NUDGING THE EUROPEAN CONSUMER: A PERSPECTIVE OF EU AND BUSINESS NUDGING

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NUDGING THE EUROPEAN CONSUMER: A PERSPECTIVE OF EU

AND BUSINESS NUDGING

Richard Nan 10222820

MA Thesis in European Studies

Graduate School for Humanities

Universiteit van Amsterdam

Main supervisor: Dr. P.W. Zuidhof

Second supervisor: Dr. M.E. Spiering

03/07/2017

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What is the role of the European

private sector in the nudging of the

European Citizen?

Abstract

Over the last 10 years, behavioural economics and its implications have found their way into different fields of policy and have assisted these policy fields on different levels. Within the scope of behavioural economics, nudging has become a method used by both European policymakers and multinationals operating within Europe, to steer the European citizen in ways that meet the goals of these institutions. This paper investigates whether insights from behavioural economics and nudging have had an effect on the European consumer, contributing ultimately to the question; What is the role of the European private sector in the nudging of the European Citizen?

By gathering primary research and consulting relevant literature within this niche field, this paper has attempted to answer the research question.

ABBREVIATIONS

BI Behavioural Insights

BIAP Behavioural Insights Applied to Policy

BE Behavioural Economics

EC European Commission

EU European Union

JRC Joint Research Centre

PEF Product Environmental Footprinting

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I

Introduction

Imagine your favourite deodorant suddenly decreases 50% in size, whilst the price stays the same. Would you still be willing to buy the product? Probably not. Instead, you would probably find a different deodorant that has the familiar size that you always buy. But what if the packaging of the new smaller size deodorant would explain that the volume of the bottle has stayed the same, but the gas in the bottle is compressed, for environmental and sustainability reasons? Still you would probably buy the bigger deodorant, because you feel comfortable with that size. It’s the size you always buy.

The above-‐sketched scenario describes an insight in the behaviour of humans, and the economical background that comprehends the fact that you still make the choice to buy the bigger can is called behavioural economics. Large multinationals deal with these kinds of situations and human choices every day, and struggle with the dilemma this brings forth. On one hand, these companies are trying to drive their business in a sustainable fashion and aim to be forthcoming to the well-‐being of the European consumer, a goal that is largely constructed by policy and regulation imposed by the EU. On the other hand, these multinationals need to be profitable to secure their presence in the market. The EU is faced with the same dilemma. Their main goal is to ensure the wellbeing of the European consumer so they attempt to create and sustain a consumer market that is as beneficial as possible to that same consumer. Nevertheless, policy-‐makers are forced to consider how well their decision to install policy or regulation is going to be received by multinationals. After all, these immense companies hold great influence and power over the market.

To explain and answer the dilemmas multinationals and policy-‐makers are faced with, behavioural and psychological sciences have found their way into the process of policy-‐making. Over the last few decades these sciences have been instrumental in getting commercial companies to understand consumer behaviour and rationality, and over the last decade the EU has recognised and used the insights from these sciences to steer the European consumer in the direction it believes is serving the European consumer the best. But exactly how do consumers make decisions and how should the EU and multinationals engage in steering this decision-‐making process? Questions like these have puzzled academics for years and a vast body of research and information about these topics has emerged over the years. Academic works like ‘Nudge’ by Thaler and Sunstein (Thaler, Sunstein, 2008) and ‘Prospect Theory: An analysis of Decision under Risk’ by Kahneman and Tversky (Kahneman, Tversky, 1979) have been instrumental in defining this extensive research field.

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Generally, people are viewed as rational creatures that make rational choices. However, this idea has been debated, as people are not always rational. People also tend to make irrational choices at times, for instance when they are seduced by in-‐store advertising for a product. Therefore, the former assumption might also be the reason that in the past some policies have not been as effective as they could be. Studies on human behaviour can offer useful insights to policy-‐makers by generating the evidence, which can enhance existing policies or lead to new policy-‐making. Such studies are applicable to a wide range of EU policy areas, wherever a behavioural element exists. Whether policy-‐makers aim at changing behaviour or designing better regulations, greater knowledge on how people are likely to behave should serve them well. People’s behaviour is also quite relevant to EU policy. Sometimes, the objective of a policy will be to change behaviour for the common good. Tax on cigarettes and alcohol exemplifies this, as it aims to benefit public health. On other occasions policies can be used to protect the consumer from buying misleading products. This contains retail products, but also for example financial products. Policies might also be used to steer people into a more healthy way of thinking and living, where ‘quit-‐smoking’ campaigns are a good example of this implication of policy. In all these cases, behaviour is a key element for the success of a policy initiative. The policy can be said to have a relevant behavioural element. Good policy-‐making should identify this element, assess its importance for the effectiveness of a policy, and try to understand it better.

To get a better overview of what the influence of behavioural economics is on policy-‐making, and in particular, how nudging is influencing the European consumer, this research will focus on the following question:

What is the role of the European private sector in the nudging of the European Citizen?

This question will be investigated by first giving a theoretical analysis on the subject. In chapter II.1 the essential insights of behavioural economics will be reviewed. Chapter II.2 will focus on the crucial theory of Nudging. Chapter III will assess nudging from two different perspectives, where chapter III.1 will focus on nudging performed by the European Union and its member states and chapter III.2 will focus on nudging performed by the private sector. In chapter IV.1 the overall conclusion to the research question is presented, followed in chapter IV.2 by recommendations that were derived from the conducted theoretical and practical research.

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II

Behavioural Economics Theory

Behavioural economics (BE) is a term we have seen develop in the media and in academics increasingly over the last ten years. Nudging can be seen as an application of behavioural economics insights aiming at influencing people´s behavior.

Major world leaders like Barack Obama and David Cameron have been focusing on the science and insights of behavioural economics, respectively with Obama’s Executive Order (The White House, 2015) and Cameron’s Behavioural Insights Team. These developments can be seen as a sign that behavioural economics is creating traction on the international platform and are obtaining a valuable position next to classical economics. This chapter will focus on the insights of which the field of behavioural economics consists. This analysis of the different insights is crucial, as it forms the theoretical basis to answer the research question of this research: ‘What is the role of the European private sector in the nudging of the European citizen?’ Subsequently, the focus will be on Nudge as a phenomenon and how it is being used as a strategy to influence the European community.

Rational choice

Before discussing behavioural economics, understanding the framework upon which behavioural economics theory is built is imperative. As behavioural economics diverts from classical economics theory in the assumption of human choice, explaining the concept of rational choice theory is relevant. Rational choice theory is designed to analyze and predict social and economic behaviour of a rational subject. The theory is described extensively in the 1955 article ‘A Behavioural Model of Rational Choice’ by Herbert A. Simon, in which the author elaborates on the architecture of rational choice (Simon, 1955, p. 102). The terms for a rational decision are stated as follows: ‘a set of behavioural alternatives (behavioural choices) is required. Within this set of behavioural alternatives, a subset of alternatives is to be considered by the chooser. The next step in the process is the notion of outcomes of the choice made, in which one can make a difference between perceived and actual outcome. After that the reward of the choice needs to be considered and the information given to predict which outcomes actually occur is assessed. The final step is to assess the probability that a particular outcome will follow. It can be inferred that this is the most important step in the process as it can determine the level of rationality one uses to make a choice. It can be argued for instance that the level of rationality is lower when one is influenced by external factors, such as ‘advertisements’ (Simon, 1955, p. 102).

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As touched upon above, classical economic theory is built on the assumption that people are homo economicus, or as named in the book ´Nudge´, people are Econs (Thaler, Sunstein, 2008, pp. 7-‐9) Econs can be seen as ‘unboundedly unscrupulous’ (Thaler, 2013). In more simple language, this roughly means that Econs are only interested in themselves, whereas Humans (terminology introduced by Thaler and Sunstein) are influenced by the environment around them. Econs are to be seen notoriously as the most intelligent economists around and whilst they are not influenced by their environment, humans are. Humans are not all as naturally bright as Econs, and often are absent minded and have limited attention, including problems relating to self-‐control, according to Thaler. These and other human traits cause humans to deviate from the ‘Econ’ path and the choices which are then made, form the research grounds of behavioural economics. With regard to European policy, it can be inferred that when policy makers constantly refer to the rational choice theory as a reference of social and economic behaviour, policy will not be fully adjusted to the actions of the subjects that policy tries to affect.

II.1

Behavioural Economics

As mentioned above, crucial insights that derive from the field of behavioural economics must be understood before acknowledging how they are used in the practice of nudging. More specifically, nudging within the European Union and its effects on the consumer market must also be understood. In this light, this section provides the insights that behavioural economics has brought forth.

Over the last decades, behavioural economics has gradually gained an important status within the general field of economics. But how the field of BE should be grasped must be questioned. Behavioural economics as referred to in this thesis is ‘a scientific discipline that applies psychological insights into human behaviour to explain economic decision-‐making’ (Ciriolo et al., 2016, p. 10). Since the beginning of BE in the early fifties many experiments on the human psyche in relation to choice have been conducted which forms the basis for BE theory. In the wide array of economics theories, BE theory can arguably be seen as standing alone amongst other theories. According to Stigler, an accurate economic theory consists of three attributes and should be evaluated along those measures (Stigler, 1965, p. 380). These attributes are reality, generality and tractability, where generality is the singular attribute that does not consistently acquire the same function in BE theory as it does in other theories. In economic theory, one of the research goals is to provide a depiction that is as close to reality as possible, and look for a general ‘rule’ or ‘law’ that can be derived from numerous experiments. Theories that make use of general assumptions are assumed to be more tractable,

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because they try to keep the number of used limitations rather small. Experiments in BE studies inherently have to make use of behavioural suppositions, which gives them more assumptions to deal with. Even though these studies might not fully fit Stigler’s criteria, many valuable behavioural insights have formed over the years (Camerer, Loewenstein, 2002, pp. 2-‐3).

II.1.2.

Essential Behavioural Insights

To grasp a more substantial grounding in the components of behavioural economics, one must understand the basic insights that are currently utilized. This cannot be understood without understanding the predominant academic literature. Conventional economic theory assumes that every consumer can be regarded as an ‘economic man’, or one ‘who makes choices on the basis of what is cheapest, most supplementary, most efficient and so on’ (Simon, 1955, p. 99). If we only think of how we make consumer choices ourselves, it is hard to see yourself continuously making choices in that way. People tend to make choices because they are influenced by different thoughts, persuasions and incentives.

Behavioural insights were initially used as part of a discussion between economists from different schools, but generally the behavioural insights were used as a mirror towards classical economic theory. Over time these insights have gained presence in EU policy. Since 2008 there has been an influx of research and academic insights in behavioural economics and the insights and applications of nudging. According to Zuidhof this development ‘undeniably has far-‐reaching consequences for EU policy making’ (Zuidhof, 2016, p. 4). This is exactly what the science of behavioural economics tries to take into account when looking at choices people make from an economic perspective. The non-‐ rational choice pattern of people can be recognized in the following essential behavioural insights, which are categorized by Ciriolo (Ciriolo, 2011, p. 1).

II.1.2.1

Choice Architecture

Thaler et al. see choice architecture as ‘organizing the context in which people make decisions’ (Thaler et al., 2014, p. 428). By this context they mean the environment in which a person makes choices, or the influence of environment on the subject’s brain when one makes a decision. Unsurprisingly, all elements are crucial in the decision-‐making process. Every contextual or environmental influence exposes the subject to choices, either instinctual or rational. One interesting

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and amusing test that shows the workings of or battle between instinctual and rational choice is the Stroop test (MacLeod, 1991). The version used today is entirely simple, yet effective. Subjects are positioned in front of a computer screen and shown a number of words that either appear in red or green. If the word shown on the screen is red, the subject is instructed to press the right button on his keyboard, if shown in green the subject needs to press the green button (Ibid, p. 249). This could be assumed as a simple task to perform and whilst this might be correct, it’s only until a new component is introduced. Hidden in the set of words, there is the word GREEN in RED and the word RED in GREEN. One could say that this is irrelevant, as the subject is focussing on the colour and not on the actual word shown on the screen. Nevertheless, once shown on screen, response time increases and more errors are made. In the frame of choice, the Stroop test depicts the trade-‐off occurring in a human’s brain between instinctual or rational choice.

By deconstructing the implications of choice architecture, it is important to also understand that choice architecture should be seen as a framework to influence the behaviour of humans. Within this framework, there are practical methods to influence behaviour. These methods are described below.

II.1.2.2.

Default Options

Default options are options one is presented with, in any situation. The appearance of options in situations forces humans to make choices, and according to Thaler and Sunstein (Thaler, Sunstein, 2008, pp. 8-‐9), these choices are factors that influence the rationality of the human mind. The choices are predetermined ways of dealing with an issue that will come into force if the decision-‐ maker does not influence the process. Thaler and Sunstein explain default options by the following example:

‘When you get a new cellphone, for example, you have a series of choices to make. The fancier the phone, the more of these choices you face, from the background to the ring sound to the number of times the phone rings before the caller is sent to voicemail the manufacturer has picked one option as the default for each of these choices. Research shows that whatever the default choices are, many people stick with them, even when the stakes are much higher than choosing the noise your phone makes when it rings.

Two important lessons can be drawn from this research. First, never underestimate the power of inertia. Second, that power can be harnessed. If private companies or public officials think that one policy produces better outcomes, they can greatly influence the outcome by choosing it as the default’ (Thaler and Sunstein, 2008, pp. 8-‐9).

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As stated, large amounts of power can be derived from the knowledge of the workings of default options on the human mind. Knowing which options to set as default options in order to achieve most success of the goals set by private companies or public officials, is a powerful source of knowledge. As stated, that power comes from the workings of inertia, but one might question, what exactly is inertia. Derived from Newton’s first law of motion (or often referred to as Newton’s law of inertia), inertia is the assumption that ‘an object stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force’, (Physics classroom, 2016).

Abiding by this law, it can be understood that default options work in the same way. People stick with the option they chose when first introduced to the array of options and see the change of these options as effortful, even if the reward of that (small) effort can be greatly beneficial. The fact that most people keep buying a newer model of the same car is often not because they believe it to be a particularly good car, but because they are reluctant to invest time in doing market research about other comparable cars. Conducting research could be greatly beneficial from a financial perspective, however the human mind responds easily to administering change in that sense.

II.1.2.3

Incentives of search

Incentives refer to human motivation, the act of doing something to reach a goal. An interesting thought is that the real goal isn’t reaching the goal, but overcoming the struggles to get to that goal. Overcoming a real struggle or pain generates that sense of victory, and actually enjoying the goal that has been grasped is usually only a nice addition (Dan Ariely Ted Talk – Predictably Irrational, 2012). Ariely describes two conditions that play a role in human motivation: the meaningful condition and the sisyphic condition. The meaningful condition depicts the idea of building something that is durable and something that is appreciated in a way. The idea of building something meaningful or with purpose can be seen as motivation, as one wants to keep building because it is going somewhere. The sisyphic condition is named after Sisyphus, the legend of the Greek king and founder of Korinthe. In short, the Greek gods lay the punishment of moving a rock up a mountain upon Sisyphus, only to see it roll down again once he makes it to the top. This Greek legend can be seen as a metaphor for demotivation, because working on something with no potential of reaching a goal is undeniably demotivating. Furthermore, an example Ariely poses about this process is the cake-‐mix example, which proves that people need to exert a level of effort to feel pleasure from

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achieving a goal. In the fifties an American company that produced cake mix with eggs witnessed their new product failing which could not be explained. Scientists came up with a possible solution to this problem and advised the company to take the eggs out of the pre-‐mixed cake mix. Now customers had to add eggs to the cake mix, which gave them a feeling of achievement. Customers could now feel happy about taking credits for the ‘self made’ cake and sales increased significantly as a result of this method.

Another correlating aspect of motivation is value, meaning how much value does one assign to a certain goal. The effort one puts into achieving a goal is therefore in correlation with that goal. The incentives of value are personal and can for instance be social incentives or monetary incentives (Bandiera et al., 2010). Social incentives are incentives that stimulate social contact and actual interests, and can be powerful incentives, sometimes more powerful than monetary incentives. Subsequently, monetary incentives are incentives that use gaining money as a goal and are commonly the main driver for motivation (Kamenika, 2012, p.21). Kamenika points out that employees working on a commission basis are significantly more likely to work harder and work towards their targets, as they receive instant rewards for the extra work they undertake. Subsequently, Kamenika points out that inadequately structured incentive schemes might lead to inefficiency due to multitasking problems, which means that workers are not able to reach targets as they have too much commission-‐based work (Prendergast, 1999). Furthermore, Kamenika argues that workers might also not fully understand incentives that generate bonuses and therefore are not inclined to hit their target.

Lastly, employees might be influenced by loss aversion, meaning that they are not willing to take the risk of doing extra work, where it could affect the quality of regular work they would otherwise do in the same amount of time. Other reasons for the weakening of incentives might be the inconsistency of work-‐life balance that targets bring, or the risk of demotivation when incentive goals are too high and seem impossible to reach. All above situations prove that incentives do not always improve productivity, and when placed incorrectly they can potentially deteriorate productivity.

II.1.2.4.

Myopic Decisions

Myopic decisions are decisions based on an inaccurate estimation of time and how much time something will cost. The inadequate understanding of time affects choice and choice structures in a multiple ways. Firstly, humans tend to not value things when they’re in the distant future, as it is desirable to be rewarded in the foreseeable future. This can lead to choices that are not necessarily

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beneficial to the individual in the long term, but provide quick results. Secondly, humans tend to focus on one particular, preferable outcome of the options presented of things to happen in the future. This outcome is fundamentally the most profitable, but is not always the most likely. However, individuals tend to focus on that one outcome and are sure it will materialise, thereby discarding all second-‐choice outcomes. Thirdly, perhaps the most ‘humane’ of insights, is that humans tend to be overoptimistic about the future. They tend to assume that the outcome they desire will undoubtedly be delivered and thereby also overestimate the time and money they will have to spend in the future. This insight is arguably the biggest danger in making decisions.

II.1.2.5.

Loss Aversion

Loss aversion denotes as an insight where humans generally find losing twice as much more painful than they find winning joyful (Kahneman & Tversky, 1979). Loss aversion as a concept is closely related with prospect theory, a theory formulated by Kahnmeman and Tversky and developed through extensive testing and research by these two authors. Fundamentally, prospect theory is the finding that people tend to prospect a certain outcome through the use of a reference point, for instance current wealth or health. In this case especially situations that involve risk and uncertainty were tested.

II.1.2.6.

Choice and information Overload

People face choices daily, thus coping with many choices can be challenging. Barry Schwartz elaborates on the subject of choice overload and its effects in his book ‘The Paradox of Choice’ (Schwartz, 2004). Schwartz points out a crucial dogma that free or democratic societies operate under, which advocates that choice or information overload is good. The more elements of choice one has, the more freedom, where the more freedom equates to more prosperity. Schwartz argues that this is not natural for humans. The pace of technology for instance, is too high for the human brain to contend with. For example, when buying a cell phone, there are multiple options of cell phone choices. Once acquiring a few options, humans must again choose between the different applications the phones have, presenting the brain with greater options.

Choice has negative effects on people such as paralysis. An excess of choice tends to paralyse people leading to the inability of making any choice at all. This process leads to procrastination and thus no choices are made at all (Johnson et al., 2012). Furthermore, if we do succeed at making a choice from a variety of options, research shows that we are inevitably less happy with the choice then

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when we would choose from a few options. Not in the least because we would always think about the many other options we had and the possibility of them being the better option than the one we chose now. The regret that choosing the option you chose subtracts from the happiness you received when making, in your mind, the right choice. The more options there are, the easier it is to regret any option you chose, because more options generates a greater sense of missing out on a more beneficial option. This second phenomenon is called opportunity cost, because it reflects the concept of the cost of missing out on a certain opportunity with many attractive features.

When an excess of options arises, the third phenomenon is an escalation of expectations. When someone has few options, it can mean the expectations for these options are relatively low. This is because people compare the options, but only have a few aspects of the options to compare, if the options are in the same category. However, if you have many options, you have many different aspects of options to compare and your expectations might escalate. This might lead to you feeling worse about your choice, even though you did better than you would have with fewer options. In that case the amount of choices increased expectation levels so high that one of the choices should have been perfect. When the choice is not perfect, the regret subtracts from the choice happiness again.

Companies often claim to offer the best service whilst claiming that everything is possible. Moreover companies currently offer multiple options in their taylor-‐made products, but this again leads customers to believing they will receive a perfect service. Looking at this problem from that perspective, every customer experience is potentially and eventually disappointing, because no company can maintain a constantly perfect service. As well as this disappointment, it also brings forth regret and subtracts from your choice happiness. It can be inferred that the only option to essentially enjoying a service is to have lower expectations.

II.1.2.7.

Heuristics

Another crucial part of the decision-‐making process is the science of heuristics. Heuristics as a concept can have many different meanings, but in the psychological context have been referred to as ‘rules of thumb’ or ‘mental shortcuts’ (Shah, Oppenheimer, 2008, p. 207). Simon referred to it as ‘methods for arriving at satisfactory solutions with modest amounts of computation’ (Simon, 1990, p. 11). This science comprehends any method of learning, problem solving or decision-‐making that uses a practical approach which isn’t necessarily the ideal approach, but sufficient for the task at that

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moment. In other words, when one makes a choice in the decision-‐making process, it tends to be the choice that reaches the immediate goal the quickest, but isn’t necessarily the most efficient. Tversky and Kahneman discuss the different aspects of heuristics in their article ‘Judgement under Uncertainty: Heuristics and Biases’. The authors discuss the different forms of heuristics under uncertainty, so when one has no prior knowledge of the outcome of the choices that are presented. Three heuristics findings from this paper form the basis of heuristics theory these days. These findings can be categorized as follows : Anchoring, Availability, Representativeness.

II.1.2.7.a Anchoring

Anchoring is an interesting heuristic as it shows the brain essentially using a first impression of experience as an anchor for coming experiences, which can be familiar products or experiences. The anchoring gives the subject the idea that there is an order or segmentation in the range of products or set of experiences that are being compared. Subsequently, anchoring gives the subject the feeling that they are making a thought-‐out and measured choice, choosing the best out of all options presented. In reality, this is not the case, as proven by Kahneman and Tversky in their anchoring experiment. In this experiment, subjects were shown a wheel of fortune that would have an outcome of either 10 or 65 with every spin. After the outcome, either 10 or 65, the subjects were asked how many African countries were in the United Nations. Results showed that subjects whose wheel of fortune outcome was 10, guessed a number that was close to 10. Subjects who got 65 as an outcome guessed a number that was close to 65 (Kahneman, Tversky, 1974, p. 1126). The outcome of this experiment shows that even though there is no direct connection between the wheel of fortune and the number of African countries in the United Nations, the human brain makes use of anchors. Both the wheel of fortune and the number of countries are expressed in numbers, which apparently is the overpowering and connecting factor in the human brain.

Anchors can be used both from a commercial and policy point of view. From a commercial point of view, anchors are interesting, where setting up a large anchor can make a consumer pay more for a good product then one would normally do. For instance, if a shop owner would put two bottles of wine on display, one for 10 euros and one for 15 euros, then the 10 euro wine sets an anchor for both wines, whilst the wine might actually only be worth 3 and 5 euros, or might even be worth the same. Consumers are influenced by this anchoring and will see the 10-‐euro bottle as the ‘cheap’ bottle, compared to the 15 euro bottle and will not consider the price or actual product anymore. This shows that what we think is a reasonable price to pay for a product, often comes from an arbitrary anchor. In the document Mindspace the following is brought forth: ‘It has been shown that the minimum payment amount on credit card statements attracts our attention and “anchors” our

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decisions. When a credit card statement had a 2% minimum payment on it, people repaid £99 of a £435 bill on average. When there was no minimum payment, the average repayment was £175. In other words, presenting a minimum payment dragged repayments down. Insights such as this may offer more sophisticated means of regulation’ (Dolan et al., 2010, p. 24). One of the writers of this document, David Halpern, later formed the Behavioural Insights Team and advised Prime Minister David Cameron on policy making, with the use of insights such as the insight described above.

II.1.2.7 b Availability

The availability heuristic is somewhat interesting, as it focuses on the mind’s view on the probability of an event or occurrence happening. More specifically, this theory focuses on the mind’s imagination of an event or occurrence presenting itself. It is inferred that people’s estimation of a specific event occurring is often incorrect. The mind takes on and projects certain patterns that seem to be correct, but are often false.

II.1.2.7 c Representativeness

Representativeness is a heuristic that mainly has to do with the human ability to categorize. This ability helps us to make sense out of an otherwise chaotic situation and the ability to understand things better. We look for aspects in a person, object or situation that match or partly match a pre-‐ set model of a person, object or situation in our brain. By doing that, we enable ourselves to relate the unknown to something we’ve experienced before, thereby making us understand the unknown better. This can also be seen as a survival tactic as instinctively we use representativeness to make us understand dangerous situations better. Representativeness is thereby closely related to experience as well, because the pre-‐set models we use are formed partially by experience (Tversky, Kahneman, 1974).

Subsequently, by classifying certain situations, we are able to save time and energy. This is because we don’t spend time thinking about the right way to act in a certain situation; instead using a sense of unwritten rules, to make a quick and often un-‐thought through decision to tackle a given problem. Experience hereby makes us fall into the mental shortcut of representativeness, because we create patterns in our brain that make it easy for us to link experiences to patterns. These patterns lead us to pre-‐set models that we then use to identify a certain unknown person, object or situation.

Experiences are not the same as memories. Experiences happen in the now, memories happen in the now and in the past and are more comprehensive than experiences. Experiences form memories, and all experiences together form a memory about a certain situation, object or thing. Memory strongly plays into representativeness because memory affects experience and thereby also affects

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the way in which the unknown is classified. In describing how this works precisely, Daniel Kahneman discusses a typical example of two patients that undergo a colonoscopy (Kahneman, Ted Talk, 2010). Two aspects are measured in the experiment, experience and memory.

During the test, the two patients were asked to describe the level of pain they suffer, every 60 seconds. Afterwards, the patients were required to describe how they felt during the test. Interestingly enough, the patient they found who recorded higher pain levels, did not have the worst memory of the test, in fact the other patient did. This means that there is a correlation between memory and experience, and memory being the accumulation of all those experiences. It might be that the patient who had the worst experience has had many painful experiences in the past and now goes into these medical tests with a biased feeling about how that whole experience is going to be.

It is the same as going to the dentist, because we have been submitted to these dentist visits from an early age on, our minds have formed a pre-‐set model around dentists, namely that it is unenjoyable to visit the dentist. One might ask if this would be the same if a person has never gone to the dentist before and now goes for the first time at the age of 30. Probably this person will feel bad whilst he is having his teeth checked, but will not feel so bad about the whole experience of going to the dentist, because of a lack of memory on dentists, which could have made him feel significantly worse.

Research also shows that the ending of an experience is the most important factor of the memory that is revolved around it. It is like making a very hard test that you’ve worked on for a few hours, if the last few questions went well, it is likely someone will feel more confident about a good result than if the last few questions of the test were miserable. Similar results were found in the experiment where Kahneman found out that if the experiment continued for a few more minutes, the overall memory of the experiment was better. This had to do with the fact that the patients were familiar with to the colonoscopy and the idea of it, and the memory was now more peaceful.

Kahneman and Tversky underwrite all above stated characteristics in their paper “Probability and Representativeness”, and they conclude the major insight that comes from research on representativeness. First, the insight that we try to estimate probability on questions we have no answer to or no bearing of when it comes to knowledge. Even in these situations, we try to classify and categorize to come to a certain estimation of an outcome, based on nothing in the end, as the situation or problem described cannot be classified or categorized. Additionally, there is another way to classify something, through availability (see & I. 1.7). According to Kahneman and Tversky it relates to mental effort in these types of heuristics, as they are seen as mental shortcuts. They are seen as mental shortcuts because they assess a certain situation. More specifically, the question should be

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how well heuristics can assess a certain situation, and arguably not efficiently, as heuristics are intended to save time and effort. Heuristics, and especially representativeness can therefore mislead people easily.

II.1.2.7 d Intertemporal and Present Bias

Intertemporal biases concern the different values that humans give to a time slot in a process in different stages of that process. It is linked with the Present Bias, which indicates that humans are more inclined to value payoffs that are in the near future more than payoffs that are in the distant future. This indicated that humans find it difficult to postpone payoffs, even if the payoff in the distant future is of higher value (O’Donoghue, &, Rabin, 1999, p. 115). This human behaviour can be explained through the tendency of humans to be impulsive in and instinctive to find gratification, which is for instance the case with addiction to nicotine, as Bickel et. al suggest (Bickel, Odum, & Madden, 1999, p. 450).

Summary

In this chapter the paper has shown that people tend to make choices based on influences through a multiplicity of complex thoughts, persuasions and incentives. Behavioural economics is a scientific discipline that applies psychological insights into human behaviour to explain economic decision-‐ making (Almeida et al., 2016, p. 10). This will also be the definition of BE that this paper will refer to and use hereafter. Since the beginning of BE in the early fifties, many experiments on the human psyche in relation to choice have been conducted and they form the basis for BE theory. Behavioural economics have gradually gained an important status within the field of economics. As nudging can be seen as an application of BE basics with the goal of influencing people´s behaviour, this chapter examined the most important behavioural insights. The different insights of behavioural economics that were discussed in this chapter thus provide a clear overview of the complexity of the consumers’ choice patterns, but also in the way choices can be influenced. The way choices are presented matters, but also factors like peer pressure, the consumers’ own choice-‐history, expectations, memories about certain situations and motivation plays an important role. In the next section the research delves into nudging as a method to influence humans. As presented through this chapter, the BE theory has provided helpful explanations to why people are continuously influenced when making choices. It is therefore now both interesting and necessary to discover what the theoretical fundaments of nudging are.

NUDGING THE EUROPEAN CONSUMER: A PERSPECTIVE OF EU AND BUSINESS NUDGING