The last day of Wharton's spring semester was a glorious day for me, and not just because the magnolias were in bloom. Once again, my consumer behavior students have made me very proud. It was the last of four rewarding days in which students presented their solutions to various companies' challenges. I ask for the solutions to be theory-based, and experimentally tested. My goal is to convince these cream-of-the-crop young minds that decision science and behavioral economics are not just clever, but also very practical and applicable to multiple consumer situations.
One of the companies that the students were supposed to assist was S2H (Switch 2 Health), that sells wrist watches that log physical activity. For every 60 minutes of movement, a code reveals itself, and users log on the company website to enter the code and receive points. These can be redeemed for really cool prizes, ranging from iTune cards and gift cards to stores such as Best Buy, all the way to Wiis. So far so good, right? Except the company wants to see action in terms of people exercising and redeeming points. And people do not always exercise as much as they think they want to, and, when exercising, they don't always redeem the points.
What's this got to do with theory? As the students figured out, quite a lot. In fact, this is part of an uphill battle I have with my students—MBAs in particular—at the beginning of each semester. They came to business school to receive actionable tools, and here I am yacking about theory. How does this translate to action?
One of the tenets of the Nobel winning Prospect theory, developed by Kahneman and Tversky, the theory on which behavioral economics is founded, is loss aversion. Not only do losses loom larger than gains, but, once we have something, the idea of forgoing it becomes painful, even is the object we own was not so desirable to begin with. So, said the students, how about instead of having people start off with zero points, and gaining them through exercising, we start off by giving them points, then taking those away if they do not meet their exercise goals?
This was cleverly done. Emma, Kenneth, Andre, Prustdom, Haroan, and Yining first recruited U Penn students, then recorded their initial level of weekly exercise, to establish a base rate. They then gave the participants the wrist watches, and asked each student to set him or herself a goal of 3 or 5 weekly hours of exercise. And this is when the fun began. To test whether loss aversion would prove motivating, the team then gave half the exercisers their points upfront, warning them that the points will be taken away if the goal wasn't met—a painful loss of 60 points per hour. The other half of exercisers expected to earn their points the traditional way—first work out, then get 60 points per hour.
Several interesting things happened. First of all, those who were randomly assigned a higher goal in terms of weekly hours, exercised more. As simple as that. When the goal was 3 hours a week, people exercised an average of 1.27 hours. This may not sound too impressive. But when the goal was 5 weekly hours, those busy, overcommitted students reached 2.15 weekly hours of exercise— almost twice as much. Sure, on average people fell short of their goal, don't we all? But the effect of merely setting these goals was amazing. You just have to will yourself to go to the gym, the pool, yoga, whatever it is you do—more often than you actually go, and your actions will somehow align.
So what about the loss manipulation? The participants did not get to use the actual S2H platform and go for the real awards, so the points carried no monetary value. Would anyone even care about points that have no bearing in the real world?
Surprisingly, even though the points allotted in the experiment were entirely hypothetical, participating students were very keen to obtain them, and even keener to keep them. For example, the students who were assigned a goal of 5 weekly hours, received 300 points each when the experiment started—an equivalent of 60 points per hour. They had to live through the pain of seeing some of these points taken away from them, because, on average, they only exercised 2.64 hours a week. But they put up a fight, because their fellow students who were in the control group and who received points as they went along, had only exercised 1.38 hourly weeks on average. That's almost half the amount of hours. Similar results were obtained for the group whose goal was set at 3 weekly hours. So precious were the points that one of the participants, who, for some reason was late in meeting with a team representative and receiving his watch, practically begged not to have his points—those symbolic, hypothetical points—taken off. And this was accomplished merely by reversing the point acquisition process, and pushing the participants' giant loss aversion button.
And these were not hard core exercisers or die hard fans. Their physical activity consisted of jumping up and down at rock concerts, walking, running, and—having sex (I think this is double dipping but oh well).
The work was also inspired by an article about a Boston gym program, initiated by Harvard graduates, where membership was free, provided you came four times a week. Everybody expects to pay for going to the gym, but once you've set the reference point at zero payment, every time you need to reach into your wallet and pay, hurts. And, to avoid the pain of paying, people walk the treadmill, run, or what have you, instead of missing out on a few bucks.
Granted, multiple difficulties lie in implementation, as Seth Tropper, S2H president and CEO commented. Users who do not meet their goals and, subsequently, face the threat of having their points deduced, might bring a doctor's note, or disclose unfortunate personal circumstances which precluded them from exercising (come to think of it, this is not unlike the life of a professor, having to deal with absenteeism and delayed submission of case reports).
But still, these behavioral economics ideas—both goal setting and the loss aversion—are compelling, practical, and highly applicable in various consumer contexts. And, when applied toward the improvement of health and well-being, that's the ultimate win-win.