Anastasia Shchepetova and Lirio Barros on Are Dark Patterns Profitable from an Economic Standpoint.

Traditional economics assumes that as humans, we use all available information, and we process all this information in a purely rational way in order to make an optimal decision. But studies show that in reality, there are serious limits to anyone's ability to process information. Behavioral economics calls these limits « bounded rationality ».

Because of these cognitive limitations, the way in which information or choices are presented can have a significant impact on the decisions that individuals make.

How behavioral economics can be used by policymakers to design “choice architectures” such that people are promoted to make better decisions? What can economics teach us about how dark patterns work? What are the incentives to switch from dark to fair patterns, from a sheer economic point of view?

In this episode, we dive into the economics behind dark patterns with Marie Potel and her guests, Anastasia Shchepetova and Lirio Barros, both consultants in economics and finance at Oxera.

To go further :

• Federal Trade Commission complaint against Amazon.com
• “Nudge : improving decisions about health, wealth and happiness” by Richard Thaler & Cass Sustein (2009)

Have a question or need some support? Visit us at fairpatterns.com and follow us on LinkedIn FairPatterns!

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Transcript

Marie Potel-Saville 

Hi everyone, and welcome to this new episode of fighting dark patterns regain your freedom online. My name is Marie Potel-Saville, I'm the founder of fair patterns: the first holistic solution to detect dark patterns, remedy them with interfaces that empower users to make enlightened and free choices at last, and train all stakeholders to avoid creating new Dark patterns or new deceptive design. So, as you probably know by now, so called Dark patterns are interfaces that deceive or manipulate users to make you behave either without realizing or even against your interests. They're also called deceptive design and are unfortunately found in 97% of European favorite e-commerce websites according to a recent study by the European Commission. Now, there's a lot going on in dark patterns enforcement currently. For example, in the EU, we are seeing that European consumer protection authorities are equipping themselves with homemade tools to detect dark patterns and very interestingly, they successfully identified urgency countdowns at scale, for example, which by the way, are currently available off the shelf through many online providers. So, it's great that regulators are really taking a strong stance. In the US, the Federal Trade Commission opened proceedings against Amazon for the dark patterns enshrined in prime. The FTC claims that these dark patterns are and I quote "enrolling customers in prime without consent." So remember, this is what we said at the beginning, when dark patterns make people behave without realizing, this is exactly what we're talking about. And the FTC also claims that these dark patterns are, and I quote again, "sabotaging customers attempt to cancel." So, this is more on the manipulative side. It's really interesting to see how the complaint is both very practical, very hands on, with tons of screenshots of all the steps that you can try to implement to unsubscribe, usually unsuccessfully, but also takes a more macroeconomic view explaining the systemic deception and systemic manipulation within prime. Now, this systemic aspect brings us to a very interesting question. Are dark patterns really profitable from a sheer economic standpoint? To discuss this topic today, I'm absolutely thrilled to welcome Anastasia Shchepetova and Lirio Barros, both working at economics and finance consultancy Oxera. Hi, Anastasia. Hi, Lirio.

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Lirio Barros 

Hi, Marie. Thank you. Delighted to be here.

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Marie Potel-Saville 

Great to have you both. Perhaps I'll give a quick introduction of each of you, Anastasia, you're a senior consultant at the Paris office of Oxera. As I said, Oxera is an economics and finance consultancy helping their clients to make better decisions and bringing impactful solutions to the biggest questions facing business and society. Anastasia, you focus on competition policy and behavioral economics. We'll talk more in detail about what that is exactly. You hold a PhD in Economics from Toulouse School of Economics, and your research area covers Competition and Consumer Policy. And Lirio, you're a consultant at Oxera in the Brussels office and you've been with Oxera for three years. Your focus is mainly on competition, for example, antitrust litigation and merger reviews, in particular in the digital sector. So that actually that reminds me of one of my prior lives as an anti-trust lawyer. Well, it's great to have you both, perhaps Anastasia we could start with you with a key question really, as an economics consultancy, what led you to work on dark patterns at all? And why Oxera is interested in this topic? 

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Anastasia Shchepetova 

Thank you, Marie for this introduction and very happy to join you in such an initiative to talk more about dark patterns. So to jump into your question why the interest in dark patterns. Well, as you know better than others, it's a super exciting topic, and relevant for each of us. Because we all face a lot of them as a consumer every day. So for everyone, this is a natural curiosity. Second, as you correctly also mentioned, dark patterns are going to be potentially regulated quite a bit, because regulators worldwide are looking into the topic very actively and Oxera has a very long history of working in regulated markets. Just before we jump into the main topic of our discussion, which is of course economics of dark patterns, I'll say a couple of words to present Oxera in order to better understand why we are here to talk about this topic. So as you said, already, Oxera is an economic consultancy founded in early 80s by a group of academics from Oxford University. The idea was to bring economic and financial insights to inform the ongoing process of privatization of state owned public utilities at a time in the UK, and also in other countries afterwards. So this shows that Oxera has historical expertise in regulated markets, from which stems the motivation also to look into dark patterns. But also, when we say dark patterns we mean deceptive practices online in general, and deceptive practices, we've already seen them in other markets. For example, during the financial crisis, deceptive practices already attracted increasing attention of regulators and academics as well due to a number of misaligned scandals. With the development of e-commerce of course deceptive practices gained in scale which raises additional concerns. But as an example, the UK financial regulator, the FCA, after 15 years of evolution in the regulation of financial services, has introduced the so called Consumer Duty Regulation, a new set of rules which implement a highest standard of have a duty of care for consumer outcomes. Oxera took an active role in advising the FCA in designing the regulation and on implementing the new regulation. And just for reference the duty of care puts the burden back onto companies to assess the risks put in place by their solutions for consumers.

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Marie Potel-Saville  

Let's pause this here for a second Anastasia, this is a very, very important point. So usually, you know, it's for the customers who have a problem, who might have might believe that they've been misled, to evidence that information wasn't clear enough, or they were not provided all the information to make the right decision for them. So what you're saying is that, you know, the reversal of the burden of proof means that it's for the companies selling the financial products to actually evidence that their clients really understood what the financial products were about, is that right?  

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Anastasia Shchepetova  

Exactly. So their idea is for companies to make sure that the outcomes of their products and services are not harmful for consumers. That requires, obviously gathering evidence, constant monitoring and auditing of your business processes in order to be sure that your customers are not harmed by the product and services you offer.

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Marie Potel-Saville 

Exactly. But you're also a competition economist Anastasia and I think you have a specific angle from the economic theory perspective in looking into dark patterns, right?

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Anastasia Shchepetova 

Exactly. As a competition economist, we are also very interested in, also during the financial crisis, to model different behaviors and see if competition can be a universal tool to ensure that dark patterns do not appear. But unfortunately, the models that we looked at show that competition in some cases may even foster adoption of dark patterns in order to soften competition and ensure some additional profits. This is an area of research that is still ongoing. The traditional economics that usually assumes rational and inferred choices from consumers and firms needs to incorporate behavioral insights because we're talking here about consumer behavior and various consumer and biases. So traditional economics makes a call to behavioral insights from other social sciences, such as psychology and sociology. And this is what we are calling behavioral economics. And I think Lirio will talk about it. 

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Marie Potel-Saville 

Exactly. This is such a fascinating area, you know, my background is in competition. I used to be a competition lawyer for 10 years in very large law firms. And behavioral economics, I think, bring an additional light to traditional economic theory. So Lirio, can you enlighten us about what is behavioral economics? And how does that come into play as regards dark patterns?

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Lirio Barros

Yeah, yeah, absolutely. I think it's a very important topic in this context, because behavioral economics occupies a central position in terms of explaining the phenomenon of dark patterns, why do they exist, and also assessing whether a certain interface is a dark pattern. And when an economist thinks about dark patterns, the first thing they think about is really behavioral economics. So I think, as Anastasia was already saying, much of traditional economics assumes that as humans, we use all available information before us and then we process all this information in a purely rational way in order to make an optimal decision. 

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Marie Potel-Saville

Yeah. I guess, that's called the rational actor model, which has been debunked quite some time ago. Right? 

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Lirio Barros 

Yeah, there are definitely areas where it has been shown that it does not hold. And that's a large share of what behavioral economics does in the sense that it identifies these areas. So indeed, in reality, there are serious limits to anyone's ability to fully process all information before them and do that rationally and behavioral economics fills that gap. And it does so by providing economics with more realistic psychological foundations. So it is a field that builds also upon all the sciences to some extent. And in some contexts, these foundations are essential in order to understand and explain human behavior because normal traditional economic models would fail to predict what humans actually do in some cases. So behavioral economists call the limits of people to fully process all information "bounded rationality." And so what that means is that because an individual's brainpower and time is inherently limited, it's not realistic for humans to be expected to solve all problems optimally in that sense, as traditional economics would maybe expect. So what behavioral economics says is that instead, people adopt rules of thumb to use their effort and their time efficiently. Thing is, though, that such heuristics, or even relying on instinct, can lead to systematic and predictable errors, as you as you would say, when you compare it to standard economic theory, in situations of uncertainty. Now, these errors are then referred to as behavioral or cognitive biases. Because of these biases, the way in which information is presented can have a significant impact on the decisions that individuals make. And this is not just the case when we look at decisions that maybe are relatively inconsequential, we also see this where the decision is important and the stakes are high. So for example, we also see it happening in the selection of health insurance plans and retirement options and things like that.

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Marie Potel-Saville 

This is so true. And unfortunately, there are more than 180 different cognitive biases identified in literature. So we're all driven by these biases, whether we like it or not. So Lirio at Oxera, how do you apply behavioral economics in your daily job? How does that help your clients making those better and more informed decisions?

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Lirio Barros

Yeah, it's a good question because the position of behavioral economics is fairly broad in that sense. At its core, it provides a toolkit that can be used for many, many different purposes. So it's highly relevant for regulation and policymaking, as well as for commercial decisions of both online and offline businesses. So just to provide a couple of examples, Oxera has delivered training programmes to staff of the UK financial regulator about the tools that behavioral economics has to offer for consumer protection and also competition purposes. At the same time, we've also provided trainings and advice to firms on how to implement the forthcoming regulation on how to treat customers and how to not treat them. And just to provide a final example, the wide variety of users will behavioral economics, we frequently carry out experiments with survey partners as well. For instance, we were commissioned to conduct a behavioral experiment to test the impact of regulatory interventions on innovation in the EU. And in a case that was about the digital markets act.

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Marie Potel-Saville 

Oh, this is so interesting. So what did you do? Exactly?

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Lirio Barros 

So basically, what we did is we ran a survey, where we asked people to make investment decisions under various regulatory scenarios. And all this was to investigate, how likely would it be that the digital market Act will adversely impact innovation in the EU. Behavioral economics is absolutely core here because the way you phrase the question can drive the results. So in order to lead sound policymaking, sound regulation, you need to phrase the question in a neutral way through which you can really listen to what would be likely to happen, and not steer the answers in one direction. 

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Marie Potel-Saville 

This is so true. Very often, people come to us asking or saying that, in any event, you have to nudge people. In any event marketing is about nudging. Should you perhaps explain you know the difference? What nudge is perhaps first, and then how does that come into play when analyzing dark patterns?

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Lirio Barros 

Absolutely. Because I think it's right that you can use behavioral influencing for both for good and for bad. So it can also be used to support benevolent policy objectives, helping people make better decisions. So just to provide an example, healthy food options can be displayed more prominently within a canteen or a supermarket if you want to promote a healthier lifestyle. So these nudges they can be either on the internet and the digital sphere but also in real life, where these things also have some relevance. And at least these things, nudging someone towards a better decision, for example, leading to better health. These are called nudges. And this was popularized by Richard Thaler and Cass Sunstein in their well known book published in 2008. They define a nudge as any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives.

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Marie Potel-Saville

Yeah, and then the rationale behind that is that there are a number of topics where regulators know for sure what's the best outcome for people. So the example of food is a quite clear cut, you know, healthy food. However, I guess, you know, it can also be subject to criticism to the extent that, well, it's intrinsically paternalistic, someone else is deciding what's good for you and what's bad for you.

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Lirio Barros 

Yeah, to some extent that there is some truth to that argument. However, I think one of the things that we've learned from our work is that there is in the end no neutral architecture. So you are leading someone to an outcome whether you want it or not. So just to provide the food options in the canteen example, there is always one food option that is at eye height, whether you like to or not. And so either you make that a healthy one or not. So if you make it a healthy one, we would call that a nudge And the flip side of that, nudging for evil essentially, is what is called a sludge, or so going by tater. A sludge makes the process more difficult to arrive at an outcome that is not in the best interest of the user. So in this case, that might be you know, eating something unhealthy, although we could have a back and forth around what is the best interest of the user because of the user really wants to eat something unhealthy, then, you know, why not?

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Marie Potel-Saville 

Then they should perhaps be free to do so. But yes, I guess the key point is whether users are aware of what's going on and are empowered to make their own informed and free choices. I guess that's our take at fair patterns. Anastasia, turning back to you. You know, given the huge prevalence of dark patterns online, we've quoted the European Commission study with 97% in Europe, but it's pretty much the same in the US or even around the world. So given the huge prevalence of dark patterns, does that mean that dark patterns are really profitable from a sheer economic perspective?

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Anastasia Shchepetova 

Thanks, very good question. Well, as you put it, an immediate intuitive response would be given the frequency of the dark patterns’ adoption by both large and small companies, dark patterns must be profitable otherwise we need to look for other rationale for them to prevail in the market. The main driver of dark patterns is certainly the business model. Several testimonies from insiders of tech industry suggest that orientation and growth by all means in today's tech industry is the main driver of dark patterns. Product teams inside the companies and designers are kind of incentivized to incorporate dark pattern designs within their apps and their websites to maximize sales and revenue, they have incentives to design optimal interfaces for engagement and maximum attention, and also for data use and collection, which may lead to various harms, intentional and unintentional perhaps. That's what we see, as testimonies from the industry itself.

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Marie Potel-Saville 

Isn't that very short term? I mean, you know, that turnover boost, does that last over time? Yeah, that's so interesting. We came across a study recently in the media sector, showing that when offered two different options to subscribe to a new media, 30% of buyers would actually not subscribe in the presence of auto renewal. So there would be 30% less subscriptions, when the system would look like something slightly deceptive or manipulative with auto renewal. And that would be different if the service was offered with auto cancellation. So I think we can see some literature also pointing at the fact that people do value fairness, and that reflects in their purchases behavior where they sort of refrain from buying if they have some sort of hint that they're going to be tricked. Does that make sense at all, Anastasia? 

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Anastasia Shchepetova 

Exactly, exactly. I guess, some business models are really orientated to gain faster market share in a number of clicks or whatever you can imagine and one should of course, distinguish between short term and long term profitability. There is a number of economic models that looked at dark pattern in the context of short term profitability, and showed that they may be profitable, because by exploiting the consumer biases that Lirio just talked about, they can reduce informed choice and therefore soften price competition, for example, and increase joint profits. In such models, as I already mentioned, more competition may actually harm consumers. However, they do not reflect all the market realities, which is usually the case also kind of academic theoretical research, such as repeated purchases or reputation or existence of maverick firms, for example. And in such settings, dark patterns might be less profitable, as they can reduce a reputation of a firm in the long term. For example, in the retail markets that used to be a source of examples for deceptive practices to motivate the research question, the evidence points out that the buyers are less likely to purchase complex promotions, which individuals associated with higher prices, lower fairness and lower transparency. So to some extent, consumers learn from their experience and may become averse to complexity and to also dark patterns potentially. The main message here is that the message is mixed, we need to know more about the effects of dark patterns and also empirical evidence in economics provide very mixed insights. Researchers are lacking information from insiders about business models, about consumer preferences, for example, what are consumers searching cost? And so we absolutely need to know more about these factors and insider firms should engage more to help shape a better understanding out various practices and why businesses basically use them apart from gaining more profits. Of course, this is an immediate reaction. Consumers learn from their experience and develop protection and are being careful. And also, it is important to stress that different consumer groups, depending on the level of sophistication or vulnerability can be affected in various ways. But also, if we're talking about consumer protection, we should pay attention to the fact that if consumers perceive themselves too protected, it might actually affect incentives to how to protect themselves, and be careful. So all these factors should be considered together.

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Marie Potel-Saville 

Absolutely, absolutely. So now turning back to you Lirio. What are the economic incentives to stop deception by design? And hopefully switch to fairness and transparency? 

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Lirio Barros 

Yeah I think there is some hope to be had, indeed. So I would say that there are two sort of broad buckets of incentives to consider here. So the first one being, governance and sort of ethical culture in a company can be used as a form of product differentiation by the firm as well. So in practice, what this would mean is that, for example, web shop might think to itself, what if I make a user interface that doesn't pressure customers into purchasing at all that is easy to use, no matter the decision the consumer decides to take. And I can then use that to market and advertise myself on that basis. So the first incentive would be that you can stand out from the competition as a firm stand out from the crowd, making a user interface that is more neutral. So that would be the first one. Now. Second, what we see is that, I think, as you know, is that there is increased awareness around online manipulation and this is finding its way also into new legislation enforcement and litigation against firms using dark patterns. So I just discussed, product differentiation through the user interface in the hope of attracting new customers, is more about providing a carrot to the business. The incentive I'm discussing now is more of a stake. So just to name one example, as you know, that the DSA, the Digital Services Act will enter into force in the first quarter of 2024 I believe, has a provision explicitly banning dark patterns. So there's also various investigations going on regarding dark patterns or you know, longer standing consumer protection rules. What all this means is that firms will more and more need to be able to evidence to regulators that they are not using dark patterns. So what we also know is that this can be a challenge, because the line between a dark pattern or design that is persuasive but fair can, in some cases, be blurred. It's not always necessarily obvious to the naked eye, although sometimes it is. As a result, I think businesses would do well to be proactive about compliance, and to gather and provide data driven evidence that the outcomes of their designs are good for their customers. And that in particular vulnerable customers as Anastasia already alluded to briefly, are not taken advantage of. At the end of the day, I think a firm doing all this testing, and that is thoroughly thinking about how they design their user interface and the trade offs that are involved in that, should mean both for the firm and for the regulator, that the regulator will not have to intervene in their case at all, because the interface is already fair by design. So this could save them a big headache.

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Marie Potel-Saville 

That actually reminds me of a couple of instances where the ICO so the Data Protection Authority in the UK, gave a courtesy visit to some of our clients and actually, we provided the results of our user testing through our user testing lab, which measures understandability, but also, clarity of the information and memorization of the information, and on that front at least, it closed the investigation. So definitely, it's interesting to have some sort of measurement, some sort of evidence that you're not trying to trick users and that on the contrary, you measure how much they understand from your interfaces and how much they're actually empowered to do the actions they want to do on a given website or application. That's really interesting. I guess we could keep talking for hours and hours. But we have a final question that we ask all of our guests in this podcast. What are the two practical tips that you would like to give and to whom you would like to give those steps?

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Lirio Barros 

Yeah, thanks, Mary. Perhaps I'll go first on this one. So my tip would be both the firm's and to regulators and it would be to focus on consumer outcomes. Because there is no such thing as a neutral choice architecture. So whether or not you want to, you're always nudging a consumer in some direction. So even if you want to present all information and fully neutral way, there's sometimes just limited space. So just going back to that supermarket context, some products are listed at eyes height and others are not. And this is a necessity because not all products can be listed at eye height, you need to priorities some products over others in that case, and in UI design, you need to prioritize some information over all the information. And we know also that framing in many cases can lead to better outcomes. So a classic example is organ donations where, where the default is to donate, and there's an opt out. We know that these countries tend to have higher organ donation rates, which also we know that for many people donating their organs after they pass aligns with the preferences they have, right. So in that sense, we would consider that a good outcome, not in itself, but because it matches with the preferences of the people.

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Marie Potel-Saville 

Yeah, this is so interesting area, because you know, that might be our way out of paternalism that we discussed previously. You know, the problem with nudge, for some people would be paternalism. But then if you define the best outcome by the fact that it actually match consumer preferences, then all you need to do is identify those preferences in a very objective and transparent way and then compare the outcomes with those preferences.

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Lirio Barros 

Yeah, absolutely. So I think that will be the key question, are consumers finding the product or making the decision that they want to be making if they have all the information all the time, all the time in the world? And I think if you, as a business, do testing, and you ensure that you are your UI design indeed accomplishes this, it can lead to these sort of Win Win Win situations that you were just describing. Where the user benefits because of the UI, your regulator is happy because they don't have to do anything because the user interface of the firm is already good, which means that the firm is also happy.

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Marie Potel-Saville 

I love this. Anastasia, any practical tips from you?

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Anastasia Shchepetova 

Well, this is just to expand on what was just said, I would give a tip to firms perhaps, to practically engage with regulators, to provide more evidence of the effects of their practices to ensure this cannot be classified as dark patterns, which means again, more data orientated approach in governance and monitoring the outcomes. So basically, provide more insights about what consumer wants and how the product aligns with consumer preferences. Ethical behavior and responsibility should come from the top of the firm and be embodied in the overall strategy to make it work. And at the end of the day, we're all final consumers and should benefit from more fairness and transparency.

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Marie Potel-Saville 

Exactly. It's about our lives. Ultimately, that reminds me about the fact that several regulators already said that they're ready to proceed to investigations where there would require the A B testing of interfaces as part of an investigation on dark patterns. So AB testing is basically the practice where you provide two different options of one given interface since as we said, there are several ways of designing any given interface. So AB testing means that you've got option A, in a certain direction, option B, as a second type of interface and you test both to see how consumers and customers react to each of them and what leads to what outcome. Knowing that regulators at European level and in the US are now willing to obtain those AB testing results, I think that it's probably an incentive for companies to think twice about how they tailor their AB testing and what outcomes are they trying to achieve through this testing. 

Well, thank you very much to each of you, Anastasia, and Lirio. It's been an absolute pleasure to have you on this episode. Thanks a lot for listening to this episode, and stay tuned for our next ones. Don't forget to subscribe to our various platforms where you can listen to the podcast but only if that's your informed and free will of course, stay tuned and take care. Bye bye !

Fighting dark patterns, a podcast by Amurabi. For further information, you can go to fair patterns.com

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