ – comparing, then guessing from that subjective reference point
  • ‘Availability’ – actually meaning perceived frequency, commonness, and familiarity of something
  • ‘Representativeness’ – comparison based on (often unreliable subjective) stereotypes

The above are three of the heuristic tendencies (or types of ‘nudges’) identified and named by Thaler and Sunstein, and earlier by Kahneman-Tversky, who identified several more which feature in Thaler-Sunstein’s Nudge theory. All of the main heuristics presented by Thaler and Sunstein are explained in detail below. Besides these, other heuristics (or ‘nudge’ effects) exist and are detailed separately as supplementary heuristics below.

‘Nudge’ Heuristics In Detail

Sub-index:

  • Anchoring and Adjusting (comparing then guessing)
  • Availability (perceived popularity/rarity)
  • Representativeness (stereotyping and comparison)
  • Optimism/over-confidence (under/over-estimation or complacency)
  • Loss aversion (holding on to things/resistance) ‘status quo bias’ (inertia)
  • Status quo bias (inertia, default to no action)
  • Framing (orientation, accentuation, presentation, styling)
  • Temptation (greed, ego, short-term reward)
  • Mindlessness (negligence, avoidance, not concentrating)
  • Self-control strategies (habits and routines to counter weaknesses)
  • Following the herd (conforming, mob instinct, safety in numbers)
  • Spotlight effect (anxiety, pressure, “…everyone’s watching my decision”, fear of making errors)
  • Priming – (the ways people can be made ready or prepared before thinking and deciding, e.g., visualization, role-modeling, building belief, offering methods not just directions)
  • Stimulus response compatibility – overlays other heuristics and ‘nudges’ – (the design of signage, language, so that it looks and seems appropriate for the message it conveys)
  • Feedback – overlays other heuristics and ‘nudges’ – (given to respondent during and after thinking/decisions, enabling adjustment and useful experience)

The thinking/decision-making heuristics explained here have existed under varying terminology for many years in the study and theory of psychology and decision-making, outside of Thaler and Sunstein’s ‘Nudge’ theory work, notably pioneered by Kahneman and Tversky, as discussed already.

Thaler and Sunstein very cleverly assembled these sub-theories and named them, to create a cohesive series of elements by which Nudge theory can be understood and applied, rather like a series of techniques, which can (I suggest) be used as a  ‘toolkit‘.

The names of the first three heuristics, Anchoring and Adjustment, Availability, and Representativeness, are specifically attributed by Thaler and Sunstein to psychologists Daniel Kahneman and Amos Tversky. The additional Thaler-Sunstein ‘nudges’ are to varying degrees similarly derived. Here they are:

Anchoring and Adjustment (comparison and guessing)

Key points:

  • Using a known/comparable ‘fact’ or belief and adjusting it to guess/decide something which is unknown.
  • The ‘comparable’ reference is commonly not a good similarity.
  • Estimates are commonly very inaccurate, resulting in unreliable guesses on which to base a decision.
  • This thinking may be affected (unhelpfully ‘primed’) by mass media, misreporting, popular misconception, and myths.

In Thaler and Sunstein’s terminology, an ‘anchor’ refers to a person’s perceived reference point in relation to a question for which the answer is not known and is to be deduced. In simple terms an anchor is a clue, or cue, or a pointer, or a starting point, (whose scale/quality we think we know reasonably reliably) which can be adjusted to help us to estimate an answer.

The authors call this ‘anchoring and adjustment’. (The term is borrowed from Amos Tversky and Daniel Kahneman’s work on heuristics.)

Most people would naturally do this when asked a question such as the cost of something that’s completely new to them. Or the time it takes to complete a task in which they have no knowledge. Similarly when people are required to answer a quantitive question, such as the height of the Empire State Building, or the population of a city, they tend first to establish internally an ‘anchor’ reference (another building or city whose scale they know), and then they adjust this amount until they feel comfortable with their guess for the unknown answer.

In the context of Nudge theory, anchors act as nudges.

However anchors are not a very reliable way to arrive at an accurate assessment of something.

The authors offer evidence that different people arbitrarily select quite different ‘anchors’ for the same unknown questions, which even after adjustment commonly produce quite different estimated answers. Anchoring is inherently unreliable, but it is also dependent on differing individual standpoints.

Availability (perceived popularity/frequency/rarity, visibility, commonness)

Key points:

  • Perceived commonness/familiarity of something produces a perceived popularity or incidence of something, and a basis for trust/credibility.
  • This is often quite different to real popularity, and is rarely a basis for trust.
  • Perceptions are greatly influenced by mass media, which equates to unhelpful ‘priming’.
  • The tendency operates in reverse; i.e., perceived uncommonness or rarity tends to produce perceptions of low popularity, low credibility and distrust, which may be very unreliable.

Thaler and Sunstein use the term ‘availability’ in referring to visibility, or how commonly something is perceived to arise in a general sense, which significantly influences people’s assessment of how likely it is to arise in a personal sense. (The term ‘availability’ is borrowed from Amos Tversky and Daniel Kahneman’s work on heuristics.)

Thaler and Sunstein give the example of the visibility (‘availability’) of homicides (in the media notably) compared to that of suicides. This leads to the incorrect belief among most people that homicides are more common than suicides, when the opposite is true, by a considerable margin.

For the same heuristic reason, most people are far more cautious when taking a plane journey than when crossing the road or driving their car, when in fact it’s far more dangerous statistically to cross the road or drive a car than take a plane journey.

And also for the same heuristic reason, billions of people continue to drink too much alcohol, when they would not dare to touch an ecstasy tablet. Thousands die every day from alcohol-related disease. Deaths from ecstasy tablets are perhaps a few hundred in the history of mankind.

The perception of frequency or visibility (‘availability’) – how common something is – is an important heuristic within Nudge theory.

People often assess likely outcomes based on a false perception of actual facts and statistics.

It follows therefore, assert Thaler and Sunstein, that by shifting false perceptions, so in turn people’s assessments of outcomes can be shifted too, along with related decision-making.

Here is a practical example of the use of the ‘availability’ (visibility) effect, offered by Thaler and Sunstein in the 2008 book, Nudge, “…A good way to increase people’s fear of a bad outcome is to remind them of a related incident in which things went wrong; a good way to increase people’s confidence is to remind them of a similar situation in which everything worked out for the best…”

The ‘Availability’ heuristic equates in some situations to ‘familiarity’ (that something seems familiar to us), and this is strongly linked to trust (in the validity or credibility of something, or information about something). The concept of branding and brand awareness is an example of the ‘availability’ heuristic in use. Corporations spend millions building and maintaining the ‘familiarity’ of their brands and logos, etc., because this increases our sense of trust, and a perceived sense of reliability, in the products/services under the brands in question. Incidentally this effect offers an example of two or more heuristics (‘nudges’) working together, because brand familiarity acts potently with the ‘following the herd’ (conforming) heuristic.

Representativeness (stereotyping, comparison)

Key points:

  • People refer to personal stereotypes or assumptions in seeking references for unknowns.
  • This is highly subjective, susceptible to misinformation, and a very unreliable basis for forming opinions and making decisions.
  • This thinking is affected (unhelpfully ‘primed’) by mass media promotion of stereotypes and biases.

Thaler and Sunstein suggest the word ‘similarity’ to clarify ‘representativeness’ (which is borrowed from Amos Tversky and Daniel Kahneman’s work on heuristics).

They also relate this heuristic mechanism to ‘stereotyping’.

We see ‘representativeness’ bias occurring widely in people’s thinking when stereotyping and discriminating on the basis of race, religion, gender, sexuality, age, and social class, etc.

Assessments and decisions based on ‘similarity’ assumptions and extensions are extremely common and happen daily on a vast scale in every field imaginable.

The tendency is seen also in the extension or extrapolation of a small sample to produce a wrong conclusion about the bigger picture.

As with the other heuristic tendency ‘availability’ (visibility or commonness), the mass media contributes greatly to the building and maintaining of stereotypes in all aspects of life.

The ‘representativeness’ heuristic is sometimes a confusion between, or reversal of, cause and effect. Or it may be a faulty correlation – for example, the common mistaken view that people can ‘catch’ a cold from being out in cold weather, whereas a cold is a virus that is passed from person to person.

‘Representativeness’ misjudgments may alternatively stem from the misinterpretation of a chance or random pattern as being a normal or standard effect, which can be extended or projected, much like the extension of a stereotype.

Optimism/over-confidence (over/under-estimation, complacency, ignoring or taking risks)

Key points:

  • People tend to under-estimate expenses/costs, timescales, complexity, and difficulty of unfamiliar challenges.
  • People tend to over-estimate rewards and the ease of unfamiliar tasks.
  • This can cause denial, complacency, and insufficient planning, attention, resourcing, time, etc.
  • The ‘Optimism’ heuristic generally ignores, denies, under-estimates or justifies risk.

This is the tendency to under-estimate costs, timescales, challenges, and to over-estimate rewards and the ease of unknown things. This tendency leads to complacency, inertia, extravagance, wastage, delays, failures to make budgets and control spending, setting unreasonable goals and expectations.

The ‘Optimism’ heuristic is closely linked with risk – either as an effect of low perceived risk, or a cause of ignoring or under-estimating risk, or of justifying taking risk.

When people mismanage their household budgets by spending too much of their monthly salary in the first couple of weeks of the month, this is typically due to the optimism heuristic. They hope their money will last, and fail to check account balances, rather than budgeting and controlling expenditure. This for many people becomes a lifelong repeating cycle of failing to balance their outgoings and incomes. Optimism then influences many people’s decisions to seek and commit to punitively expensive loans.

Woven into these feelings is the unconscious or deliberate denial of risks arising from the thinking and decision.

The same tendencies cause many people to:

  • take a hopeful approach to retirement rather than planning and saving,
  • avoid medical diagnosis and treatment when they get sick,
  • delay getting repairs done until the roof is actually leaking bucketfuls,
  • and defer and procrastinate in considering the urgency of all sorts of necessary jobs.

The optimism heuristic is also commonly responsible for people being late, when they imagine they can complete jobs and travel much faster than proves to be so.

The ‘Optimism’ tendency is also responsible for people finding themselves in awkward embarrassing positions when misjudgments have been made, compounded by reluctance or denial in accepting that corrective action is necessary, causing situations to go from bad to worse. As with other heuristic failings, blame can soon emerge. “Someone should have told me…” is a common reaction to problems arising from this heuristic. A useful approach for preventing or countering the risks of the ‘optimism/over-confidence’ heuristic is designing ‘feedback’ (covered below) into processes and choices offered to people.

The ‘Optimism’ heuristic is an opposing instinct to the ‘loss aversion’ heuristic shown below. Depending on the person and situation one of these may be a dominant factor in someone’s thinking.

Loss aversion (holding on, resistance)

Key points:

  • People tend to value something more when they possess it, than if they do not (Thaler and Sunstein suggest that this over-valuation equates to 100% or double)
  • People (therefore) tend to resist (to a disproportionate degree) losing something they already possess, or exchanging it for something of equal or even greater value.
  • This causes inertia and tendency to default to inaction (which potentially equates to Status quo bias, (below).
  • The ‘Loss aversion’ heuristic is a major cause of risk avoidance, which also produces inertia.

Thaler and Sunstein suggest that most people are fundamentally ‘loss averse’, so that assessments and decisions tend to be made so as to avoid a perceived loss, even if the ‘loss’ is more than compensated by a different gain.

Thaler and Sunstein assert that: “…Roughly speaking, losing something makes you twice as miserable as gaining the same thing makes you happy…”

It seems that when people believe they must “…give something up, they are hurt more than they are pleased to acquire the very same thing…”

The authors extend this point to assert that “…Loss aversion helps produce inertia, meaning a strong desire to stick with your current holdings…”

The ‘Loss aversion’ heuristic produces a heightened sense of risk. Most people tend to avoid risk. Thinking becomes driven by a feeling that change will be disadvantageous, and so decisions are made either to preserve, conserve or consolidate the current position (often seen a holding something) and this relates strongly to the ‘Status quo’ heuristic, explained below.

The ‘Loss aversion’ heuristic is an opposing instinct to the ‘Optimism’ heuristic explained above.

‘Loss aversion’ avoids risk, whereas ‘Optimism’ ignores, minimizes or justifies risk.

Status quo bias (inertia, resistance to change, default to inaction)

Key points:

  • People generally fear change, especially of uncertain nature.
  • Fear of error, embarrassment, rejection, etc., may also contribute to inertia depending on personality and life-stage and situation.
  • Status quo bias may be compounded by laziness, aversion to complexity and effort, etc.

Thaler and Sunstein refer to ‘status quo bias’, being a tendency for humans to want to maintain things in their present form and so to resist change.

Inertia (where people find it easier to do nothing rather than make a change) is a powerful effect, and has been used by leaders and communicators for generations.

Inertia relates to the use of defaults by authorities and corporations, which we see every day in checkboxes, on forms and websites, and embedded more deeply into how options are often presented. The use of inertia as a selling, marketing and governing mechanism is controversial, especially where the default (what happens in the event of no change or decision) produces advantages for a seller/governing authority, and disadvantages or unnecessary costs for customers.

Inertia and defaults feature strongly in ‘choice architecture’, explained below – the signage and structures that influence our attitudes prior to decision-making.

Logically, the authors say that inertia is produced by the human tendency to avoid change, effort, risk, etc., which in turn may be due to laziness, aversion to time-consuming complexity (for example in understanding complicated options), and/or simply a discomfort felt when considering changing something.

We see inertia especially affecting people’s decisions when having to adopt new technologies, or decluttering a home, or working towards a new qualification or career change.

Thaler and Sunstein refer to the use of inertia and default in securing permissions for organ donation as a positive helpful application of the technique.

They offer evidence by which the permission default was switched to ‘opt-out’ from ‘opt-in’, so that people’s natural inertia in checking boxes produced a massive increase in organ donation permissions.

It is not difficult to imagine how this simple but very potent heuristic – inertia, doing nothing – has been and will continue to be used widely for unethical purposes.

Framing (orientation, accentuation, presentation)

Key points:

  • The presentation or orientation of information can alter its perceived meaning/nature.
  • This includes positive/negative accentuation, juxtaposition, association, or many other ways of distorting the attractiveness/unattractiveness of something.
  • The description of a choice can entirely alter the way people notice and perceive the meaning and implications of the choice.

‘Framing’ is proposed by the authors as a further significant heuristic in how people assess options and make decisions.

Language is immensely flexible. Something which is a good possibility/option may always be described or ‘framed’ as a poor one, and vice-versa.

Thaler and Sunstein offer the example of illness diagnosis and treatment/recovery prognosis between doctor and patient: that if a medical consultant focuses on death rates, people are put off treatment, whereas a focus on survival rates tends to increase agreement for treatment, without any alteration of the actual figures. It’s a matter of orientation and presentation, or ‘framing’.

The notion of accentuating the positive is an aspect of ‘framing’. A child is more likely to spill a drink if told, “Don’t spill that drink,” than if told, “Be careful with that drink.”

When a sports coach says to the team at half-time: “Now go win this game,” rather than “Don’t lose this game,” the coach is ‘framing’ the same instruction in a way that is more likely to get a good result.

A classic example of framing is the ‘glass half-full/half-empty‘ analogy.

Also see the famous ‘beans up the nose story‘.

‘Framing’ affects the way people feel and think about something primarily due to the way in which a choice or option is described. This heuristic may operate in parallel with more direct forms of mood-changing, which is described in the  supplementary (non-Thaler-Sunstein) heuristics section later.

Framing relates to relevance and self-image.

Temptation (greed, ego, short-term reward, inability to delay gratification)

Key points:

  • People tend to want short-term more than long-term reward, whether the values are real or perceived.
  • People are attracted to choices which they perceive to be easy, and/or which they perceive will make like easier for themselves.
  • People tend to behave according to the maxim that: ‘A bird in the hand is worth two in the bush’ – i.e., people are tempted by having something now, more than something bigger in the future.
  • People are tempted by different things according to personality and situation.

People are generally and naturally attracted to options which offer quick appealing reward. What is regarded as ‘reward’ by people can take many different forms, for example:

  • Material/financial,
  • Optimizing ‘return on effort/input’ (big outcome from small investment),
  • Recognition, praise, thanks
  • Needs of ego and self-image,
  • Avoidance of challenging/difficult effort,
  • Responsibility,
  • Control,
  • Security and protection,
  • Benefits for friends/children/etc,
  • Power,
  • Love and affection,
  • Food, sex, shelter, etc.

The values people place on different types of rewards depend on a person’s circumstances and feelings at the time.

See the theories of Maslow and Herzberg to understand motivation/needs and reward in more detail.

Temptation is a very powerful heuristic – people are naturally biased towards short-term reward, and against long-term reward, or perceived low reward.

See the WIIFM factor (‘What’s in it for me?’).

We see the ‘temptation’ heuristic being exploited to extreme degrees in the operation of most gambling products/services. Many people are naturally are drawn to possibilities which offer large rewards for a small effort or investment – even if logic, facts, and experience, suggest otherwise.

Every day around the globe millions of intelligent mature people gamble collectively millions of dollars on lotteries, which these people know offer odds of several millions-to-one against winning a major prize. They do this mainly because for them the temptation heuristic is more powerful than facts and logic.

Mindlessness (negligence, not concentrating)

Key points:

  • People sometimes form views and decisions without concentrating, or negligently.
  • Distraction, illusion, or difficulty can be major factors in reducing concentration.
  • Simple ‘human error’ or other common human weaknesses can cause oversights and mistakes.

Where Thaler and Sunstein use the term ‘mindlessness’ this refers to various sorts of human error in considering situations and options.

Mindlessness is the tendency for people to form views and decisions carelessly.

This may be due to difficulty and complexity, stress and pressure, laziness, anxiety, poor awareness or education, distraction or deception, false assumptions, illusions, declining mental powers, etc.

In the modern age, this human tendency to overlook important details is exploited by various authorities, especially cynical corporations.

For example a perceived ‘free’ or discount offer can be intentionally distracting, encouraging people to ignore more important issues. Where retailers exaggerate discounts by stating artificially high previous selling prices they are deliberately trying to produce and exploit a mindlessness in people.

Mindlessness is related to ‘framing’ (the way that a choice is described) and ‘over-optimism’ (hoping that things are okay).

See TANSTAAFL (‘There ain’t no such thing as a free lunch’).

People are practising mindlessness when they fail to read terms and conditions, and other ‘small print’. It’s a very widespread behaviour and is very widely encouraged and exploited by corporations and authorities.

Mindlessness usually causes people to make unhelpful decisions, or to overlook the need for a decision. Authorities, leaders, corporations (and other ‘choice architects’) therefore have a responsibility to identify risks of mindlessness in designed choices, and to improve clarity and visibility as appropriate.

It is not ethical to defend the poor design of an important choice (in a communication process, etc) by saying that ‘people should have read the small print’. ‘Choice architects’ should know that mindlessness is a real human tendency, and take measures to protect people from such vulnerability.

Self-control strategies (habits and routines to counter weaknesses)

Key points:

  • People are often aware that they have some ‘heuristic’ weaknesses, which they might regard as ‘bad habits’, or simply ‘weaknesses’).
  • People commonly devise routines and protections against their perceived weaknesses.
  • Strategies which people use to protect themselves from their own weaknesses become new heuristic tendencies potential weaknesses.

Most people know that they have ‘human heuristic weaknesses’, although they’d be highly unlikely to use that terminology.

People instead tend to acknowledge their own vulnerability to heuristic weakness in expressions such as:

  • ‘I am my own worst enemy’
  • ‘I would lose my own head if it were not screwed on’
  • ‘I should have made a list’
  • ‘I should count to ten… (to give thinking-time before speaking/acting)’
  • ‘I can’t resist a bargain’
  • ‘I wear my heart on my sleeve’
  • ‘I should have known it was too good to be true..’

Many people devise tactics to overcome their weaknesses.

Interestingly many of these strategies then act as additional heuristics.

Thaler and Sunstein give the example of people who put their alarm-clocks out of reach, as a strategy to counter the ‘temptation’ heuristic which encourages people to switch off the alarm and go back to sleep.

Here are some more examples of self-control heuristics that people use to counter other heuristic weaknesses:

  • keeping a watch a few minutes fast, to counter a lateness tendency
  • leaving a car parked on a steep hill in neutral gear, for fear of forgetting it’s in gear when they return to it and start the engine, which would cause the car to leap forward (a car parked on a steep hill should be left in gear, as a safety measure in case of hand-brake failure)
  • using the same PIN code for all secure devices and accounts, for fear of forgetting lots of different ones
  • running more bank accounts than necessary (or saving money in different pots) for fear of being unable to control spending using fewer accounts/pots
  • setting task deadlines in advance of actual due dates for fear of missing them
  • keeping unnecessarily big stocks of consumable products for fear of running out/forgetting to re-order

Many self-control strategies like these (and there are hundreds more) actually become new weaknesses.

‘Choice architects’ should recognize when such tactics could be present in people’s behaviour, and make allowances in how choices are offered accordingly.

Following the Herd (conforming, mob instinct)

Key points:

  • ‘Following the herd (crowd)’ without question causes ‘the mob effect’, mob rule, daft ‘committee’ decisions, and underpins fashions, fads, crazes and myths.
  • The tendency is caused by people’s need for affirmation, avoiding risk/embarrassment, strength in numbers, fear of isolation, etc.
  • Mass media, and authorities and institutions with vested interests in certain beliefs, commonly help build and maintain false group-beliefs.

Thaler and Sunstein explore this heuristic (they call it ‘following the herd’) at great length and depth, understandably, because it is a very substantial aspect of group and societal behaviour.

The tendency is known by many other terms, some very loosely, such as the mob effect, mob rule, majority rule, ‘when in Rome…’ (‘…do as the Romans do’), the herding effect, behaving like sheep, strength in numbers, lowest common denominator, among other terms and metaphors.

There are many cultural factors which enhance these effects, especially when enabled and magnified by modern internet/computer/communications technologies.

The common human urge (conscious or unconscious) to conform to the behaviours of others, or to social norms, expectations and customs, has many different causes, for example:

  • the need for affirmation (being like others, which produces feelings of affirmation)
  • avoiding risk/embarrassment/being wrong (not ‘raising one’s head above the parapet’)
  • fear of isolation, ridicule, persecution, retribution, etc
  • allegiance to a societal grouping, religion, cause, campaign, movement, etc.

Fear (of embarrassment, isolation, being wrong, loss of reputation, etc) is a big factor in this heuristic. So is the ‘spotlight effect’.

Note that this sort of conforming is to a ‘perceived’ norm, which is not necessarily the reality.

The analogous fairy tale of ‘The Emperor’s New Clothes‘ illustrates the bizarre susceptibility of humans to conforming to a perceived majority belief, even if unproven or plainly daft.

(A pompous king is persuaded by mischievous tailors that a ‘magnificent’ expensive suit they have produced for him can only be seen by clever people, when in fact there is no suit at all, so the king is in fact naked. The king, his courtiers, and crowds, are all tricked into agreeing that the king’s suit is wondrous, even though the king is naked, because each person does not dare to appear to be stupid – except eventually a small boy, unaware of the tailors’ claims, who exposes the sham.)

This is similar to experience of sitting in a classroom situation not daring to ask for clarification of a complex issue, because we imagine everyone else understands, when in fact not everybody does, and people are conforming to the same false notion.

The fascinating Abilene Paradox is another example of unhelpful group thinking according to this (following the herd/conforming) heuristic, by which a group, especially a committee or supposedly cooperative united group, is prone to making idiotic decisions based on the individual members misreading and then following a wrongly perceived group view.

Confusingly when lots of people conform to a false but perceived norm, such group delusions can easily produce actual real norms, which are based on nothing but the imagination of lots of people.

Many experts would also say that conforming in one way or another has also been a necessary survival instinct throughout human history, so that the tendency may actually be to a degree ‘hard-wired’ or genetically inherited by each of us.

Whatever the causes of conformity it’s immensely powerful and potentially lethal too. All wars are based on soldiers and populations conforming. (This is not the same as following orders; it’s actually willingly doing as others do, following virtually without question, what a big crowd of fellow humans are doing). Sports and music fan-bases would not exist without the human heuristic of conforming. Nor would Facebook or Google or Twitter exist without human conformity. Nor would there be a fashion industry, or strongly branded merchandise, were it not for the human urge to conform.

In fact the human urge to confirm is so powerful that non-conformers are commonly ridiculed or persecuted, quite outside of wars, and this behaviour can be seen in tiny children as well as in supposedly intelligent mature adults.

Spotlight Effect (anxiety, pressure, ‘all eyes on me’, fear of making mistakes)

Key points:

  • People tend to imagine their individual actions/decisions are very noticeable to a group.
  • This can produce unhelpful pressures on thinking, and influence decision-making.
  • Fear is a main factor – fear of embarrassment, criticism, making mistakes, isolation, etc.

This is the tendency for people to over-estimate the visibility/significance of their own decisions and actions, which Thaler and Sunstein call the ‘spotlight effect’.

The metaphor alludes to the feeling of being centre-stage, with a spotlight and all eyes upon us, so that our every action is seen by everyone.

In reality groups of other people – as a group – do not notice what we do and care very little what we do and decide.

(This is different from the more realistic fear that our actions and decisions can be highly visible and significant to another individual person, or a small personally connected group, but this is a separate matter entirely.)

The effect of the ‘spotlight effect’ heuristic is to pressurize our thinking and decision-making, one way or another, as if everyone were judging us and/or dependent upon our decision.

The spotlight effect is strongly linked to, and adds to the potency of, the ‘conforming’ heuristic (‘following the herd’).

The ‘spotlight effect’ is a particularly significant ‘false’ factor in the early development stages of ‘mob rule’ situations, which can then develop to propose much bigger real threats to non-conforming individuals.

As with many other heuristics, the ‘spotlight effect’ human weakness is often exploited in cynical ways by corporations, thereby persuading individuals to conform to a false reality. Much of the corporate/commercial world embeds this tactic into its advertising in attempting, often very successfully, to convince audiences that the product/service/lifestyle being promoted is far more popular and ‘normal’ than it actually is. The tobacco industry did this for decades, and actually continues to do so via ‘product placement’ in movies, etc.

Ethical ‘choice architecture’ should obviously avoid presenting ‘norms’ that are unhelpful to people.

Priming (preparing people for thinking and decisions)

Key points:

  • People can be helped to approach choices in a more prepared state.
  • This happens before the choice is experienced.
  • Many people need and benefit from this effect.
  • The ‘choice architect’ responsibility is extended to people’s attitude, as part of the choice design.

The manner in which people are ‘primed’ or softened/hardened before a situation or option is introduced – extends to enabling visualization of a viewpoint or feeling – relates to facilitative theory.

People’s openness and preferences towards choices are influenced by what happens before and while an option is emerging. Thaler and Sunstein call this preparatory stage ‘priming’. This relates to and overlaps with ‘framing’.

The ‘priming’ heuristic potentially includes the imagining or visualization of a viewpoint or feeling (i.e., the person consciously or unconsciously imagines the feeling or consequences of a decision).

This potentially includes people’s self-image, which is is significant in affecting personal response and responsiveness to all sorts of things, including ‘nudges’. See ‘relevance’ in the supplementary heuristics section, which is greatly affected by self-image.

Priming relates to NLP (neuro-linguistic programming)clean language,  transactional analysisfacilitative theory, and many other psychological concepts which are concerned with mental attitude.  Body language can also feature in priming. A classic example of ‘priming’, although not called this at the time, is the ‘Hawthorne Effect’ experiments of Elton Mayo.

Sports coaches frequently use the ‘priming’ heuristic to influence the feelings and decisions of athletes and teams. The centuries-old leadership notion of fighting for a god or or ‘Queen/King and country’ is a form of ‘priming’. Most advertising seeks to employ a form of ‘priming’, often by first showing attractive sexy/cuddly images of people, scenery, cars, puppies and kittens, etc. Many stories, jokes and analogies also use ‘priming’ in creating a certain attitude or expectation in the audience.

Separately, a very specific and simple aspect of ‘priming’ has been recognized (although not named as such) in psychology and concepts such as NLP for decades, in the use and avoidance of certain words when seeking to influences human responses, for example:

  • The word ‘how?’ is more likely to produce a positive response than ‘why?’
  • Words like ‘situation’ and ‘challenge’ are more positively stimulating than words like ‘problem’ and ‘difficulty’,
  • In communications designed to motivate, using the word ‘but’ usually prompts a negative feeling, compared to ‘and’ or ‘also’.
  • Single clear positive messages/instructions/requests work better than communications which carry more than one main message.
  • A request to ‘do’ something generally produces better response levels than a request which instructs ‘not to’ or ‘don’t’ do something.

These examples are also arguably forms of framing, although framing refers to a more general orientation of a communication, rather than the preparatory ‘priming’ aspect.

Stimulus Response Compatibility (language, signage, design – does the ‘look and feel’ of the choice match the meaning of the choice?)

Key points:

  • Stimulus Response Compatibility refers to how reliably the ‘look and feel’ (signs and signals) of a choice reflect/represent its meaning.
  • This heuristic concept overlaps many other heuristics (types of ‘nudges’).
  • There are cultural differences – signals/signs can mean different things to different cultures.

Thaler and Sunstein refer to this area of heuristics as ‘choice architecture’, and also as ‘stimulus response compatibility’.

Thaler and Sunstein’s use of the term ‘choice architecture’ for this area of heuristics is a little confusing, and inconsistent with the term ‘choice architect’, which embraces all heuristics.

Stimulus Response Compatibility refers to whether the look and feel of the communication or signal (the ‘stimulus’) matches (is ‘compatible’ with) the message that we receive or infer (our ‘response’) from the communication.

In other words, is our brain being tricked?

This aspect of human thinking is not presented by Thaler and Sunstein as a stand-alone heuristic like the above listed items, but is easier to appreciate in this grouping, especially when heuristics are seen as ‘nudges’ in a ‘toolkit’.

Stimulus Response Compatibility is an aspect of semiotics, which is the study/science of how meaning is conveyed in language, signage, symbols, stories, metaphors, etc., and generally any other visual carrier of meaning.

In ‘honest’ communications, the appearance or feel of something (a sign, words, or anything designed for us to engage with or respond to) should help us understand how to respond or engage with it, (rather than encourage us to respond in some other way).

How many ‘f’s?FINE POINTIt is easy to miss the finer 
points in life. Folk are 
frequently guilty of falling 
into this trap.

The letter f appears eight times in the box. People commonly count seven, by failing to see the last but one f.

The ‘stimulus response compatibility’ effect on thinking – where the brain is ‘tricked’ by incompatibility – is a major area of heuristics. It overlaps with several other individual heuristics, and is hugely significant in how (usually visual) communications and signals are designed, in terms of human expectation and conditioning, so that commonly we decide about things prematurely, often not even bothering to examine and understand the detail.

Generally green means go or okay, and red means stop or danger, even if the words say something different. Capital-letter (upper-case) words generally emphasize importance, loudness, priority, etc., even if the words/meaning are unimportant. A tick means yes, an X means no, usually. A ‘white-out box’ invites us to write something in it. Many more examples exist in thousands of very recognizable patterns, customs and symbols that we see around us, and these signals are increasing still more in the digital age.

The extent to which the look and feel of something prepares us for a certain response is a very big factor in how we are ‘nudged’ towards one response or another.

Imagine how much slower the world would work if overnight the ‘enter’ key were renamed or moved elsewhere on computer keyboards.

Every year there is a major electoral dispute somewhere about the design of a voting slip, because the design confused people as to how many boxes should be marked.

More commonly, the very tiny extensive ‘small-print’ in most contracts discourages us from reading it. The stimulus (small, difficult to read) is not compatible with the response we should have (“…these terms and conditions are important, so I should read them”). We expect important information to be conveyed clearly, concisely, in large print. When we see lots of small print we are not inclined to read it because ‘small-print’ equates to unimportant, and it’s difficult to read too because of the language, length of the text, and layout. This is often a cynical intention of the communicator because they know that if people actually read the small-print they would hesitate to agree to the contract. The communicator is deliberately creating and exploiting a stimulus that is incompatible with the response that the communication deserves.

Thaler and Sunstein offer a couple of simple amusing examples of ‘stimulus response incompatibility’, notably:

  • a door which must be pushed to open, but which has big handles on it, so people wrongly think it must be pulled
  • and the daft four-in-a-line control knobs on nearly every cooker, which are incompatible with the four-in-a-square layout of the hob burners.

And one example of helpful compatibility, which arises more than once in the ‘Nudge’ book, is that of the image of a fly inside men’s urinals, so as to ‘improve aim’, and reduce cleaning and hygiene problems (it works).

You will encounter examples every day of communications/stimuli that are designed helpfully, and unhelpfully. Many unhelpful designs are merely accidental or careless, but plenty are designed deliberately to encourage you to respond in a way that is not in your best interests.

This area of heuristics overlaps strongly with conditioning, and is especially potent when combined with defaults (i.e., what specifically happens when you decide to do nothing), inertia, checkboxes, and other mechanisms which leave people wishing they’d taken more time thinking how to respond.

Bear in mind that aspects of this heuristic are subject to major cultural variation. For instance the ‘thumbs-up’ sign is insulting in certain parts of the world, and generally icons based on western body language are certainly not always transferable internationally with consistent meaning.

Feedback (during thinking and decision-making, enabling correction and useful experience)

Key points:

  • Feedback equates to helping people understand their situations, thinking, and decisions, responsively during thinking and deciding processes.
  • People are open to help/influence from feedback or reflection while thinking and deciding, or having decided, prior to further decisions.
  • Feedback is a relatively skillful and sophisticated aspect designing choices.
  • Feedback is a crucial element of optimizing the effectiveness of Nudge theory.

This is a major and sophisticated aspect of heuristics, and is part of ‘choice architecture’ as defined by Thaler and Sunstein.

Note that feedback here is mainly a part of a system design, for a process, or signage, as experienced by large groups of users, (rather than conventional one-to-one feedback).

(Feedback is not presented by Thaler and Sunstein as a stand-alone heuristic like the above listed items. It is is easier to appreciate in this grouping of heuristics, especially when heuristics are seen as ‘nudges’ in a ‘toolkit’.)

As with other decision-making heuristics explained here, feedback has existed in the study and theory of decision-making for many years quite outside of Thaler and Sunstein’s ‘Nudge’ theory work.

Humans are potentially able to respond very well to receiving feedback about their actions and decisions. We do not always do so however, because this depends how the feedback is given and how we are feeling at the time.

The feedback may be accurate, but if it is given in the wrong way, or the recipient is not feeling good about him/herself, then there’s no certainty that the feedback will be absorbed or acted on. And sometimes poorly designed feedback can make things worse.

To imagine or explain how feedback operates while people are taken through a process, a useful example is the signage during road diversions, which provides good and bad examples, especially where people are liable to make wrong turnings (unhelpful decisions). Good feedback offers signs informing people of mistakes, and signs directing people back to the correct route. Poor feedback fails to anticipate that some people may find themselves on the wrong road, and allows people to continue unaware of their mistakes, often becoming completely lost.

Separately Transactional Analysis is very helpful in understanding – at an emotional level – why feedback may be received positively or negatively, and how to design feedback and reflective systems so that they are as helpful as possible. Transactional Analysis is typically concerned with personal one-to-one communications, however its principles transfer very readily to the design of systems and processes, and how organizations and systems should interact with users/customers/etc.

Facilitative decision-making is also very relevant and helpful in understanding and designing feedback that helps people through a discovery and decision process. This sort of facilitative ‘nudging’ methodology is a major and sophisticated area of heuristics in its own right, and is detailed separately in the supplementary heuristics section.

We see many examples on the web of processes which include feedback, and in other computerized applications. Some are very good, where the user is ‘ coached’ through a thinking/deciding process; others are very unhelpful. Your own experiences will give you plenty of examples.

In appreciating what feedback is required for users in processes and systems – to confirm, give feedback, correct, and offer helpful options and information – it can be useful to step away from the actual project (because choice architects are often so close to a project that it’s difficult to imagine what a user needs).

Feedback – in helping people think and decide – should:

  • confirm to people when they are making good decisions
  • check/ask/prompt/correct people wherever an error of judgment might have occurred
  • suggest alternative/remedial action in the event of errors
  • and should do all this at appropriate times/stages/ in an appropriate manner (again see Transactional Analysis)

Some sort of ‘flowchart’ diagram is useful in designing good feedback systems, by which every possible choice/option/decision point in the decision-making process is identified, analysed, and mapped (showing all the possible paths and outcomes available). This enables appropriate support to be designed to ensure that users/customers are helped at each stage depending on the choices they make.

This completes the summary and explanation of the heuristics identified by Thaler and Sunstein.

However many other additional ‘heuristics’ feature in human thinking/decision-making, and could be considered part of a ‘Nudge’ theory methodology or toolkit.

Several of these major ‘supplementary heuristics’ are explained in detail next, below.

Other Types of ‘Nudges’

Supplementary Heuristics

There are many other aspects of human communicating/engaging which, while not specifically identified as ‘heuristics’ or ‘nudges’ by Thaler and Sunstein, might be regarded as such, and deserve explanation and inclusion here, and especially in the  ‘Nudge toolkit’.

Some of these heuristics are similar to, or overlap, Thaler-Sunstein ‘nudges’. Others are quite different and do not feature in the Thaler-Sunstein published work.

None of the following are specifically named or categorized as ‘nudges’ by Thaler and Sunstein.So please don’t suggest they are.

Some of these may be similar to heuristic theories of other academics and psychologists, including Kahneman and Tversky, however the collection is not intended to represent anyone’s specific theories. The field of ‘heuristics’ is broad, changing, and open to wide interpretation. The collection which follows is an attempt to categorize and explain the main effects in an accessible and useable manner.

On which point, the word ‘intervention’ is used in this section in referring to actions, communications, choices, ‘nudges’, inputs, etc., that are devised and applied by leaders in attempting to alter people’s behaviour/behavior.

Please note also that these are generalized aspects of human thinking. Not everyone behaves predictably according to these influences.

First, a summary table, followed by more detailed explanations and examples.

N.B. The following heuristics are not named or defined as ‘nudges’ by Thaler and Sunstein, although some arise in their examples and supporting narrative, and others are logical extensions of Thaler-Sunstein ideas, and/or have been proposed in various forms by other theorists. The table below attempts to offer a simple accessible summary of these ideas and their meanings, which in turn helps to identify where they exist, and how they might be modified or used.

Supplementary Heuristics (‘Nudges’)
PositioningPositioning, moving things, prominence, proximity, etc. The physical or visual positioning of something that people engage with, or which influences the way people engage with something else.
LimitingExpiry dates, limited stock, and ‘forbidden fruit’. The impression that opportunity could be lost, or something is in limited supply.
SympathyEasy, rather than difficult (at a personal level). Ease of engagement, a perceived high return on on low effort, path of least resistance. When an intervention is sympathetic to someone, then engaging and responding to it is easier than something which is unsympathetic. Is the intervention ‘in tune’ with the target audience?
AccessibilityVisibility – the efficiency or reach of the communication or signal. This is a measure of how many people are exposed to an intervention, and how many times people are exposed to it. Increased accessibility tends to increase responsiveness.
LikeabilityTrust, reputation, credibility. People are more likely to engage and feel positively towards interventions associated with trusted, credible, likeable authorities and the figurehead leaders/characters perceived to represent the authority in question.
RelevanceMeaningful fit with people’s self-image. People consciously or unconsciously ask themselves, “Is this for me?” or “Is this relevant to my needs and situation?” This is similar to ‘framing’ but more personal and individually evaluated.
Mood-changeHow the intervention makes people feel. Kahneman and Tversky theorized in detail about different types of mood influences. It’s a form of ‘priming’ but more specifically entails stimulation and signals which affect people’s feelings, which in turn affect our thinking and decision-making.
FearA big influence on people’s thinking and a major thread running through lots of heuristics. Used widely throughout human history as perhaps the most immediately impactful ‘nudge’ of all, but ‘fear’ contains more complexity and a range of applications, for potentially helpful effect, aside from the usual unhelpful usage.
FacilitationPeople are helped to understand and decide, free of bias. This is a very sophisticated, proactive and personally responsive heuristic which extends a combination of several heuristics, notably such as ‘priming’ and ‘feedback’.
SensoryAlteration of attitude via other sensory stimulation, aside from more obvious ‘mood-changers’. Sensory stimulants include interventions such as sound and music, colour/color, brightness, touch and texture, heat and cold, wetness, humidity, air quality, and certain forms of body language.

The ‘nudges’ in the table above and explained below in more detail are not identified as specific ‘nudges’ by Thaler-Sunstein, although some overlap Thaler-Sunstein ideas. The above ‘nudges’ are additions, extensions or adaptations, perhaps omissions, of the Thaler-Sunstein ideas, and also serve to further explain and clarify the principles which underpin ‘Nudge’ theory, and how it might be taught and applied.

Additional ‘Nudges’ – Detail

Sub-index

  • Positioning – moving things, prominence
  • Limiting – expiry dates, limited stock
  • Sympathy – ease of adoption, path of least resistance
  • Accessibility – efficiency of communication, reach, penetration
  • Likeability – trust, reputation, credibility, honesty, integrity (of ‘nudger’)
  • Relevance – fit with audience needs, self-image, situation
  • Mood-changers – inspiration, passion, flair, intrigue, humour/humor
  • Fear – thinking driven by risk or threat
  • Facilitation – helping people to think and decide
  • Sensory – sounds/music, smells, touch, colour/color

Positioning – locating things, moving things, prominence

This refers to the visible/physical positioning of something.

This might be the positioning of something to be read or used, or the positioning of something else which affects, or is relative to, the access/visibility of the subject/issue concerned.

For example, the positioning of words and pictures in notices and adverts; the positioning of notices and adverts themselves; the positioning of things which affect people’s movements, such as facilities, equipment, etc., that people engage with.

Thaler and Sunstein offer examples of this sort of intervention although do not categorize it as a ‘heuristic’ or ‘nudge’ as such. A notable Thaler-Sunstein example is the positioning of different types of foods in a self-service cafeteria. There are lots of other examples of this sort of ‘choice architecture’ being used in the world, especially in retailing and advertising. The advertising industry understands this positional strategy very well.

Positioning or moving things can be a very powerful way to influence all sorts of human behaviour where choice is affected by visibility/prominence, physical access or location. For example moving the position of a drinks machine in a public/work environment would affect the movement of people, conceivably to achieve an aim that might otherwise be completely unrelated to the drinks service.

There are many possibilities to alter people’s choices by positioning or moving things (including adverts and information notices), so that people are exposed to different experiences and options.

Limiting – expiry dates, limited stock, and ‘forbidden fruit’

Thaler and Sunstein do not specifically categorize this as a heuristic or nudge, yet the fear of losing an opportunity, or of limited offer, is a powerful influence on many people’s thinking.

A psychology analogy to illustrate a major effect within this notion is that of chasing after a dog (it will run away), rather than running away from the dog (it will come after you). Or the dating maxim ‘playing hard to get’.

For some reason human beings are generally conditioned to want something more if it is less easy to acquire, and this provides various ways to build new choices.

Human tendency is to be more attracted to something which is elusive, fleetingly available, limited, etc., than things that are plentiful, unlimited, always available, etc.

A further analogy is that of a child who will be more inclined to pursue things that are restricted or banned, and to refuse things which are offered enthusiastically.

This is called loosely ‘reverse psychology’ in many situations, for example the concept of withholding something from someone, which often has the effect of increasing the person’s desire for it.

People naturally seem to infer a higher value on something if it is rare, about to be lost, or difficult to acquire, etc., than on things which are common and easy to acquire, or even difficult to avoid.

Sympathy – Ease of adoption, path of least resistance (‘water flows downhill’)

Human instinctively try to conserve their energy. This is not laziness, it’s merely being efficient. We naturally prefer to make life as easy as possible for ourselves. Therefore people will tend to behave in quite predictable ways concerning the ease in which a task or process can be approached (or avoided). We take the path of least resistance, (or what we believe to be the path of least resistance).

Accordingly, choices which are designed to match this preference will tend to be preferred to choices which do not.

We might think of this as designing choices that are ‘sympathetic’ to people’s inclinations and habits, etc. Or designing choices that ‘go with the flow’ of people’s natural or habitual behaviours.

This is an over-arching ‘heuristic’ which can be seen operating in various specific nudges, but also in itself ‘sympathetic’ design of choices can be a powerful way to shape choices, and a reminder to check that choices fit with this human tendency.

Put another way, if people think that there is a very much easier option (than choices you design) – a path or very little resistance – then they will tend to take it.

If a designed choice (action or decision) isn’t easy for people, then they are unlikely to take it.

We can also consider this influence in terms of return on effort. People respond well to options which offer a high reward or yield for relatively low effort or input.

Accessibility – efficiency of communication, reach, penetration

This human preference is certainly a feature of a few of the Thaler-Sunstein ‘nudges’, but it stands alone as a very important basis for designing options for people.

For example:

  • Using larger font/type size in detailed printed communications improves people’s ease in reading them, especially older people.
  • Translating materials into different languages increases accessibility for foreign language speakers.
  • Making materials available in different media increases the opportunities for people to see the materials concerned.
  • Distributing information by post, door-to-door, will reach a wider audience than a few pages page on a website.

These are all statements of the obvious, and yet this basic sort of accessibility is often forgotten when choices are designed and offered to people.

In advertising theory this relates to ‘reach’ and ‘penetration’, which are basically measures of how many people see/receive the communication.

In a deeper sense, and in terms of ‘Nudge’ theory, this refers to how effectively a signal (or ‘nudge’) ‘reaches’ the audience – so that people:

  • see/experience it
  • absorb it
  • understand it (or can assimilate it – take it in, even unconsciously)
  • Are affected by it.

This potentially entails lots of things:

Accessibility refers to optimizing the extent to which an audience will see, receive, experience, understand (or otherwise assimilate and process internally) and be affected by the signal/communication/input (‘nudge’) from the sender or giver (‘choice architect’).

Accessibility is another powerful aspect of choice design. On a simple level of decision-making, people can only begin to think and decide about things if they are properly informed. Too often people are expected to act when the accessibility of information is so poor that facts and meanings remain effectively unknown.

Technology is a major factor in this regard, notably where people are expected to understand choices when the communication method requires an access to or command of technology that some people simply don’t have.

For example, many older people are far less informed about their personal finances in modern times because statements and balance information is only generally accessible when a customer looks for it online. Virtually no information is offered from supplier to customer without an extra cost, and this reduces people’s awareness, and therefore the quality of their thinking and decisions.

Worryingly this heuristic tendency is exploited to cynical effect by many large corporations, when poor information accessibility combines with other heuristics such as status quo bias, mindlessness, and optimism, to suppress customer complaints and terminations.

Properly approached however, accessibility should instead be a strong force for good.

Choice architects must ask themselves:

How can I maximize the chances of people seeing/experiencing the choices or communications that I am designing for them?

Consider the ‘what, how, where, when’ of choices:

  • What: content, supporting facts and figures (consider comparisons and stereotypes), language, wording, typeface and design, size, format, layout, etc.
  • How: delivered, packaged, available, linked, supported, justified, framed and primed, etc.
  • Where: located, positioned, available, etc.
  • When: available, frequency, repeated, reminded, etc.

If you don’t know how to improve accessibility, don’t guess or assume what will work better. Ask your audiences how to improve the accessibility of messages and choices designed to reach them.

Likeability – reputation, trust, credibility, honesty, integrity, ethics

This issue of reputation, trust, integrity, etc., is mentioned previously in the philosophy and ‘choice architect’ sections.

The ‘likeability’ of a ‘nudging’ organization is highly significant, although not given great attention by Thaler and Sunstein.

This heuristic factor influences people’s openness or willingness to be nudged, and so it is related to ‘priming’.

Simply, people are less inclined to respond positively (or at all) to a choice (or ‘nudge’) offered by a leader/organization if the people distrust or dislike the leader/organization concerned.

And certainly if people strongly dislike a leader/organization then their response is likely to be very negative to communications or choices offered by the leader/organization.

This tendency is commonly seen in people’s thinking about politics, social policies, corporate scandals, etc. It relates to corporate governance.

Reputation and trust are ‘heuristic’ measures applied by people to leaders and also to organizations. The reputation of the leader (and other senior figures) reflects onto the organization. And vice-versa. The reputations and likeability of leaders and their organizations often become blurred into a single feeling.

Governments have been brought down by scandals of ethics and dishonesty. So have corporations.

These are not failings of service or product, they are failings of attitude and ethics.

Yet leaders commonly ignore or underestimate the significance of likeability and trust in how people judge those in authority, and the organizations they represent.

People tend to develop feelings of distrust and dislike for leaders/organizations which display or behave with:

  • arrogance
  • duplicity
  • dishonesty
  • evasiveness
  • and other traits of leadership which undermine truthful connections between leader/authority and audiences/followers.

The potential for this sort of reputationally damage on leaders and their brands/organizations has multiplied many times since the emergence of the internet and especially social networking, so that:

  • displays/examples of bad leadership behaviour very quickly become very visible to potentially millions of people (despite traditional attempts by leaders to suppress media),
  • modern social connectivity/self-publishing systems then enable and encourage extremely potent analysis and critical comment by unofficial commentators and ordinary people about misdeeds and wrong words – there is no hiding place – and also, interestingly
  • a major heuristic effect (‘nudge’ – namely conforming (‘following the herd’) – further increases public awareness and reaction, ensuring that very large numbers of people form powerful groupings, like a ‘swarm’, to produce massive social outcries, which in the modern age can very easily then lead to serious protests, boycotts, civil disturbance or even more dramatic uprisings.

Serious negative social reactions can of course be prompted by other organizational failings aside from trust and attitudinal issues – such as product or service failures – but such failings usually result in proportionate audience reactions which build slowly and are easier to predict and remedy; whereas reactions to failures of trust (duplicity, dishonesty, greed, etc) tend to produce much deeper quicker uncontrollable audience indignation and outrage, and this is obviously not helpful at all for organizations seeking to maximize audience receptiveness to ‘nudges’.

Relevance – meaningful fit with audience needs, situation, self-image

Audiences tend to respond better to situations, choices, communications, etc., that they feel are relevant to their own lives and situations, than to opportunities which are impersonal or seem designed for ‘other people’.

There are overlaps between this notion and the Thaler-Sunstein ‘framing’ heuristic.

This ‘relevance’ heuristic is however more specifically concerned with how well an intervention matches the personal needs, situation and self image of the respondent.

Audiences consciously or unconsciously assess how meaningful an intervention (choice, nudge, option, etc) is to their own situation and self-image.

We must also consider the audience ‘self-image’ because this is to a degree flexible. The question of whether and how audience self-image can be changed is mainly addressed via the ‘priming’ heuristic.

The ‘choice architect’ must ask: Is the communication ‘framed’ to be personally relevant?

And more deeply, is the option (choice, nudge) itself personally relevant for the audience?

People instinctively judge whether a signal and related option ‘fits’ or feels comfortable.

If it does not seem personally relevant, in style and implications, then the person is less likely to act on it.

Neglecting this need in people is a common failure in the thinking of authorities, because leaders and policy-makers (who become ‘choice architects’) generally do not understand and empathise with their audiences.

Audiences commonly joke that irrelevant ill-fitting options are ‘from another planet’.

The option is irrelevant and ill-fitting because the person who designed it doesn’t understand the audience.

So there is a great need for choice architects to have empathy for and real knowledge of their audiences – to know what people will consider relevant and fitting – both in terms of the way a choice is presented, and the nature of the choice itself.

Leaders need to improve their awareness of the vast differences that usually exist between themselves and the audiences they seek to influence or change, and to take appropriate action: either to develop genuine understanding and empathy for the audience, or to delegate the design of choices and interventions to people who have such understanding and empathy.

Mood-changers – inspiration, passion, flair, intrigue, humour/humor

This range of heuristics, applying to how people feel, is potentially an aspect of ‘framing’, but also stands alone as a heuristic which specifically affects the mood of the audience or respondent.

This is somewhat different to ‘framing’, which generally refers to the styling of the option itself.

We might say that:

  • ‘Framing’ mainly describes the choice or option, whereas
  • ‘Mood-changers’ (and related motivators) affect the mood of the audience.

And:

  • ‘Framing’ mainly entails facts, information, description, affecting how people think, whereas
  • ‘Mood-changers’ (and related motivators) connect with people’s emotions and how they feel.

The style or character of an intervention (choice, nudge, communication) can increase the audience’s mood of receptiveness and responsiveness.

For example, people’s responsiveness is often increased when they are:

  • Smiling
  • Happy
  • Curious
  • Amused
  • Entertained
  • Surprised
  • Inspired
  • Enthused
  • Uplifted
  • And other positively motivating effects on feelings

We can all be influenced by the enthusiasm and belief of others.

Choice architects should ask themselves:

  • Does the choice design enthuse people?
  • Does the communication convey excitement, or some other appealing mood?
  • How can the intervention be designed so that people will feel more inclined to engage with it?

There is a part of most people which responds to inspiration and enthusiasm of some sort and even the most mundane choice can be improved somehow to increase the attention of an audience.

Fear – thinking driven by risk or threat

Fear is an influential thread which to varying degrees runs through many heuristic tendencies in people, notably:

  • Loss aversion
  • Framing
  • Status quo inertia
  • Temptation
  • Mindlessness
  • Self-control strategies
  • Conforming
  • Spotlight effect
  • Limiting
  • Mood-change

Fear is certainly exploited widely for cynical purposes by authorities, governments, leaders, and corporations, and has been for thousands of years.

Sadly its use can be extremely effective in achieving the aims of the authority concerned.

Examples of authorities/institutions which routinely promote and exploit fear in people to achieve the aims of the authority include:

  • Religious organizations – “You will go to hell/not go to heaven unless…”
  • Political movements – “Immigrants (or some other minority grouping) are taking over your city/country…”
  • Governments – “We have to wage a war overseas, and increase surveillance on our own society, or terrorists will kill you…”
  • Corporations – “You will not be attractive to the opposite sex unless you buy…”

The abuse of fear is everywhere.

We learn from our parents that: “You will get a smack/be sent to bed/get no pudding unless you behave…” And we pass this on to our own children.

However fear is an important part of life. A lot of natural fear can be helpful, and has enabled the human species to survive, for example the fear of:

  • Lions, tigers, snakes, bears, big spiders, scorpions, etc
  • Things we might eat but which look and smell bad
  • Explosives
  • Sharp or pointed things
  • Heights (falling from a height is life-threatening)
  • The dark (risk to safety increases without light)
  • Strangers (especially behaving inappropriately)

But when fear is exploited in a manipulative and cynical way it becomes an unhelpful heuristic or ‘nudge’.

The message from this to leaders and other ‘choice architects’ is to avoid exploiting fear unethically.

In such judgments the Thaler-Sunstein notion of ‘libertarian paternalism’ is a useful reference point, and you should understand what is meant by this, or have your own equating ethical standard, before you begin designing choices for people.

Facilitation – helping people understand and decide, according to their personal needs and thinking processes and responses

This is a very sophisticated type of ‘nudge’.

It’s an extension of the Thaler-Sunstein nudges of ‘priming’ and ‘feedback’. It is not described or acknowledged as a heuristic or nudge by Thaler and Sunstein, and is not offered as a part of ‘choice architecture’.

The concept is however a growing and potentially very significant part of choice architecture.

This sort of ‘nudging’ support is likely to become increasingly popular with the continuing development of computer technology, and especially the ‘artificial intelligence’ of computer systems with which people engage.

A pioneer of this methodology is the American expert and writer on decision facilitation, Sharon Drew Morgen, whose extraordinary ‘Buying Facilitation’ theory effectively foresaw the Thaler-Sunstein ideas in the 1990s. See Sharon Drew Morgen’s Buying Facilitation concept, which offers a specific process enabling the application of facilitative support for people’s thinking and decision-making. Morgen’s main focus in advocating facilitative methodology is towards more helpful and effective business and selling, but the principles and techniques are transferable to any situation where one person or body seeks to help others think and decide, importantly think and decide what is best for the person, not the facilitator, or seller or authority (or ‘choice architect’).

In a more general sense, these methodologies and principles and are increasingly featuring in the ‘artificial intelligence’ of human processing systems, so that users, customers, audiences, societies, etc., are offered truly helpful guidance in addressing personal choices.

As such the ‘nudging’ becomes an entire responsive process, which is reactive to individual situation and needs.

Much of the Thaler-Sunstein Nudge theory is by its nature universal; it offers the same carefully designed choices to very large numbers of people. Whereas the more personally-driven facilitative ‘nudging’ characterized by Morgen’s work offers individually responsive choices and feedback, so that people are treated as individuals, rather than part of a large group all of whom are basically treated the same. Central to this level of sophistication is the need to help people understand their own situations, as a crucial requirement before choices are explored and decisions are made.

Sensory – sounds/music, smells, touch, colour/color, temperature, humidity, etc

These sensory stimulants can be very powerful influences on human thinking and decisions.

This sort of heuristic influence is not specifically identified or categorized as a type of ‘nudge’ or heuristic by Thaler and Sunstein.

The effects of sensory stimulation – such as smell, sounds (notably music) – on human thinking and decision-making can be very influential.

For example:

Smells

  • The smell of freshly baked bread in a supermarket tends to increase people’s thinking about bread, and people’s decisions to buy bread.
  • The smell of various foods, especially cooking, increases people’s thinking about eating, and the likelihood that some people will decide to eat something.

Sounds

  • The sound of certain rhythms and music increases people’s conscious thinking and unconscious feelings about moving, dancing, tapping their feet, etc., and the likelihood that some people will decide to start moving, in time with the music (or not, depending on their sense of rhythm..).
  • Certain songs increase people’s thinking and decisions to start humming, singing or whistling.
  • Certain music evokes different moods, such as sadness, fear, pride, etc., and correspondingly affects people’s thoughts and decisions.
  • Certain music is associated with organized groups or people, which can prompt reactions in thinking and decisions, especially members or enemies of the group – e.g., football clubs, nationalities, religions, armed forces, etc.
  • Sounds and music in media such as film, adverts, documentaries, political broadcasts, can have a powerful effect on people’s thinking, and consequently their decision-making.

Other

  • Being suddenly soaked in water discourages people from being energetic and organized – hence the use of water cannons by riot police.
  • The addition of salt, sugar, fats, and other strong tastes to foods tends to strongly influence people’s reactions to them, which of course in most cases is not a helpful effect.
  • The effect of sunlight and warmth, as opposed to darkness/dullness and cold, tends to produce increased positivity in people, and therefore potential amenability and receptiveness towards interventions. (A crowd in the outdoors is more likely to be supportive in fine weather.)
  • Many studies have indicated that when people are exposed to natural green countryside, such as green fields and trees, etc., that this is a more positively conducive environment than being inside buildings and concrete/asphalt surroundings.
  • Two tobacco smoking heuristics: 1. The appeal of cigarette smoking is increased by physiological synergy with alcohol consumption, in that alcohol and tobacco taken together increase the chemical pleasure-effect of each. 2. The UK ban on tobacco smoking in pubs strongly contributed to the downturn in pub customer numbers and widescale pub closures, shifting people away from drinking in pubs and into their homes.

There are many other sensory stimulants which alter our feelings and thoughts. You will think of plenty that affect you personally.

This completes the listing and explanations of (supplementary ‘non-Thaler-Sunstein’) heuristic tendencies in people which we might consider to be types of ‘nudges’ in the context of Thaler and Sunstein’s theory and its natural extension.

The range of heuristics that are additional to the ‘nudges’ specifically identified and defined by Thaler and Sunstein is vast.

These ideas offered here are not exhaustive.

You will discover more.

Being more aware of the interventions and situations that affect your own thoughts and feelings will help you identify new heuristics, many of which can equate to ‘nudges’.

Nudge Theory Is For Everyone

Just as anyone ‘can be a leader’, so anyone can be a ‘choice architect’, and use Nudge techniques to help people towards improving their thinking and decisions.

The opportunity to use Nudge theory, like the opportunity to be a leader or use leadership, is determined by what you do, and is not restricted or enabled by your job title or official role.

This is especially so if you are already responsible for others in any sense, and obviously more so if you are a manager or parent for example.

If you are a leader, manager, supervisor, a teacher, or trainer, or a parent, you are already a ‘choice architect’ and you can begin using Nudge principles and techniques in the way you engage with your people, and the way in which you help them consider their options and make their decisions.

The same applies if you are a businessman or businesswoman, or entrepreneur, or run a part-time business from your home, because your customers/clients are your people, and to varying degrees may be helped by your using ‘Nudge’ theory.

And the same applies if you do anything that entails engaging with or helping others, for example, social work, campaigning, research, charity and voluntary work, etc.

Even if the only engagement you have with another human being is with a spouse or partner, you can be a choice architect and use ‘Nudge’ principles and techniques to helpful effect.

Nudge theory is also a powerful instrument for identifying, understanding, and modifying existing ‘nudges’ which are affecting you, or other people you care about, potentially extending to quite large groups, communities or even societies. These ‘nudge’ influences may be accidental or deliberate, and are often unhelpful, especially if used cynically by corporations or other authorities.

Develop, Adapt, and Use Nudge Theory

Here are pointers, tips and examples of how to develop, adapt, extend, and use Nudge theory. This includes ideas and examples of how to teach, train and coach the principles represented by Nudge theory. And how to relate Nudge theory ideas and optimise their use, alongside complementary models and concepts of motivation, communications, leadership, etc.

Nudge theory was originally devised and proposed in the context of ‘behavioural/behavioral economics’ (such as pensions and healthcare arrangements), however the Nudge concept can be used in virtually any area of human interaction, for example:

  • Leadership and management
  • Supervision and teambuilding
  • Teaching and training, and education of all sorts
  • Coaching and mentoring
  • Counselling and mediating
  • Government – local, national, international – policy, strategy, processes, materials
  • Charitable, voluntary, community sector work
  • Self-development
  • Parenting
  • Working with teenagers and job-seekers
  • Working with minorities, disabilities, and people with difficulties
  • Sports and fitness coaching
  • Healthcare

Nudge theory is generally quite easy to use if you appreciate how it works.

Central to this is the philosophy of Nudge theory.

Nudge theory is not a complex science, but it is quite different to conventional methods of trying to change people’s thinking and behaviour/behavior (which is how mostly we see change-management being attempted by leaders, authorities, corporations, etc., and how we are taught and trained to do it).

  • Conventional methods of changing people use direction and enforcement, often with the threat of punishment.
  • Whereas Nudge theory entails changing people’s environment and choices so they are more likely to make decisions that are helpful and positive (for themselves).

Many Nudge principles (essentially the heuristics, or ‘nudges’) will be familiar to you in one way or another, because they have existed for a very long time in a variety of forms, although not previously called ‘Nudge’. For example, the concept of brand awareness is largely based on the Nudge principle called ‘Availability’ (in terms of ‘familiarity’). That is to say, we tend to trust well-known brands because they are familiar to us. The corporations that develop such brand awareness are exploiting the ‘availability’ heuristic; specifically the tendency for people’s thinking to be ‘nudged’ (and decisions influenced) by familiarity. Such brand owners combine this tactic with use of the ‘following the herd’ (conforming) heuristic, and probably a few other nudges too, such as the ‘spotlight effect’ (appealing to people’s heightened sense of self and being judged by others) and ‘framing’ (by presenting their brands/products and services offerings according to people’s desires, fears, sympathies, etc).

This illustrates that different types of nudges can be, and are often, used in support of each other.

So Nudge theory is a very flexible concept – like a ‘toolkit’.

Nudge techniques can also be used in combination with other methodologies and theories, for example, with:

Nudge theory can be used wholly as an overall entire approach, or elements within Nudge theory can be used individually or in small tactical sets for specific situations.

Nudge theory is not a fixed process, or a sequence, although certain elements by their nature are best used at certain times and for certain durations.

Nudge theory is not limited or self-contained – on the contrary – Nudge theory is extremely adaptable, extendable, and ‘relatable’, so that its methodology – or any part of it – can be developed and used cohesively and supportively alongside lots of other methodologies, theories and techniques.

Note again that Nudge theory can also be used to identify, assess and modify existing nudges, which may be accidental or intentional choices offered by authorities and corporations, and which produce unhelpful effects and decisions for people. This ‘retrospective’ use of Nudge theory – as an analytical and improvement methodology – can be useful in relatively small groups, and potentially for very wide-scale societal situations, for example political lobbying and campaigning; designing educational and social improvement programs; project management and trouble-shooting; mediation, diplomacy, peacemaking, etc.

For ease of use, the table below includes brief descriptions and links to bigger explanations of the Thaler-Sunstein ‘nudge’ types, together with concepts which support or assist the use of the ‘nudges’ concerned.

The Nudge theory ‘toolkit’ offered below is a simple guide to how different heuristic tendencies in people can be used to design helpful choices. The toolkit comprises:

Nudge Toolkit

This table is a listing of the Thaler-Sunstein ‘nudges’, and of some significant supplementary ‘nudges’, which are not specifically identified and defined by Thaler and Sunstein.

The ‘toolkit’ offers:

  • Names and brief descriptions of each ‘nudge’, with the fuller descriptions coming after the table
  • Usage examples/guidance of how to use each ‘nudge’,
  • Methods/theories to use with each ‘nudge’ for understanding, teaching, and applying the ‘nudge’.
Nudge Theory Toolkit
 Nudge typeBrief descriptionUsage examples and guidanceUse with
1Anchoring and adjustmentUsing known things to estimate unknown things.Give the audience factual comparisons and references that are relevant to them. Publicize statistics and facts about things which distort people’s thinking and which are misleading influences.Marketing – Training
2AvailabilityFamiliarity and perceived commonness or rarity.Offer statistics which give true scale of popularity, frequency or rarity of issues. Correct common faulty assumptions.Marketing – Training
3RepresentativenessAssumptions based on stereotypes.Give the audience clarification of facts and figures to dispel false stereotypes and wrong assumptions and replace them with accurate comparisons.Sales – Marketing –  Training
4Optimism/ over-confidenceHopefulness and denial. Complacency.Allow flexibility for people. Protect people from tendency to ‘hope’ rather than think. Clarify and emphasize timings, costs, schedules, etc. Use ‘feedback’. Do not assume that people correctly understand things that you explain. Clarify understanding.Empathy – The psychological contract –  Leadership
5Loss aversionFalse valuation based on possession.Focus on gains and improvements. Avoid presenting situations as ‘taking’ things from people. Clarify actual values of possessed things. Clarify actual risks.Sales – Marketing –  Leadership – Maslow’s Hierarchy of Needs – NLP
6Status quo bias and inertiaFear of change. Laziness, aversion to complexity, ‘smallprint’, etc.Use status quo and defaults to helpful positive effect. Make it easy for people to make helpful choices. Make it difficult for people to use faulty thinking and make unhelpful decisions. Using inertia and defaults to exploit people is unethical.Empathy – Leadership – Transactional Analysis –  NLP
7FramingPresentation or orientation of information that alters its perceived nature.Design communications so that choices are positioned and explained positively – relevant and clear to audience. Use words carefully. Understand and focus on what your communications mean to people, rather than what they mean to you. Orient communications according to received meaning.sales – marketing –  Buying Facilitation– Erikson’s life-stage theory – TA –  NLP – body language
8TemptationGreed, inability to delay gratification, fear of missing out.Use short-term easy gains as incentives to break inertia. Clarify long-term risks of unwise short-term, quick gratification decisions. Using temptation weaknesses to exploit people is unethical.NLP – Psychological contract –  Leadership – Buying Facilitation
9MindlessnessPoor concentration. Negligence. Complacency.Clarify, educate, design and prioritize communications so that important issues are clear and cannot be overlooked. Avoid accidentally misleading people or hiding major considerations. Translate complexity into simplicity. Communicate in ways that people can understand. Use ‘feedback’.Writing – Marketing– Training –  TA
10Self-control strategiesHabits and routines to counter weaknesses.Discover and understand the self-control strategies that your audiences use. Construct offerings so that they fit with people’s systems, habits, and their preferred ways of doing things.Cybernetics – NLP– Buying Facilitation
11Conforming – following the herdThe mob effect. Affirmation. Embarrassment. Fashion. Lack of confidence.Consider the need for people to conform and avoid isolation/embarrassment when you are ‘framing’ and offering reference facts. Avoid positioning helpful choices in ways that seem non-conformist or which expose or isolate people. Build people’s confidence and self-belief so they become less dependent on conforming. Facilitate real clarity of understanding between groups to avoid/dispel false assumptions and reduce risks of people following a wrongly perceived group view (e.g., the ‘Abeline Paradox‘).Leadership – Assertiveness –  Meetings
12Spotlight effectSelf-consciousness, causing anxiety and stress.Build calmness and relaxation into communications and the processes and outcomes of positive choices. Avoid pressurizing people.TA – NLP – E mpathy
13PrimingPreparing people for change.Help people visualize positive actions and outcomes. Encourage people to consider, explore, and assess steps and strategies – how they can do things. Help people think and decide. Avoid thinking and deciding for people. Educate and inform people, especially as to relevant causes and effects. Give people tools and training, not answers. See Facilitation.Buying Facilitation– Cybernetics –  NLP – Training – Leadership
14Stimulus response compatibility(overlays all heuristics)Language and signage design – the signal matches the message.Design communications properly.Understand the effects of design on thinking. Use skilled designers to produce anything that conveys important information.Marketing and advertising – Writing –  Body language – NLP – TA
15Feedback(overlays all heuristics)To people, during and after thinking and decisions.Build checking and feedback into choice processes wherever possible. Reflect people’s responses back to them. Design processes that offer feedback while people are engaging with them.Empathy – NLP – TA –  Buying Facilitation – Project management
above are ‘Thaler-Sunstein heuristics’ – below are ‘supplementary heuristics’
16PositioningLocation of intervention.Understand how the positioning of things affects people’s engagement with them. For example: a heading in a poster, a poster in a building, a drinks-machine, signs, meeting places, things on shelves, anything that people engage with.Marketing and advertising – Cybernetics
17LimitingDeadlines and availabilities.Helpful options can be more appealing if they seem limited by time or availability. Avoid pushing or pressurizing people, which is the opposite of limiting and therefore potentially unattractive or off-putting.Marketing and advertising – Negotiation
18SympathyEase of engaging and adopting.Be empathic and ‘in tune’ with the audience. Imagine you are the audience when you design and style communications and interventions. Test communications and interventions on an audience sample and refine accordingly.Empathy – Personal change –  Benziger thinking styles
19AccessibilityEfficiency, reach, penetration of intervention.Find ways to increase the percentage of your audience who will see or experience the intervention, and the number of times they see or experience it.Marketing and advertising – Selling
20LikeabilityIntegrity, trust and credibility of the ‘choice architect’ organization and its figureheads.Avoid undermining your organizational integrity, and avoid associating the organization or intervention with figureheads of poor repute.Leadership – Ethical management and leadership
21RelevancePersonally meaningful.Interventions and options must be as relevant as possible to the audience. Refer to and use with ‘framing’ and ‘sympathy’. The nature of communications and options must be relevant. Create, translate or interpret interventions so that they are relevant to audiences.Empathy – Kolb thinking styles – VAK learning styles
22MoodAttitude and feeling.The intervention should prompt positive attitude and feelings, so that people feel enthused, inspired, happy, intrigued, helped, etc. Interventions must try to avoid producing a bad mood.NLP – TA –  Stories– Emotional intelligence – Body language
23FearThinking driven by risk or threat.This ‘nudge’ is acceptable when used in genuinely helpful ways, for example reminding people that smoking and obesity is dangerous to health.Leadership – Maslow – Herzberg
24FacilitationPeople are helped to understand and decide.This is a deep and complex process, entailing repeated feedback according to individual actions and responses. A powerful concept in which crucially ‘facilitative questioning’ – or encouraging people to ask themselves – for example ‘what’s missing?’ and ‘how will you measure the results you are seeking?’Buying Facilitation – Empathy – Love
25SensorySound, smell, visual and other sensory influences.These types of ‘nudges’ are environmental and multi-sensory, beyond obvious language-based visual and audio communications, for example, music, smell, warmth, etc. Discover indirect sensory interventions that can influence given situations. Develop these interventions to ‘nudge’ people’s feelings, actions and thinking to being more open to helpful options. At its simplest this might be playing music to relax people.Motivation – Multiple intelligence

The above heuristics are fundamental to the understanding and application of Nudge theory. The Thaler-Sunstein ‘nudges’ (1-15) are explained in more detail in the main Thaler-Sunstein heuristics section. The additional ‘nudges’ (16-20) are explained in the supplementary heuristics section.

How to Use the Nudge Toolkit

You can use the Nudge toolkit (and the remainder of this article) in various ways in the teaching and application of Nudge theory:

  • As an aid for teaching/training Nudge theory and its related concepts.
  • To help creative exploration (for example in brainstorming) of alternative approaches and ideas in the ways that people are led, helped, supported, managed, governed, sold and marketed to, organized, etc.
  • To analyse and address existing unhelpful heuristics or ‘nudges’ which need removing or revising, or which may be of such scale that revision must be pursued via organized education, campaign or protest, etc. (We could call this ‘social change’.)
  • To develop a ‘nudge’-based approach to helping people make better decisions, individually or as a group (as an alternative to traditional autocratic management and leadership techniques, i.e., enforcement or instruction).

Here are some simple rules for working with Nudge theory. They are numbered, but are not necessarily a process or sequence.

  1. Understand and validate the required change – Understand clearly the change you seek to encourage or enable, and confirm that this is ethical and in people’s best interests. Consult as necessary. Be objective and fair. Use proper measures, not assumptions or guesswork. Quantify and define situations, changes, and outcomes. Clarify terminology. Avoid vague or technical terms which cannot be easily understood, or which could mean different things to different people. Avoid being influenced by your own heuristic tendencies, and those of your organizational leadership.
  2. Check for obstacles – Consider what might be preventing people from naturally shifting towards the identified/required change. If necessary consult a sample group. This often highlights obstacles which can be removed, and/or supporting arrangements that can be introduced which enable a natural change, without need of further intervention.
  3. Check for unhelpful existing nudges – Nudges often exist already which are unhelpfully influencing or obstructing people’s thinking. Use the nudge toolkit for clues as to possible heuristic effects which are already acting on people’s thinking. These may have developed completely accidentally, or may have been established negligently or cynically by authorities, leaders, corporations, etc., in the past.
  4. Remove obstacles and establish support – Even if further interventions are warranted, remove obstacles and introduce support as far as possible to make it easier for people to shift towards the desired change.
  5. Create a ‘map’ of the environmental/influential system around people – If no obvious obstacles exist, or additional interventions are warranted, create a ‘map’ or analysis of environmental/circumstantial factors, of people’s engagement (or non-engagement) with the issue for which change is desired. Look for hidden influential factors. Refer to the Nudge toolkit for clues.
  6. Explore which environmental/circumstantial factors can be altered/introduced – Assess and test the effects of altering/introducing these factors (‘nudges’). Refine your ideas so that you can offer people new choices that can help their shifting – through free choice – towards beneficial change. Refer to the Nudge toolkit for ideas as to the types of heuristic influences which might be altered/introduced.
  7. Teach/train leaders at all levels in the group/organization about Nudge theory and its potential use and and advantages over conventional enforcement or direct instruction, threat, etc.

It is useful – especially if teaching others about Nudge theory – to revisit the philosophical aspect of ‘Nudge’ because this underpins the way that techniques should be used, and choices designed.

Nudge theory is a potent concept, but like any concept it can be abused. Having an ethical philosophy encourages a responsible approach to its adoption and use.

Using Nudge theory is different to using conventional management and leadership techniques.

Conventional managementNudge theory
Conventional management and leadership typically involve instruction or action which directs or induces people to change in the way that the authority requires.Nudge theory is typically an indirect approach, which alters situations for people, so that choices are designed which produce options for helpful voluntary changes in people.

Conventional change-management entails:

  • Forceful interventions
  • Directed at the person or group whose change is sought

Whereas Nudge theory typically entails:

  • The design of voluntary choices
  • Directed at the situations in which people exist

Nudge theory is focused on changing people’s environment, and/or the choices people face, rather than the people directly, on the basis that people have the opportunity to change in response to the new choices/environmental situation that they experience.

Nudge theory must be based on:

  • Free choice
  • Beneficial outcomes for people

Summary

  1. Nudge theory was originally developed for ‘behavioral economics’ in 21st century USA, being the main interest of American economists Richard Thaler and Cass Sunstein, authors of the 2008 book ‘Nudge – Improving Decisions about Health, Wealth and Happiness’, which named, defined and popularized the ‘Nudge’ concept.
  2. ‘Behavioral economics’ refers to the interaction between society and economic systems, notably, pensions, investing, and healthcare.
  3. Nudge theory is adaptable and applicable very widely beyond ‘behavioral economics’ to all aspects of engaging with people – for example parenting, teaching, managing, marketing, service provision, leading and governing.
  4. The use and teaching of Nudge theory should be underpinned by a positive ethical philosophy, which its authors call ‘Libertarian Paternalism’, in which the priorities are:
    • designing free choices for people, to enable better thinking and decisions,
    • for the well-being of those people, society and the planetrather than (traditional corporate/government methods entailing):
    • enforced/imposed/manipulative influence of people
    • for the enrichment of corporations and wealthy/powerful folk who lead and own them, or
    • for the consolidation of authority, and then protection/reinforcement of governing bodies/people.
  5. The 2008 ‘Nudge’ book and theory are strongly based on ‘heuristics’ – which the authors equate to ‘nudges’ – and which are (in terms of Nudge theory) a variety of factors which cause people to think and decide instinctively, rather than logically.Much of the heuristics theory in the ‘Nudge’ book is based on pioneering work of Israeli-American psychologists Daniel Kahneman and Amos Tversky, dating back to the 1970s. Their work on human thinking and decision-making is highly significant in the study of human thinking, and has a broader perspective than behavioral economics. Kahneman won the Nobel prize for economics in 2002 for his work with Amos Tversky (who, having died in 1996 did not receive a posthumous award, and so is often unfairly neglected in attributions, etc).
  6. For most of humankind’s existence the ability to think ‘heuristically’ (Automatic/System One) has been very advantageous, and so has become a highly developed intelligence in modern humans. Used appropriately, heuristic thinking saves time, enables effective group cooperation and cohesion, and produces good decisions. However in certain situations (behavioral economics for example) these ‘heuristics’ often cause people to make irrational unhelpful decisions. Also, in the modern world, societies and the wider environment are increasingly open to exploitation and abuse by corporations and governments, which increases humankind’s vulnerability to mistaken actions/decisions borne of heuristic thinking.
  7. Nudge theory proposes that these heuristic tendencies can be approached deliberately to encourage/enable helpful thinking and decisions (where existing thinking/decisions are unhelpful), and that this is a more effective way of shifting group behaviour/behavior than by traditional enforcement, instruction, threat, laws, policies, etc.
  8. Where these natural human heuristic tendencies are not understood, or are manipulated cynically (by authorities or corporations), people/societies are prone to act and decide unhelpfully (for people and society), for example: wasting resources, failing to manage money, getting into debt, eating/drinking unhealthily, losing hope and self-esteem, resorting to mob behaviour, victimizing less fortunate people, buying daft products and services, resorting to crime, becoming dependent, creating pollution and mess, etc.
  9. Governments traditionally seek to correct such behaviours/behaviors by direct instruction, enforcement, threat, punishment, etc., and this typically fails, or makes matters worse.
  10. Nudge theory offers a way to more successfully shift group behaviour: via heuristics, which is how people really think and make decisions.


Full article with thanks to https://www.businessballs.com/improving-workplace-performance/nudge-theory/

Measuring resistance to change, the mathematical way.

Measuring resistance to change, the mathematical way.

Full article with thanks to https://www.businessballs.com/change-management/formula-for-change/

Beckhard-Harris Change Equation

The Model

Having a much broader view of an organisation, managers much often notice the need for change far earlier than do employees. Therefore, they may often find themselves faced with general resistance to any change initiatives, as individuals generally favour the status quo. The Beckhard-Harris Change Equation aims to serve as a simplified way of analysing the potential success or failure of a change initiative within the workplace. If effectively describes the situation which is required for the desired change initiative to be successful. The original “Formula for Change” was described by then-management consultant David Gleicher in the 1960s, but was sculpted into the modern change equation during the 1980s by organisational theorists Richard Beckhard and Reuben T. Harris, from whom this particular model derives its name. It was then further simplified and popularised in the late 1980s and early 1990s by experienced mentor Kathie Dannemiller.

D x V x F > R

Dissatisfaction x Vision x First Steps > Resistance to Change

Dissatisfaction

D refers to dissatisfaction with the current situation. Is it bad enough, or unproductive enough, that individuals can recognise the need for change of some kind? This factor is generally the fuel for the initial change process, which can be initiated or suggested by people throughout the organisational hierarchy. Sometimes, individuals can be unaware of the need for change. Often it requires them being encouraged to consider the issues within the organisation, and an individual – perhaps in a position of responsibility – may need to make the case for change. It must be made clear to everyone that the current situation is not an acceptable way to be conducting business. The case for change must be well-rounded – approached from the perspectives of customers, stakeholders and employees alike.

Vision

Responsibility over the future Vision (V) generally lies with higher management. It is their task to convince those who would implement and work with the changes that they are desirable, and that they will improve the workplace environment, even if they will potentially alter individual employees’ everyday roles. Employees should buy into both the short-term benefits of the change which is being implemented, but also the long-term future of the organisation as whole. This should all be centred around the beliefs and values of the company, which should also be reinforced throughout the change process. The Vision should be explained clearly and succinctly, and it should be adequately explained to individuals what their role will be within organisation in the future; reassure them of any changes which may affect them.

First Steps

It is important that change is realistic. First Steps (F) refers to the practicality of the initial tasks required to work towards the goal. Individually, employees need to understand what their role will be in implementing the change initiative. Their steps should be clear and easy to follow; if the change process appears to move forwards with jumps too big, individuals will quickly accept the unrealistic nature of the project and will lose belief and motivation to work towards the end goal. To retain motivation, each small progress goal should always be within sight of those attempting to implement it. Employees should also know the steps they should be taking in order to prepare for the changes, and any support which they will require should be agreed upon and arranged. During and after implementation, it should always be reinforced what their role is and was in shaping the present and future of the organisation.

Resistance to Change

People dislike change. Even after all the necessary arguments have been put forward, there is generally at least some natural opposition which remains. Humans are generally more motivated by avoiding losses than they are of making gains and improvements. It is much simpler to take no risks, retain the status quo as it is, than to alter it entirely. Generally, when change is announced, individuals will be resistant to it – though this can change over time, with the correct encouragement. Resistance to Change is quite simply the force which needs to be overcome in order for the initiative to be successful. The product of the left three variables must be convincing and powerful enough to exceed the resistance to change of the business infrastructure, practices and individuals.

Application

Each different factor of the model is incredibly subjective, and therefore difficult to quantitively evaluate. However, the model is only intended to serve as a rough model and guide to creating an effective and motivational change initiative. Each individual factor can be scored using surveys and questioning methods, or even simpler, through estimation of individual opinions and moods – especially Resistance to Change and Dissatisfaction. First Steps and Vision are both factors which lie directly under the control of those wishing to implement change, and can therefore be adjusted in response to any other factors.

The equation is intentionally designed as a multiplication; this means, that if any individual factor on he left side, whether that be Dissatisfaction, Vision or Resistance to Change, scores zero, the entire left side of the equation is entirely equal to zero and it will be impossible to implement the new initiative. All three of the factors must hold some weight in order to drive the change process onwards.

Faults

The simplicity of the Change Equation is also it’s weakness. There are countless other factors which play a crucial role in the success of change initiatives. For example, change requires that the correct systems, structures and processes are in place. The model also implies that each of Dissatisfaction, Vision and First Steps are equal in weight with regards to their importance. This is not true in any case, and each situation and organisation are different.

Full article with thanks to https://www.businessballs.com/change-management/formula-for-change/

7 Steps to Acquiring a Small Business

7 Steps to Acquiring a Small Business

Full article with thanks to https://www.entrepreneur.com/article/343129

You don’t have to start a business to own one.

Owning a business is one of the best ways to create lasting wealth and freedom. But there’s a lot of uncertainty. 

Maybe you don’t have the funding, connections, or world-changing vision required to get moonshot ideas like Tesla, Amazon, or SpaceX off the ground. Perhaps you have a business but are struggling to build momentum. Or you have a franchise but want to create something of your own.

I know how difficult it is to start a business from scratch. My first entrepreneurial venture was selling flowers on the street at 16 years old. I didn’t know anything about flowers or sales, and unsurprisingly, no one bought from me. But there was an established flower shop with lots of foot traffic nearby. Looking back, what if I had bought that business and leveraged the reputation and customers they’d already established?

I didn’t have the money to do that, but here’s the thing: In some instances, it is possible to buy a profitable business without having any cash, credit, or experience. Rather than starting from nothing, it’s much easier and quicker to take something good and make it great — plus it’s less risky. You can even find businesses poised to double, triple, or 10X in value within a year. You’ll be hard-pressed to find a real estate investment or stock option that will give you those kinds of returns.

Over the past decade, I’ve bought multimillion-dollar businesses this way and taught others to do the same. It works so well that I’m also establishing an investment fund to support these kinds of deals. Why teach others how to do it? Simple. It gives me access to a flow of deals I wouldn’t have otherwise.

Here’s how to buy profitable businesses without spending your own money.

1. Identify what you want.

The best opportunities are small companies earning between $1 million and $10 million a year in revenue. Look for simple business models with little investment competition, such as professional services like construction, engineering, and plumbing. But the best sector is the one that speaks to your interests and experience.

At the same time, you may not even need personal experience in the industry—because you may be able to work out a deal in which the business owner trains you. If you don’t want to manage the day-to-day operations yourself, you can hire an experienced professional or promote from within the company while the owner is still around to train them. You can usually find someone doing the same job for another business and incentivize them to leave their salary for equity in your company.

2. Find motivated sellers.

It’s crucial to find business owners who want to move on and are motivated to sell. Many baby boomers are ready to retire, while other sellers are bored and need a change.

Most businesses sell for a multiple of the profits. For example, one that’s earning $100,000 will sell for three times that amount. But if you find a motivated seller, you can often negotiate only to pay the equivalent of one year’s revenue (in this case, $100,000).

You can find these businesses the same way you would find clients — through social media marketing or networking, for instance. It’s simply about changing the conversation and putting yourself out there as an investor looking for opportunities.

3. Calculate this simple math.

Offer to sign a nondisclosure agreement, so the business owner is comfortable sharing their books with you. Confirm that there’s more money coming in than going out and that cash flow has remained consistent over the past three years. Then ensure there’s enough profit to cover the cost of financing.

In addition to profitability, consider whether the business has opportunities for improvement, particularly if it’s weak in an area where you excel. You can often double your profits just by improving marketing or operations, for example.

4. Connect with the business owner.

While demonstrating smart plans for the business is important, your pitch should be about more than that. For many owners, their business is their baby — which means they care about more than money. They want to know that you’ll look after the brand and reputation they’ve worked so hard to build. So they may be wary that you will lay off their long-time employees or damage meaningful relationships.

Focus on why you will be the best steward of what they have built by demonstrating that you’re trustworthy and will continue their legacy. How? Build rapport, ask questions, and speak directly to their concerns. Show that you care about them rather than talking about yourself the whole time. It’s even better if you can position yourself as a young, eager version of them.

5. Finance the deal, sometimes with little or no out-of-pocket costs. 

Many financing options don’t require your own capital — or any at all. If the owner is motivated to move on, you can often buy a high-potential business for next to nothing. Some business owners will let you pay them back over time using the profits from the business. If they want to be paid up front, you can secure a loan from a financial institution that specializes in acquisitions. Banks can use the business profits as collateral; they’re less interested in your credit and mostly want to see that you have skin in the game.

You’d be surprised how much of the financing terms are negotiable, so brush up on your sales and persuasion skills. It’s common to pay no more than 30 percent of the purchase price at closing. If you can find experienced investors to loan you the money in exchange for equity, you can use the profits from the business to cover the interest payments.

There are other deal structures, but the point is this: Rather than acquiring debt to fund an unproven idea, it’s possible to buy an asset that has the cash flow to pay for itself.

6. Dive into due diligence.

After you agree on an offer, it’s time for due diligence. Consult with accountants and lawyers and negotiate a fee structure that’s contingent on closing the deal. That way, they’re not motivated to bill as many hours as possible.

Speak openly with key employees to understand how the business runs and ensure that they don’t plan to leave when the deal closes. Establish a solid succession plan with a manager who knows the industry inside and out. Clarify your role and theirs and identify key performance indicators (KPIs) for everyone.

7. Leverage the business owner through the transition.

Now you need to hold everyone accountable, with a clear process in place that you can execute. The business owner knows exactly how everyone and everything works, so lean on them throughout the transition. They’re typically motivated to help you succeed, but consider stipulating a handover period to ensure they stay long enough to pass on their knowledge.

Congratulations! You are the owner of an established, profitable business. Whether you stay involved in the day-to-day or step back and let others do that, you now have a valuable asset — and more personal freedom.

Full article with thanks to https://www.entrepreneur.com/article/343129

6 Steps to Effective Organizational Change Management

6 Steps to Effective Organizational Change Management

With thanks to Fionnuala Courtney and PulseLearning for their post, shared and fully attributed here: https://www.pulselearning.com/blog/6-steps-effective-organizational-change-management/

Are you new to the concept of change management?  Do you want to understand what all the fuss is about?

This quick read from PulseLearning in 2016 is a great introduction to the subject.

Most organizations today are in a constant state of flux as they respond to the fast-moving external business environment, local and global economies, and technological advancement. This means that workplace processes, systems, and strategies must continuously change and evolve for an organization to remain competitive.

Change affects your most important asset, your people. Losing employees is costly due to the associated recruitment costs and the time involved getting new employees up to speed. Each time an employee walks out the door, essential intimate knowledge of your business leaves with them.

WHAT IS EFFECTIVE ORGANIZATIONAL CHANGE MANAGEMENT?

A change management plan can support a smooth transition and ensure your employees are guided through the change journey. The harsh fact is that approximately 70 percent of change initiatives fail due to negative employee attitudes and unproductive management behavior. Using the services of a professional change management consultant could ensure you are in the winning 30 percent.

In this article, PulseLearning presents six key steps to effective organizational change management.

1. Clearly define the change and align it to business goals.

It might seem obvious but many organizations miss this first vital step. It’s one thing to articulate the change required and entirely another to conduct a critical review against organizational objectives and performance goals to ensure the change will carry your business in the right direction strategically, financially, and ethically. This step can also assist you to determine the value of the change, which will quantify the effort and inputs you should invest.

Key questions:
• What do we need to change?
• Why is this change required?

2. Determine impacts and those affected.

Once you know exactly what you wish to achieve and why, you should then determine the impacts of the change at various organizational levels. Review the effect on each business unit and how it cascades through the organizational structure to the individual. This information will start to form the blueprint for where training and support is needed the most to mitigate the impacts.

Key questions:
• What are the impacts of the change?
• Who will the change affect the most?
• How will the change be received?

3. Develop a communication strategy.

Although all employees should be taken on the change journey, the first two steps will have highlighted those employees you absolutely must communicate the change to. Determine the most effective means of communication for the group or individual that will bring them on board. The communication strategy should include a timeline for how the change will be incrementally communicated, key messages, and the communication channels and mediums you plan to use.

Key questions:
• How will the change be communicated?
• How will feedback be managed?

4. Provide effective training.

With the change message out in the open, it’s important that your people know they will receive training, structured or informal, to teach the skills and knowledge required to operate efficiently as the change is rolled out. Training could include a suite of micro-learning online modules, or a blended learning approach incorporating face-to-face training sessions or on-the-job coaching and mentoring.

Key questions:
• What behaviors and skills are required to achieve business results?
• What training delivery methods will be most effective?

5. Implement a support structure.

Providing a support structure is essential to assist employees to emotionally and practically adjust to the change and to build proficiency of behaviors and technical skills needed to achieve desired business results. Some change can result in redundancies or restructures, so you could consider providing support such as counseling services to help people navigate the situation. To help employees adjust to changes to how a role is performed, a mentorship or an open-door policy with management to ask questions as they arise could be set up.

Key questions:
• Where is support most required?
• What types of support will be most effective?

6. Measure the change process.

Throughout the change management process, a structure should be put in place to measure the business impact of the changes and ensure that continued reinforcement opportunities exist to build proficiencies. You should also evaluate your change management plan to determine its effectiveness and document any lessons learned.

Key questions:
• Did the change assist in achieving business goals?
• Was the change management process successful?
• What could have been done differently?

With thanks to Fionnuala Courtney and PulseLearning for their post, shared and fully attributed here: https://www.pulselearning.com/blog/6-steps-effective-organizational-change-management/

The Six Types of successful acquisitions

The Six Types of successful acquisitions

Full article with thanks to https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-six-types-of-successful-acquisitions

Companies advance myriad strategies for creating value with acquisitions—but only a handful are likely to do so.

There is no magic formula to make acquisitions successful. Like any other business process, they are not inherently good or bad, just as marketing and R&D aren’t. Each deal must have its own strategic logic. In our experience, acquirers in the most successful deals have specific, well-articulated value creation ideas going in. For less successful deals, the strategic rationales—such as pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio—tend to be vague.

Empirical analysis of specific acquisition strategies offers limited insight, largely because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy. What’s more, the stated strategy may not even be the real one: companies typically talk up all kinds of strategic benefits from acquisitions that are really entirely about cost cutting. In the absence of empirical research, our suggestions for strategies that create value reflect our acquisitions work with companies.

In our experience, the strategic rationale for an acquisition that creates value typically conforms to at least one of the following six archetypes: improving the performance of the target company, removing excess capacity from an industry, creating market access for products, acquiring skills or technologies more quickly or at lower cost than they could be built in-house, exploiting a business’s industry-specific scalability, and picking winners early and helping them develop their businesses.

Six archetypes

An acquisition’s strategic rationale should be a specific articulation of one of these archetypes, not a vague concept like growth or strategic positioning, which may be important but must be translated into something more tangible. Furthermore, even if your acquisition is based on one of the archetypes below, it won’t create value if you overpay.

Improve the target company’s performance

Improving the performance of the target company is one of the most common value-creating acquisition strategies. Put simply, you buy a company and radically reduce costs to improve margins and cash flows. In some cases, the acquirer may also take steps to accelerate revenue growth.

Pursuing this strategy is what the best private-equity firms do. Among successful private-equity acquisitions in which a target company was bought, improved, and sold, with no additional acquisitions along the way, operating-profit margins increased by an average of about 2.5 percentage points more than those at peer companies during the same period.1 This means that many of the transactions increased operating-profit margins even more.

Keep in mind that it is easier to improve the performance of a company with low margins and low returns on invested capital (ROIC) than that of a high-margin, high-ROIC company. Consider a target company with a 6 percent operating-profit margin. Reducing costs by three percentage points, to 91 percent of revenues, from 94 percent, increases the margin to 9 percent and could lead to a 50 percent increase in the company’s value. In contrast, if the operating-profit margin of a company is 30 percent, increasing its value by 50 percent requires increasing the margin to 45 percent. Costs would need to decline from 70 percent of revenues to 55 percent, a 21 percent reduction in the cost base. That might not be reasonable to expect.

Consolidate to remove excess capacity from industry

As industries mature, they typically develop excess capacity. In chemicals, for example, companies are constantly looking for ways to get more production out of their plants, even as new competitors, such as Saudi Arabia in petrochemicals, continue to enter the industry.

The combination of higher production from existing capacity and new capacity from recent entrants often generates more supply than demand. It is in no individual competitor’s interest to shut a plant, however. Companies often find it easier to shut plants across the larger combined entity resulting from an acquisition than to shut their least productive plants without one and end up with a smaller company.

Reducing excess in an industry can also extend to less tangible forms of capacity. Consolidation in the pharmaceutical industry, for example, has significantly reduced the capacity of the sales force as the product portfolios of merged companies change and they rethink how to interact with doctors. Pharmaceutical companies have also significantly reduced their R&D capacity as they found more productive ways to conduct research and pruned their portfolios of development projects.

While there is substantial value to be created from removing excess capacity, as in most M&A activity the bulk of the value often accrues to the seller’s shareholders, not the buyer’s. In addition, all the other competitors in the industry may benefit from the capacity reduction without having to take any action of their own (the free-rider problem).

Accelerate market access for the target’s (or buyer’s) products

Often, relatively small companies with innovative products have difficulty reaching the entire potential market for their products. Small pharmaceutical companies, for example, typically lack the large sales forces required to cultivate relationships with the many doctors they need to promote their products. Bigger pharmaceutical companies sometimes purchase these smaller companies and use their own large-scale sales forces to accelerate the sales of the smaller companies’ products.

IBM, for instance, has pursued this strategy in its software business. Between 2010 and 2013, IBM acquired 43 companies for an average of $350 million each. By pushing the products of these companies through IBM’s global sales force, IBM estimated that it was able to substantially accelerate the acquired companies’ revenues, sometimes by more than 40 percent in the first two years after each acquisition.2

In some cases, the target can also help accelerate the acquirer’s revenue growth. In Procter & Gamble’s acquisition of Gillette, the combined company benefited because P&G had stronger sales in some emerging markets, Gillette in others. Working together, they introduced their products into new markets much more quickly.

Get skills or technologies faster or at lower cost than they can be built

Many technology-based companies buy other companies that have the technologies they need to enhance their own products. They do this because they can acquire the technology more quickly than developing it themselves, avoid royalty payments on patented technologies, and keep the technology away from competitors.

For example, Apple bought Siri (the automated personal assistant) in 2010 to enhance its iPhones. More recently, in 2014, Apple purchased Novauris Technologies, a speech-recognition-technology company, to further enhance Siri’s capabilities. In 2014, Apple also purchased Beats Electronics, which had recently launched a music-streaming service. One reason for the acquisition was to quickly offer its customers a music-streaming service, as the market was moving away from Apple’s iTunes business model of purchasing and downloading music.

Cisco Systems, the network product and services company (with $49 billion in revenue in 2013), used acquisitions of key technologies to assemble a broad line of network-solution products during the frenzied Internet growth period. From 1993 to 2001, Cisco acquired 71 companies, at an average price of approximately $350 million. Cisco’s sales increased from $650 million in 1993 to $22 billion in 2001, with nearly 40 percent of its 2001 revenue coming directly from these acquisitions. By 2009, Cisco had more than $36 billion in revenues and a market cap of approximately $150 billion.

Exploit a business’s industry-specific scalability

Economies of scale are often cited as a key source of value creation in M&A. While they can be, you have to be very careful in justifying an acquisition by economies of scale, especially for large acquisitions. That’s because large companies are often already operating at scale. If two large companies are already operating that way, combining them will not likely lead to lower unit costs. Take United Parcel Service and FedEx, as a hypothetical example. They already have some of the largest airline fleets in the world and operate them very efficiently. If they were to combine, it’s unlikely that there would be substantial savings in their flight operations.

Economies of scale can be important sources of value in acquisitions when the unit of incremental capacity is large or when a larger company buys a subscale company. For example, the cost to develop a new car platform is enormous, so auto companies try to minimize the number of platforms they need. The combination of Volkswagen, Audi, and Porsche allows all three companies to share some platforms. For example, the VW Toureg, Audi Q7, and Porsche Cayenne are all based on the same underlying platform.

Some economies of scale are found in purchasing, especially when there are a small number of buyers in a market with differentiated products. An example is the market for television programming in the United States. Only a handful of cable companies, satellite-television companies, and telephone companies purchase all the television programming. As a result, the largest purchasers have substantial bargaining power and can achieve the lowest prices.

While economies of scale can be a significant source of acquisition value creation, rarely are generic economies of scale, like back-office savings, significant enough to justify an acquisition. Economies of scale must be unique to be large enough to justify an acquisition.

Pick winners early and help them develop their businesses

The final winning strategy involves making acquisitions early in the life cycle of a new industry or product line, long before most others recognize that it will grow significantly. Johnson & Johnson pursued this strategy in its early acquisitions of medical-device businesses. J&J purchased orthopedic-device manufacturer DePuy in 1998, when DePuy had $900 million of revenues. By 2010, DePuy’s revenues had grown to $5.6 billion, an annual growth rate of about 17 percent. (In 2011, J&J purchased Synthes, another orthopedic-device manufacturer, so more recent revenue numbers are not comparable.) This acquisition strategy requires a disciplined approach by management in three dimensions. First, you must be willing to make investments early, long before your competitors and the market see the industry’s or company’s potential. Second, you need to make multiple bets and to expect that some will fail. Third, you need the skills and patience to nurture the acquired businesses.

Harder strategies

Beyond the six main acquisition strategies we’ve explored, a handful of others can create value, though in our experience they do so relatively rarely.

Roll-up strategy

Roll-up strategies consolidate highly fragmented markets where the current competitors are too small to achieve scale economies. Beginning in the 1960s, Service Corporation International, for instance, grew from a single funeral home in Houston to more than 1,400 funeral homes and cemeteries in 2008. Similarly, Clear Channel Communications rolled up the US market for radio stations, eventually owning more than 900.

This strategy works when businesses as a group can realize substantial cost savings or achieve higher revenues than individual businesses can. Service Corporation’s funeral homes in a given city can share vehicles, purchasing, and back-office operations, for example. They can also coordinate advertising across a city to reduce costs and raise revenues.

Size is not what creates a successful roll-up; what matters is the right kind of size. For Service Corporation, multiple locations in individual cities have been more important than many branches spread over many cities, because the cost savings (such as sharing vehicles) can be realized only if the branches are near one another. Roll-up strategies are hard to disguise, so they invite copycats. As others tried to imitate Service Corporation’s strategy, prices for some funeral homes were eventually bid up to levels that made additional acquisitions uneconomic.

Consolidate to improve competitive behavior

Many executives in highly competitive industries hope consolidation will lead competitors to focus less on price competition, thereby improving the ROIC of the industry. The evidence shows, however, that unless it consolidates to just three or four companies and can keep out new entrants, pricing behavior doesn’t change: smaller businesses or new entrants often have an incentive to gain share through lower prices. So in an industry with, say, ten companies, lots of deals must be done before the basis of competition changes.

Enter into a transformational merger

A commonly mentioned reason for an acquisition or merger is the desire to transform one or both companies. Transformational mergers are rare, however, because the circumstances have to be just right, and the management team needs to execute the strategy well.

Transformational mergers can best be described by example. One of the world’s leading pharmaceutical companies, Switzerland’s Novartis, was formed in 1996 by the $30 billion merger of Ciba-Geigy and Sandoz. But this merger was much more than a simple combination of businesses: under the leadership of the new CEO, Daniel Vasella, Ciba-Geigy and Sandoz were transformed into an entirely new company. Using the merger as a catalyst for change, Vasella and his management team not only captured $1.4 billion in cost synergies but also redefined the company’s mission, strategy, portfolio, and organization, as well as all key processes, from research to sales. In every area, there was no automatic choice for either the Ciba or the Sandoz way of doing things; instead, the organization made a systematic effort to find the best way.

Novartis shifted its strategic focus to innovation in its life sciences business (pharmaceuticals, nutrition, and products for agriculture) and spun off the $7 billion Ciba Specialty Chemicals business in 1997. Organizational changes included structuring R&D worldwide by therapeutic rather than geographic area, enabling Novartis to build a world-leading oncology franchise.

Across all departments and management layers, Novartis created a strong performance-oriented culture supported by shifting from a seniority- to a performance-based compensation system for managers.

Buy cheap

The final way to create value from an acquisition is to buy cheap—in other words, at a price below a company’s intrinsic value. In our experience, however, such opportunities are rare and relatively small. Nonetheless, although market values revert to intrinsic values over longer periods, there can be brief moments when the two fall out of alignment. Markets, for example, sometimes overreact to negative news, such as a criminal investigation of an executive or the failure of a single product in a portfolio with many strong ones.

Such moments are less rare in cyclical industries, where assets are often undervalued at the bottom of a cycle. Comparing actual market valuations with intrinsic values based on a “perfect foresight” model, we found that companies in cyclical industries could more than double their shareholder returns (relative to actual returns) if they acquired assets at the bottom of a cycle and sold at the top.3

While markets do throw up occasional opportunities for companies to buy targets at levels below their intrinsic value, we haven’t seen many cases. To gain control of a target, acquirers must pay its shareholders a premium over the current market value. Although premiums can vary widely, the average ones for corporate control have been fairly stable: almost 30 percent of the preannouncement price of the target’s equity. For targets pursued by multiple acquirers, the premium rises dramatically, creating the so-called winner’s curse. If several companies evaluate a given target and all identify roughly the same potential synergies, the pursuer that overestimates them most will offer the highest price. Since it is based on an overestimation of the value to be created, the winner pays too much—and is ultimately a loser.4 A related problem is hubris, or the tendency of the acquirer’s management to overstate its ability to capture performance improvements from the acquisition.5

Since market values can sometimes deviate from intrinsic ones, management must also beware the possibility that markets may be overvaluing a potential acquisition. Consider the stock market bubble during the late 1990s. Companies that merged with or acquired technology, media, or telecommunications businesses saw their share prices plummet when the market reverted to earlier levels. The possibility that a company might pay too much when the market is inflated deserves serious consideration, because M&A activity seems to rise following periods of strong market performance. If (and when) prices are artificially high, large improvements are necessary to justify an acquisition, even when the target can be purchased at no premium to market value.


By focusing on the types of acquisition strategies that have created value for acquirers in the past, managers can make it more likely that their acquisitions will create value for their shareholders.

Full article with thanks to https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-six-types-of-successful-acquisitions

The impact of the pandemic on insurance mergers

The impact of the pandemic on insurance mergers

Whole article with thanks to https://www.canadianunderwriter.ca/insurance/the-impact-of-the-pandemic-on-insurance-mergers-1004175814/

Brokerages negotiating a merger or acquisition don’t have to stop because of the COVID-19 pandemic, a Canadian M&A advisor suggests.

“A good deal can get done. I suspect it may take a bit longer,” said Georges Pigeon (pictured), Montreal-based deal advisory partner with KPMG Canada who has led more than 100 mergers and acquisitions in the financial services sector. “The challenge will be in having meetings. I think, to an extent, that virtual meetings, calls and presentations can happen.”

But whether it’s a carrier, brokerage or independent adjusting firm going through a merger or acquisition, sometimes it is good for management teams to meet face to face, Pigeon said in an interview.

That probably won’t be happening at least in the short term. The World Health Organization declared Mar. 11 that COVID-19 is a pandemic, and the Ontario government is one of several jurisdictions that declared a state of emergency as a result. Ontario has banned public gatherings of more than 50 people. Although insurance is exempt from a province-wide shutdown of business that takes effect Tuesday night, public health officials are still advising people to keep their distance from one another.

“Parts of Canada have gone on lockdown or shutdown over the past two weeks or so,” said Pigeon. “What we are currently seeing is, the (M&A) processes that were ongoing when the crisis really hit don’t need to be stalling. I think a lot of the parties at play are quite conscious that deals don’t get signed overnight.”

If this was happening 15 years ago, it would have been more difficult to execute a merger, Pigeon said Monday.

“If I go back to the start of my deal career, there is no way I could have operated the way I am operating right now,” he said. “During the 2008-09 crisis, I think the technology was good for certain functions, but I doubt I would have been able to operate at the level I am currently operating at.”

This is not to suggest that M&A will continue at the same pace.

“Any deal that was still ongoing when the crisis hit, if the deal was weak to begin with, we would not be surprised that it doesn’t come to fruition. That is both on the carrier and on the insurance services side,” said Pigeon.

“There were obviously some transactions that had been in process in 2019 into early 2020. Some of them came to fruition. Others dropped off, especially when things were a bit weaker, whether in terms of strategic fit whether [the target firm] was actually worth what it was worth. Those ones would have fallen off the table in advance of the crisis.”

Whole article with thanks to https://www.canadianunderwriter.ca/insurance/the-impact-of-the-pandemic-on-insurance-mergers-1004175814/