What ‘The Big Short’ Can Teach You About Increasing Revenue

This week, University of Chicago business professor Richard Thaler won the Nobel Prize in Economic Sciences. For years, he has been one of the leading players in the new field of “behavioral economics.”

In the past 30 years, the way that economists understand people’s behavior has undergone a revolution. While classical economics is based on the notion that people act with rational self-interest, many of their decisions seem far from rational. Behavioral economics was born out of the necessity to explain these seemingly irrational choices.

Behavioral Economics

Earlier this year we published a book titled “Dollar Dash.” The subtitle of the book is “The Behavioral Economics of Peer-to-Peer Fundraising.” In Dollar Dash, we quote Thaler, when he says that behavioral economics, “… is not a different discipline: It is still economics, but it is economics done with strong injections of good psychology and other social sciences.”

Behavioral economics sheds light on the many subtle and not-so-subtle factors that contribute to our decisions. In Dollar Dash, we describe how psychological factors affect choices about how people commit their time and resources to nonprofits. Sometimes these decisions are counterintuitive. For example, often people’s fundraising performance improves when they receive fewer incentives. In many circumstances, rewards demotivate people. Or, paying a registration fee for your event makes people less inclined to fundraise. You will enjoy greater net income if you don’t have one.

Unlike most Nobel Prize winners, Richard Thaler was already pretty well known. He wrote the 2008 best-selling book, “Nudge,” about how to help people make better choices. He also played himself in the 2015 movie, “The Big Short,” delivering an explanation of the causes of the 2008 financial crisis.

Credit: Movie Pilot

“Nudge” is about using behavioral insights to give people a nudge in the right direction when they are making decisions. His ideas have influenced governments to improve a wide range of public services—from getting people to save more for retirement to simple things, like paying their car registration fees. It’s all about overcoming peoples’ “inertia” and getting them to act (Thaler avoids using the word “lazy”).

Overcoming Inertia

Turnkey uses the same behavioral tendencies Thaler describes in “Nudge” to overcome inertia and get people to fundraise for nonprofits. The key is to get them to make that first step, take the first action. Sign up for an email list, post on Facebook, register for an event—whatever. And once their initial inertia has been overcome, they are far more likely to do more on the nonprofit’s behalf.

Peer-to-peer contact is the magic that makes that first action happen. Do a direct response campaign, and you are ecstatic if you get a three percent return. Do a peer-to-peer campaign, however, if you don’t get 30 percent, you’ve done something wrong. Peers overcome inertia.

Behavioral economics works, because it connects economic decisions with psychology. People don’t make decisions in isolation from their friends, family and acquaintances. They’re influenced by what people in their social groups think and do, as well as by what those outside their groups do—whom we identify with and our desire to fit in influences decisions. New decisions are influenced by past decisions. Peer-to-peer fundraising—when done right—takes advantage of all of these social levers.

We are a bit like fish; we swim in a sea of social influence, but often seem unaware of the water. Although social influence biases most everything we do, when surveyed, less than one percent of us think we are as biased as the average person. As University of Pennsylvania economist Jonah Berger says, “Peers don’t just affect what we choose, they motivate us to action.” By understanding these biases, we can harness their power.

That’s exactly what we do with peer-to-peer fundraising.