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Two Novel Ways to Reduce Socioeconomic Disparities

Two Novel Ways to Reduce Socioeconomic Disparities

Kellen Mrkva, Nathaniel A. Posner, Crystal Reeck and Eric J. Johnson

Listen to the authors present their findings (source: March 2021 JM Webinar)

Choice architecture is unavoidable for marketing managers and retailers. Products and options must be presented in some way to consumers, and the order and way they are presented impacts purchases. Though it is well-known that choice architecture influences decisions overall, it is less clear how choice architecture influences inequities across people. A new study in the Journal of Marketing demonstrates that people with low socioeconomic status (SES), low numerical ability, and low knowledge are most impacted by nudges. As a result, “good nudges,” designed to encourage selection of options that are in people’s best interests, reduce SES disparities, helping low-SES people more than high-SES people. On the other hand, nudges that encourage selection of inferior options exacerbate disparities relative to “good nudges” because low-SES consumers are more likely to retain inferior default options. In other words, nudges are a double-edged sword that can either reduce disparities or make matters worse because they impact low-SES people most. 
 
Our research team generalizes our findings across three different types of nudges, several different consumer decision contexts, and real retirement decisions. Our results suggest that choice architecture interventions are more effective among some segments of consumers than others, so the effects of interventions on different segments should be carefully monitored. In many cases interventions should be applied selectively.
 
In addition, our results suggest that nudges can be a cost-effective way to reduce inequities. Many marketing firms, corporations, and governments around the world value equity and seek to reduce inequities, especially when actions to reduce inequity are inexpensive and also benefit the firm. Our results suggest that nudges can be one way to meet those goals. 
 
In five experiments as well as data from real retirement decisions, we show that people who are lower in SES, domain knowledge, and numeracy are impacted more by a variety of nudges. As a result, “good nudges” that facilitate selection of welfare-enhancing options reduce disparities by helping low-SES, low-knowledge, and low-numeracy consumers most. We demonstrate this effect across several types of nudges, several decision contexts, and in real world decisions. 
 
In Study 1, participants made five consumer financial decisions. For each decision, they were randomly assigned to a “no default,” “good default,” or “bad default” condition (the latter two pre-selected correct or incorrect options, respectively). After they made these five decisions, participants completed common measures of the three hypothesized moderators—financial literacy, numeracy, and socioeconomic status. As predicted, there was a large default effect. There were also interactions between the default condition and the three moderators; participants lower in these moderators were more impacted by defaults. These effects remained significant when adding survey engagement, comprehension, need for cognition, agreeableness, decision time, and their interactions with condition to the model as covariates.
 
In Study 2, we examined whether these effects generalized across three different types of nudges and three decision contexts. We replicated the SES and financial literacy effects of Study 1 across all nudges and contexts. Unlike Study 1 and all subsequent studies, the nudge x numeracy interaction was not significant. The key effects remained significant when controlling for a measure of fluid intelligence. 
 
In Study 3, we acquired syndicated data from stratified random samples of American households about their retirement investment decisions. We examined a sample of people who work for companies that use defaults to automatically enroll employees into retirement contributions. Respondents reported whether they retained or opted out of the default contribution amount and default investment allocation. We hypothesized that lower-SES and less financially literate people would be more impacted by nudges and thus less likely to opt out of these retirement defaults. Evidence supported this: Lower-SES participants were less likely to opt out as were participants with lower financial literacy. These effects were significant both for decisions about whether to retain the default contribution amount and whether to retain the default investment allocation.

In Study 4, we conceptually replicated these effects in the context of COVID-19 health decisions (e.g., deciding whether to wear a mask). Additionally, domain-specific health knowledge moderated default effects whereas other-domain knowledge did not. In Studies 5-6, we replicated the predicted moderators from Study 1 with incentives. Mediation models suggested people with lower SES, domain knowledge, and numeracy were more impacted by nudges partly because they experience higher uncertainty and decision anxiety when making decisions. 
 
Across the six studies, nudges influenced choice disparities across people. This suggests that nudges that make behaviors such as retail purchases, vaccine sign-up, and retirement contributions more automatic can reduce socioeconomic inequities.

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From: Kellen Mrkva, Nathaniel Posner, Crystal Reeck, and Eric Johnson, “Do Nudges Reduce Disparities? Choice Architecture Compensates for Low Consumer Knowledge,” Journal of Marketing.

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Kellen Mrkva is a Postdoctoral Scholar, Columbia University, USA.

Nathaniel A. Posner is Lab Manager, Columbia University, USA.

Crystal Reeck is Assistant Professor, Temple University, USA.

Eric J. Johnson is Norman Eig Professor of Business, Columbia University, USA.