What is behavioral economics and why does it matter to marketers?

We’re not rational. I agree that was an unusual way to begin a “think piece”, which typically involve a degree of logic but according to Alain Sampson, author of Behavioral Economics, we are not rational. Instead, we’re emotional, irrational and high-strung beings who like to fool ourselves with stories about our rationality, when in reality our decisions are often made by chance. We reach decisions based on insufficient information which often points to uncertainty and we are highly influenced by both our psychological and emotional states and the context in which we live our lives. In short, behavioral economics is an exploration of human impulses. The study seeks to understand why irrationality is the driving force behind our actions and why human behavior defies conventional economic models.

In 2014, Roy Sutherland provided his perspective on behavioral economics. He argued that it could be summarised with these six points:

1) Small changes can have large effects.

2) Psychology is really important.

3) People can’t always explain why they do what they do, or what they want.

4) Preference is relative, social, and contextual, not absolute.

5) Trust is never a given; commitment really matters.

6) People satisfice.

Behavioral economics is therefore a combined study of psychology and economics. It’s concerned with behavior at micro-level as opposed to macroeconomics where the emphasis is far more on economics as a whole. For example, the pain of paying for an item is regarded as an extremely painful psychological experience. This was researched in experiments comparing paying with money to physical pain, as well as priming and placebo manipulations. In the latter, participants who thought they had taken a psychological pain-enhancing pill were willing to pay more for an object than those who were given a psychological pain reliever. Microeconomics incorporates psychology into its discourse whilst macroeconomics doesn’t.

Thinking like a consumer is the crux of marketing. If behavioral economics explores the irrationality and emotional impetus that determines human behavior and consumption is the end goal for players within the marketing industry, then behavioral economics is the means by which brands can have the most impact. Behavioral economics tells brands that in order to gain a competitive advantage in an over-saturated and homogeneous market, consumers must not only see the brand but must feel it. Behavioral economics has demonstrated that consumers are receptive to “experiences” more than anything else.

The proof is in the examples:

Habit

Habit is an automatic and rigid pattern of behavior which is usually acquired through repetition and develops through associative learning. Behaviors may initially serve to attain a particular goal, but once the action is automatic and habitual, the goal loses its importance. For example, popcorn may habitually be eaten in the cinema despite the fact that it is stale.

Herd behavior

This effect is evident when people do what others are doing instead of using their own information or making independent decisions. For example, voting for a particular party because everybody else is doing the same.

Loss Aversion

It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining, and since people are more willing to take risks to avoid a loss.

Pain of paying

People don’t like to spend money. We experience pain of paying, because we are loss averse. This pain is thought to be reduced in credit card purchases, because plastic is less tangible than cash, the depletion of resources (money) is less visible, and payment is deferred. Because different personality types experience different levels of pain of paying, this can affect spending decisions. Tightwads, for instance, experience more of this pain than spendthrifts, which leads to different outcomes for these groups when payments are made by cash versus card.

Satisficing

According to Herbert Simon, people tend to make decisions by satisficing (a combination of sufficing and satisfying) rather than optimizing ; decisions are often simply ‘good enough’ in light of the costs and constraints involved. As a heuristic, satisficing individuals will choose options that meet their most basic decision criteria.

Scarcity (heuristic)

When an object or resource is less readily available (e.g. due to limited quantity or time), we tend to perceive it as more valuable . Scarcity appeals are often used in marketing to induce purchases.

The ways in which we demonstrate behavioral economics are vast and the above list is by no means exhaustive but it should signal a need to implore more of these tactics within marketing strategy. If human beings are driven by emotional and psychological states which are largely dictated by varying context, then we need to write more compelling stories.

#BehaviorialEconomicsMatters