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Applications of Behavioural Economics to consumer insight

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Shown at the AMSRS National Conference 2013 this presentation on Behavioural economics by Ben Wright highlights the very interesting findings from a small exploratory study that could serve as the basis to the beginnings of a revolutionary measure in the market research industry.

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Applications of Behavioural Economics to consumer insight

  1. 1. Applications of Behavioural Economics to consumer insight Testing the model…can we make it work? Ben Wright Quant Account Director Direction First SPONSOR LOGO
  2. 2. Behavioural Economics has exploded onto the scene in recent years. From Nobel prize winning Daniel Kahneman’s seminal work “Thinking Fast and Slow”, to “Nudge”, “Predictably Irrational”, “The Paradox of Choice” -the list goes on. The learnings from it have been applied virtually everywhere - even Obama’s used it. But, where is the application to market research, specifically, our tools? There is plenty of action in marketing, but not so much our research. So, we set out to test whether new metrics could be incorporated into market research surveys to make our models work better SPONSOR LOGO
  3. 3. Contents Why the explosion in behavioural economics? Turns out it’s the brains fault, so we’ll look at that first. Then what we did, what we found, and lastly where to next. SPONSOR LOGO
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  5. 5. From 400 million years ago to the present, the evolution of the brain can be divided into four general stages: reptilian, mammalian, primate, & homo sapiens (including most recently, behavioural modernity). SPONSOR LOGO
  6. 6. Condensing the timeframe, if the history of the universe were being measured on a 24-hour clock, the lizard brain would have been around for 41 minutes, the mammalian for 6 minutes, the primate brain for about one minute; and our modern brains for around a second. SPONSOR LOGO
  7. 7. Looking at the timescales involved, it’s not hard to see why the more ancient primal brains within us might have more impact on our behaviour, despite being less accessible to our conscious awareness. What makes these stages distinct is the functionality associated with each. SPONSOR LOGO
  8. 8. The innermost, oldest brain is the reptilian brain, and as any graduate student will tell you there are “four F’s of reptile brain behaviour”: • Feeding • Fighting Instinct, in other words… • Fleeing, & • Reproduction SPONSOR LOGO
  9. 9. The mammalian brain is the seat of emotion. It is also the home of implicit memory (memory beyond our consciousness but that can impact future behaviour, an example being riding a bike). SPONSOR LOGO
  10. 10. The top layer is the primate brain, which most recently has evolved into the human brain with all the high level functioning such as planning, abstract thought, logic and language. This is where we all live mentally. This is where we see ourselves. But most of our mental existence is unknown to us, happening sub consciously in the other brains. SPONSOR LOGO
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  12. 12. So how have consumers been viewed for so long...in a word, mechanistically. Economics saw us only as the modern brain – rational, utility-seeking maximisers, acting in a mathematically optimal manner. Behavioural Economics has shown that our decision-making is guided by our evolutionary baggage, heavily influenced by the ancient brains which have been with us for so long. SPONSOR LOGO
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  14. 14. This is easily demonstrated through a quick check... Have you ever done any of the following activities on the previous slide? From a rational perspective it would not makes sense to do many of these...but many of us still do, and often. Why? Well, we basically can’t shut our pesky old brains up. And they aren’t wired for a modern world like our recent brain bits. So while we have the mental ability to be rational, we tend towards being irrational. SPONSOR LOGO
  15. 15. Behavioural Economics conceptualises two modes of thinking that broadly reflect this rational/irrational difference: • System 1 thinking which is spontaneous and intuitive and, • System 2 thinking which is rational and deliberately controlled thinking. SPONSOR LOGO
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  17. 17. A wonderfully simple little test, the Cognitive Reflection Task (CRT) measures the tendency of an individual towards one or the other of these styles of thinking – rational or intuitive. Around three-quarters of people (including Harvard graduates) get these wrong. Those that get them right we call system 2 or rational thinkers. What do they do....well they monitor and where applicable override their thoughts. It was these ‘monitoring’ and ‘overriding’ ability that led us to consider two additional measures that might be related: self-efficacy and self-consciousness. SPONSOR LOGO
  18. 18. Behavioural Economics studies these kinds of biases…and system 1 vs 2 thinking can be explored using Cognitive Reflection Task (CRT) “The ability or disposition to resist reporting the response that first comes to mind” Q A bat and a ball together cost $1.10. The bat costs a dollar more than the ball. How much does the ball cost? A Q It takes 5 machines 5 minutes to make 5 widgets. How long will it take 100 machines to make 100 widgets? A Q If you answered $10c – you are wrong! The correct answer is 5c If you answered 100 minutes – you are wrong again! The correct answer is 5 minutes In a lake there is a patch of lily pads. The patch doubles in size every day. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake? A If you answered 24 days – oops! The correct answer is 47 days SPONSOR LOGO
  19. 19. What is self-efficacy? Basically it’s our inner roar. Why is it important? Well the belief you have in your ability to do something is tantamount to actually doing it. Those with higher self-efficacy tend to approach tasks with a sense of serenity and goal-activated thinking – in other words with much greater mindfulness that we would associate with system 2. SPONSOR LOGO
  20. 20. Self-consciousness is a dispositional tendency to focus attention on the self and it can help explain self-regulation of behaviour. We likened this to the overriding ability of system 2 thinkers. SPONSOR LOGO
  21. 21. So what did we do? SPONSOR LOGO
  22. 22. Objectives & Approach Can scales like CRT (Cognitive reflection), SCS (Self-Consciousness & GES (Self-Efficacy) be effectively incorporated into a quantitative survey to add a layer of information to help build predictive models of consumer choices and add insight to segmentation and profiling Online study – 15 minute (April/May 2013) n = 1,030 nationally representative sample (gender/age/location) MGBs and recent holiday shoppers SPONSOR LOGO - Screener - CRT/GSE/SCS exercises - Shopping behaviour – low involvement product category - Holiday Shopping habits – higher involvement service category - 5 point scale - Shopping behaviour – Max/Diff exercise - Scale vs. Max/Diff evaluation - Survey enjoyment
  23. 23. Objectives & Approach We took the CRT, and scales from the Psychological literature representing the other constructs and put them into a survey. Big nationwide sample (using both Direction First’s panel – Izatso, and YellowSquares) And we looked at shopping behaviours in two categories – fmcg and holiday, reflecting low and high involvement categories respectively. SPONSOR LOGO
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  26. 26. Findings I We confirmed that most people are down the intuitive end of the spectrum. Don’t worry if you got those CRT questions wrong, most do, including Harvard professors. It doesn’t matter how much education you’ve had in your life, you’re going against 400 million years of ancient brain development. More intuitive type thinkers are less likely to avoid other cognitive biases (and there are dozens and dozens of other documented cognitive biases) and have less consistency in their choices over time. They are also over confident when providing incorrect answers. If it wasn’t bad enough that respondents tend to lie, give socially friendly answers, etc. even when they aren’t they’re possibly still misleading us as they are not privy to the erroneous nature of their decision making. This suggests that most consumers’ future consumption behaviours are likely to be poorly predicted by past consumption behaviours. That’s a bit of an issue for researchers. On the flip side, there are a group of more rational thinkers that have an ability to monitor and override their own cognitive biases. This group could be called super-respondents, and are certainly very interesting respondents at least, in helping to explain their own and other consumers mental processes when making purchase decisions. SPONSOR LOGO
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  28. 28. Findings II Self-efficacy – the higher it is, the more likely someone is to be a system 2 thinker. To our knowledge this is the first study to ever directly link these two constructs. System 2 thinkers are aware of their own cognitive biases, and are also aware that they can overcome them sometimes. This gives them confidence. So what? Well we found that this impacts on shopper behaviour. Those with greater selfefficacy/rationality are more likely to engage to seek out value in higher involvement categories, and are less likely to shop on convenience in lower involvement categories. These measures are helping us define consumer segments in terms of the way they shop. This enables us to classify consumers on how they respond differently to harder tasks, or less involved more habitual ‘autopilot’ tasks such as grocery shopping. SPONSOR LOGO
  29. 29. Findings II I would suggest it could be an even more important predictor of behaviour in the context of complicated categories such as financial or insurance products. These results also suggest that these measures would help us explain how consumers respond differently to the paradox of choice (overwhelmed by choice). ‘Give me lot’s of options vs. just give me what I want’. The point is that these measures look likely to help us understand consumer reactions to reduced or greater options – in supermarkets, online, wherever. The metric gets at the very nature of how consumers approach, frame and make decisions. SPONSOR LOGO
  30. 30. Rational thinkers self-regulate mental effort to the task at hand. Ramping up their thinking in more involved categories, and reducing it in low involvement categories. Intuitive thinkers did not demonstrate this shift. To me, that is fascinating. Some consumers are adjusting how miserly their cognitive effort is in given contexts, and we’ve got a measure that is capturing it. SPONSOR LOGO
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  32. 32. Findings IV Part of our research also explored the impact of cognitive type and response to our scales. While choice-based tasks have long been praised for their more naturalistic representation of consumer decision-making, consumers preferred the rating scales. Maybe the max-diff scale is doing its job – making consumers consider their responses more – and also giving us more differentiated data. Although, as we’ve just seen consumers differ on how engaged they like to be. Of particular interest was that system 1 thinkers tended to rate the Max-Diff scale more preferably than reflective thinkers. Our more rational thinkers actually dislike the more naturalistic scale. It shows there is an interaction with our instruments depending on cognitive disposition.…Like culture. This should feature in our considerations of how we go about capturing data. SPONSOR LOGO
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  34. 34. Future Directions IQ  EQ  RQ? Development of a ‘rationality quotient’ “Dysrationalia” or what is missing in IQ tests – is it missing in MR? Choice and emotion, making buying decisions can give rise to a sense of control and thereby increase happiness in retail therapy SPONSOR LOGO
  35. 35. Future Directions The potential of a ‘rationality’ measure has most recently been evidenced in the commissioning of research to develop the world’s first Rationality Quotient (or RQ), which happened smack bang in the middle of our study. The same guys that did the CRT. I think rationality as a cognitive metric is missing in market research, and I think we should certainly test it in a whole host of areas. It’s not just a self-report measure (which we know is plagued with problems), it’s a performance measure. In my research I’ve discovered a multitude of findings that increasingly make me think this is a fundamentally exciting measure. For example, some recent research has found that buying decisions can even bring happiness into people’s lives when it gives them a sense of control – this sense of control element relating to self-efficacy and system 2 thinkers’ ability to monitor and override their mental activity. Who’d have thought we can make people happy through shopping?! This was a relatively small exploratory study, and some very interesting findings emerged from it. Based on them I think this could be a revolutionary measure in the market research industry. As a quantifiable measure the magic of a metric such as the CRT, or the RQ once developed, is that our industry is perfectly positioned to leverage this to keep us at the frontier, the edge, of research into consumers into the future. SPONSOR LOGO
  36. 36. References Campitelli, G., & Labollita, M. (2010). Correlations of cognitive reflection with judgments and choices. Judgment and Decision Making, 5, 182 – 191. Donald J. Scandell & Donald Scandell (1998). Journal of Social Behavior & Personality, 13(4), 579-593. http://fenwayfranks.tripod.com/selfcon.htm Ellsberg, Daniel (1961). "Risk, Ambiguity and Savage Axioms". Quarterly Journal of Economics 75 (4): 643–79. doi:10.2307/1884324. Fenigstein, A., Scheier, M. F., & Buss, A. H. (1975). Public and private self-consciousness: Assessment and theory. Journal of Consulting and Clinical Psychology, 43(4), 522-527. doi: 10.1037/h0076760 Gardner, Howard ([1985] 1987). The mind's new science : A history of the cognitive revolution. New York: Basic Books. Gigerenzer, Gerd and Selten, Reinhard. Bounded Rationality: The Adaptive Toolbox. Berlin: MIT Press, 2001. Kahneman, Daniel. “Maps of Bounded Rationality: Psychology for Behavioral Economics”. The American Economic Review. December 2003, pp. 1449-1475. SPONSOR LOGO
  37. 37. References Kahneman, D., & Frederick, S. (2002). Representativeness revisited:Attribute substitution in intuitive judgment. In T. Gilovich, D. Griffin, & D. Kahneman (Eds.), Heuristics and biases: The psychology of intuitive judgment (pp. 49–81). New York: Cambridge University Press. Klonsky, Bruce G. and Dutton, Dawn L. (1990). Developmental antecedents of private self-consciousness, public self-consciousness and social anxiety. Genetic, Social & General Psychology Monographs, 16, 3, 275-298. http://www.cla.calpoly.edu/~nschultz/419/Scales/DevelopmentalSCS.html Marshall, Alfred (1890 [1920]). Principles of Political Economy, v. 1, pp. 1–2 [8th ed.]. London: Macmillan. Nasby, W. (1997). Self-consciousness and cognitive prototypes of the ideal self. Journal of Research in Personality, 31, 543-563. Schwarzer, R., & Jerusalem, M. (1995). Generalized Self-Efficacy scale. In J. Weinman, S. Wright, & M. Johnston, Measures in health psychology: A user’s portfolio. Causal and control beliefs (pp. 35-37). Windsor, England: NFER-NELSON. Tisdell, Clem. Bounded Rationality and Economic Evolution: A Contribution to Decision Making, Economics and Management. Cheltenham: Edward Elgar, 1996. Toplak, M. E., West, R. F., & Stanovich, K. E. (2011). The Cognitive Reflection Test as a predictor of performance on heuristics and biases tasks. Memory & Cognition, 39, 1275-1289. doi:10.3758/s13421-011-0104-1 SPONSOR LOGO
  38. 38. Thank You! Lets Connect! Ben Wright Quant Account Director www.directionfirst.com Linked in: au.linkedin.com/pub/victor-benwright/1a/904/260 Email: ben.wright@directionfirst.com SPONSOR LOGO
  39. 39. Thank You! Lets Connect! Erica van Lieven Managing Director www.directionfirst.com Linked in: au.linkedin.com/in/ericavanlieven/ Twitter: @erica_dfirst Email: erica.vanlieven@directionfirst.com SPONSOR LOGO

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