Friday, 17 July 2015

How Jetstar takes advantage of your quasi-rationality

You may have seen that Consumer NZ is leading a campaign against Jetstar's practice of pre-selecting optional extras like travel insurance and seat selection in its online booking form:
"Jetstar's practice of pre-ticking boxes for optional extras risked misleading customers on both sides of the Tasman into paying for services they didn't want," Ms Chetwin said.
"In both markets, it uses the same sneaky practice of ticking boxes for travel insurance, seat selection and extra bags. It's high time Jetstar stopped confusing its Kiwi and Aussie customers and ditched the ticks."
What Jetstar is doing is taking advantage of our quasi-rationality. But how?

A purely rational buyer of airline tickets from Jetstar would evaluate the cost and expected benefits of travel insurance and make a fully-informed decision - and if the expected benefits outweighed the cost, they would choose to purchase travel insurance. However, few people are purely rational.

In their book "Nudge", Thaler and Sunstein point out that the selection of default options can affect people's choices. The examples they use to illustrate include default retirement savings plans (most people don't actively select plans, which is why most people remain in the default plan - which has also been observed in New Zealand), and organ donation (if the default is opt-out rather than opt-in, then more people donate organs - see this excellent paper (PDF) by Johnson and Goldstein for example).

So, even though the choice not to purchase travel insurance involves simply un-ticking a box, fewer people will choose not to purchase if the box is pre-selected. And this leads to higher profits for Jetstar.

One way of explaining this surprising behaviour (not ticking a box to avoid the cost of travel insurance is almost a no-brainer if you don't think it's worth it, surely?) is to think about the choice itself. The decision about whether you will need travel insurance or not is not straightforward. If you were purely rational, you would need to weigh up the risks of all catastrophic (and not-so-catastrophic) events that could befall you on your travels, and the costs associated with those events, in order to evaluate the benefits that insurance could provide. That evaluation is hard, meaning there is a cognitive cost associated with making the decision. So, because the decision in itself is costly, rather than making the decision you might choose to make no decision (and avoid the cognitive cost involved). This results in the box remaining ticked (if it started out pre-selected), and you end up paying for travel insurance. Whereas if the box was not pre-selected, you wouldn't buy the travel insurance.

Plenty of firms make money from our less-than-pure rationality (or quasi-rationality as Richard Thaler terms it), but note that this is quite different from the actions of an un-named smartphone app creator as described in this post by Linnea Gandhi. As she notes, changing the 'buy' button to look exactly the same as the previous 'do not buy' button isn't so much taking advantage of our behavioural biases as it is taking advantage of our inattention to detail.

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