Nudges and Negative Option Marketing

C. W. Von Bergen

Southeastern Oklahoma State University

&Morgan P. Miles

University of Tennessee at Martin

Presentation Overview

Nudges

NOM

Defaults

Mental Short Cuts, Biases, Heuristics, & Rules of Thumb

Dual-Process Theories of Decision-Making, Judgment, and Choice

System 1/Instinctive System2/Reflective

• Unconscious • Conscious

• Implicit • Explicit

• Automatic • Controlled

• Low effort • High effort

• Rapid, reflexive • Slow, deliberative

• Prone to stay with the default • Systematic thinking that inhibits default responses

• Holistic, perceptual • Analytic, reflective

• Historically associated with cognitive biases

• Historically associated with reflective thinking and normatively correct solutions

Our Split Personalities

Homer Simpson Mr. Spock

Cognitive Bias, Mental Shortcuts,Heuristics, & Rules of Thumb

• http://homepages.se.edu/cvonbergen/files/2013/01/Embrace-Your-Cognitive-Bias.pdf

• For example– Confirmation bias– Overconfidence bias– Loss aversion bias– Endowment bias– Planning fallacy– Status quo bias

“A nudge … 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.”

—Thaler & Sunstein (2008)

What is a Nudge?

A Very Famous Nudge

Nudging: A Simple Example

Eating Containers Can Influence How Much People Eat: The Plate or Bowl-Bias

A Gentle Nudge: Signing a Form at Its Beginning Decreases Dishonesty

MINDSPACE*Messenger we are heavily influenced by who communicates information

Incentives our responses to incentives are shaped by predictable mental shortcuts, such as strongly avoiding losses

Norms we are strongly influenced by what others do

Defaults we ‘go with the flow’ of pre-set options

Salience our attention is drawn to what is novel and seems relevant to us

Priming our acts are often influenced by sub-conscious cues

Affect our emotional associations can powerfully shape our actions

Commitments we seek to be consistent with our public promises, and reciprocate acts

Ego we act in ways that make us feel better about ourselves

*Dolan, P., Hallsworth, M., Halpern, D., King, D., Metcalf, R., & Vlaev, I. (2012). Influencing behaviour: The mindspace way. Journal of Economic Psychology, 33, 264-277.

A Quintessential Nudge: Defaults

Defaults—where a person takes no

further action—make a difference

Why Defaults Are Influential?

• Implied endorsement—consumers assume the default was chosen because it’s typically the best choice

• Effort—humans are cognitively lazy and making a decision involves effort

•Status quo—the propensity for decision makers to keep things the way they are

Willingness to Donate OrgansAfter People Pass Away

Taxicabs, Restaurants, etc. … and Defaults

Default Effects and 401(k) Savings Behavior

• Madrian and Shea (2001) document a 48% increase in 401(k) participation among newly hired employees and an 11 percentage point increase in participation overall at one large U.S. company 15 months after the adoption of automatic enrollment (i.e., the default is you’re in and individuals have to opt out).

• Automatic enrollment has been particularly successful at increasing 401(k) participation among those workers least likely to participate in standard retirement savings plans: young, lower-paid, and Black and Hispanic employees.

Nudge May Be Problematic:Choice Without Awareness

• Lack of transparency nudges typically work better in the dark: “If we tell students

that the order of the food in the Cafeteria is rearranged for dietary purposes, then the intervention may be less successful.”

• Maybe not as important as suggested Lowenstein et al. (2014) found, in the context of end-of-life

care choices, that even when individuals are explicitly informed that a default rule is in place, and that it has

been chosen because it affects people’s decisions, that people are not uncomfortable with defaults, even when they are made aware that choice architects have selected them, and do so because of their significant effect.

Negative Option Marketing

• The FTC uses the term “negative option marketing”: broadly, to refer to those commercial transactions in which sellers interpret a consumer’s failure to take affirmative action-either to reject an offer or to cancel an agreement-as affirmative assent to be charged.

• AKA: advance consent marketing, automatic renewals, continuous service agreements, recurring billing, book-of-the-month plans, free trial offers, or inertia selling,

Negative Option Marketing

Negative Option is a term used to describe payment plans and subscription services, where a merchant or organization (bank, lender, etc.) debits one’s checking account or charges their credit card, periodically (monthly, usually) until they say “Stop”. In other words, the charges go on and on until the person says no.

People are probably signed up in a negative option deal with their utility company, mortgage holder, phone company, cell phone provider, cable television provider, car loan company, or the like. Every month, their bills come due, and every month, they automatically charge the person’s credit card or debit their checking account.  

Negative Option Marketing

• The general principle involves enrollment procedures in which a participant must actively opt out of a plan rather than actively opt in which dramatically increases plan participation across a number of domains and demonstrates the influence and effectiveness of defaults (Sunstein, 2013).

• The buyer and seller agree in advance that one or more subsequent offers from the seller will be deemed to be accepted unless the buyer explicitly rejects the offer.

• NOM Plans or Offers

Negative Option Plans

Type of Plan Characteristics of Plan Examples

Pre-notification Seller sends periodic offers of goods. If the customer does not take action, the goods are sent to and charged to the customer.

Book club;Wine club

Continuity Customer agrees to receive periodic shipment of goods or provision of service until the customer cancels the contract

Gym membership

Automatic renewal

Product or service is automatically renewed at the end of a specified period unless the customer cancels the renewal.

Magazine subscription

Free-to-pay or Nominal fee-to-pay

Customer receives a trial offer of a product/ service at little or no cost. At the end of the trial period, customers are charged the regular price unless they cancel the service.

Premium cable channel subscriptions; Credit card

Benefits of NOM Offers

To Sellers

• Allows them to stock inventory more efficiently because they can ship products on a predetermined schedule

• Helps avoid costs related to renewals

• Lower decreased operating costs can generate increased profits

To Consumers

• Receives uninterrupted service, often with a greatly simplified renewal process

• Sellers may provide buyers up-front benefits, such as introductory gifts or free trials

• Convenience—no need to revisit the purchase/payment process each month

Costs to Consumers

• Consumers must take action to reject future products or services (we’re lazy; status-quo bias)

• Some NOM plans generate significant consumer dissatisfaction; e.g., those offered as an upsell by third-party sellers

• Seeming lack of transparency and inadequate disclosures

• Consumers ignore pre-checked boxes as a means of consent

Negative Option Marketing

• In 2009, the FTC sought comments on the Negative Option Rule as part of the agency’s systematic review of all its current rules and guides

• July 25, 2014: FTC Will Keep Negative Option Rule In Its Current Form– Measure the effects of Restore Online Shoppers’

Confidence Act (“ROSCA,” 2010)– The FTC's proposed amendments to the Telemarketing

Sales Rule (“TSR”)

FTC’s Rule Concerning the Use of Prenotification Negative Option Plans

• Requires sellers to clearly and conspicuously disclose the plan's material terms before consumers subscribe

• Abide by particular time periods during which sellers must send introductory merchandise and announcements identifying merchandise the seller plans to send

• Giving consumers a specified time period to respond to announcements

• Providing instructions for rejecting merchandise in announcements

• Promptly honoring written requests to cancel from consumers who have met any minimum purchase requirements

To Be Continued …

The following slides not used

Taxicabs, Restaurants, and Starbucks—and Defaults

What is a Nudge?

• “Ways of influencing choice without limiting the choice set or making alternatives appreciably more costly in terms of time, trouble, social sanctions, and so forth” (Hausman & Welch, 2010, p. 126).

• Seemingly minor changes in the way a choice is framed/presented to a decision-maker can generate dramatic changes in behavior.

Choice Architecture

Choice architecture describes the way in which decisions may be influenced by how choices or options are presented.

Qantas Airlines’ Carbon Neutral Program and Defaults

• Choose to fly “carbon neutral” with Qantas’ Carbon Neutral Program

• For just a small contribution, you can choose to carbon offset by clicking below or as part of the process when booking flights on qantas.com.

• Dallas to Sydney = $8.61 automatically added to your flight but you can cancel this fee

“Nudge” in the Medical Field

When patients are exiting after their visit to prompt patients to verbally repeat the time of an appointment or asking them to complete the appointment card reduced the number of ‘no shows’ by 31 per cent.

Norms• Guests often encounter cards in hotel rooms

asking them to reuse their towels– “HELP SAVE THE ENVIRONMENT”– “PARTNER WITH US TO HELP SAVE THE

ENVIRONMENT”– “THE MAJORITY OF GUESTS IN THIS ROOM

REUSE THEIR TOWELS”

• Compared to the first two messages, the social norms message increased towel reuse by 34%

Signing Forms at the Top Makes People More Honest

• Signing at beginning of forms makes ethics salient and significantly reduces dishonesty

• 20,000 forms sent from car insurance firm asking for miles driven with the statement: “I promise that the information I am providing is true”– ½ with signature testifying to truthfulness of miles driven at the

beginning of the form– ½ with signature testifying to truthfulness of miles driven at the

end of the form (similar to IRS 1040)

• Results– Promise at the beginning: 26,098 miles driven– Promise at the end: 23,670 miles driven– 10.25% difference

Negative Option Plans

• Pre-notification plans—e.g., book or wine or clubs; seller sends periodic notices offering goods and if buyer does not respond seller sends goods and charges consumer

• Continuity plans—Consumers agree in advance to receive periodic shipments or provision of services, which they continue to receive until they cancel the subscription

Negative Option Plans• Automatic renewals—e.g., a credit card

seller may automatically renew a consumer’s subscription when it expires and charge for it, unless the consumer cancels the subscription

• Free-to-pay or nominal fee-to-pay—consumers receive goods or services for free (or a nominal fee) and sellers automatically begin charging a fee (or higher fee) unless consumer affirmatively cancels