Question

KJ and Andy develop a 2-brain framework which they call system 1/system2. Thaler develops a framework surrounding nudge moments. Please explain and define system 1/ system 2 and nudge moments with examples. How are they similar and how are they different.

Answer 1

A dual-system theoretical framework to explain why our judgments and decisions often do not conform to formal notions of rationality.

• System 1 “is the brain’s fast, automatic, intuitive approach”. System 1 activity includes the innate mental activities that we are born with, such as a preparedness to perceive the world around us, recognise objects, orient attention, avoid losses - and fear spiders! Other mental activities become fast and automatic through prolonged practice.
  
• System 2 is “the mind’s slower, analytical mode, where reason dominates” . Usually, system 2 activity is activated when we do something that does not come naturally and requires some sort of conscious mental exertion.

A common example used to demonstrate the two systems is the following puzzle: A bat and a ball together cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?

Faced with this puzzle, the majority of people instantly guess 10 cents. The correct answer, however, is 5 cents - which, again, most people can work out after spending more time thinking about the question. For years, this has been used as a perfect example of how the way we think is ruled by two types of mental processes: fast and intuitive, versus slow and analytical.

Nudge theory suggests consumer behaviour can be influenced by small suggestions and positive reinforcements.

Proponents of nudge theory suggest that well-placed ‘nudges’ can reduce market failure, save the government money, encourage desirable actions and help increase the efficiency of resource use. Critics argue nudges can be misused and become a form of social engineering or way to encourage consumers to buy goods they don’t really need.

“Irrational” Decision Making: The Example of the Psychology of Price

Boundedly rational choices, made due to limits in our thinking processes, especially those we make as consumers, are illustrated well in Dan Ariely’s popular science book Predictably Irrational. A good portion of the research he discusses involves prices and value perception. One study asked participants whether they would buy a product (e.g. a cordless keyboard) for a dollar amount that was equal to the last two digits of their US social security number. They were then asked about the maximum they would be willing to pay. In the case of cordless keyboards, people in the top 20% of social security numbers were willing to pay three times as much compared to those in the bottom 20%. The experiment demonstrates anchoring, a process whereby a numeric value provides a non-conscious reference point that influences subsequent value perceptions (Ariely, Loewenstein, & Prelec, 2003).

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 leadership, motivation,  change management, and many aspects of personal/self-development.