Happily Misunderstood

At its best, BE a powerful way to think about human behaviour, at its worst its 50 anecdotes loosely strung together under one phrase. To take behavioural economics beyond dinner party conversation we have to take practical steps to apply it to real life business problems.

There’s been a lot of noise about something called ‘behavioural economics’ recently, books such as ‘Nudge‘, ‘Predictably Irrational’ and ‘Freakonomics’ have done a lot to bring this area of study into the mainstream, whilst Rory Sutherland makes an excellent case for why we should incorporate it into everything we do as communication professionals here.

So what is behavioural economics and how can we use it?

We were lucky enough to have a ‘behavioural economics’ day down Ogilvy recently to get to the bottom of this question. Put simply, behavioural economics is the study of why consumers and economic agents do what they do, especially when what they do is seemingly less than rational. For a good summary of the day, along with some definitions and principles of behavioural economics, check out James Myers’ post here.

Knowing about behavioural economics and being able to quote some examples is one thing, using it is another. One of the expert speakers at the Ogivly BE day was Eric Bonabeau, CEO of Icosystem. Eric began his fascinating talk by making the observation that behavioural economics remains ‘a set of 50 or so anecdotes strung together under one phrase’ unless we can apply it in a practical way to form predictive models. Eric’s started by outlining how he uses the principles of behavioural economics to solve real business challenges. Eric’s approach involves intense study of detailed behavioural data in order to identify the patterns that explain why we do what we do.

The clever thing that Eric does, is to explain these patterns in terms of the ‘heuristics’ (rules of thumb) that we use to find ‘best fit’ solutions to complex problems. We form heuristics through experience, they allow us to make snap judgements based on the outcomes of previous events. A relevant example might be ‘if something costs more it must be better’, this heuristic uses past experience to solve the complex problem of too much choice. However, heuristics are prone to error, they are fast but imprecise ways of making decisions that can result in seemingly irrational outcomes. When heuristics lead us to make these irrational decisions, they are called biases. Biases normally occur when:

•    We give too much weight to one particular element of a problem
•    We over generalise solutions across problems
•    We interpret information in a way that best suites us

Eric uses data to reveal the heuristics and biases that people use to make decisions, once these are known, it becomes possible to influence them.

How do we apply behavioural economics?

1) Identify the specific heuristics and biases (rules of thumb) that are at play at the moment of decision.

Remember the following:

•    Biases are by their nature irrational, look for things in the decision process that don’t make rational sense. What factors shouldn’t make a difference, but do? What factors have the opposite effect of what might be expected?
•    Heuristics are subconscious processes; they exist so we can make decisions without having to think about them. Discoverer them through observation (qualitative or quantitative) of behaviour, not direct interrogation of people.
•    More than one heuristic or bias is likely to be operational at any one time, keep looking until you have a satisfactory model.
•    Heuristics and biases are a function of experience, so not everyone will be using the same ones, in fact, you may use these differences to form the basis of a segmentation model.

The good news is that you don’t have to start from scratch, a validated list of general heuristics and biases can be found here. It is doubtful that these general heuristics and biases will fully explain the behaviour you are observing, you will need to adapt them, and discover more to suit your needs.

2) Experiment

Once you have identified a few possible heuristics that might be in play, test them. Controlled experiments will help you identify what combination of heuristics are actually in use.

3) Exploit

Once you’ve identified the heuristics and biases that are in use, explore how they can be exploited. What changes can you make to influence decisions in your favour? What changes will have the biggest influence on consumer behaviour?

4) Evolve

Heuristics and biases are a function of previous experience, that means they are subject to change over time. Periodic re-examination of these heuristics and biases will be necessary. It may also be possible to ‘train’ people with new heuristics by controlling experience, this may be one of the ways traditional branding works.

Conclusions

I hope the above helps to take behavioural economics beyond dinner party conversation into practical business application. This is just my personal take on the whole thing, and I’m by no means an expert, so as always, please comment and let me know what you think.