Do behavioral nudges work on organizations?
MOre than a decade of research in behavioral economics has taught us that individuals can be influenced through the use of “nudges.” The design of seemingly small contextual factors— such as the simplification and planning of prompts that clearly articulate the when, where and how of an action—can be used to induce individuals to act in their best interests in a variety of areas, including their health, their finances and their education.
Despite the breadth of insights on how to improve individuals’ behaviors, however, we know relatively little about how, or even whether, such tools influence organizational behavior. Should we expect organizations to respond to nudges differently?
Behavioral economics has taught us that human behavior is context dependent, and researchers in the fields of social psychology and organizational behavior have studied the many ways in which group contexts can amplify some psychological processes and diminish others. Organizations are subject to competitive pressures, which incentivize profit maximization, and they can put in place cognitive support tools, like training, bureaucratization and technology, to help employees make better decisions. This might lead us to predict that organizational decision-making is already sufficiently optimized and a nudge will provide little to no additional help. On the other hand, phenomena like groupthink, polarization and social loafing (a process by which people are less productive when collaborating than they are when working individually) are biases that uniquely afflict group decisionmaking, suggesting that nudges targeting solely individuals may be a poor fix for what can cause organizations to go off course.
To help address the question of whether nudges can work for organizations, we collaborated with the Ministry of Finance in Ontario. Our research focused on organizations that failed to file an annual payroll tax return. Typically, the ministry informed delinquent organizations by mail one week after their due date that their tax return had not been received, and it reminded them to file the return immediately to prevent further actions. The letter assumed that organizations simply forgot or were procrastinating because they did not take the delinquency seriously enough. So we tested one modification to this standard late-filing notice to see if it would help overcome this type of inaction.
Our modified version of the letter included explicit step-bystep instructions that described how and where to file a return, and it specified a deadline. The specific deadline was chosen for two reasons. First, it marked the time when additional collection efforts would be initiated, at a cost for the ministry. Second, the deadline established a more concrete goal than asking someone to pay “immediately” did. Stylistically, we used second-person pronouns and the active voice, without significantly changing the meaning or the reading difficulty of the text. We expected these small modifications together would help those organizations who intended to pay their tax act upon this intention.
In each of two consecutive years, we randomly assigned all late-filers, around 6,300 and 6,200 organizations respectively, to one of the two letters—the ministry’s original or our modified version. We found that compared with the standard la te-filing notice, our prompt increased delinquent organizations’ likelihood to comply and file their annual taxes four or five days sooner, before the start of additional, more costly collection efforts.
What does this mean in dollars? In the first year, our modified letter garnered 61% more in remitted taxes, prior to the start of additional collection efforts, resulting in $288,335 being collected within 10 days of mailing the modified letter and saving the government $5,766 in collection costs. had our modified letter been sent to all late-filing organizations, the government could have expected to receive an additional $475,438 in remittances before initiating additional collection measures and saved some $9,508 in collection costs. The results in the second year were similar.
having conducted our study for two consecutive years, we found no evidence that the effect of our letter persisted for more than one year. It’s not surprising that a single letter did not establish a self-sustaining organizational culture. But that result serves as a reminder that when it comes to nudges, timing is important, if not everything. More importantly, however, we did find that the effect of our letters was consistent over time. Our modified version of the letter worked equally well, if not even better when organizations received it for a second time, suggesting that sustained nudges can lead to sustained organizational change.
Our intervention advanced the goals of the government and the public it serves: It saved the government money in collection costs, saved organizations money in additional penalties and interest, and increased collected taxes. Given that implementing this nudge involved zero marginal costs, and that we found no evidence that repeated exposure to the letter diminished its effect, the government is adopting the experimental letter as a standard practice.
Organizations are as complex and diverse as the people they employ, and much work remains to be done on the intersection of behavioral economics and organizational behavior. What we have learned is that the foibles that can cause individuals to fail to follow through on their best intentions can persist despite the advantages of organization, and that in some instances the same tools can be applied to successfully overcome these foibles.
Nina Mažar is a professor of marketing and co-director of the Susilo Institute for Ethics in the Global Economy at Questrom School of Business, Boston University. Nicole Robitaille is an assistant professor of marketing at Smith School of Business, Queens University. Julian House is a behavioral scientist in the behavioral insights unit of the Treasury Board Secretariat, Government of Ontario.