Behavioral economics and the art of making choices

  by Nigel Hollis

This week Richard H. Thaler, professor at the University of Chicago Booth School of Business, won the 2017 Nobel Prize in Economic Sciences for his pioneering work in behavioral economics. In an interview Thaler promised to spend the prize money as irrationally as possible, a statement that acknowledges that he might otherwise try to make rational decisions.

In an interview from 2015 Thaler states that he spent much of his college years asking his professors, “Really?”.  His intuition told him that the models of highly rational behavior used by the economists of the day were wrong. Many years later, and the evidence conclusively proves that we are not the rational decision makers we might like to believe. Our decisions are subject to all sorts of influences and biases.

 

 

Many people have enthusiastically used the learning from behavioral economics to propagate the belief that all decisions are irrational and largely governed by our emotions. That viewpoint is no more backed up by the evidence than those original models based on assumptions of complete rationality. As Thaler implies in his promise to spend his million dollars as irrationally as possible, the more money and risk involved in making a decision the more we will consciously deliberate on which outcome might be best.

Put it another way, most times we buy a soft drink we are unlikely to put much thought into it (provided the selection is familiar). Our choice will likely be instinctive guided by habit and what is prominent. In contrast, however, I would suggest most of us would put some time and thought into buying a new car. The cost is far higher and the risk of ending up driving a vehicle we do not like is also high. The soft drink in gone in a few minutes. The car is going to be yours for at least a couple of years.

As discussed elsewhere on the blog, our decision about which car to buy is going to be heavily influenced by our pre-existing understanding about different makes and models, what we find out during search, test drives and, of course, various biases like price anchoring. Strangely, however, the marketing world today seems to place far more emphasis on search and behavioral biases when it comes to decision making than the influence of pre-existing associations.

Maybe it is simply because SEM and behavioral economics seem trendy (hey, Nobel Prize, right?). Or perhaps simply because they originate closer to the point of decision; marketers seem to have decided that manipulating search and buying cues are the solution to making a sale. This ignores the fact that the outcome of both are highly dependent on what brand comes to mind when shopping anyway. If your brand is not salient in some way then no one is going to consider it and neither search results nor behavioral economics cues are going to make much difference.

But what do you think? Why do we seem to be focusing more on manipulating brand predisposition rather than building it in the first place? Please share your thoughts.