An introduction to Behavioural Economics - Rory Sutherland at the IPA 44 Club

This time last night I was at a fascinating talk by Rory Sutherland, who explained why one of his missions during his IPA presidency is to get us all excited about Behavioural Economics - a field which combines psychology, philosophy and economics in order to understand how people make decisions.  Since understanding people and changing their behaviours is pretty much at the heart of what we do everyday, it's no surprise that the IPA has a series of sessions planned on it. 

Last night's talk was a great introduction to the field.  And, just for you, here are my notes:

Media, metrics, models, markets, morals

- Rory's definition of our job = using human understanding to business advantage.
- Our current metrics and models have evolved to cover a narrow range of media and businesses and be attitudinal not behavioural - they narrow amount we can do and charge.
- Spreadsheets drove excessively numerical obsession that's been deleterious to brands.  Hyper-rationality = maths wrongly applied to reality.
- People have never made entirely rational purchase decisions but it's been a handy defence against anti-advertising folk (cf the hidden persuaders).
- Behavioural Economics studies how behaviour affects major economic topics.  It's the hottest topic in economic world.  We can't ignore it because it's what we're trying to do ourselves. Applying it gives you fresh understanding and new vocab to use with clients.
-  Old way of thinking was that changes in attitude preceed changes in behaviour.  In reality, attitude often changes after behaviour .  A shift in sales often preceeds a shift in likeability.

Behavioural Economics has three main themes:

Heuristics: People often make decisions based on approximate rules of thumb, not strictly rational analysis. We suffer from cognitive biases and often only apply our rationality after having greatly simplified the choices available.

Framing: The way a problem or decision is presented to the decision maker will affect their action.

Market inefficiencies: There are explanations for observed market outcomes that are contrary to rational expectations and market efficiency. These include weighing up the options wrongly and non-rational decision making.

Examples of Behavioural Economics in action: the sorts of ideas that we should be coming up with...

1.  The save more tomorrow pension.  When people were asked to join a pension scheme uptake was slow, as people are loss averse and they have time bias (over optimistic about future earnings).  However, when they were asked to sign a pledge that 10% of their future payrises would be put into a pension pot uptake rose by over 200pc.

2.  The most efficient way to get people in hotels to re-use their towels is to establish the appearance of a social norm - say that most people do it.

3.   When people in Australia where told their water consumption relative to the population, total water use was cut by 25% because people didn't want to be above the norm.

(there are a few more here but I might make them separate posts :)

Conclusion: stop obsessing about attitude when behaviour is key

- Simple psychological insights into behaviour can change behaviour
- The folly of integration is that everything says the same thing.  We shouldn't be producing matching luggage but using different media for different jobs.  E.g. the DM drives sales but the ATL changes attitudes that allow the sales to happen (creates saleability)
- In many cases behaviour is more driven by the channel in which you do it than attitudes
- A lot of communication is becoming context based.  Google is not about target audience but target moment - your now, not your who.
- 4Ps have become 4Es - experience, everywhere, exchange, evangelism (create an interface)
- Comms change product experience.  Intangible/perceptual value IS real value: value is subjective
- The best way to get people to finish their antibiotics might not be to advertise but to turn the last 5 blue and tell people to take the white ones then the blue ones.  These are the kinds of chats we need to be able to have with our clients...

Further reading/watching:

-  Read:  Discover your inner economist, marginal revolution, animal spirits, adam smith, keynes, marx, wikipedia, nudge, herd
-  Watch: deal or no deal as an illustration of irrational behaviour.  People factor in the pain of potential loss into their behaviour.  People who've had a big loss tend to gamble furiously, massively affecting the stock market. 

Comments

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