As strategists, we’re often the only advocate for the consumer in the room. That’s not say that no one else cares how the consumer thinks and behaves. Everyone does to a degree. Unlike other team members, however, a strategist’s primary job is to thoroughly understand the target audience. Doing so, gives the team the best chance at cutting through the noise.
Enter Behavioral Economics
So who are the consumers? Where do they live? What beliefs do they have? What motivates them? In what ways do they connect with others? Most importantly, how do they make choices? And what most affects their purchase decisions?
The last two questions are exactly what behavioral economics can help us answer.
An Insanely Brief History of Economics
(Preface: I’m not an economist, nor did I study it in college. My understanding of its history only relates to marketing and strategic planning.)
At a high level, economics can be divided into two categories: classical economics and behavioral economics.
The goal of classical economics is to create structures for making the most rational and therefore most beneficial economic decisions. The problem, however, is that human beings rarely make the most rational decisions. (I know, for instance, that eating a lot of red meat is bad for my health. Yet I do it anyway.) So while excellent at deciding what decisions should be made, classical economics isn’t a very good predictor or modifier of actual human behavior.
Behavioral economics, on the other hand, creates structures that, given a more accurate understanding of human decision making, can better predict and then modify our economic decisions.
In short, classical economics emphasizes the rational mind. After all, that’s where the best economic decisions are made. Behavioral economics, on the other hand, takes a more realistic view of human behavior by studying the predictable yet irrational (or emotional) choices we make.
Thus, the two systems of thought that Daniel Kahneman cogently outlines in his brilliant book Thinking, Fast and Slow.
Behavioral Economics and Strategy
Human beings are notoriously bad at understanding our own decisions. For instance, I may tell friends that I can’t go out to dinner with them because I need to save money for an upcoming trip. But the real reason might be that I’m still very much depressed from a recent breakup and, as so often the case with depression, have no energy to do anything.
This is an example of post-rationalization.
My decision was quick and emotion-based (System 1 thinking). This type of thinking is often subconscious. After already making a decision, I came up with a rational reason (System 2 thinking) to explain my decision to myself and others.
The problem is that a lot of market research that strategists use relies heavily on people’s ability to explain their decisions. Focus groups are perhaps the most obvious example. People are asked why, for instance, did you choose that toothpaste over another?
Using this kind of market research, strategists are unable to come up with a complete audience profile. This leads to less effective marketing. By not understanding real-world human behavior, significant wastage and cost inefficiencies can occur. The chances of achieving the business objectives are thus significantly reduced.
Humans are incredibly complex creatures. Due to a variety of psychological and social constructions, it’s rare that we’re able to make the most rational decisions even if that means making less optimal decisions.
In a vacuum, humans might behave more rationally.
For example: if I was really standing in the chip aisle at the grocery store with all the time in the world to make a decision, I might go through a much more rational decision-making process. I might make my decision after thoughtfully considering the ingredients, the cost, the nutrition information, the brand’s ethical business practices, etc.
But I’m rarely, if ever, in a situation that gives me the time and mental capacity to make such a decision.
Humans want and, in many ways, need heuristics (shortcuts) to make decisions, otherwise we’d be driven insane by the influx of decisions we have to make daily. Imagine taking the time to make a perfectly rational decision on every item at the grocery store? Might as well be living there.
And that’s exactly what our emotions do—give us shortcuts for quicker decision-making.
In short, behavioral economics provides strategists with a more accurate picture of human behavior. This thus reduces our chances of our strategy leading the team astray.
Behavioral economics also gives us the tool to more effectively change behavior. At a later date, I will write posts on how this be achieved by using nudging, framing, scarcity, and others.
· A fantastic overview of behavioral economics by Richard Thaler
· A marketer’s guide to behavioral economics by the consulting firm McKinsey & Company