Behavioral Econ’s Role in Shaping Emerging Enterprise
A lot of lip service has been paid lately to companies using principles of behavioral economics and social psychology to drive business models. Just last week, the NYTimes published an in-depth editorial on how Uber has made use of behavioral nudges to optimize supply and demand matching. As much as Uber has been demonized in the media for its subtle-at-best, manipulative-at-worst tactics, the company is undeniably on to something. To remain competitive, aspirational companies across industries will be forced to pay attention to end-to-end behavioral triggers. This increased focus on consumer behavior will be based on two key macroeconomic drivers: increased transaction speed and stricter alignment of supply and demand.
It may be helpful to start with some examples of how behavioral economics trickles into our everyday lives to understand how it will play an outsized role going forward. Uber has notoriously made effective use of the framing effect, compelling drivers to work longer by telling them that they are within reach of hitting totally arbitrary achievement goals. They’ve also adapted their driver-side systems particularly well from a UX perspective in favor of inertia, making it difficult for drivers to opt out of sequential routes. Gilt and other flash sale sites twist our natural tendencies toward loss aversion by showing us how much we save rather than how much we spend. Warby Parker helped us justify buying three new pairs of glasses in a dissociating mail order transaction since we were “just going to try them on!,” not truly have to register the moment of money leaving our wallet. At its most basic level, this is the same model that made opening up a credit card tab so genius for bar owners. We remove friction from the buying process and insulate against the pain of money going out the door.
As transactions become increasingly swift, we are more vulnerable than ever to succumbing to our inherent behavioral weaknesses. We have less time to deliberate and when we don’t flex our rational override muscles, we fall deeper under the spell of the Ubers and Gilts and Warby Parkers of the world. Simultaneously, as the gig economy continues to scale and services become instantaneously need-based, there will be greater connection of supply and demand. Under these conditions, companies like Uber exist to frame the playing field, establish the rules of the game, and then let the players on the field get on with it. The decisions that Uber makes to frame the field and set the rules are therefore massively consequential (I have previously written in-depth on just this question — the orientation of institutions is arguably more important than individuals acting within that institutional framework).
There is a broader moral and ethical debate to be had here around how we can position companies of the future to play to the best aspects of our behavioral impulses. In the FinTech personal investing space alone, companies like Qapital, Stash and Acorns are making noble strides in this regard. I hope that aspiring entrepreneurs will continue to think carefully not only about their business ambitions, but their social responsibilities as well, when framing the businesses of the future.
[P.S. — much credit is due to Amos Tversky and Daniel Kahneman for socializing the application of behavioral economics and psychology to emerging enterprise. If you get a chance, check out Thinking Fast and Slow, or for a beachier read, Michael Lewis’ The Undoing Project.]