Increasingly start-ups are turning to behavioral economics for inspirational business models. Psychological cues can be stronger than price signals in a wide set of circumstances. These ideas have been captured in a variety of books recently including Nudge. From a paper recently published by Science:
Programs that allow people to commit in advance to such actions—e.g., saving money or exercising—have proven quite popular, even when that commitment is costly (1, 2). Default (“no-action”) options strongly influence choices [e.g., when choosing between 401(k) plans], even when an alternative option is markedly better and switching appears easy (3, 4). Small changes in context (“nudges”) can affect behavior as much as large price changes (5). Such findings are striking in a cost-benefit framework; psychological cues typically cost very little compared with price changes.
This suggests a potential role for non–price-based, behavioral interventions. Many such ideas have been studied in a large body of ongoing research on social approval, consumption feedback, goal setting, commitment, and other mechanisms (9, 10). Although many of these were small-scale, short-term pilot studies on nonrepresentative populations, they do show proof of concept (11).
Recent work by a company called OPOWER, informed by academic work showing the power of social comparisons in environmental conservation (12), suggests that behavioral programs can be cost-effectively scaled to millions of households. OPOWER sends home energy-use reports to electricity and gas consumers that display the household’s energy consumption, compare it with that of similar households, and provide energy conservation tips. Using randomized, controlled trials with hundreds of thousands of utility customers across the United States, these reports have been shown to reduce electricity consumption in the average household by over 2% (13).
The same thing has been shown when firms turn on contributions to 401ks by default. It leads to a much higher participation rate among employees. One of the most interesting models recently has been the launch of Blippy. The site exposes all of your purchases on a given credit card to your social network. While interesting business models can be built around these behaviors the biggest impact could be in the form of drafting better public policy. From Science:
Our argument has three key policy implications. First, governments can provide funding for potentially high-impact behavioral programs as part of their broader support for energy innovation. A bill under consideration in the U.S. House of Representatives, HR 3247, would establish a program at the Department of Energy to understand behavioral factors that influence energy conservation and speed the adoption of promising initiatives.
Second, through market incentives, policy-makers can encourage—or fail to encourage—private-sector firms to generate and utilize behavioral innovations that “nudge” consumers to make better choices. Historically, economists and policy-makers have focused on how regulation affects relative prices—for example, how emissions caps or taxes on pollution-intensive goods affect the prices firms set. In practice, however, firms interact with consumers in many ways in addition to pricing.
Third, government agencies often provide independent information disclosure, such as vehicle and appliance energy-efficiency ratings. This helps catalyze private-sector innovation by allowing firms to credibly convey the financial value of energy efficiency to consumers.
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