Richard Thaler, a Nobel Prize-winning economist, coined the term “sludge” for administrative burdens that include:
- selecting from multiple ill-defined options
- completing paperwork requirements
- filling in forms
- navigating confusing websites
- dealing with other forms of bureaucratic hell
His central theme by removing the sludge, you can make people’s lives a lot better. You can save them time and money, reduce frustration, and potentially improve health as well. Also, you help people make choices that are in their best interest as judged by themselves.
“Sludge can take two forms. It can discourage behaviour that is in a person's best interest such as claiming a rebate or tax credit, and it can encourage self-defeating behaviour such as investing in a deal that is too good to be true. Less sludge will make the world a better place.” — Richard Thaler
The world is becoming increasingly complex. We have ever more significant responsibilities, that include selecting our insurance, picking our mortgage terms, determining out how much to save for our retirement, choosing our cell plan, etc.
What is a Nudge?
Thaler and Cass Sunstein provide a simple idea in their book Nudge: Improving Decisions About Health, Wealth, and Happiness. A nudge is a small action or change in the environment, which makes it easier for you to decide which of the options is best for you, without forcing you to choose a certain way.
The individuals who improve the environment in which people choose are known as “choice architects.” We unconsciously make better decisions in an environment that nudges us in the right direction every time temptation becomes greatest.
For example, when you use a smartphone GPS app, you decide where you want to go. The app offers a route. You are free to follow it or decline the advice and take a different route.
Thaler and Sunstein suggest that the goal of a conscientious choice architect is to help people make better choices “as judged by themselves.”
Nudge Individuals to Make Better Choices ‘As Judged by Themselves’
There are many helpful nudges —good signage, text reminders of appointments, healthy daily specials, and thoughtfully chosen default options.
- Automatically enrolling employees into retirement savings plans from which they can easily opt out. Thus, people who always meant to join a program but never got around to it are more likely to have more comfortable retirements.
- If the cafeteria places fruits next to the register, rather than the candy bars — you will eat more bananas – merely because they are easier to pick up.
- When an app lets you know in advance that your subscription will expire in 30-45 days and offers you a discount to renew for another year.
What is Sludge?
Sludge is about activities that create in action or nudge people to make suboptimal choices. Sludge messes things up and makes wise decision-making and prosocial activity more difficult. While we expect businesses to promote their goods and services, some use nudging techniques for less benevolent purposes. They encourage buyers to maximize profits rather than to improve the buyers' welfare. Thus, they create sludge. Here are some examples of sludge:
- When you need to supply a credit card for a “free trial” of an app. If you did not like the app, you must remember to cancel the subscription otherwise a charge appears on your next credit card statement.
- When a cashier at McDonald’s asks you “Do you want fries with that?” that is also a nudge in the wrong direction or sludge.
- If a gym, magazine, or app is automatically renewing your subscription without telling you in advance and providing a choice to cancel it.
- In extreme cases it is fraud — think of financier Bernie Madoff who defrauded thousands of investors.
- When an organization offers a rebate to buy a product, if the refund happens when we check out, either online or in person, they are providing a nudge. However, if they require you them to mail in a rebate form, the SKU bar code on the packaging, a copy of the receipt, and so forth — it is sludge.
Why Retailers and Manufactures Like Mail-In Rebates
When retailers and manufacturers use mail-in rebates to promote products and increase sales, customers do not get the discount at the time of purchase. Usually, they must send a rebate claim form, either through the mail (referred to as mail-in rebates) or online. Then customers must wait for the processing of the claim. Eight to ten weeks later the refund cheque is sent out.
During the rebate process, companies earn interest on the money that is being held to pay the outstanding rebates. Also, about 70 percent of people are like me and never get around to sending the rebate claim forms. Furthermore, nearly one-fourth of all customers lose or forget they have a rebate check. The submission and cheque cashing rates increase with more substantial rebates.
These companies are offering an illusion of a rebate. They only pay about 20% of the amount they would have paid if they provided an instant discount. Because of this thick sludge, redemption rates for rebates tend to be low. However, the lure of the rebate stimulates sales— marketers call it “buy bait.”
Sludge in the Public Sector
Earned Income Tax Credit
Sludge in the public sector comes in many forms. As an example, consider the earned income tax credit program in the US. It aims to support the working poor by encouraging work and transferring income to them. While the Internal Revenue Service has all the information necessary to adjust for credit claims by any eligible taxpayer who files a tax return. However, the rules require people to fill out more forms and send them separately. So, many eligible taxpayers do not complete the extra paperwork. Thus, people are depriving themselves of the subsidy that Congress intended they receive.
In Ontario, the government offers a program to help lower-income customers with their electricity bills. Through the OEB, it provides monthly on-bill credits of up to $57/month to reduce their electricity bills. In one utility we worked with fewer than one percent of customers who are eligible for the rebate claimed it. In five days, using a couple of students contacting and helping customers complete the paperwork, half of those eligible customers began receiving the credit.
Since then, the OEB improved their process and now offer online applications. Step one is a calculator with two inputs number of people in the household and annual income. It estimates your monthly credit. You then decide if you should invest the 20 minutes in completing the application — a helpful nudge.
Getting on the Voters’ List
Similarly, one of the essential rights of citizens is the ability to vote. Moreover, increased voter participation can be nudged by automatically registering anyone who applies for a driver's license. However, voter participation can decrease through sludge. For example, the state of Ohio has recently been purging from the list of eligible voters those who have not voted recently or who have not responded to a postcard prompt.
Defenders of such sludge claim that it serves as a protection against voter fraud, even though people who intentionally vote illegally are rare. In Canada, when we file our taxes, there is a nudge. The tax form has a checkbox to allow the tax authorities to pass our name and address to the federal and provincial departments that manage the voters' list.
Choice architects shape how we choose. Some companies abuse our susceptibility to nudges. Moreover, they intentionally create sludge. This sludge takes two forms.
- It can discourage behaviour that is in a person's best interest such as claiming a rebate or tax credit.
- It can encourage self-defeating behaviour such as investing in a deal that is too good to be true.
Nudges are small hints or changes, which push you in one direction, but leave all options open. A default is a powerful nudge, as it requires you to object it for it not to work. Government and organizations States can use nudges to improve societies and countries. I now view all organizations through the lens of the nudges they offer and the sludge they create. This provides insight to determine if they are customer-centric — someone I want to do business with.
Interestingly, when compared to sludge, in the long-term, nudges create fewer complaints, cause less stress to employees, increase customer retention, and are more efficient.
So, let us continue to encourage all organizations in both the public and private sectors to become desirable choice architects — nudge for good. It is good for us and good for them. Moreover, let us also urge organizations to engage in sludge cleanup campaigns. Less sludge makes the world a better place.
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