1.2.4 Behavioural Economics and Economic Policy

Choice Architecture and Framing

Choice architecture/Framing: the design of different ways in which choices can be presented to consumers to influence their decision-making and behaviour towards making rational decisions.

There are three main ways in which choice architecture can be used to influence consumer behaviour:

• Default Choice: Making the desired option the option that is automatically selected if the consumer does not make an active choice. e.g. organ donation opt-out systems.
• Restricted Choice: Limiting the number of options available to consumers to simplify decision-making and reduce choice overload. e.g. simplifying menu options in a restaurant.
• Mandated Choice: Requiring consumers to make the desired choice legally. e.g. requiring car owners to have third-party insurance.

Nudges

Nudges: a concept in behavioural economics that refers to subtle interventions or changes in the choice architecture that influence people's behaviour in a predictable way without restricting their freedom of choice.

Nudges can be used by the government to encourage individuals to make better choices for themselves and society. For example, nudges can be used to encourage people to eat healthier by placing healthier food options at eye level in supermarkets.

Nudges can also be used by firms to influence consumer behaviour and increase sales. For example, Netflix nudges users to pay for the most expensive premium subscription by making it the default option when signing up, and highlighting the benefits of the premium subscription compared to the cheaper options.