Is Behavioral Economics Really a Game Changer for Marketers?

Much has been written, and said, lately about the impact of behavioral economics on marketing. Some pay no attention to it, some fear it and some adapt it to their own particular cause. But, in reality, does behavioral economics really change anything?

First let’s look at what "it" is. Behavioral Economics (BE to the enlightened) is a different approach to economic theory. In it's simplest interpretation, BE comes from the proposition that people do not behave in rational ways, as opposed to more traditional thinking which, following on the teachings of the late great Adam Smith, believes that people do indeed behave rationally to further their own best interests. BE is a mashup of psychology and economics, and as a discipline seeks to explain why individuals and therefore societies do what they do.

For instance: if we act rationally in our own best economic interest, explain the following: the price of gas in Toronto is $1.239 at my local station, but I hear on TorontoGasPrices.com (which I follow religiously), that I can fill up for $1.1239 at a station approximately 3 minutes away from my regular station. This is a great deal and I enthusiastically drive 3 minutes out of my way to save 10 cents/litre or a total of $4.50 cents. On the other hand, if Saul Korman at Korry's Clothiers for Gentlemen were to advertise a $4.50 saving on a $700 suit, I would think he is crazy and not be in any way motivated to go out of my way to buy that suit. And yet, in both cases I would be saving the same amount. Rationally they are the same. But they would certainly not have the same effect on sales.

There are many more examples of irrational behaviour, and there should be no need for an entire academic discipline to point them out. We can figure them out for ourselves. Behavioral Economics is not so much dedicated to isolating these irrational behaviours as it is to understanding why they happen.

There are many reasons, but for the sake of this discussion, three are the most relevant: 

The first is that we have lazy little minds and therefore avoid thinking about as much as we can. To do this we rely on a rules of thumb or other heuristics that allow us to reach a conclusion without really thinking about it. For the most part the bigger box has more stuff in it; if it costs less it's lower quality; if it's made in Italy it's higher quality than if it's made in Viet Nam. 

We may argue that this is not always the case, because it’s not. But it is the case that we always start the choice process from one of these beliefs (for want of a better word). Unless something happens to interrupt this process, we will make our choices based on these beliefs. But, very often something does interrupt the process: we recall that the last time we bought the bigger box we found it was filled with air; an ad comes to mind in which we were convinced that the cheaper version was more appropriate for us; we recall our friend telling us that her suit made in Viet Nam was as good as any she had ever bought. Something, in each of these cases, interrupted our automatic behaviour based on the intellectually easiest answer. That said, the probability is that most of what we do, most of the choices that we make, are in fact based on the immediate, heuristic answer that pops into our conscious when faced with options.

Framing is the second reason behind our irrational behaviour investigated in the BE discipline. Heuristic thinking as described above explains how we react to externalities once we have some conscious or unconscious, contextualized awareness of the subject. But how do we develop this contextualized awareness in the in the first place? Once again our intellectual laziness helps explain the phenomenon. We need to make sense of everything we see and hear (that's just the way we are), and in order to do this we strive to frame information in ways that explain it and that we can understand it. The frame is akin to the filter through which we understand and interpret information. They provide quick and easy ways to process information. Of course, this is all unconscious (as are the rules that govern our heuristic thinking) until something interrupts the process and forces us to re-evaluate the frame.

Generally speaking if I see a starburst on an ad in the newspaper, I will think there is a deal in the ad, and I will respond based on my response to deals. If there is a car in that same ad, I will respond as I would to retail car ads (i.e. not at all if I am not in the market for a car). The frame in which I understand the information in the ad, the filter through which I see the information, has determined my response, without my lazy brain having to think about it. Move along, nothing happening here. But, put a cup of coffee or a donut into the ad, and this clearly doesn't fit my frame. My lazy brain is forced to pop out and say, "What's going on here?" But, as soon as I figure it out, the information is passing through another frame -- the frame of interest in donut shop contests. 

Two critical points about framing: it explains why we respond differently to information based on the way it is framed and if we are made aware of a habitual frame, or if something disrupts a frame and makes it seem illogical, we adjust frames. In certain circumstances we build new frames to accommodate the new information. But, we will frame everything one way or another.

And the third BE enlightenment comes down to a simple thought: we like to agree with ourselves and develop a raft of intellectual biases that help us do this in spite of what others might consider reality. Cognitive biases determine much of what we think and how we judge the world around us. There are a number of them, but among my favourites are: availability bias, the tendency to make choices based on what is most easily remembered or recalled; knowledge bias which explains why we very often choose the option we think we know the most about, and the all time favourite in our industry, information bias which is the tendency to seek information even when it won't affect the decision.

Which brings us to the end of the lecture (but not the blog) -- there is infinitely more to learn about BE, on the internet, YouTube and a couple of outstanding books: Thinking, Fast and Slow by Daniel Kahneman (the Nobel winning psychologist who started all of this) and The Art of Choosing by Sheena Iyengar.

Now, back to the original question: "Is BE a game changer for marketers?"

Fortunately for those driven by cognitive consonance bias, the answer is both yes and no (for more on how an answer can be both yes and no, consult "string theory" in nanophysics!). BE definitely is a game changer for those who understood marketing as a way of persuading people by delivering information (even where that information is well crafted, insightful, relevant, persuasive, etc.) For them, an approach to marketing that suggests understanding how peoples' minds work to lead to decisions will be quite novel and hard to get their head around. The implications being that people make choices on unconscious interventions that are entirely disconnected from rational (or emotionally logical) information; that people process information in ways that have nothing to do with what is said or written, but rather base decisions on what they ultimately hear, which is filtered through unconscious determinants (of which they are generally not aware); and that people will not respond, even emotionally, in a rational way (BE does not say that people don't behave rationally only in matters of functionality, but in all matters -- we do not necessarily respond rationally to emotional imperatives, either). All of this is quite a shock to the “if I understand their needs, engage them in the conversation by delivering relevant, authentic information in an insightful way, they will buy” crowd.

But, for those who understand that the decisions people make are more about who they are and how they relate to the world, BE is not new or game changing. It provides additional levels of insight into how people relate to the world around them, and therefore offers exciting ways to build brands and loyalty. For market researchers BE can inform methodology and help determine what questions need to be answered; for advertisers (all kinds, including digital and especially social), BE offers a way of blue-printing communication plans that engage people in their reality, which is often not the reality we think it is.

I think this YouTube clip of Rory Sutherland, CEO of Ogilvy in the UK, is a brilliant summation of how important BE is to advertising. Who will do the same for market research? 

Laurence Bernstein