Nudges and Negative Option Marketing
C. W. Von Bergen
Southeastern Oklahoma State University
&
Morgan P. Miles
University of Tennessee at Martin
Presentation Overview
Mental Short Cuts,
Biases, Heuristics,
& Rules of Thumb
Nudges
Defaults
NOM
Dual-Process Theories of DecisionMaking, 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
What is a Nudge?
“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)
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 Organs
After 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, lowerpaid, 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 actioneither to reject an offer or to cancel an agreementas 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 Gym membership
of goods or provision of service until the
customer cancels the contract
Automatic
renewal
Product or service is automatically renewed at Magazine
the end of a specified period unless the
subscription
customer cancels the renewal.
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