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Behavioural Economics - The complete picture

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Behavioural Economics - The complete picture

  1. 1. Brain Game Behavioural economics: the complete picture? Share this In Focus
  2. 2. Behavioural economics: the complete picture? One of the reasons that the teachings of behavioural economics have become so widely influential is that they are a lot more colourful, intriguing and, let’s face it, fun than the neo-classical approach to economics that largely dominates our world. Share this In Focus 2
  3. 3. Behavioural economics: the complete picture? The picture here shows a young couple taking part in one of shopping’s great rituals – the search for an engagement ring. It’s a routine that’s been established in the consumer mainstream since the late 1930s – and you would think that by now we would have a pretty robust idea of what takes place on such occasions. However, our view of this and other familiar shopping scenes has been transformed in recent years. We now know that an unseen landscape of contextual and unconscious factors has the potential to sway our couple’s choice in ways that they may well, themselves, be completely unaware of. The playing field of choice is by no means level – and we can’t resist the challenge of working out exactly how it might be slanted. Share this In Focus 3
  4. 4. Behavioural economics: the complete picture? Fun with behavioural economics This new perspective has been provided for us by behavioural economics, which has been pushed into the mainstream of politics and marketing by books such as Thaler and Sunstein’s ‘Nudge’, Dan Ariely’s ‘Predictably Irrational’, Timothy Wilson’s ‘Strangers to Ourselves’ and Daniel Kahneman’s ‘Thinking Fast and Slow’, as well as by the influential work of Gerd Gigerenzer. Behavioural economics has focused marketers and governments alike on the importance of fast and frugal heuristics, and the contextual triggers with which they interact in driving much of human choice and behaviour. And an entire industry has sprung up around detecting their presence and adjusting them to achieve desired ends. However, what devotees of pop behavioural economics sometimes forget is that the thinkers mentioned above do not put forward one single consensus view when it comes to just how our unconscious mental structures influence our behaviour. Behavioural economics is as much a debate as it is a conclusion; a collection of insights that has much to add to Share this traditional thinking, but is far from a complete, self-contained answer to why we behave the way that we do. One of the reasons that the teachings of behavioural economics have become so widely influential is that they are a lot more colourful, intriguing and, let’s face it, fun than the neo-classical approach to economics that largely dominates our world. That neo-classical approach views human decision-making as a rational, calculable exercise, which can be predicted reliably by anybody with the patience to work out the best possible outcome for those concerned. It’s a take on human behaviour that’s far too like maths to cause widespread excitement. Behavioural economics is different. The insights that it puts forward resonate far more strongly with us as human beings. This does not make them any less scientifically established or credible as explanations; but it does perhaps help to explain why we are increasingly inclined to give them pride of place when it comes to decoding a picture such as this. Behavioural economics is as much a debate as it is a conclusion; a collection of insights that has much to add to traditional thinking, but is far from a complete, self-contained answer to why we behave the way that we do. In Focus 4
  5. 5. Behavioural economics: the complete picture? Choose your heuristics When doing so, we could start by looking at the fast and frugal heuristics, the mental rules of thumb that our brains use to guide our decision-making, and which prevent us agonising over every possible permutation of our choices. These heuristics are the product of our own experiences as well as psychological, social, cultural and market influences. The reality of which heuristics we follow in different circumstances is often as individual as we are. The jewellery industry has worked hard to establish its own convention governing the judgement of wedding ring purchases: a man should spend the equivalent of two months’ income on the ring that he buys for his future wife. If we can establish whether our couple are likely to be following this consciously created heuristic then we may take a very different view of the price of ring they are likely to buy than if we went on their preferences and purchasing power alone. However, just because a heuristic theoretically exists does not mean that somebody is necessarily following it. This particular heuristic was deliberately established by the marketing of De Beers in the early 20th century, and it is most likely to be followed in western markets, and in particular the USA. Consumers in other cultures may follow it but they may equally be unaware of it – or consciously reject it, if it were pointed out to them (by a helpful sales assistant, for example). 2013 Just because a heuristic theoretically exists does not mean that somebody is necessarily following it. Share this In Focus 5
  6. 6. Behavioural economics: the complete picture? Indeed, there are plenty of alternative heuristics that our couple could be following in this scenario, many of which are shaped by personal experience. Some men, when buying jewellery for their wife or partner (a purchase with more than its fair share of subjective pressures and second-guesses) will follow a version of the familiarity heuristic and buy the item that is most similar to something they have bought for them on a previous occasion; others will always opt for a jewel that matches the colour of their wife’s eyes. Many will make use of brands, which can themselves act as heuristics, to guide their perceptions of quality and value. Such heuristics are classic examples of bounded rationality in action, wherein we deliberately simplify choices to make them more manageable. All involve our jewellery purchasers effectively putting artificial constraints on their decision; constraints that are designed to steer them towards an acceptable choice whilst significantly reducing the degree of angst involved. Gigerenzer’s ‘stopping rule’ describes how using a clearly defined hierarchy of heuristics to judge a decision prevents us from having to weigh up all the options in the style of a wholly rational neo-classical economist. If weighing up our choices according to the first rule of thumb in our hierarchy produces a clear winner, there is no need to consider any further. Heuristics are classic examples of bounded rationality in action, wherein we deliberately simplify choices to make them more manageable. Share this In Focus 6
  7. 7. Behavioural economics: the complete picture? Minding the rationality gap An appreciation of heuristics and bounded rationality brings us significantly closer to understanding why many human decisions (wedding ring purchases are one example, although the choice of drink in a pub or breakfast cereal in a supermarket are just as applicable) do not fit with what we might expect if we sat down with pen, paper and calculator and worked out likely courses of action according to the neo-classical economic model; or indeed, if we took brand tracker surveys at face value and expected people to make the choices they say they will and buy the brands they say they prefer. Heuristics are accessed at the moment of decision, by our experiencing self that deals with the day-to-day business of life, rather than by our remembering self, which evaluates and explains it afterwards (and handles the task of filling out questionnaires). As such they help to explain why consumers themselves cannot always accurately predict what they will do. However, heuristics do not in themselves provide us with a complete understanding of our happy couple. Share this Heuristics are accessed at the moment of decision, by our experiencing self that deals with the day-to-day business of life, rather than by our remembering self. In Focus 7
  8. 8. Behavioural economics: the complete picture? A healthy dose of context Behavioural economics also teaches us to be alive to the contextual factors at play in this situation. And the first and most obvious of these contextual factors is the couple themselves. Our heuristics, which focused for the most part on the decision making of the man, gave us at best only part of the picture. He may indeed be the one making the final purchase decision (particularly if the couple are following tradition), but the presence of his bride-to-be will have a huge influence over that decision. The need to adjust one’s own buying preferences to those of others often exerts huge influence over purchases – and rarely more so than in this situation. Both members of the couple will be influenced by other internal contextual factors in the form of cultural norms and expectations that may easily override the heuristics mentioned earlier. Some of these cultural contexts are stable and enduring. The convention that engagement rings should be diamonds is one such, which is likely to override our more personal eye-matching heuristic mentioned earlier. However, such enduring cultural influences Share this can be challenged by momentary or new contexts that may be less predictable. Suppose our couple found that only three diamond rings were on display at the jewellers, and on enquiring as to why, were told that the trend this year is to use different jewels in wedding bands. The enduring cultural convention would be challenged, and the couple would then have a choice to make about which cultural context (new or old) they give primacy to. The many cultural contexts in which decisions are made include overlapping local or regional traditions, religious influences, and family histories. If either member of our couple comes from a conservative religious background (if they originate from a traditionally Buddhist family in Myanmar, say), then any heuristics suggested by De Beers and others may well be excluded from their judgement by powerful family traditions that suggest purchases should never be flamboyant or intended to express status. Such social contexts are powerful influences, but they are not alone in shaping the basis for the engagement ring decision. One of the most intriguing areas of behavioural economics is the way in which the physical environment can shape a purchase in ways that the actors in the scene are almost wholly unaware of. In Focus 8
  9. 9. Behavioural economics: the complete picture? Contextual triggers In our picture, the importance of physical context begins with the shopping mall itself, or to be precise, where the shopping mall is located. Is it in an upmarket, sophisticated part of town that has framed the couple’s decision making in a way that tends them towards a more expensive purchase? Did they take a special trip to get here, setting expectations that this is a unique shopping experience justifying a unique purchase price? Or is the mall in fact, around the corner from their home district, somewhere they walk through every day? Is the jewellery store one they have passed on numerous occasions on the way to buy something else? In such a case they may well be less pre-disposed to paying an ‘out of the ordinary’ price. Share this All sorts of subconscious phenomena, defined and described by behavioural economics experiments, could be at work in helping to prime our couple to spend more or less on their ring. Transaction utility describes how we are predisposed to pay more for something that we visualise in an expensive setting; priming helps to explain how we enjoy things more when we are told that they are more expensive (through their being sold in an upmarket store in an upmarket location or simply commanding the biggest price tag); anchoring shows how unrelated numbers can affect our judgements, suggesting that if our jewellery store stands next to a display of expensive sports cars it may dispose our couple to pay more for the rings in front of them. And it would be a dangerous oversight to ignore the role of our own visceral mood states in swaying decisions: the types of day that our couple have experienced are themselves a form of context that could exert significant influence over their choices. In Focus 9
  10. 10. Behavioural economics: the complete picture? Beware the decoy When it comes to comparing rings and choosing the one for them, our couple are likely to be influenced by the manner in which the rings are displayed – and their relationship to one another. Let’s say that they have narrowed their choice down to two rings, one of which is set with three emeralds (matching the lady’s eyes) and two diamonds and costs US$3,000; the other set with a single emerald and single diamond and costing US$2,500. They are torn because it is difficult to weigh up the additional cost against the additional gemstones, particularly given the fact that this is also a subjective judgement about which ring is most aesthetically pleasing, and which suits them best. Share this Now let us consider a third ring, conveniently placed between the two, which costs US$3,200 and is set with two emeralds and a single diamond. Our couple are unlikely to choose this ring (since its gemstones are relatively far more expensive than the other two), but its presence significantly increases their likelihood of choosing the first ring over the second. It acts as a decoy, providing a basis for comparison between the other two. Since the first ring is both less expensive than this third ring and contains more gems, it is more likely to be chosen than the second ring, which is less expensive than the third, but contains fewer gems. ? $3,000 $3,000 $2,500 $3,200 $2,500 In Focus 10
  11. 11. Behavioural economics: the complete picture? Now imagine that our third ring is taken away and replaced by another, which is set with only a single diamond but costs US$2,750. Suddenly the comparison shifts in favour of the second ring, which now contains more gems than the decoy whilst costing less. Our first ring also contains more gems than the decoy but it also costs more. In this scenario, the second ring becomes the ring more likely to be chosen. Or does it? Because at the end of the day, the couple are not diamond or sapphire traders. Their choice of ring is not directed by their perceptions of its absolute value but by their prediction of its value to them. They are buying not a collection of gems and precious metals but a token of their love for one another and a promise of future happiness. In weighing up the cost of rings with the difference their choice may make to their future lives together, they are asked to distinguish between two very different forms of value. The task of assessing which form of value dominates our judgement in a given situation is one of the most challenging for behavioural economics – and for research in general. ? $3,000 $3,000 $2,500 $2,750 $2,500 Assessing which form of value dominates our judgement in a given situation is one of the most challenging for behavioural economics and for research in general. Share this In Focus 11
  12. 12. Behavioural economics: the complete picture? Distinction bias and affect Studies of distinction bias suggest that human beings tend to over-estimate the value of something that can be quantified, whilst under-stating the value of something that cannot. When faced with a choice between a stimulating and fulfilling job paying US$60,000 a year and a tedious one paying US$70,000, it seems that we are predisposed (depressingly enough) to go for the bigger paycheck. This might lead us to conclude that our husbandto-be may hold back from spending more on a ring just because it is more strikingly beautiful and may make his wife and himself happier for life. But wait: there are other forces stirring in this balancing act. Behavioural economics experiments also point to the influence of affective value (the extent to which things align with our deepest personal motivations and desires) over the monetary decisions that we make – and behavioural economists are well aware of the phenomena of loss aversion, whereby the threat of loss is weighted far more heavily than the promise of gain. How do such factors influence the value that we place on efforts to make our partner happy for life? Share this Studies of distinction bias suggest that human beings tend to over-estimate the value of something that can be quantified, whilst under-stating the value of something that cannot. In Focus 12
  13. 13. Behavioural economics: the complete picture? Understanding the purchase of a wedding ring is wholly impossible without taking our unique capacity for conscious thought and decision-making into account. And our understanding of any other consumer decision will be equally distorted if we push consciousness out of the picture. Reaching a decision It is at this point that the risks of interpreting our couple as merely the sum of potential behavioural impulses become apparent. True clarity can only come to the picture when we integrate the importance of our own consciousness in directing our decisions. Consciousness provides us with the ability to delay and deliberate, to put gratification on hold by trading something good now for something better later, it allows us to anticipate the future, to plan and to hope. Share this Many interpret the lesson of behavioural economics as being that humans are inherently suggestible, that we are the plaything of contextual triggers that can be used to nudge us in one direction or another. Behavioural economists themselves rarely think this way. The fast and frugal heuristics that they describe form a highly effective means of consistent decisionmaking when faced with complexity, pressure and uncertainty. It is a system that is highly individual, composed and shaped by affective memories, motivations and by our own rational, considered choices. Viewing ourselves simply as a series of unconscious buttons that marketers or governments can push (as the term ‘System 1 brain’ has too often come to mean), is every bit as blinkered as assuming that human beings are always compelled to act rationally. For a complete, holistic view of human decisionmaking, we need to respect human beings as individuals, and focus the insights that behavioural economics provides on the many and varied ways in which those individuals make choices, whether they are standing in a jewellery shop on a life-changing occasion or travelling down the same supermarket aisle they visit every week. This will involve integrating the latest thinking in behavioural economics with key learnings from other behavioural sciences (psychology, sociology, even anthropology), to provide the best foundation for understanding behaviour. The skills involved in investigating memories, motivations and rational choices are where many of research’s great strengths lie; the challenge of behavioural economics is not to abandon these skills but to integrate them with new forms of insight as to the way decisions are made. In Focus 13
  14. 14. Behavioural economics: the complete picture? About the authors Darren Bhattachary heads up the Global Qualitative work for one of TNS’s key accounts. He has spent much time thinking about why people do things and how to nudge them in new directions. He previously ran qual for TNS-BMRB wrestling with such knotty issues as how to get people to stay in pensions (when they’d rather spend the cash now) and how to make it easy to be green. He holds a PhD in Philosophy and started life as a marine biologist. Mark Francas is interested in behaviour change, social marketing and public policy development. He heads the Behaviour Change Institute within the Political & Social team at TNS, comprising senior researchers and leading international academics. The Institute has developed an industry-leading Framework - based on the latest thinking in behavioural theory and behavioural economics - which is used by national governments, major NGOs and donor organisations. Dr George Kyriakopoulos is a Statistician in the Survey Methods and Sampling Team of TNS UK. With over ten years of experience in academic and applied research, George has worked with a variety of global clients in social and market research and he is particularly interested in methodological Share this References design and survey mode. George’s academic work in Economic Psychology has focused on socio-cognitive processes involved in decision making under conditions of uncertainty or asymmetric information. Adhil Patel is the Head of Thought Leadership, TNS Global Brand Equity Centre. Over the years, Adhil has focused his efforts on understanding and explaining brand relationships, and the implications thereof. In his role he is part of a team that is evolving the area of brand equity measurement, and sharing and developing new thinking. Anjali Puri is Managing Director, TNS Qualitative, Asia Pacific. A seasoned qualitative researcher with over two decades in the industry, Anjali has been active in the development of new qualitative methodologies, and has contributed to shaping contemporary thinking in qualitative research globally, particularly in the areas of consumer choices, behaviour change and social media. Passionate about understanding cultures and how they shape our relationships with brands, Anjali is currently working on understanding how archetypal needs translate across cultures. Hsee, C., & Zhang, J. (2004). Distinction Bias: Misprediction and mischoice due to joint evaluation. Journal of Personality and Social Psychology, 89 (5), 860-895 Ariely, D. (2008). Predictably Irrational: The Hidden Forces That Shape Our Decisions. HarperCollinsPublishers: London. Cialdini, R.B. (1993). Influence: The Psychology of Persuasion. Quill: New York. Gigerenzer, G. (2000). Adaptive Thinking: Rationality in the Real World. Oxford University Press: New York. Gigerenzer, G., Todd, P.M. and the ABC Research Group. (1999). Simple Heuristics That Make Us Smart. Oxford University Press: New York. Kahneman, D. (2011). Thinking Fast and Slow. Farrar, Straus and Giroux: New York. Loewenstein, G., Lerner, J.S. (2003). The Role of Affect in Decision Making, In Dawson, R.J., Simon, H.A. (1947). Administrative behaviour: A study of decision-making process in administrative organization. Macmillan: New York. Thaler, R., Sunstein, C. (2008). Nudge: Improving Decisions about Health, Wealth, and Happiness. Penguin Books: London. In Focus 14
  15. 15. Behavioural economics: the complete picture? About In Focus In Focus is part of a regular series of articles that takes an in-depth look at a particular subject, region or demographic in more detail. All articles are written by TNS consultants and based on their expertise gathered through working on client assignments in over 80 markets globally, with additional insights gained through TNS proprietary studies such as Digital Life, Mobile Life and The Commitment Economy. About TNS TNS advises clients on specific growth strategies around new market entry, innovation, brand switching and stakeholder management, based on long-established expertise and market-leading solutions. With a presence in over 80 countries, TNS has more conversations with the world’s consumers than anyone else and understands individual human behaviours and attitudes across every cultural, economic and political region of the world. You may be interested in... The value of context: or what qualitative research can learn from behavioural economics > Breaking the habit code > The secret life of the brain > TNS is part of Kantar, the data investment management division of WPP and one of the world’s largest insight, information and consultancy groups. Please visit for more information. Get in touch If you would like to talk to us about anything you have read in this report, please get in touch via or via Twitter @tns_global Share this In Focus 15