Reports indicate that since February, eBay has been nudging its sellers to abandon the auction format it made famous in favor of fixed-price sales.
So much so, that where auctions once accounted for nearly all of the action on eBay, fixed-price "Buy It Now" sales account for 42 percent of the gross merchandise volume on the site.
Watching eBay try to navigate the twin perils of Amazon and Craig's List is an interesting business story in itself. But there's another intriguing dynamic at work: eBay has deployed a series of incentives to entice its users to behave in a certain way - that is, they want them to set prices instead of holding auctions.
As users conform, we may well see eBay's marketplace become less efficient, since auctions determine value more efficiently than fixed-price sales. (Efficiency meaning that prices reach the point where the greatest number of sellers are willing to sell and the greatest number of buyers are willing to buy.)
The eBay evolution illustrates that systems have the power to influence the behavior of individuals, and hence larger outcomes. Economists refer to this phenomenon as "choice architecture" and it is the subject of Richard Thaler and Cass Sunstein's excellent new book,
Nudge
:
Improving Decisions About Health, Wealth and Happiness.
Thaler and Sunstein are interested in how choice architects influence the decisions we make in our daily lives and how the cumulative weight of those decisions impacts society.
Who is a "choice architect?" Anyone in government or the private sector who establishes the context in which we encounter decision-making moments. For example, while it's easy to customize the ringtone on your cell phone, many people don't bother, opting to simply use the default tone. Thus the person who created the default setting is a choice architect and was subtly influencing ringtone choice.
Or put it another way: Imagine a cafeteria. Studies show that if a given type of food is more prominently displayed, consumption goes up. If another type of food is somewhat obscured, say, placed above eye level or away from the main cafeteria path, consumption goes down. Unlike ringtones, food choices actually matter.
The theory of
Nudge
is that consumers aren't perfect economic engines and that they will often make choices that aren't necessarily good for them - buying the cookie right next to the cash register in the cafeteria, for example. But Thaler and Sunstein argue that systems can be designed where people still have freedom of choice, but context nudges them into making better decisions. And these better individual choices can add up to better societal outcomes.
Consider the problem of organ donation. America faces a constant shortage of organ donors, despite the fact that surveys show large majorities supporting donation. The problem,
Nudge
argues, is the choice architecture. Most states force people to take positive action by checking the organ donation box on their drivers' licenses.
Instead, states could change their policies to assume that people are organ donors, unless they opt out. Or they could force people to make an active choice about donation - yes or no - in order to get their licenses. Neither system would curtail your freedom not to donate your organs, but (as has been proven in other countries) either would result in higher rates of donation.
Thaler and Sunstein charmingly refer to their modus operandi as "libertarian paternalism," and they see in it the capacity to improve health-care decisions, retirement savings and environmental conservation. There's even a
Nudge
solution to heat-of-the-moment angry e-mails - they propose a program that checks the content of an e-mail you're about to send and, if it notices signs of intemperance, asks whether you really and truly want to send it.
The principles that undergird
Nudge
theory are that (1) we don't approach every decision in life with perfect rationality; and (2) the costs of bad decisions can add up in serious ways to the point where they impinge on others. To go back to our cafeteria, if we eat too many cookies and become obese, we incur health-care costs that get passed on to everyone else.
The idea of libertarian paternalism is a bit seductive: Let people do whatever they want - even if it's bad for them - so long as they're doing it consciously. There are, however, two caveats. As the case of eBay demonstrates, we can be nudged to both better and worse outcomes. And we should be wary that a nudge doesn't turn into a shove. Because while we might not mind having the cookies tucked away in the back of the cafeteria, it's not hard to imagine another choice architect deciding that they shouldn't be sold at all.