Here are some meanderings on Behavioural Economics. Something we've all heard of, but not really worked out to use.
The problem with behavioural economics has been its own success. The popularity of Nudge has ensured that most marketing people see it as a below the line, point of sale thing, not a means to change mass behaviour.
However, the psychology behind behavioural economics provides some really interesting ideas to help influence mass behaviour and better understand how what we do in communications actually works.
So to understand behavioural economics, we first have to understand that the human mind works in a very specific way.
System 1 & 2
The mind is actually two minds working in tandem:
System 1 – a more primitive system that does much of the mental heavy lifting and provides us with gut feels (System 1 is at work all the time. It's why answers just pop into our heads, or how we drive to and from work without thinking about it)
System 2 – a higher system it is our thinking conscious. It analyses the information that System 1 provides.
The key drivers of System 1 are survival and pro-creation.
System 2 on the other hand is about probability, checks and balances.
System 1 is fast.
System 2 is slow.
Work by Psychologist Benjamin Libet demonstrated in the 1970s that our awareness of a decision to act—for example to reach out and pick up a glass—takes place later than an observable electrical change in the brain associated with that act. In other words, the unconscious brain “decides” to act before our conscious mind confirms the action. That's System 1 and 2 in action. System 1 has made the decision before we even seem to know.
System 1 follows well worn paths through the brain. And as a result likes the familiar. That's why you often do things without seeming to think.
The way the two systems interact influences how we make decisions. In fact, there are actually only four decisions that we're capable of making:
1. Endorsed decision: System 1 provides the answer and System 2 agrees.
E.g. driving a car
2. Anchored decision: System 1 provides the answer and System 2 modifies it.
E.g. working out a percentage
3. Emotional indecision: System 1 provides the answer and System 2 disagrees. E.g. looking at a chocolate bar when you're on a diet
4. Rational indecision: System 1 doesn't know so System 2 tries to decide.
E.g. choosing between two unfamiliar but equally long routes to a destination.
System 1 is the more powerful of the two. It sets the agenda. By influencing it, we can influence how people behave.
The great strength of advertising is that it can influence System 1 to a huge degree. The emotional power of the audio visual is huge and as a result can have a huge impact on System 1.
Tim Reid's point is that all ad agencies are essentially System 1 companies. That's what we we're set up to do. The trouble is we've never really known why we do it.
Behavioural Economics
Behavioural Economics takes account of these systems and demonstrates certain rules:
The Three Golden Rules
Status quo bias – we always prefer the known (the fear of the unknown is always greater than the benefit of the unknown) – System 1 likes what it knows and fears the unknown.
Loss aversion – we over-value what we already have – we're familiar with it, and we like the status quo – Again, System 1 dominates because of our fear of the unknown
Anchoring – we think relatively (we use other facts/situations/numbers to frame our decisions – we like to compare apples with other fruit/veg/food not with cars or phones). Anchoring helps System 1 by providing a context or 'frame'. We can influence System 1 by changing the frame of reference.
The surprisingly uncommon common sense
Chunking – Parts are easier than "wholes". The way a task is presented affects people's willingness to take it on and complete it. Something presented as one long task to be conducted in a single act will be less likely to attract people than something "chunked up" into bite-sized stages. If it appears easy, System 1 will be more likely to go for it.
http://en.wikipedia.org/wiki/Chunking_(psychology)
Fear of missing out – People frequently simplify decisions by mimicking the actions of people around them and by adhering to social norms. In Australia, water consumption was cut dramatically by simply printing the average consumption figure for his street on an individual's water bills.
Hyperbolic Discounting – we discount the future against the present. We tend to respond to stimulus and feedback in proportion to its immediacy, not its strength. Vehicle-activated signs that instantly flash your speed at you do more to reduce accidents than cameras that trigger a fine that will arrive days later.
http://en.wikipedia.org/wiki/Hyperbolic_discounting
Scarcity Value – When we perceive something to be scarce, it has a greater value in our eyes. Conversely, when we perceive it to be plentiful, its perceived value falls.
http://en.wikipedia.org/wiki/Scarcity_value
Goal Dilution – When items promise multiple benefits, they are less convincing than items that appear to do only one thing.
Price Perception – The price that is demanded for something makes us value it more.people who paid more for the same over-the-counter pain- relief products reported more effective pain relief despite price being the only variable.
http://www.medicalnewstoday.com/articles/99532.php
Applying BE to business
1. System 1 thinking defines what we've traditionally done in advertising – it's about making people feel good towards a product so that their impulse is to choose it
2. We need to focus on giving people great brand experiences to strengthen the emotional connection they have with our brands
3. However, when we're challenging a dominant player we need to harness the power of System 2 to question the normal unthinking behaviour.
4. Fear is arguably the most important emotion. People won't change their behaviour for a positive reason. We need them to fear something e.g. missing out on potential gains
5. By changing the way people frame things we can change their behaviour. For example, for ING Direct, rather than the frame being 'banking' we make it 'feeling good'. (A classic example of reframing is psychological pricing. We see $19.99 and process the $19 rather than $20. –
http://en.wikipedia.org/wiki/Psychological_pricing)
6. People over value what they already have. So we need to make them think differently. For example, if you can't decide whether or not to sell your trainers you should think 'if I didn't have that pair of Air Jordans VI already, would I buy them today?'
Ideas for clients
– think about the longer term effects of advertising and how best to measure them.
– think about how we can influence System 1 beyond just advertising – how do you make the product or service more familiar and imbue it with likeable characteristics?
– Segment audience by prevalent decision types (looks at who goes through each decision stage and who doesn't – what are the differences)
– Change the status quo – people have to 'opt out' not 'opt in'
– Look for small changes to avoid procrastination e.g. people not being able to complete a form, or it appearing too long
– Loss aversion – demonstrate that by not doing X they're missing out on Y
– Find new anchors – The trick with anchoring is that although we are not willing to pay more for the same thing, we are willing to pay more for different things. Brands can present us with different things and charge us more for them than they do for their core product e.g. Guardian iPhone App costs £2.79 while the online paper is free
– Focus on manipulating System 1 & 2 – reframe the problem e.g. 'it's not an estate tax it's a death tax' or 'one salesman sold Rolls-Royces at a yacht show. Seen alongside a $10 million yacht, a $500,000 car seems like a bargain.'
– Use cognitive dissonance – provide a rational reason that allows System 2 to question System 1 e.g. Toyota's are not reliable.
Sources:
To do this I've been cutting and pasting along the way. The key sources for much of this are Rory Sutherland's blog post and Tim Reid's website. Both well worth a read.
Stanovich and West:
http://www.bbsonline.org/Preprints/OldArchive/bbs.stanovich.html
Alan G. Sanfey and Luke J. Chang:
http://www.scientificamerican.com/article.cfm?id=of-two-minds-when-making
Rory Sutherland:
http://www.campaignlive.co.uk/news/949585/Why-advertising-needs-behavioural-economics/
Matthew Taylor:
http://www.prospectmagazine.co.uk/2009/09/left-brain-right-brain/
Kahneman and Taversky: Choices, Values and Frames
Kahneman and Taversky: The Framing of Decisions and the Psychology of Choice
Kahneman:
http://globetrotter.berkeley.edu/people7/Kahneman/kahneman-con4.html
Thaler & Sunstein: Nudge
Dan Ariely: Predictably Irrational
Tim Reid: Admap,
http://timreidpartnership.com/Site/How_the_2_Systems_work_together_2.html
George A Miller:
http://en.wikipedia.org/wiki/The_Magical_Number_Seven,_Plus_or_Minus_Two
Influence without logic 