Missing the Point About Behavioral Economics

Casual observation on Linkedin or marketing websites reveal articles touting the applicability of behavioral economics to marketing strategies. Some examples include:

  • Applying behavioral economics to research physician decision-making
  • Can behavioral economics inform the ad research process?
  • Why behavioral economics is the future of shopper insights

These articles, while insightful in their own right, fundamentally misunderstand what behavioral economics is. Rather than being a tool for marketers and researchers to use; it’s simply an observational discipline. An exercise in modeling and understanding why people behave the way they do; not suggesting people behave in certain ways.

Behavioral Economists Prefer Observation

There’s a person economists study named Homo Economicus. We love this guy because he’s totally rational and it’s really easy to predict what he’s going to do. To give you an example of how this guy behaves, there’s something called the ultimatum game. This is the basis for many economics experiments and has revealed a lot about how people behave. Here are the rules:

  • Take two people: Person A and Person B.
  • Person A gets $10 and proposes an offer to Person B. In the offer, Person A distributes the money between herself and Person B. (For example, A gets $7; B gets $3).
  • Person B decides whether to accept the offer.
  • If the offer is accepted, the money is split based on what Person A said.
  • If the offer is rejected, nobody gets any money.

Now, the rules are kind of absurd. What person would want to play that game? But leave it to Economists (and yes, I’ve done this before) not only to devise the rules but make people play it.

Think about for a moment, for yourself, how much would you offer if you were Person A? Why not more/less? Is there any offer you would reject as Person B? If someone offered you a penny would you “punish” them for making such a measly offer?

In experimental settings, we usually see something like offers below 20% of the initial pie ($2 in the case above) get rejected. And I totally get this. Suppose I’m Person B and Person A offers a $9-$1 split (Person A gets $9; I get $1). Being offered a meager $1 when someone else gets $9 flies in the face of my sense of fairness. So I will give up a $1 just to teach you a lesson. Also, I may not want to appear like a pushover. Maybe getting a reputation as a pushover will result in worse deals in the future.

If, instead of me, Homo Economicus were Person B, though, he would accept an offer as little as one penny. A penny is better than nothing after all. And Mr. Economicus is probably never going to encounter Person A again, so there’s really no incentive to spend money developing a reputation.

What this has to do with behavioral economics is that the actual results are so different from the predicted results. (Like, sooooo, different – we are off by basically a factor of infinity.) We had a model of human behavior, but that theory failed to predict what actual humans do. It is the role of the behavioral economists to observe these deviations from prediction and refine or develop a model of human behavior that is consistent with previously-accepted doctrine as well as the new insights.

Why Are You Asking Us?

Now, here’s where you have it backwards.

Behavioral economics is NOT a set of directions to marketers. Behavioral economists live in the abstract. Psychological insights may provide intuition or after-the-fact justification for prediction errors, but at the end of the day, a consumer is just another data point to us.

This whole time we economists have sat quietly in the corner of the room watching you and your consumers have a conversation, documenting your behavior – how much stuff is transferred at a given price, how much time do consumers spend looking for a better price, which marketing strategies work better than others, etc. Suddenly, one of us coughed (thanks, Rich), and you’ve spotted us. Now you’re asking what you should say next. Just ignore us. Please. We don’t want our existence to interfere with your natural behavior. (Oh hey, that’s an observation bias reference!).

Seriously, you are way better at marketing than we are. The only thing we have to offer is a (probably incomplete) theory about how you behave. Have you ever watched a nature documentary and seen the tiger ask David Attenborough what to do in the middle of a chase? No. Are you really going to ask a bunch of geeky economists how to talk to your customers? Please don’t.

Ok, Maybe Some of It You Can Use

I admit I’m being a little cheeky. Having someone observe and document your own behavior is probably beneficial for your long-term success. By developing insights on how the best marketers capitalize on human bias, you can find ways to adjust your own strategies.

So, yes, I’m sure there are ways for you (the marketer) to use the research of BE to help your success. But know that for the most part, you were probably doing the things described in the BE literature already. I’m sure there are insights to be applied, but they are potentially overstated.

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