Loyalty program: From Nudge to Big Nudging

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Loyalty program as a strategy to keep clients in a hyper-competitive environment is part of nudge theory. Nudge theory, or libertarian paternalism, was proposed as a new kind of economic policy in 2008 by economist Richard Thaler in collaboration with legal scholar Cass Sunstein. The theory is to push individuals to make more "right" decisions for themselves, without limiting their choices as such, using soft methods. In fact, this concept is based on people's propensity to choose the default option, since any other action involves additional energy consumption. In the conditions of saturation of the information environment of the human being, the question about the limits of the volume of perceived information becomes especially important. And as a consequence, there is a question about the management of this volume.

If the resource of human perception is limited, then an excess of information leads to a crisis of ability to make a choice, immersing the subjective structures (in our case, consumer) in a state of uncertainty. Getting reliable information becomes so expensive process that it is more profitable to be uninformed. If the cost of obtaining information is higher than the benefits derived from information, then comes the state of rational ignorance. This theory was proposed by Anthony Dawns back in 1957. Developed in relation to the theory of public choice, "rational ignorance" explained the reasons for voter passivity during elections, and today can be applied to describe the model of passive behavior of buyers. The key point of this principle is that the value of information cannot be estimated until the information is available. Judgements are made based on the expected benefits and costs of obtaining information; expectations are based on prior experience that may be misleading.

Thus, despite the seemingly low cost of obtaining information in the era of digital reality, the amount of information available is so great that it does not fit within the limits of human perception. This pattern is also true for the trade sphere, where millions of goods carry billions of bits of information. And at this point, the "push theory" becomes particularly relevant.

Richard Thaler's Nudge theory illustrates that the "right" choice of an option by default changes the choice of individuals. Thaler and colleagues have been asked to extend this principle to address various economic issues. An important condition of the proposed program is the ability to freely opt out of the program or change the conditions of savings, i.e. in fact the program does not impose any restrictions on the choice of individuals.

Thaler's persuasive research on the policy of libertarian paternalism has led to its spread to other spheres, this policy has become actively used in many countries. Governments are increasingly interested in using behavioral ideas as a complement to or substitute for traditional economic levers to shape citizens' behavior and promote public priorities. The commercial sphere has also adopted these principles, transforming them into an effective means of a successful loyalty program - for example, tactics of default newsletter options, or presentation of promotional products in shops at eye level (this reduces the search costs for the buyer).

"Knowing how people think we can make it easier for them to choose the option that's best for them, their families and society" (Thaler, Sunstein, 2008). Let us stress once again that, according to Tyler and colleagues, pushing should not restrict an individual's freedom of choice, but should be easy and inexpensive. 

However, the high progress of competition (for example, in the retailing sphere) has led to a paradigm shift: instead of conditions of choice with an unsecured result, a quick result is needed to maximize the company's profit. To describe this change in the works of Helbing (2019) and colleagues, the term Big Nudging was introduced, which considers "pushing" under conditions of rapid accumulation of information. The increasing amount of personal information about individuals, often collected without their consent, reveals habits, intentions and other personal information, thus allowing manipulation of individuals. This type of Big Nudging results in individuals making choices they would not otherwise have made, such as buying some overpriced or unnecessary goods. In other words, Nudge turns into Big Nudging.

The distortion of Thaler's original approach is that the demand for freedom of choice in conditions of information saturation is replaced by the demand for a quick result. We can say that libertarian paternalism is replaced by "rational paternalism" (the name - by analogy with rational ignorance), when one chooses an option before the Nudge.

Georgetta F. Palsen

Georgetta F. Palsen

About the author

Georgetta F. Palsen spearheads the Loyalty Programs Project, aiming to unravel the global impact of loyalty programs. Leading a dedicated team, she adopts an interdisciplinary approach to explore these programs' influence on consumer behavior and capitalism, offering critical insights for academics and businesses navigating the complexities of today's societal dynamics. More info


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