Behavioral Economics


Why you don’t drink Coke out of a sink and why you should always order first in a restaurant.

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Amy Rohn

"A messy desk is the sign of a brilliant mind."

What we learned from Dan Ariely at LSB’s Brandworks University

A purchase may seem like a relatively easy concept. But as noted behavioral economist Dan Ariely told attendees at Lindsay Stone & Briggs’ Bandworks University 2010 there is a lot more going on in the mind of the purchaser than a simple cash for goods or services transaction.  And, according to Ariely, we, as marketers, should think about certain human weaknesses, namely a lack of self control, and create mechanisms to help people make better purchase decisions.

When it comes to self control, Ariely talked about consumers overemphasizing the present and undervaluing the future.  Anybody who has ever tried to diet, tried to start an exercise program or committed to saving money for the proverbial rainy day can understand this. Temptation is all around us.  Temptation to cheat on the diet, hit the snooze button instead of going for the jog or spending on the pricey new toy instead of saving.

Ariely offered solutions to the issue and discussed the implications for marketers.

  • Reward substitution involves getting people to use surrogate rewards to get them to act a certain way.  A given reward may be too far in the future for a consumer to be motivated by it.  Reward Substitution provides a proxy reward that allows a consumer some benefit in the near-term.
  • The second solution Ariely discussed was a self control contract.  Think about Ulysses and the sirens.  He overcame temptation by forcing his future self to avoid the siren’s song by getting his crew to tie him to the mast. Perhaps a more relatable example given by Ariely is a diner in a  restaurant  telling the waiter to keep the dessert tray away from the table, thereby insuring that your future self does not indulge in the chocolate mousse.

So, what does this mean for marketers?  Well, it means that consumers don’t behave as economic theory predicts they would behave, because so much of their behavior is based on irrational tendencies that they don’t necessarily even see.

It means that we, as marketers must be more systematic and experimental in our approach.  We can’t rely on our intuition because out intuition is flawed by this irrational consumer behavior.

One of the most obvious manifestations of this irrational consumer behavior can be found in the psychology of money.  Economic theory tells us that we should consider the shadow value of money or the opportunity cost of money whenever we make a purchase.  But Ariely’s research reveals that nothing could be further from the truth.

In fact, consumers have a very difficult time understanding what they’re giving up when they make a purchase.  He tells us that because we can actually do so many things with money, we can’t calculate the opportunity costs.  So what consumers tend to do is rely on habits.  They assume what they have done before, say spent $3.00 on a cup of coffee, was the right decision for some reason, so they repeat the behavior and it becomes the standard.

BRAND’S INFLUENCE ON BEHAVIOR

So, where does the brand come into play in all of this?  Ariely’s research shows that the brand actually can alter the consumers experience primarily because it sets expectations that the consumer has.  Ariely shared research related to blind and non-blind taste tests or tests  where aspects irrelevant to the taste of a product were changed.  In each case the brand changed the way a consumer experienced a product.

When consumers thought that a medication was a national brand, they claimed it worked better than what they thought was a store brand when in reality, the medications were the same.  Golfers who through they were playing with counterfeit clubs didn’t play as well as they did when they thought they were playing with the real deal even though the clubs were actually the same.  In a test of sunglasses, consumers reported that they worked better when they thought they were Armani sunglasses rather than an off brand.  Of course, the sunglasses were the same.  It was the consumers’ expectations that were changed by the brand.

And speaking of expectations, what about the title of this blog post? The first commenter who can explain what it means relatively to Ariely’s research gets a free copy of his book, Predictably Irrational courtesy of LSB.

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