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An intro to Behavioural Economics & Qual

An intro to Behavioural Economics & Qual

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Here’s an introductory reader in Behavioural Economics and Qualitative Research. Give yourself a good 45 minutes for this in-depth piece.

Behavioural Economics weaves behaviour (psychology and neuro psychology) into its economic models and theories. It rejects classical economics ‘rational’ man models.

Some examples

  • Loss aversion: Classical economics has formulas for decision making based on losses and gains, but fails to take into account if losing matters more or less to people than gaining does. Behavioural economists have set up experiments that show we often feel worse about losing something that belongs to us than we do about gaining something new. If you have a favourite pen (for example) losing that object will mean more to you than gaining its equivalent monetary value…or even being offered a new pen of the same value.

Why should a business be aware of loss aversion? It’s partly the reason why so many new ideas fail (better the devil you know), it’s the reason why change * in business is so difficult…we’re hard wired to be conservative.

  • Pain (and Gain) with reference points: Importantly too they have highlighted that we use reference points to judge gains and losses (not just rational emotionless decisions). Imagine someone tells you they are going to give you £100,000. You get used to the idea and start to plan what you’ll do with the money. Then the offer is withdrawn. You’ll feel more pain than if you had never been made the offer. (All the drama of who wants to be a millionaire is built around this insight)

Why should a business be aware of reference points? Inflation and price rises (for example) are disproportionately painful because they operate against a strong reference point – what I used to get for this amount of cash

  • Possibilities and probabilities: We don’t decide on risk based simply on the degree of chance that something will happen. We are disproportionately biased towards possibilities. Say there is 0% chance we will win on the lottery. And now think that there is a 1% chance we will win. We over-value that 1% because we now see a possibility. Imagine there is a 5% chance an operation to prove mobility on our leg will fail, we become much more alert to the possibility of the failure than is ‘rational’.

Why should a business be aware of possibilities? Customers want certainty and even when small risks emerge, reactions are disproportionate – think the horse meat scandal.

  • Choice Architecture: We learn how to place value on products by using anchor points (reference points again). So for example, a bottle of water can sell for £2 in the right fridge because the choice architecture here is built around the price points of other soft drinks. If the price architecture is different, maybe when we are thinking about the cost of tap water, then the price will feel wrong. Further, we like to feel a price is right, by weighing up prices (comparing and contrasting different price points).

Why should a business be aware of choice architecture? A business can manipulate price points by setting up the choice architecture in its favour. Equally it needs to protect price point anchors – so consistent discounting of a product (Pringles comes to mind) creates a new price point anchor in customers’ minds. Discounters can radically affect choice architecture. Think of the impact of Card Factory (for example) on Clinton’s Cards…

There are many more examples – Nudge by Thaler and Sunstein and Predictably Irrational by Dan Ariely are good reads and give lots of examples of Behavioural Economics challenging conventional wisdom/ classical economics and demonstrating how we really behave…

Blending with Psychology and Neuroscience

By demonstrating that we don’t behave rationally when we are making choices, experts in the field have highlighted the importance of understanding the psychology of decision making, and examining how our minds work.

Some important ideas have emerged about how we behave that have big implications for retailers, brands and marketing. A comprehensive theory of how our minds work (in relation to decision making) has been developed by Daniel Kahneman. He describes System 1 and System 2 Thinking. System 1 is our quick witted, instinctive response system. System 2 involves the kind of hard thinking we have to set our minds to.

People like to use System 1 thinking because it doesn’t strain the brain too much. Imagine choosing between the vast array of instant coffees on the supermarket shelf in your weekly shop. You are feeling broke, so you can’t go for your favourite brand. System 1 spots a brand that is cheaper, but looks very similar to the brand you like – a bias towards familiarity is triggered by System 1.

System 1 uses heuristics – rules of thumb that help us arrive at quick decisions – in this case the heuristic is that familiar is best…System 2 – the slower, thinking part of your brain is happy to be left out of the decision making, and off you go (perhaps with a slight sense of concern, because of your risk aversion to change makes you ‘fear’ trying this new thing…).

So, System 1 is quick, intuitive but fallible, a short-cut system that generally works well, but can be ‘duped’ because of the biases it calls on to make decisions.

Priming is one particularly key issue for System 1 (and research). We can be very biased in relation to thoughts that have been previously introduced to us. By dropping a thought into someone’s mind (cakes for example) we are then primed to ‘think’ cake the next time we are asked to make a mental association.

System 2 is involved with mental heavy lifting – we call on it when we have to do abstract tasks like more complicated mathematical thinking. It’s the back-up system that allows us to over-ride our quicker System 1 processing.

However, System 2 can be duped too, often failing to spot the flaw in a System 1 decision process. System 2 is biased towards familiarity and plausible explanations. When something seems right, System 2 will happily accept this because we are hard-wired for cognitive ease, feeling that something is right or makes sense.

System 2 is fallible because it can be lazy – it will too easily accept what is in front of it, rather than demanding, what don’t I know, what more do I need to consider? Daniel Kahneman talks about our bias towards WYSIATI (what you see is all there is…) We are programmed to string together explanations for events based on the available data rather than looking further than the data we know.

System 2 thinking will also avoid cognitive strain by substituting hard questions with easier answers. You might need to make a difficult decision like which school should I send my child to? It’s a tough one, so you might answer that hard question with an easier answer… I like the atmosphere of that particular school…

Why should a business be aware of system 1 and 2 thinking?Cynically you can argue that business can exploit our flawed cognitive processes. Round £ price points favour System 1 quick thinking and System 2’s laziness…branding itself plays to System 1 processing, and the world of marketing is maybe all about cognitive ease – always making the purchase of a product the ‘easy’ choice.

Perhaps more constructively we can think harder about how to make life easier for our minds, and also we can demand more of our own System 2 thinking. (There is, for example, lots of work being done on ‘expertise’ and the benefits of practicing difficult tasks so they become like a system 1 process…).

We also need to be really aware of the fallibility of our minds. If our minds like the feeling of cognitive ease – and we are attracted to plausible solutions that feel right we can all too easily fall pretty to sloppy thinking that isn’t helpful in business decision making.

Our two selves…

Daniel Kahneman’s Thinking, fast and slow book finishes up with the concept of our two selves – the experiencing and remembering self. The experiencing self lives in the here and now, going through day to day life. Our remembering self recalls experiences. Critically our remembering self has biases in its processes. It underplays duration of experiences and it places greater emphasis on the end of an experience. Imagine you are running a marathon. It’s a hellish experience and you hate nearly all of it, but in the last mile a massive crowd wills you home to the finish line, the sun comes out and the last 100 meters are all down hill. At the end of the race you complete the course in a faster time that you were expecting. Your remembering self is likely to recall this experience with a great deal of joy, so much so that you might want to go again! This decision goes against your experiencing self’s experience…

Why should a business be aware of our two selves? Customers have two selves, but their remembering self is the one that will influence their next decision about whether or not to come back to the store.

Wider influences

Behavioural Economics challenged conventional wisdom at the end of the 20th Century, and is the forerunner for other important disciplines that want to understand social influence. Theories of mass behaviour and ideas about how we behave first and foremost as ‘social animals’ that are (probably) inspired by the notion that we don’t behave like we think we do…

One key idea is that we behave less as individuals responsible for our own unique decisions, and more like a herd animal, and that we are all connected (consciously and sub-consciously) to each other, and each other’s thinking.

Ideas are transmitted by social interactions (think of a chain reaction) and we use social proof to help us work out what does and doesn’t matter to us. Social proof is the idea that whenever we are unsure of what we think about something (do I like the latest fashion? Do I want a new tablet? What is enjoyable?) we reference other people’s thinking to help us figure out what matters to us. Some people are particularly socially influential because we respect them, so they become our reference point and set the rules for behaviour.

Mark Earls book ‘Herd’ is a good place to start thinking about Social Influence, as is the well-known Tipping Point by Malcolm Gladwell.

Other interesting work on social interaction has come from marketing experts who have studied how we influence each other. Concepts like reciprocity, for example – where once I have done something for you, you feel duty bound to return some kind of favour to me, are really interesting tools (or weapons) of social influence that are worth knowing about.

Robert Cialdini’s Influence is an excellent and informative read on this subject.

Why should a business be aware of theories of Social Influence? These ideas are developed specifically with businesses in mind. They suggest that we need to understand how people interact with each other as a key building block for marketing and that creating social influence is probably the most powerful way to get people to want your brand and your product. This means re-thinking who your target customer is – rather than being the people who spend the most money with you, they could be the most influential of your customers (and that might not necessarily be the same thing). Social influence theories suggest that people want to line up behind people with strong values, visions and ideas, which means that businesses need to have a strong, visionary message that it consistently delivers at every point of interaction with everyone involved with the business.

Behavioural Economics Relevance for Qual Research

Behavioural Economics and other related disciplines challenge how we do research. They highlight pitfalls and opportunities that have direct relevance to how we should do and design research. I think there are 6 big learnings we should apply to research

  1. People are unreliable witnesses – we don’t behave like we think we do
  2. People are susceptible to being primed – recent ideas dropped into our subconscious minds have a strong effect on how we make decisions and talk about preferences
  3. People adopt all sorts of heuristics (rules of thumb short-cuts) to help them make decisions – these rules of thumb are not ‘rational’ they just help with quick thinking
  4. We are programmed to look for and create plausible explanations for behaviour and we’ll create these explanations out of very limited knowledge
  5. We are social animals and social influence hugely affects how we behave and how we report our behaviour
  6. We have two selves – the experiencing and the remembering self

Here is how we should apply the key learnings…

1. Unreliable witnesses

If people don’t really know themselves and their own behaviour we cannot ask them to report on their own behaviour. Asking ‘why you did that?’ is a total no, no. This means we need to set up methodologies in research that either directly observe ‘live’ behaviour (observations, filming in-store, other monitoring methodologies) or we need to set up experiments that examine how people behave under certain circumstances. In NPD research I have developed my own research process using decision cards which get people to select new ideas (amongst a set) rather than ‘respond’ to NPD concepts to get round this unreliable witness issue.

2.Susceptible to being primed

Qual groups classically ask people to talk about their behaviour and then introduce new ideas to explore. This is priming at its worst. We need to think of clever ways to explore ideas – by keeping discussions more ‘discrete’ so that respondents don’t know the issue we are interested in. For example in pack research we might want to understand how effective and appealing the pack designs are – but we should establish this through behaviour – asking respondents to choose products they want to take home with them, and then understand what they anticipated about the product, what they were weighing up when they made their decision… I also think that some conscious priming can really help. In group discussions I think priming people to look at a fixture before a group might actually help them with a more realistic response about what they want in a new idea… So doing research in-store could be a good thing.
I’m sure the danger of priming has huge implications for questionnaire design in quantitative research too…

3.The biased mind that uses heuristics/ short-cuts to make decisions

Qual research can come into its own here! Good qual research has always been about understanding how people interpret the world around them, and how they make decisions. Knowing about this short-cut thinking we can be even more sensitive/ on the look-out for heuristics – and make it our job to uncover for clients just how consumers are behaving rather than how they say they are.

4. Programmed to create plausible explanations

We need to be aware of the system two bias to WYSIATI (what you see is all there is). Researchers need to spend more time thinking and analysing their findings and combining their insight with other pieces of data. If we take at face value what people have just said in a group (often reporting on their unreliable behaviour) we will potentially end up with a plausible explanation – it feels right¬… but it does not actually reflect what’s really going on. More thinking time is required!

5.Social animals and Social Influence

Mark Earls in his book Herd is hugely critical of all research because he believes we focus on the individual’s response and don’t understand the role of social influence. We need to develop questioning techniques and methodologies that build in the impact of social influence and the ‘social proof’ process into research. The solution here is to get questioning right. We can ask key questions around ‘who in your social circle is influential in this sphere?’… ‘Who do you talk to about this stuff?’… ‘Whose advice did you follow when you bought that?’ We can also set up methodologies to uncover social influence. I have developed a social proof methodology that involves exploring new ideas with respondents, then asking them to talk about this new idea to three relevant people, and I then interview those other three to see how the ideas has been transmitted and how social interaction has progressed the concept. I also think there’s a role in quantitative questionnaires for showing respondents other participants’ answers (“25% prefer x so far in our survey”) so they can rate their thinking within a social context. There are also new big data methodologies emerging which are ‘social listening tools’ that aggregate social network chatter on key subjects.

6.Our two selves

We need to build awareness of our two selves into our questioning techniques and discussion guide development. Are we trying to uncover the ‘remembering self’ or the ‘experiencing self’ and do we need to explore both selves in our research methodologies? So imagine you want to understand wine choice in a project. You need to explore the experiencing self – by seeing wine purchase in action, but you also need to explore the remembering self who might come into store with key memories about a great bottle of wine, or a conversation they’ve had with someone about wine, and this will help to narrow down their choices and their decision making. All discussion guides could benefit from identifying which ‘self’ is being interrogated – the remembering or the experiencing self.

Conclusion

Consumer behaviour is far richer and more complex than we might first think, and Behavioural Economics kick-started the conversation about this.
The more we know about how the mind works, the more we know that our behaviour precedes thought as much as our thought precedes behaviour. We need to design research with this in mind, and we need to be mindful of the research we do!

Check out the Book Club for a comprehensive reading list

Well done for getting through all of that. Kath

kath-handonheart

Kath Rhodes

I love love learning and so I invest time and resources into exploring social psychology, neuro science, creativity and new techniques in research. Read all about it and help yourself to the ideas that will deliver your business the insight it needs

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@Qualstreet on 26 June 2017