Let’s start with a question:
A hardware store has been selling snow shovels for £15. The morning after a large snowstorm, the store raises the price to £20. Is this fair?
This question was posed by pioneering behavioural economists Daniel Kahneman, Jack Knetsch and Richard Thaler in a disarmingly simple, but ground breaking, study in 1986. If you think that raising the price of the snow shovel is ‘unfair’ then you are with the 82% of people in the study who felt the same way…
But hold on – maybe you’ve got your business hat on? Business is business, right?
Kahneman et al got very different results when they posed the same question to a sample of MBA students. This time 76% thought that raising the price of the snow shovel was ‘fair’. Of course, MBA students are ‘real’ people too. But, as Richard Thaler makes clear, they are stepping into role. They’ve been trained to ‘think like an Economist’ and ‘forget what it is like to think like a Human’.
It seems that there’s a danger that many of us ‘forget what it’s to think like a human’ as soon as we get behind a desk or get around the boardroom table. There are codes of expectation around the myth of rational economic (wo)man. But does this really make for good business? Or does this create problems?
This is where an understanding of behavioural economics (BE) comes in. It champions humans, and highlights how real-world behaviour consistently and predictably contradicts the classical model of rational economics that continues to dominate in business and marketing. Thus, we’d argue that an understanding of BE offers several routes to cultural change and more authentic business practice. Here’s a few.
The central principle of behavioural economics is that humans have ‘bounded rationality’. Note, not that we are completely ‘irrational’. But conscious deliberation and reflection takes a lot of effort and we have limited cognitive bandwidth. This leads to our decisions and behaviour being heavily reliant on a highly efficient and adaptive system of heuristics and mental shortcuts.
And business people are subject to all the same heuristics and biases as their customers, just in a different way.
So, BE’s first contribution to more authentic business practice is to make business people aware of their biases and help them manage them. For example, the language that we use has a profound impact on how we think and behave. Discourse in business and, increasingly, everyday life is dominated by old-school economic framing. Think of the ubiquity of ‘consumer’ in news and media and how rarely you hear the word ‘people’ in the boardroom. Building on a study conducted at Northwestern University in Chicago, our own research has shown that simply reframing ‘consumers’ as ‘citizens’ significantly increases feelings of social responsibility, trust and co-operation.
In Chapter 1 of his new book, ‘Are We Smart Enough to Know How Smart Animals Are?’ the renowned biologist and ethologist Frans de Waal introduces his readers to the concept of Umwelt. Taken from the German for ‘surroundings’, in ethology umwelt refers to ‘the world as it is experienced by a particular organism’. In semiotics umwelt is typically translated as ‘self-centered world’. The idea is that each species necessarily constructs its own subjective model of the world that is never fully perceptible or knowable to other species. However, de Waal owes his success to the human capacity for empathy and our ability to ‘imagine the umwelt of other organisms’.
Despite this we even find it hard to escape our surroundings and put ourselves in the shoes of other people! And, in fact, a great deal of accepted business practice and insight work serves to reinforce the subjective world of business rather than challenge it. Consider the very simple intuition at the heart of marketer’s emphasis on brand personality – it is that people like and buy brands that are either like them or that embody how they would like to be. In the academic literature on behavioural economics and psychology this is called ‘self-brand congruity’.
Academic studies have demonstrated the significance of self-brand congruity in driving a wide range of behaviour including brand loyalty, product consideration and communication and sponsorship effectiveness.
But (remarkably, in our view) self- brand congruity remains neglected in conventional market research. Brand personality measurement tends to be narrowly focused on the business’s own agenda and the monologue about what attributes the brand wants to communicate and ‘own’. It asks people to elaborate about the brand in detail (the thing they don’t care much about) and virtually ignores the thing they do care about (themselves and other people). Which makes it all rather laboured and artificial, and reminds us of this famous cartoon…
Surely what we should be focusing on is increasing business empathy by anchoring all our work in deep understanding of how businesses can achieve fit with people’s self-image and motivations. This means integrating as many principles from psychology and behavioural economics as possible.
In a recent collaboration with academic researchers at City, University of London, we took many of the most well-known experiments in behavioural economics out of the lab and applied them to a large representative sample of the UK population.
This work produced a unique profile of the diverse ‘cognitive styles’ of real people. What it shows is that a binary framework that contrasts ‘emotion’ and ‘rationality’ simply isn’t sufficient. Everyone exists on a spectrum and our cognitive style adapts according to needs and context. By embracing deeper psychological and behavioural profiling we can help clients develop better products and communication for the real world by adapting their activity more precisely to the way people navigate the world around them.
Behavioural economics can also help business pinpoint authentic attitudes and responses in customers. Ground breaking work on implicit research has shown that authentic response is often implicit response. The dominance of System 1 generates unconscious ‘blind spots’, stereotypes and a failure to align our behaviour with our intentions.
Anthony Greenwald and Mahzarin Banaji, the inventors of the Implicit Association Test (IAT) argue that the first step to ‘outsmarting the machine in our heads’ is to gain awareness of our unconscious attitudes and biases. And that’s where a range of implicit research methodologies come in. All this can be used to inform a more authentic and congruent approach to communications and media planning.
Engage and nurture
Finally, BE methods also offer the participant a far more rewarding experience. Economic games and implicit approaches are far more stimulating and intellectually challenging than conventional research approaches. Psychological profiling generates deeper insights for the client and the opportunity to provide personally relevant and intrinsically motivating feedback for the participant, thus creating a richer and more authentic experience for all concerned.
To sum up: managing bias – especially our own – requires reflection, training and discipline. But the potential for transformation is significant.
And if businesses are to reinvent their place in culture and society, and reclaim trust from the public, they have to start thinking like human beings.