The theory of rational consumer choice assumes that consumers are rational, have perfect information and aim to maximise their utility, which is "a measure of the satisfaction derived from purchasing a good or service." A rational consumer can rank all the alternatives available to them, ranks them consistently, and always prefers more of a good to less. With perfect information about every product, its quality and its price, the consumer chooses the combination of goods that gives the greatest utility from their income. If these assumptions held, the way choices were presented would not matter. Consumers would compare every option and choose the same utility-maximising option regardless of the order or layout.
Behavioural economics is "a branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by economic actors." It challenges the assumption that consumers always make rational, utility-maximising choices. In reality, consumers often lack the information or time to compare every option, act out of habit, put off decisions and are influenced by what they notice first. Behavioural economics uses these limitations of rational consumer choice to influence decisions. Because consumers do not weigh every option equally, a change in how the options are presented can change what they choose, even when prices and incomes stay the same.
This essay explains two related behavioural techniques: choice architecture and nudge theory. Choice architecture is made up of three types of choice: default, restricted and mandated choices. Each changes the setting in which consumers decide in a different way. Nudge theory works by using prompts and hints to make one option more likely while leaving all options available. Governments and firms can both use these techniques, so they can influence consumer decisions in many markets.
Choice architecture "suggests that the decisions that we make are affected by the layout, sequencing, and range of choices that are available." The people or organisations that design this setting are choice architects. Because consumers do not behave as the rational model assumes, choice architects can change outcomes by changing the setting in which a choice is made.
Default choices. A default choice is "when consumers are automatically enrolled in a system, so that the consumer will 'make' this choice if he/she takes no action." In the market for savings, employees can be automatically enrolled in a workplace pension scheme, with the option to opt out. Under the rational model, enrolling automatically should make little difference, because an employee who wanted to save would simply sign up. In reality, many employees intend to save but put off filling in the form, or stick with whatever option they are given because of habit or a lack of interest. Under automatic enrolment, doing nothing now leads to saving, so participation rises. The default does not force anyone to save, because employees who prefer not to can still opt out. It influences decisions by changing what happens when the consumer does nothing.
Restricted choices. A restricted choice is "when the choice of a consumer is restricted, but still exists." The government or another authority limits the options available, but consumers still choose among those that remain. For example, a school cafeteria could stop selling large bottles of sugary drinks but continue to sell small bottles, water and juice. A student who would have bought a large sugary drink must now choose from the remaining options, so their sugar intake is likely to fall. This technique works by changing the set of options available, not by changing how attractive any option looks. Tragakes notes that restrictions are often justified because consumers face too many choices and, without better information or because of poor judgement, often make poor choices.
Mandated choices. Mandated choices are "when consumers are required to state whether or not they wish to take part in an action." The consumer remains free to say yes or no, but they cannot avoid the question. For example, an airline's online booking page could refuse to complete a purchase until the customer actively selects "yes" or "no" for travel insurance, instead of adding it automatically or hiding the option. A consumer who would otherwise skip the question, and later regret travelling uninsured, must now make a deliberate decision. Unlike a default, a mandated choice does not decide what happens if the consumer is passive. It removes the option of being passive. Tragakes gives a historical example of this effect: at the time described, people renewing a driver's licence in Illinois had to answer whether they wished to be organ donors, and about 60% signed up, compared with a US national average of 38%.
Nudge theory "is generally used to describe situations where nudges (prompts, hints) are used to improve the life and wellbeing of people and society." A nudge is designed to influence consumer choices in a predictable way without offering financial incentives, imposing penalties or limiting choice. It therefore leaves the price and the range of options unchanged. For example, a supermarket can place fruit and other healthy foods at eye level near the entrance, and sweets on lower shelves away from the checkouts. Under the rational model this should make no difference, because a fully informed consumer would buy the same basket wherever products were placed. In reality, consumers shopping quickly choose the products they notice first and that are easiest to reach. Placing healthy food in more visible positions makes it more likely to be bought, and Tragakes notes that this has been shown to increase sales of such foods. If the nudge works, demand for healthy food increases and demand for sweets falls, even though neither price nor income has changed.
Nudges differ from restricted choices because no option is removed: a consumer who wants sweets can still buy them. A default choice that is easy to opt out of, such as automatic pension enrolment, can also act as a nudge, because it makes saving the easiest option without forcing it.
Choice architecture and nudge theory can help influence consumer decisions because consumers do not behave as rational consumer choice theory assumes. Each technique works through a different mechanism. Default choices change the outcome of doing nothing, so they are effective when consumers procrastinate or act out of habit. Restricted choices change which options are available. Mandated choices force an active decision that consumers might otherwise put off. Nudges make one option more visible or convenient without removing the others. By changing the setting of a decision rather than prices or incomes, governments and firms can therefore shift consumer decisions in markets towards particular outcomes.