Nudge and Digital Design: Driving Online Decision Making

Eric Vacin  

April 29, 2014

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As a Senior Project Manager I’ve seen many complex projects through launch and beyond. I've been doing this for the better part of 20 years starting my career at NASA and working on some of the first sites on the web. Over the last few several years, I've narrowed my focus to the financial space-including leading the global digital strategy for American Express's corporate card, the go-to-market digital strategy for an asset-backed debt product being offered by a large energy provider, planning consumer targeted regional personalization for a major insurance carrier, and reshaping defined contribution portals for some of the biggest international record keepers.

A recent article in The Atlantic got me thinking about some of our financial services clients struggling to find ways to create better outcomes for participants in defined contribution plans like 401(k)s. Such plans are historically marred by low participation, low contribution rates, and inappropriate asset allocations.

The article outlined how Square is disrupting the dynamics of tipping by "nudging" people. By simply suggesting a tip amount or requiring users to select "No tip", gratuities increased by up to 45% in some venues.


Square's impact is not surprising to data and economic geeks who have understood this principle since at least 2008 when two professors from the University of Chicago published their seminal work Nudge: Improving Decisions about Health, Wealth, and Happiness. In it, they describe a nudge as.

 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. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not.

If this simple concept can push the needle that far when applied in practice at your local coffee shop, what can it do in other areas?

Rational Actors

The financial planners I talk to agree, if we all acted in our own best interest (if we behaved as what economists refer to as "Rational Actors") we'd all start saving for retirement in our early 20s. Saving a mere 6% of our annual income over our working lifetime when matched by our employer's contribution would translate into 75% of current inflation-adjusted income for retirement.  So why, according to a study in 2006, do nearly a quarter of employees opt out if their employer sponsored 401(k) plans?

Rational to a Point

The reality is, we live in a world of limited information. We don't all have PhDs in economics or certificates in financial planning. We live in a world dictated by our access to education and information, and so our decisions always take place in a world of what economists call "bounded rationality". Many factors contribute including education, income, and age.  Can you remember how difficult it was to imagine life in retirement when you were in your early twenties, let alone predict when you might retire or what income you will need with any degree of accuracy? Everyone is bounded by his or her current situation, and financial planning is one of a number of demands competing for our time.

This makes it all the more important that UX designers at Extractable create an experience that encourages good decisions each time a user logs on to their company's retirement portal, whether that's to sign up for the first time or make changes to their asset allocation. Other areas where people operate in bounded rationality might include healthcare and peer-peer marketplaces.

Designing for Good Decision-Making

As the Square example shows us, nudge theory plays a significant role in designing digital experiences that emphasize good decision-making. It plays an even more significant role when building complex experiences including guiding retirement plan participants toward more beneficial retirement outcomes, for example, by nudging employees to participate by asking them if they want to opt-out.

Studies have shown that individuals participated at a much higher rate when they had to opt-out of a company retirement plan rather than opt-in.


Another powerful tool in the UX designer's' tool-belt are default options when presenting choices as, for example, choosing how much to contribute to their plan.

By preselecting an option for the user, we gently nudge them to take full advantage of an employers matching contribution.

These are just two examples of ways well designed digital experiences help nudge users in the right direction and solve the dual problem of limited time and limited information when faced with important life choices. The implications, of course, extend beyond retirement savings portals to other arenas. For example, having a patient cancel rather than schedule an annual physical or helping a seller to price a good or service to sell it quickly without unnecessarily giving up value.

At Extractable, we design these experiences all the time.


Further Reading

To learn more about Nudge Theory, check out these resources: