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Behavioural economics alumni
The document discusses behavioural economics and how it differs from traditional economics. Traditional economics assumes people act rationally to maximize wealth and income. Behavioural economics recognizes people do not always make rational decisions due to things like biases, limited willpower, and outside influences. It provides examples of how heuristics and irrational behaviors can influence decisions. The document advocates applying insights from behavioural economics, such as understanding decision-making processes and identifying bottlenecks, to help address irrational behaviors and encourage positive outcomes through "nudges" like simplifying choices and using social influences. It categorizes approaches as mindful or mindless, and externally imposed or self-imposed. The goal is to harness behavioral economics to help achieve strategic objectives.
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Behavioural economics alumni
- 1. Behavioural Economics What it isand how it can be harnessed
- 2. Introducing Alice ‘Alice lovesto listen to New Age music and faithfully reads her horoscope each day. In her spare time, she enjoys aromatherapy and attending a local spirituality group’ Is Alice… a) An accountant b) A retail assistant c) A holistic healer
- 3. Traditional economics “Individuals, groupsand organizations are assumed to act rationally, have multiple desirable ends in sight, limited resources to obtain these ends, a set of stable preferences, a definite overall guiding objective, and the capability of making a choice. There exists an economic problem, subject to study by economic science, when a decision has to be made by one or more resource-controlling players to attain the best possible outcome under bounded rational conditions”
- 4. Traditional economics “Individuals, groupsand organizations are assumed to act rationally, have multiple desirable ends in sight, limited resources to obtain these ends, a set of stable preferences, a definite overall guiding objective, and the capability of making a choice. There exists an economic problem, subject to study by economic science, when a decision has to be made by one or more resource-controlling players to attain the best possible outcome under bounded rational conditions”
- 5. The Reality It isnaive to assume that people always make informed, rational decisions in an economic and financial environment. Sometimes we do, sometimes we don’t.
- 6. Traditional economics People arenot influenced by anyone or anything else People efficiently and effectively acquire and process all relevant information People figure out and factor in future consequences of current decisions People always make smart decisions they don’t regret People always make decisions in an ideal decision-making environment Wealth and income maximization are all that matter Behavioural economics People are influenced by their peers, their past and by their circumstances People are boundedly rational – they do the best they can given the constraints they face People aren’t always able to figure out the consequences of current decisions People can and often make decisions they end up regretting People often face decision-making environments that prevent them from making the best possible choices Wealth and income maximization are important, but so is being fair, maintaining a good reputation and pleasing friends/partners Traditional economics compared to Behavioural economics
- 7. Heuristics and irrationality Heuristics help explain why we make irrational decisions on a day to day basis They are experience-based techniques for problem solving, learning and discovery People often make decisions based on approximate ‘rules of thumb’ and ‘mental shortcuts’
- 8. The range ofheuristics that help describe irrationality
- 9. Behavioural Economics in marketingpractice Some examples
- 10. Irrational value assessment Consumersmake inferences about value using cues such as price and overall look and feel E.g. Wine
- 11. Dominated alternatives Options canlack appeal if consumers have no reference point for the status quo in the same product category Option 1 Print only - $56 Option 2 Print + online - $125
- 12. Dominated alternatives Options canlack appeal if they have no reference point for the status quo in the same product category Option 1 Print only - $56 Option 2 Print + online - $125
- 13. Dominated alternatives Decoy optionscan provide a reference point for consumers to make a particular option seem more appealing Option 1 Print only - $56 Option 2 Print + online - $125 Option 3 (decoy) Online only - $125
- 14. Dominated alternatives Decoy optionscan provide a reference point for consumers to make a particular option seem more appealing Option 1 Print only - $56 Option 2 Print + online - $125 Option 3 (decoy) Online only - $125
- 15. Attribute priming Merely emphasisinga particular product attribute can make it more desirable Memory Processor speedvs.
- 16. Decision paralysis Be wearyof choice overload 6 jam choices 24 jam choices
- 17. The power offree Just the sight of the word ‘free’ can release large quantities of dopamine
- 18. How, as strategists,can we harness behavioural economics to help us achieve our goals? So…
- 19. A process foraddressing irrational behaviour •Understand the consumer and the decision making processes •Determine key heuristics and influences Map the context •Ideate possible actions Select the nudge •Identify possible constraints •Agree areas where actions can be implemented Identify the levers •Prioritise actions and test for effectiveness •Refine and optimise Experiment and refine
- 20. Stage 1, understandthe decision PROPERTIES OF THE DECISION 1. Is the decision important to the individual or does it receive little attention? 2. What moments or events motivate an individual to act on the decision? 3. Is it an active or an automatic, passive choice 4. How many options are available? What is the default option if an individual decides to do nothing? 5. What are the incentives? Which ones are most prominent, which ones are not? 6. What are the associated costs? INFORMATION SOURCES 1. What knowledge or expertise is needed to make a decision? 2. How is information knowledge communicated to the individual? (visually, verbal, text) 3. Does the information flow sequentially? What information is presented first, last? FEATURES OF THE INDIVIDUAL MINDSET 1. Are the benefits of making a good decision delayed or felt immediately? 2. Is the decision usually made when the individual is in an emotional state? 3. Does the decision take willpower or self-control? ENVIRONMENTAL FACTORS 1. Is the decision made in isolation or in a social environment? 2. Is the decision influenced by what is in the media or by expert opinion? 3. Are peers a major source of information
- 21. Then map thedecision making process and identify where bottlenecks occur Recognise the importance of retirement savings Allocate money Open retirement account Select investment fund Monitor investor returns Re-allocate as required In this example, often the key challenge is triggering the need among younger adults
- 22. Think about whatmay cause the bottlenecks BEHAVIOURAL INFLUENCES Status Quo An individual’s inertia to change even if that change would be advantageous Endowment effect The inclination to value and pay more for an item that is already in possession than one that has yet to be attained Loss aversion A tendency to be more attuned to losses than gains Conformation bias A predisposition to accept information that is confirmatory to one’s opinions rather than contradictory Mental accounting Money being allocated to several accounts (eg clothes, entertainment) rather than being fluid Will power We only have a certain amount of willpower and its needs to be replenished periodically Hyperbolic discounting To value benefits that are reaped now more than those reaped in the future. Similarly costs that are paid in the future are not felt as deeply as those paid now Choice overload Too many choices for decision making it hard to evaluate and decide Information overload The presence of too much information, preventing evaluation and a good decision HEURISTICS Availability bias Information that comes readily to hand is used to make a decision rather than a comprehensive set of facts Representativeness The use of similar attributes to judge a situation Anchoring and adjustment To assess based on a comparison to a pre-determined normative number Social proof Where a decision is influenced by the group and the desire to conform
- 23. A process foraddressing irrational behaviour When choosing the best course of action, consider: - Prioritise the actions that resolve bottlenecks that are further up stream in the decision making process - Reach. Self-imposed nudges such as pre-commitment may not reach as many people as automatic enrolment. Though it may be in their best interest, an individual may not want to make an upfront commitment - Automatic enrolment may not work as the default option may not suite everyone - The longevity of the nudge’s impact - Wherever possible test the nudge against a control cell to measure impact and
- 24. The four dimensionsof addressing irrational behaviour MINDFUL MINDLESS ENCOURAGE DISCOURAGE ENCOURAGE DISCOURAGE ACTIVATING A DESIRED BEHAVIOUR EXTERNALLY IMPOSED BOOSTING SELF- CONTROL EXTERNALLY IMPOSED SELF-IMPOSED
- 25. The four dimensionsof addressing irrational behaviour MINDFUL MINDLESS ENCOURAGE DISCOURAGE ENCOURAGE DISCOURAGE ACTIVATING A DESIRED BEHAVIOUR EXTERNALLY IMPOSED Simplifying tax rules to make tax filing easier Placing signs reminding people not to litter Advertising that most people are recycling to increase recycling efforts Including neighbourhood average energy consumption on bills to reduce power usage BOOSTING SELF- CONTROL EXTERNALLY IMPOSED Simplifying application processes for college grants to encourage higher level education Installing car dashboards that track petrol usage Automatic prescription refills to encourage medicine taking Placing unhealthy foods in harder to reach places SELF-IMPOSED Maintaining an exercise regime by agreeing to a small penalty if a gym session is missed Avoiding drink driving by ordering a scooter driver Joining a peer savings group to encourage saving Using a water pebble that times your shower then reduces shower length after that and uses traffic lights to indicate time left
- 26. BE in Action Handsup who thinks to themselves it’s a cheap price just because it ends in 44. It must be cost price right? By comparing you with others it triggers a reaction that it otherwise hard to achieve despite being all of ours goal – to be more green and save money http://www.thefuntheory.com/speed-camera-lottery-0
- 27. Bringing it alltogether - People make 10,000 decisions a day - As strategists we might hope that the ones that relate to what we do are rational. But they often are not. - But if we accept that, understand it and apply structures thinking based on a deep understanding of the consumer we will become much more effective
- 28.