I am not an expert of Behavioral Economics. Lets leave that to Richard Thaler and Daniel Kahneman of the world. This article is about how to avoid mistakes while predicting Irrationality, which covers more than half of the decisions that we take today, be it personally or professionally. Again I am not an personality expert, so I will limit my writeup on appications of AI in Nudge management around business decisions.
Lets take the example of applying AI in pricing. Before I define the problem statement, its necesaary for us to understand the concept of decoy pricing. You can read about it on the web, but let me take a shot at explaining it. Study shows that our decisions or choices are always influenced by relative frame of reference. We always compare, to arrive at the best choice. In decoy pricing there is a decoy choice which is used to influence you, to make you choose what businesses/sellers want you to choose. So that’s decoy pricing!
Now, imagine I am a Data Scientist who has no idea about such Pricing strategies and had been assigned a task to come up with a Pricing Model or Recommendation model, which will help me to predict the best price offer/recommendation to be given to the customer, and improve the overall conversion rate.
Being a “good” data scientist, I will start profiling the customers and will come up with a classification model, which tells me that customers with certain profiles will choose certain types of offers. Isn’t that great?
Remember “Decoy Pricing”. Actually the above model is going to fail miserably because it doesn’t take into account the influence of parallel/alternate offers/choices in the input data. Talking in terms of Machine Learning model, this alternate choice will/should have the maximum weight, after I fit my model.
So remember while predicting irrationality, always include the possible choices that an individual/corporation has before you build such a model. Extend the model to make the Nudges efficient and effective.
“Most people can do absolutely awe-inspiring things. Sometimes they need just a little nudge” — Tim Ferriss