Behavioral Economics

Or how to investigate what people really want and operate in order to be more efficient.
Why don’t we save for our retirement? Why do we not eat healthy or exercise more? All of this is explained if we understand the basic principles of behavioral economics. Here are the 10 basic things that you should know about a social discipline with far-reaching insights and why it matters to you if you work in marketing or research.

1. We do not always do what’s best for us. The Behavioral Economics premise is simple: economical theories had for years assumed that people are rational agents that look to maximize utility and benefits when making decisions. There is proof that in reality, we tend to evaluate options based on cognitive shortcuts that favor the emotional.

2. We are more unpredictable than what we think we are. If humans were 100% rational; just evaluating options with a list of pros and cons, promising to do something and actually doing it, etc, then our behavior would be much more predictable and problems such as obesity or climate change would be easier to attack.

3. We make decisions based on emotions. Most of the decisions we make on a daily basis such as tax payment, donations to NGOs, what brand to choose or how we use a new product, are actually related to what is socially accepted, as well as our aversion to losses or what’s gratifying in the short term (1).

4. We are irrational beings. And not because we are stubborn, but because we are efficient. When we evaluate based on the affective we do it in a faster and automatic way (this is what Daniel Kahneman, Nobel Prize winner in the field of economics calls System One in his Dual System Theory) (2) It is only when feelings fail on us, that we activate the reflexive judgment (System Two, the slower one).

5. Our consumptions are irrational. Behavioral Economics originated from an academic context, but lessons from the field are increasingly being applied to public policies, marketing and advertising (3,4). For instance, brand value is much more irrational than rational. When we understand this, it sounds logical that brand presence increases purchase intention by 390% (5).

6. B.E. contributes with new methodologies to really understand what consumers want. Consumers tend to respond in a rational way during focus groups and online questionnaires. Changing research methodologies to a more spontaneous, more irrational paradigm will let us observe interesting differences between what people say they want and what they actually want (6).

7. Its global application has come to the fore. In 2015, Barack Obama gave the executive order to use B.E. in government departments to improve the life of citizens (7). A myriad of laboratories where their theoretical and practical principles are applied, emerge; Linexx in Valencia, Irrational Agency & Ogilvy Change in London or The Mexican Institute of Behavioral Economics (8) are proof of it.

8. It is mainly used to:
• Analyze the impact of new strategies of sustainable businesses.
• Improve design
• Anticipate failures in the implementation of disruptive experiences or products.

9. Hundreds of initiatives realize the positive uses B.E. can have in the world. Understanding why people do what they do and leverage on theoretical background to change negative behaviors sounds as socially beneficial as it sounds Machiavellian – however, positive manifestations are increasingly more. Take for instance, the emergency of start-ups in the social innovation area:
-Save for Tomorrow is an initiative to increase people’s retirement savings
-Stikk is an app that helps you accomplish your personal goal based on BE insights

10. Its application becomes more compelling than ever before, mainly due to:
a) The imperative need to modify socially damaging habits such as energy waste or bad eating habits.
b) A lot of money is wasted in ingenious innovations that at the end no one ends up using.

References:

  1. Pfarr, N. (2016) Diseñando para incentivar. Manual de Economía del Comportamiento Volumen 2. Comportamiento del Consumidor. Instituto Nacional de Economía del Comportamiento.
  2. The Economist (2011). Not so smart now. Human Decision-Making. Retrieved from: http://www.economist.com/node/21534752
  3. Del Valle, C. (2016) Conocer mejor al consumidor: adios intuición, hola Economía del Comportamiento. En Manual de Economía del Comportamiento Volumen 2. Comportamiento del Consumidor. Instituto Nacional de Economía del Comportamiento.
  4. Hodges, J. (2016) Más allá de lo académico: cómo la psicología ha sido adoptada en la publicidad y la comunicación. En Manual de Economía del Comportamiento Volumen 2. Comportamiento del Consumidor. Instituto Nacional de Economía del Comportamiento.
  5. Barden, P. ( 2016) Las marcas como marcos. En Manual de Economía del Comportamiento Volumen 2. Comportamiento del Consumidor. Instituto Nacional de Economía del Comportamiento.
  6. Caldwell, L. & Seear L. (2016). Behavioural Economics gets real. Probably the largest implicit market study in history, for one of the world’s best known brands. ESOMAR. Conference Papers. Congress 2016. New Orleans 18-21 September.
  7. White House (2015) Executive Order – Using Behavioral Science Insights to Better Serve the American People. Retrieved from https://www.whitehouse.gov/the-press-office/2015/09/15/executive-order-using-behavioral-science-insights-better-serve-american
  8. Díaz, E. & Del Valle, C. Editores (2016). Manual de Economía del Comportamiento. Volumen 2. Comportamiento del Consumidor. Instituto Nacional de Economía del Comportamiento. http://www.ecomportamiento.org/
  9. Benartzi, S. (2011) Saving more tomorrow. Ted Talk. Retrieved from: https://www.ted.com/talks/shlomo_benartzi_saving_more_tomorrow
  10. EY. Building a Better Working World (2016) The upside of disruption Megatrends shaping 2016 and beyond. Retrieved from https://www.whitehouse.gov/the-press-office/2015/09/15/executive-order-using-behavioral-science-insights-better-serve-american