Home > Kyle Cockett >Using Behavioural Economics Wisely

Kyle Cockett this week considers the growing popularity of behavioural economics in the research industry.

As an econometrician by training, I am naturally interested in the behavioural, cognitive and statistical biases found in research. Often, it is further understanding of these underlying aspects of research that allows the greater provision of explanatory and actionable findings to clients at the conclusion stages of projects. However, just how strong is our understanding of the underlying drivers behind human decision-making?

At a recent research conference, I listened to Phyllis McFarlane, Managing Director of the international market research agency GfK NOP speak of the growing need for a change in approach to research. The argument was clear – it is time to move away from the stale, outdated assumption of human beings as rational decision makers. Indeed, we have learnt as researchers that the theory of rationality does not always hold – under certain circumstances, such as intense pressure or a lack of information, respondents can be prone to making unconscious, irrational decisions. Therefore, with this in mind, can we always expect to gain a full understanding of respondents from quantitative scaling questions when conducting research? Is there a case for probing to gain some deeper understanding of the underlying cognitive biases and psychological heuristics behind decision making?

I recently read an article by Andrew McCormick from Brand Republic on the growing use of behavioural economics as a research and marketing tool. Behavioural economics, also known as ‘nudge theory’ in the political arena, has long been mooted as an alternative approach to the neoclassical assumption of rational human behaviour. The theory of behavioural economics is built around a central treatise of bounded rationality, where the rationality of individuals is limited by the information available to them, the cognitive limits of their minds and the finite amount of time available to make decisions. In McCormick’s words:

Behavioural economics examines consumer activity through understanding social, cognitive and emotional factors behind purchase decisions. It then uses these insights to redefine the choices offered to customers”

Some of the key heuristics behind behavioural economics include:

Loss aversion – The tendency to prefer avoiding losses to acquiring gains. It implies that a respondent who loses £100 will lose more satisfaction than another person who finds £100 will gain.
Status quo bias – The tendency not to change an established behaviour unless there is a compelling incentive to do so. The idea that ‘if it isn’t broke, do not try to fix it’.
Cognitive framing – The influence of wording and the way information is presented to us. Examples can be found in well-known bleach advertisements, where brands are presented as ‘killing 99% of all known germs’ instead of ‘letting 1% of all known germs survive’.

Behavioural economics has remained as a ‘fringe’ discipline for a long period. However, according to McCormick a growing number of brands are now seeking to harness its use, even if the ‘chasm between knowledge and implementation is still significant for many’. The research industry also appears to be taking note – Research Magazine has dedicated a new series of articles to the topic. McCormick cites many recent examples of brands employing behavioural economics, including Hyundai seeking to reduce the fear of loss among consumers when purchasing new cars and Lloyds bank ‘nudging’ customers towards the use of their money manager tool. Although these examples are based on consumer products, we often see evidence of irrationality in business to business markets. Many projects for utility suppliers show clear evidence of status quo bias – many respondents are quite happy to remain with the same supplier for long periods before they feel compelled to change.

So what does the rise of Behavioural Economics hold for the future? McCormick states a belief that:

Behavioural Economics are likely to become a natural, everyday and almost invisible part of the marketing industry over time”

My personal belief is that the same outcome is likely to apply to the research industry. At the fieldwork stage, there is a perhaps a case for stating that well-constructed research has already been uncovering underlying behavioural economics for a long time, through the use of projective techniques at the qualitative stage and derived measures at the quantitative stage. However, as research agencies assume a more consultative role, like ourselves at B2B International, it is crucial that we learn to inform and advise clients on how to give their customers those crucial ‘nudges’ at the conclusive stages of projects.

One thought on “Using Behavioural Economics Wisely

  1. Nicos says:

    A fascinating topic indeed Kyle. I would just add that our irrationality is in fact quite predictable. Professor Dan Ariely (of MIT) has demonstrated this through a series of experiments (he tends to use MIT students for his experiments, but there is no reason to doubt the general validity of his findings). I recommend his book “Predictably Irrantional” to anyone interested in the subject.

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