Small changes in how products are presented or represented can impact our economic decisions. In most cases, nudging is used to increase the well-being of consumers such as to stop them from smoking and eating healthier.

Richard Thaler (Nobel prize winner) stated that nudges should be:

1. Nudges should be transparent and not misleading
2. It should be easy to opt out of nudges
3. Nudges should improve the welfare of those being nudged

The benefits of nudging can be seen though government action, whether it be through negative incentives such as carrying out a punitive action by withholding tax benefits if citizens do not vaccinate their children or through positive incentives such as subsidies; the government offers vaccines at free or very little cost to encourage more people to get vaccinated. The government purchases the vaccines but does not pass the cost onto consumer, they subsidies the cost.

 However corporations use this same idea of ‘nudging’ but rather than helping consumers make better choices that will benefit them in the long term, they more aim to increase their own profit (self-interest); unnecessarily increasing consumer spending.

This technique is called ‘sludge’.

Techniques used to sludge consumers into spending more

There are several techniques used to make consumers spend more.  One in particular is the default effect.  The default effect relies on bounded rationality. Basically, options that corporations want consumers to choose are presented as the default . The reason people stick to the default is due to bounded rationality; it takes time and effort to change or explore other options. This plays hand in hand with present bias as consumers tend to priorities other activities that have more immediate rewards rather than researching other options that may be more beneficial to them. 

An example of the default effect is how many subscription businesses (such as Netflix) default an automatic renewal unless the consumer chooses to cancel. By setting automatic renewal as the default leads to people procrastinating cancelling the service and end up forgetting about it.  Subscription businesses further rely on the fact that consumers procrastinate; basically subscription companies make cancelling harder which deters people from cancelling an unwanted service due to the time and energy involved in cancelling. A survey conducted in the United States show that more than 70% of consumers (who were surveyed) continued paying for unwanted subscription as they had not remembered to cancel the subscription.

Another technique used is anchoring  which refers to the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.  This is as in most cases, consumers do not have a clear idea of how much to spend.

Anchoring is used by a lot of restaurants. Say you have gone out for a nice meal and you are looking to purchase a bottle of wine. Not knowing much about wine, you’re not certain what you should purchase.  The drinks menu lists a wine priced at $100 with a wine value at $50 just underneath it.  When you see the $50 wine bottle, you will likely think it was an incredible steal and even though you may be just as happy with a $25 bottle of wine, you’re likely to fall victim to the anchor price of $100. 

Another technique used to nudge consumers into spending more is framing. Framing is basically how the options are presented.  For instance, subscription business will usually price subscriptions on a monthly basis such as $84/month. This amount seems much better than $1000/year even though they even out to the same cost. Therefore, consumers are likely to buy products depending on how they have been framed even if it is not beneficial for them.

The ethics of sludging consumers into spending more money is a rather convoluted issue; there are two sides to the argument. In my opinion, sludging increases the profit made by businesses which is more beneficial for the country’s economy.  Furthermore, the tax earned from profit made due to sludging can be used by the government to further improve hospitals, roads and schools. While sludging may be thought of as unethical, in my opinion it is a necessity as it is more beneficial for the economy.

Bibliography:

https://theconversation.com/sludge-how-corporations-nudge-us-into-spending-more-101969

http://www.marketwired.com/press-release/hiatus-survey-62-consumers-waste-money-on-unwanted-subscriptions-because-they-dont-cancel-2107639.htm

https://impactually.se/nudge-vs-sludge-the-ethics-of-behavioral-interventions/

https://www.helpscout.com/blog/pricing-strategies/

Click to access northcraft_neale.pdf

https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/framing-effect/

https://www.ezonomics.com/whatis/sludge/