Economic Misbehaviour: Naughty Marketers Exploiting Irrational Consumers

Anyone with a rudimentary knowledge of economics accepts that it is a science largely based on assumptions. Perhaps the most far-fetched assumption is that consumers act rationally. If the price of a product goes up, then consumers will rationally reduce their purchasing of that product. This is called the Law of Demands. However, a modern age, teenage punk version of Adam Smith might tell you that ‘economic laws were made to be broken’.

In economics, there are a several examples of product types that defy the ‘law of demand’ and thus convey seemingly irrational consumer behaviour. The most interesting of these is the Veblen good.

The nature of a Veblen good is that its demand is proportional to its high price. This is so disconnected from all realms of human rationality, and consequently begs the question: why?

Veblen goods are luxury goods, top of the range and often affiliated with a high-end brand like Gucci or Aston Martin. The high price of one of these products attracts consumers because they possess a what is called an ‘intangible value’. This could mean that a product is associated with a certain kind of person, or that it brings about fond memories, or simply that it makes you feel happy. For example, a consumer may be attracted to a £100,000 Aston Martin because they want to possess a physical manifestation of their economic status. However, for most people, owning an Aston Martin is just about getting you a step closer to becoming James Bond (to be clear, we’re talking about Daniel Craig and Sean Connery, definitely not Timothy Dalton).

Veblen goods, and indeed all goods, hold some degree of intangible value. This is where behavioural economics comes out of the shadows and saves the day in a Bond-esque manner. Using psychology and neuroscience, behavioural economists can dismantle the complexity of intangible value as well as explain consumer’s reactions to every action. It is no longer enough to work out how/when/which consumers buy things. Part of the behavioural economist’s remit is to work out why consumers buy things, researching the psychology of every purchase, before, during, and after the purchase.

Marketing can clearly benefit from the work of behavioural economists as one of the marketer’s main tasks is to understand their consumers. In a fully rational world, adverts would do nothing but inform consumers, but with the help of behavioural economics, adverts can inform, inspire, stimulate and engage with the consumer.

We often pay a lot of money for a product because of its intangible value, but this is by no means a bad thing. By adding an emotional value to a product, we are not overpaying for a product, but rather enjoying a product more because of its emotional value. Coca-Cola is a prime example of this, as consumers enjoy the drink not just for the flavour, but because our cognitive bias towards Coke and its association with happiness and excitement adds a new dimension to its consumption. Many consumers are aware of their own biases, yet we happily accept these biases despite the fact that (in a blind test) many of us prefer the taste of Pepsi.

As consumers, we don’t look at products from a purely analytical point of view, but rather incorporate our own prejudices, preconceptions and emotions into a product’s assessment. There’s a whole list of cognitive biases that change the way we choose which products to consume. In fact, the very act of choosing a product translates to a heightened experience of its consumption purely because it was your choice. This is called ‘choice supportive bias’. One of my personal favourites is the ‘ostrich effect’, whereby you ignore negative information like an ostrich burying its head in the sand. This could anything from CEOs ignoring their share prices during a recession to smokers avoiding health warnings on a packet of cigarettes.

Marketers have happily incorporated Nietzsche’s philosophy that “in everything, one thing is impossible: rationality”. However, all good Nietszchean marketers also understand that it is possible to rationally exploit irrational people. For years, marketers have been using cognitive biases to their advantage, reinterpreting their sales and brands to lure consumers in. For example, in 1974 Tversky and Kahneman conducted several experiments on ‘prospect theory’, and showed that we dislike losses more than we like equivalent gain.

How does this actually work? If insulating your walls were to save you £100 pounds of heating every year, marketers might want to think hard about how to convey this idea to the consumer. Prospect theory suggests that saying ‘you are losing £100 without insulation’ is more effective than saying ‘you will save you £100 pounds with insulation’

It’s all a matter of semantics, and yet marketers have to be very careful about how they convey products. Looking back at Veblen goods, brands have to make their products valuable as well as exclusive. We often throw around the phrase “playing hard to get”. Does this refer to your high-school crush, or a beautiful car? Either way, you have to work hard to earn it.

Marketers use behavioural economists to unravel some of the following: what makes consumers tick; what makes them feel like buying; what makes them happy; what makes them sad.

To be a successful marketer is a bit like being a good spouse. Whether it’s your target audience or your husband or wife, you need to forgive their irrational nature and concentrate on understanding the multiple minuscule nuances that make them who are they are. If you can do that, everyone wins.