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Behavioural
Economics
What it is and how it can be
harnessed
Introducing Alice
‘Alice loves to listen to New Age music and
faithfully reads her horoscope each day. In
her spare time, ...
Traditional economics
“Individuals, groups and organizations are assumed to act rationally, have
multiple desirable ends i...
Traditional economics
“Individuals, groups and organizations are assumed to act rationally, have
multiple desirable ends i...
The Reality
It is naive to assume that people always make
informed, rational decisions in an economic and
financial enviro...
Traditional economics
People are not influenced by anyone or
anything else
People efficiently and effectively
acquire and ...
Heuristics and irrationality
 Heuristics help explain why we make irrational decisions on a day to day
basis
 They are e...
The range of heuristics that help
describe irrationality
Behavioural Economics
in marketing practice
Some examples
Irrational value assessment
Consumers make inferences about value using cues such as price and overall
look and feel
E.g. ...
Dominated alternatives
Options can lack appeal if consumers have no reference point for the status
quo in the same product...
Dominated alternatives
Options can lack appeal if they have no reference point for the status quo
in the same product cate...
Dominated alternatives
Decoy options can provide a reference point for consumers to make a
particular option seem more app...
Dominated alternatives
Decoy options can provide a reference point for consumers to make a
particular option seem more app...
Attribute priming
Merely emphasising a particular product attribute can make it more
desirable
Memory Processor speedvs.
Decision paralysis
Be weary of choice overload
6 jam choices 24 jam choices
The power of free
Just the sight of the word ‘free’ can release large quantities of dopamine
How, as strategists, can we harness behavioural economics to
help us achieve our goals?
So…
A process for addressing irrational
behaviour
•Understand the
consumer and the
decision making
processes
•Determine key
he...
Stage 1, understand the decision
PROPERTIES OF THE DECISION
1. Is the decision important to the individual or does it rece...
Then map the decision making process
and identify where bottlenecks occur
Recognise
the
importance
of
retirement
savings
A...
Think about what may cause the
bottlenecks
BEHAVIOURAL INFLUENCES
Status Quo An individual’s inertia to change even if tha...
A process for addressing irrational
behaviour
When choosing the best course of action, consider:
- Prioritise the actions ...
The four dimensions of addressing
irrational behaviour
MINDFUL MINDLESS
ENCOURAGE DISCOURAGE ENCOURAGE DISCOURAGE
ACTIVATI...
The four dimensions of addressing
irrational behaviour
MINDFUL MINDLESS
ENCOURAGE DISCOURAGE ENCOURAGE DISCOURAGE
ACTIVATI...
BE in Action
Hands up who thinks to themselves it’s a cheap price
just because it ends in 44. It must be cost price right?...
Bringing it all together
- People make 10,000 decisions a day
- As strategists we might hope that the ones that
relate to ...
Any
questions?
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Behavioural economics alumni

Talk to Square Holes' client function re behavioural economics. March 2014

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Behavioural economics alumni

  1. 1. Behavioural Economics What it is and how it can be harnessed
  2. 2. Introducing Alice ‘Alice loves to 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. 3. Traditional economics “Individuals, groups and 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. 4. Traditional economics “Individuals, groups and 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. 5. The Reality It is naive to assume that people always make informed, rational decisions in an economic and financial environment. Sometimes we do, sometimes we don’t.
  6. 6. Traditional economics People are not 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. 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. 8. The range of heuristics that help describe irrationality
  9. 9. Behavioural Economics in marketing practice Some examples
  10. 10. Irrational value assessment Consumers make inferences about value using cues such as price and overall look and feel E.g. Wine
  11. 11. Dominated alternatives Options can lack 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. 12. Dominated alternatives Options can lack 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. 13. Dominated alternatives Decoy options can 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. 14. Dominated alternatives Decoy options can 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. 15. Attribute priming Merely emphasising a particular product attribute can make it more desirable Memory Processor speedvs.
  16. 16. Decision paralysis Be weary of choice overload 6 jam choices 24 jam choices
  17. 17. The power of free Just the sight of the word ‘free’ can release large quantities of dopamine
  18. 18. How, as strategists, can we harness behavioural economics to help us achieve our goals? So…
  19. 19. A process for addressing 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. 20. Stage 1, understand the 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. 21. Then map the decision 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. 22. Think about what may 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. 23. A process for addressing 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. 24. The four dimensions of addressing irrational behaviour MINDFUL MINDLESS ENCOURAGE DISCOURAGE ENCOURAGE DISCOURAGE ACTIVATING A DESIRED BEHAVIOUR EXTERNALLY IMPOSED BOOSTING SELF- CONTROL EXTERNALLY IMPOSED SELF-IMPOSED
  25. 25. The four dimensions of 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. 26. BE in Action Hands up 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. 27. Bringing it all together - 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. 28. Any questions?

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