How to Use Behavioral Economics for Social Impact

Biases that illustrate this principle include:

• Cashless Effect: People are less likely to cheat with money, but will cheat on value (i.e. people will steal a can of Coke, but not a dollar bill). This also influences why people will pay more for something when cash is not involved (for instance, if they are charging the purchase to a credit card). A scaling social enterprise can use this line of thinking to enable free trials, delayed processing, or other systems to delay the payments in order to increase adoption in early stages.
• Defaulting: People like to “not think” and will choose the easiest option available. As an example, in countries that incorporate organ donation registration into the process of registering for a drivers’ license, the opt-in rate is about 80% for countries whose default option for organ donation is “yes”. For countries where the default organ donation response is “no” and residents have to check a box or take some other action to opt in, the opt-in rate is only 20%. Scaling social enterprises offering a variety of checkout options can leverage this effect by selecting the option it most wants customers to choose as the default.
• Irrational Value Assessment: People assign value to “irrational” things, like the bottle design or the aesthetic image of the label when evaluating the value of a bottle of wine. This also influences how much value we assign to things we were involved in making (see IKEA effect blow). Scaling social enterprises should remember to pay attention to aesthetic choices, like website design, in addition to the development of the product or solution itself.
• Loss Aversion: People are more motivated by their fear of losing than they are motivated by the possibility of winning. As an example, if someone receives a $200 bottle of wine as a gift, they will experience a marginal increase in satisfaction. If that same bottle slips off the counter and breaks, however, they will experience much more dissatisfaction than the original gain. Adding an expiration date for a free trial is a tactic social enterprises can use to motivate action to be taken during the trial period.
• Optimism Bias: People are more likely to overestimate the probability of positive events. People think that they will be on time. People think that traffic won’t be that bad. People think that next year they’ll be able to achieve their health goals. Knowing that people are more optimistic about the future than is realistic is an important thing to remember when you get their input on how much they will use a new product or service.
• Peak-End Rule: In thinking about their past experiences, people recall the final and most intense moments of the experience. In one experiment, people had to put their hands in ice water for 30 seconds. A second group put their hands in ice water for 60 seconds, followed by warm water for 30 seconds. The first group rated their experience as worse than the second group, even though they had less time in the painful ice water. A social enterprise that invests in education experiences for beneficiaries, for example, will benefit by ending the experience a fun note so that people leave with a positive association (even if the experience gets off to a shaky start).
• Regret Aversion/Minimization: People will optimize to minimize regret. Instead of considering all options and their likely effects as the basis for a decision, people will instead consider the worst possible outcome (and the regret it would make them feel) and and choose the option that minimizes regret, even if it's not the best option. For a social enterprsie offering a service, including an option that protects the purchase with a fair refund policy can minimize possible regret and motivate that choice to be selected.
• Sunk Cost Fallacy: The more you invest in something, the more likely you are to keep investing in it. As an example, imagine impact investors have invested in social enterprise A. Two years later, this enterprise’s growth indicators are not performing as planned. They are considering an investment in another venture, social enterprise B. Even if social enterprise B has more economic potential, they will more likely continue to invest in A because they will be biased by their previous investment. The same bias explains why nonprofits will keep promoting and growing a program, even if those programs are not achieving desired outcomes.

Biases that illustrate this principle include:

• Anchoring and Anchor Pricing: People will create a bias towards the value of a product based on an initial piece of information or reference point. As an example, when Williams Sonoma sold the first ever bread maker, people didn’t know if it was a good value or not. As such, they also started selling a premium, commercial quality breadmaker next to the basic model at a much higher price. People could now see what the commercial price was for a breadmaker, and thus perceived the price for the basic one as a better value. Anchoring, combined with framing, can lead people to choose one option over another based on how the options compare.
• Fundamental Attribution Error and the related Self-Serving Bias: People will attribute their successes to their own amazingness, but will attribute others people's successes to luck. People will also attribute their own failures to bad luck, and the failure of other people to their own incompetence. A social enterprise that is struggling to achieve scale might blame this on economic factors, “incompetent partners”, or “bad timing”. If the same enterprise succeeds, it will attribute its success to its own intelligence and strategy.
• Decoy Effect or Dominated Alternatives: The introduction of a third inferior option will affect how people choose between two options. Let’s say you survey a crowd to see if they would rather have: (A) a fully paid trip to Rome, or (B) a fully paid trip to Paris. Let’s say more people choose A. Now, let’s say you add another option: (C): a fully paid trip to Rome, but with airfare costing extra. In this case, with the introduction of a third inferior option, more people will now choose B than before, because this inferior option makes the comparable option appear more valuable.
• Framing: People’s choices are influenced by the words, situations, and/or settings in which they are presented (for example, most people would rather have a surgery presented as having a 90% survival rate vs. the same surgery presented as having a 10% mortality rate). Applying this same logic to a social enterprise raising money for a new program, if it approaches funders with the statistic that the program will save 90% of lives, it will likely raise more money than if it had presented the funders with the statistic that the program will still leave 10% of the population underserved.
• Hot-Cold Empathy Gap: People’s decisions are based on their emotions at the time the decision is made. As an example, students taking a class about reproductive health will likely predict that they will make safe choices if asked about it in the classroom, but many of those same students will make different choices than predicted during the classroom "cold state" when in a "hot state" situation, like on a date. This isn’t just sexual, i.e. this could include being tempted by unhealthy foods, drinks, drugs, or even inappropriate handling of professional situations.
• Priming: People’s behavior will be biased if they are led to consider a specific component of a product before considering the purchase of a product as a whole. As an example, if someone is considering buying two different models of a clean-burning cookstove, if the purchaser is anchored first to something like how much it costs to service, then they will give a greater focus to that component when ultimately making a purchase decision than they otherwise would have.
• Zero-Price Effect: People overreact for free things, and will even expend more resources to acquire something for free (like spending more money on raffle tickets than the prize itself is worth.) The value of it, especially if a user sacrificed to acquire it, will be overestimated, which can make it harder for better solutions to enter the market.

Biases that illustrate this principle include:

• Confirmation Bias: People seek and notice information that reinforces their own existing beliefs. As an example, nonprofit workers serving communities through a religious-based organization may believe that those who don’t believe in their god will be punished. When they see people living in poverty who don’t share their religious beliefs, that assumption will become further entrenched.
• Decision Fatigue: People have a limited capacity to make decisions, and the more decisions they have to make, the worse the decisions become. As an example, people living in poverty have to make many hard decisions related to day-to-day survival, which impairs their ability to make decisions about other things, like invest in learning, businesses, or other actions without an immediate payoff.
• Hindsight Bias: Upon recalling a historical event, people are likely to assign themselves more intelligence and understanding than they exhibited during the actual event. As an example, business mentors coaching entrepreneurs to learn from their mistakes are likely to encounter a “know it all” mindset, with the entrepreneurs saying things like “I knew it wouldn’t work”. This, in turn, can make it harder to get to a root cause and coach the entrepreneurs about how to avoid the same mistake in the future.
• Mindless Consumption: People will consume more mindlessly if the item is easily available or if bigger portions are provided. The simple act of removing candy from sight in an office or home and replacing it with fruit will lower the average weight of the people in that environment. As an example, if you’re trying to address obesity in a community, the simple act of hiding things people should avoid out of sight and making healthier alternatives visible and available can help improve outcomes.
• Rationalized Dishonesty: People can justify to themselves small actions they know are wrong. They may rationalize that people who commit small acts of cheating, crime, or theft are still good people, though it’s important to keep in mind how easily people can slip.

Biases that illustrate this principle include:

• Bandwagon Effect / Herd Mentality: People will start to choose options that are more popular, which in turn reinforces the popularity of those options further. As an example, perhaps a large government or foundation invests money in a certain type of malaria prevention, like bed nets. This option will gain steam and more organizations will spread this approach, even if the data shows that there are more effective preventative measures out there. However, as more organizations join this bandwagon, it continues to reinforce the popularity of this approach.
• Halo and Horns Effect: A person’s overall impression of another person or thing impacts how they feel about that person or thing in the long-term. As an example, imagine you are a nonprofit entering a new community in hopes of providing services. If the first impression of your organization is negative - say, you’re perceived as arrogant - then even if you show competence, that first impression will last. This counts for both positive and negative perceptions.
• False Consensus: People overestimate how much others agree with them.
• IKEA Effect: People attribute more value to products that they built themselves, than what the market will actually pay. As an example, if you helped build your Ikea shelf, you might think it’s now worth $50. However, if you tried to sell it, you could only make $30. We are attached to things we helped make, and therefore engaging customers and beneficiaries in the creation of products and delivery of services will result in them valuing it more highly.
• Pain of Payment or Temporal Discounting: People experience a more acute sense of loss the closer the loss occurs to the payment. For example, if you spend $5 for some fresh fruit and then drop it on the ground and it goes to waste while you are walking out of the store, you will be frustrated and lament your clumsiness. If you spend $5 for some fresh fruit, take it home, forget about it, and then remember it in the bottom drawer of your refrigerator two weeks later only to discover it growing mold, you will not be nearly as frustrated. Why? The further you are away from payment, the less the loss hurts. Temporal discounting is the opposite of this in a way, in that you will take less money today instead of more money in the future.
• Social Norms: Who a person is surrounded by, and how closely they relate to those people, will influence what they do. If your social enterprise introduces a new education program to a community of parents, if they don’t see other parents using it they won’t use it, either (even if its the superior option.) It’s important to note that social norms apply to what people see others do, not what they think others should do. According to Thaler, “The social norms approach states that our behavior is influenced by incorrect perceptions of how other members of our social groups think and act”.
• Default to Trust: People are biased to trust those who are like them. As an example, if working with a new partner, that partner will be more likely to trust other existing partners compared to trusting you.

Biases that illustrate this principle include:

• Ambiguity Effect: People will choose known outcomes over uncertainty. For example, people are more likely to choose a product with average online reviews versus a new product with zero reviews.
• Availability Bias: What people are able to recall in recent memory will influence their thinking and memory. Especially in stressed states or when faced with short-term decision making opportunities, people overestimate what they can recall in their memories. Let’s say that you’re conducting research to see if your social impact intervention is working. You go out to interview your target beneficiaries, and you ask them questions related to their memory, perhaps how often they wash their hands. The availability bias means that they will think about what they did that day, and use that information to inform what their overall trend is, even if it’s not actually accurate.
• Illusory Correlation: People often confuse correlation (two things happening at the same time) with causation (one thing causing the other thing to happen.) Just because there are trends in a data set, doesn’t mean that one thing caused the other. As an example, imagine that a nonprofit starts working in a community to improve education in inner-city schools, and that they notice a reduction in school drop-out rates. They could claim that their work is the cause for the decrease in dropout rates, but it’s possible that it’s just correlated to the occurence of their work (perhaps the school district implemented a better after-school program or had increased funding for teacher training.)
• Decision Staging: When people consider options, they will tend to break the decision into stages or elements, and then evaluate individual elements against the same element in the other option. As an example, if a person is deciding where to send their kid to school, they will break the school into elements, like teachers, facilities, location, etc., which they will then compare against the same elements in other schools to help rationalize their decision.
• Prospect Theory: Losses and gains are valued differently, and people will be biased towards sure wins to avoid the pain of possible losses. Some research shows the psychological cost of a loss is twice as powerful as that of a win. For example, if you present someone with the choice between $100 guaranteed or a 50% chance of winning $1,000, most people would choose the first option even though the potential gain is higher in the second..
• Self Handicapping (often connected to self-serving bias): People may withhold effort to avoid risking themselves and damaging their egos. As an example, someone might end up procrastinating studying for an important final exam, so that if they fail, they can blame failure on something other than their inability to do well..

Biases that illustrate this principle include:

• Choice Architechture: Choice architecture is not necessarily a principle like the others in this list, but rather a term used to think about how to use behavioral economics when presenting options to people. A person can be a “choice architect” by using behavior economic principles like anchoring, priming, and framing. Yale’s 4P framework is a great resource on this topic.
• Dual System Thinking: People’s brains have two systems, System 1 and System 2. System 1 is fast, unconscious, automatic, useful for everyday decisions (but also very error prone). System 2 is slow, conscious, effortful, and helpful for making big decisions because its more likely to lead to better outcomes. As an example, a social entrepreneur might yell at a team member for not acting in a way he feels that person should be acting (system 1), but later, while giving advice to another entrepreneur, encourage that person to create a safe environment for all team members to take risks and embrace failure (system two).
• The Elephant, Rider, and Path: This is another way of conceptualizing the way different parts of our brains interact with each other. In this model, people’s minds have an elephant (a big, emotional beast that is hard to move), a rider (a rational, forward-looking person), and a path (a way forward that is safe). To move a person you need all three going in the same direction. The riders job is to guide and motivate the elephant down a clear path that the rider agrees is a good idea.
• Nudges: Small influences, or “nudges”, will alter how people make choices. Replacing a candy bowl with a fruit bowl is a nudge. Putting your cell phone in another room when you need to concentrate on work is a nudge. Nudges are small changes that make it easy for people to adopt lifestyle choices they want to adopt (or you want them to adopt.)

Most people want to change the world to improve their lives, but the world they need to change first is the one inside themselves. (John C. Maxwell)

If you are embarking on a journey to make a positive impact on others, you must start by looking inwards. Our own biases, narratives, and experiences will influence why and how we engage in global development work, and not always for the better.

Taking time to explore what motivations we have for engaging in social impact work is a necessary first step to prevent ego-driven projects that benefit the wrong populations. How do you explore yourself using principles of behavioral economics?

Key behavioral economic principles (defined above) that will be helpful to look more deeply at in this stage:

1. Your own optimism bias might trick you into thinking that success is guaranteed, creating blind spots in terms of contingency planning or thinking through complex details.
2. Chances are, confirmation bias will also lead you to seek out information that confirms your existing world-view, rather than challenging it.
3. Social norms are also likely to influence the way you approach creating a positive impact, but keep in mind that just because people around you engage in a certain way doesn’t mean it’s the best way (this guide can help you learn the most ethical and sustainable way to engage in impact work.)

To better understand yourself, and how your motivations will influence the work you do to create social impact, consider the following resources:

• Read: Stumbling on Happiness by Dan Gilbert (good summary here) and Originals: How Non-Conformists Move the World by Adam Grant (good summary here)
• Watch: Our Buggy Moral Code TED Talk by Dan Ariely
• Skim: What Motivates People to Participate in Civil Society? in SSIR
• Get Inspired: What Motivates the Best Social Entrepreneurs? by Northeastern University

Social impact projects inherently require a diverse set of organizations and individuals to come together. With the growth of systems entrepreneurship and network leadership, this trend will only continue. As a leader or contributor of a team, applying behavioral economics principles can help you and your team perform at your best.

Key behavioral economic principles (defined above) that will be helpful to you at this stage:

1. Remember that when you start working with others, they have dual systems: one emotional, irrational system that will react quickly, and one more rational system that thinks through things slowly and methodically. When building teams, you need to make sure that you build trust quickly, and to do that, you’ll need to speak to both systems from the beginning
2. The bandwagon effect will make it easier to garner more support once you build up momentum by getting key stakeholders on board… or can make it harder if people are irrationally heading to other networks that are popular, despite not being effective.
3. Decision framing can influence whether or not people are willing to join your team or effort, so be sure to present the choice with carefully chosen words and in the right setting. Catching someone on their way out the door is definitely not the best time to make the ask!

To better understand how to build the best team to create social impact, consider these following resources:

• Read: Thinking, Fast and Slow (good summary here) and More Than Good Intentions: Improving the Ways the World's Poor Borrow, Save, Farm, Learn, & Stay Healthy (good summary here)
• Watch: Start With Why: How Great Leaders Inspire Action TED Talk by Simon Sinek
• Skim: The New Network Leader in SSIR
• Get inspired: A Network Approach to a No-Kill Nation

Before starting any project, it’s important to take time to understand the current state of the system you want to operate in and the problem you want to address. We think that frameworks like Asset Based Community Development (ABCD), Systems Mapping, and Human-Centered Design are particularly helpful in understanding the current state of things. However, in the act of research and discovery, you’ll want to consider how behavioral economics can influence behavior.

Key behavioral economic principles (defined above) that will be helpful to consider at this stage:

1. Considering the empathy gap that may exist between the state people are in during user discovery interviews and the state they will be in at the time that you are looking to support them
2. Avoiding decision fatigue by limiting how many choices people have to make, and its effects on rationality in the moment
3. Considering how loss aversion and regret minimization might influence your target beneficiaries to make different choices than the ones you predict
4. Ensuring that you and your organization make a good first impression so that the halo and horns effect leaves people with a positive long-term view that will make your work easier, rather than harder.

To better understand how to really get to know the people you are serving with behavioral economics, consider the following resources:

• Read: Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, Freakonomics, and Switch: How to Change Things When Change is Hard
• Watch: How to Make Choosing Easier TED Talk by Sheena Iyengar, Choice, Happiness, & Spaghetti Sauce TED Talk by Malcom Gladwell, and Why People Believe Weird Things TED Talk by Michael Shermer
• Skim: A Nobel Prize Winner on Rethinking Poverty (and Business) in HBR
• Get inspired: The CLTS Approach

As you work towards developing programs, products, services and/or other solutions that have a positive social impact, you should use a human-centered design process. Going through this process creates many opportunities for you to use behavioral economics principles, and test different approaches to see what the market really responds to.

Key behavioral economic principles (defined above) that will be helpful to you at this stage:

1. The IKEA effect will mean that once you, or others you work with, come up with ideas, you will overvalue them compared to others. Don’t get biased! Work with your target beneficiaries to co-develop a solution that specifically meets their needs that they will also feel a sense of ownership over.
2. Attribution theory can lead you to be overconfident that your own influence in the process is more important than it really is. You should strive to remove your own ego from the process - fall in love with the problem, not your solution.
3. Avoid a false consensus by gathering quantitative data about how potential users feel about the solution being developed so that you don’t overestimate how much others agree with your solution as a good idea.
4. Remember that defaulting means that people will typically take the path of least resistance, so make it easy for them to adopt your solution without having to jump through multiple hoops.
5. Social norms will greatly affect what is adopted, and what isn’t, so make sure you’re engaging key stakeholders in the community and earning their confidence in the value of your solution

To better understand how to apply behavioral economics to develop solutions that work, consider the following resources:

• Read: The Last Mile (good summary here), Start at the End (good summary here) and Barking Up the Wrong Tree (good summary here)
• Watch: How Behavioral Economics Can Creatively Solve Business Problems lecture by Rory Sutherland and Are We In Control of Our Own Decisions TED Talk by Dan Ariely
• Skim: Do Economists Underestimate the Impact of Social Factors on Behaviour? on WeForum and Applying Behavioral Economics Toward Social Change on Medium
• Get Inspired: How Behavioral Economics Can Produce Better Healthcare

As you and your partners continue your work, you’ll eventually reach the point in the human-centered design process where it’s time to start implementing and testing ideas. It’s important to avoid letting false positives derail your work. A solution might seem to work, only to fall apart shortly after, or a solution might fail a specific experiment, but actually be the right solution in the end.

Key behavioral economic principles (defined above) that will be helpful to consider at this stage:

1. Irrational value assessment means that initial valuations of your products may be irrational - you might end up with false indicators based on “irrational” factors like aesthetic, so engage in A/B testing to isolate those factors
2. Don’t let confirmation bias lead you to only seek out information that reinforces your assumptions, or you’ll ignore flags hat you should really be paying attention to
3. Self-handicapping means that you, your team members, and/or beneficiaries might start to progress in the right direction, but then self-sabotage that progress due to feelings of vulnerability or threats to ego.
4. Remember that loss aversion makes people scared to lose, so if your solution requires a change or switching from the familiar to the unfamiliar, your target audience will likely immediately be skeptical and you will need more resources than you are counting on in order to be effective
5. To get ideas to stick, you’ll need to address the elephant, the rider, and the path.
6. Consider nudges that make your solution easier to adopt, particularly in the last-mile.
7. Continuously test your plan and assumptions against reality and facts to avoid a false-consensus in which you think people share the same understanding and beliefs that you do, when in reality they are more different then you realize.

To better understand how to implement solutions that create real social impact, consider the following resources:

• Read: The Last Mile (good summary here), Nudge (good summary here), and The Power of Moments (good summary here)
• Watch: Social Experiments to Fight Poverty TED Talk by Esther Duflo
• Skim: Behavioral Economics in Action: Using Theory to Drive Social Change in SSIR and The Rise of Behavioral Economics and its Influence on Organizations in HBR
• Get inspired: Nudging for Good case studies

Once a program is implemented, you must continue to invest in the programs adhesion and ongoing improvement. This includes things like measuring success, getting real input from users about how to improve, and continuing to optimize the program for better outcomes.

Key behavioral economic principles (defined above) that will be helpful to consider at this stage:

1. Keep in mind that the information you collect may be subject to availability bias, which gives more weight to recent experiences
2. Use choice architecture and concepts like anchoring, priming, and framing to experiment with different ways you can present the solution to drive the outcomes you’re striving for.
3. Never stop learning from your mistakes, and don’t let hindsight bias lead you to give yourself more credit than you deserve for recognizing shortcomings in your work so far.
4. Nudges, like with the step before, will be important to keep optimizing for the desired behavioral change to gain adoption.
5. Pain of payment and temporal discounting affect how people will adopt (and keep adopting) based on if people have to pay for the intervention, and experimenting with the method and timing of payment can help you optimize outcomes.
6. If your program ultimately isn’t going to work long-term, don’t let the sunk cost fallacy lead you to continue to invest in it

To better understand what it takes to get ideas to scale, here are some extra resources for you:

• Read: The Last Mile (good summary here), Made to Stick (good summary here) and Good Economics for Hard Times (good summary here)
• Watch: The Paradox of Choice TED Talk by Barry Schwartz and Why Dieting Usually Doesn't Work by Sandra Aamodt
• Skim: When Social Impact Meets Behavioral Economics on Hackernoon and How to Build Better Calls to Action in SSIR
• Get inspired: Behavioral Economics in Action: Using Theory to Drive Social Change

The true measure of the success of a social enterprise is whether it exerts pressure to make the systems around it better. To help your solution or initiative gain the traction it needs to inspire others to change, keep the following behavioral economic principles related to movement-building in mind:

1. The bandwagon effect / herd mentality tells you that if you can build enough support, that support will keep building on itself
2. Decision staging will help you illustrate the differences (and hopefully advantages) of your movement or approach against others
3. Anchoring can help you position your movement against others by sharing the most important information first
4. Priming people to consider a specific component of your solution first will help you gain widespread interest

To better understand how to use behavioral economics to turn your solution or initiative into a broader movement, consider these following resources:

• Read: The Tipping Point: How Little Things Can Make a Big Difference (good summary here) and When: The Scientific Secrets of Perfect Timing (good summary here)
• Watch: The Riddle of Experience vs. Memory TED Talk by Daniel Kahneman
• Skim: The 3.5% Rule: How a Small Minority Can Change the World from BBC
• Get inspired: Knowing when to Nudge

Behavioral economics, in the wrong hands and/or applied incorrectly when working with uniformed and under-resourced communities, can be used to take advantage of people. Profit-driven organizations will often employ “behavioral insights” to try and exact even more profits or grow sales. As a social changemaker you have a moral obligation to do the due diligence required to apply the principles of behavioral economics responsibly and ethically, ensuring that you are creating genuine shared value and social progress, not just profits.

Please read these important primers on the ethics of using behavioral economics:

1. The Nudge 'FORGOOD' framework and research from The Behavioral Insights Team
2. The Behavioral Scientist's Ethics Checklist
3. The Ethics of Nudging
4. Behavioral Economics Finally Goes Mainstream: 4 Essential Reads
5. Facebook, Big Data, and the Ethics of Behavioral Economics
6. Behavioral Ethics: From Nudges to Norms
7. To Nudge or Not To Nudge: Ethical Considerations of Digital Nudging Based on Its Behavioral Economics Roots