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Tuesday, March 22, 2011

Behavioral Economics and The Future of Advertising

A few weeks ago I visited a retail store. As I was entering I noticed a fellow about 40 years old standing out front. He was short and easily weighed 300 pounds. To my surprise, he was inhaling deeply on a cigarette. Moving through the store to pick up a few items, my thoughts kept coming back to the guy out front. He was a walking heart attack for sure and a prime candidate for a stroke as well. As I left the store, he had another surprise for me. He lighted a new cigarette with the butt of his dying one. I shook my head sadly and moved on.

Since 1776 and Adam Smith’s “invisible hand” theory, free market economics has always made the assumption that people act in a rational manner. Smith’s invisible hand said essentially that when selfish but rational actions take place across a society, we would be more prosperous overall. Well. The chubby fellow whom I encountered in front of the store was not acting rationally. He was killing himself and not slowly. Were he rational he would go on a diet right away and go cold turkey on the cigarette habit.

The real truth is that as humans we all tend to lean toward emotion. Most of us experience love, jealousy, grief and excitement at times and that clouds our behavior and purchasing.

This concept has been captured in a field known as Behavioral Economics. Back in the 1970’s two psychologists, Amos Tversky and Daniel Kahneman, began to adapt theories on how our brains process information and then contrasted that with the economic models that featured the rational man often dubbed “Homo economicus” (Kahneman won the 2002 Nobel Prize in Economics).

So, there are reasons why 20% of Americans are morbidly obese and some smoke at the same time but they are not being rational. Behavioral Economics is a marriage of Psychology and Economics and will become an increasingly important field for marketers and ad agencies in the years to come. Here are a few core principles of Behavioral Economics that can apply to our life in advertising:

1) Despite when classical and now neo-classical economists may have said, people are moved by value judgments and, sometimes, moral judgments. Many of us every day do what is right rather than what gets the maximum profit to us short term.
2) Economists usually do not distinguish between social and market contexts. An example would be a couple’s 25th wedding anniversary. If a man gives his wife a very nice piece of jewelry she is often touched by it. Were the same fellow to give her a card with a $1000 bill in it, there is an excellent chance that the marriage would not endure for another 25 years. Some economists would argue the economic impact was the same in both cases--$1000 was spent. Behavioral Economics is more nuanced.
3) In financial markets, many of us too often are irrational investors. We buy near the top and sell when the market is bottoming out. People put way too much weight on recent events and do not often think long term, which is rational.
4) Old habits die really hard. Some 20% of Americans are morbidly obese and their girth will derail any hope of cutting future health care expenses. All too few of us examine whether our behavior is optimal.
5) Monkey see, monkey do. We observe others doing things and do not always make decisions based on our own judgment.

Historically, advertising has often made a strong appeal to emotions and we all know that emotion can be a powerful selling tool. So, ad agencies should be comfortable with Behavioral Economics and plug it in to their client service options. Today, at smaller and mid-size shops, people are all too often-dubbed Account Planners, Strategy Officers, or Marketing Directors and they basically rehash syndicated data from Simmons or Mediamark Research, Inc. (MRI). Real pros, if they have not already, should embrace Behavioral Economics. It could really sharpen their marketing effectiveness. If you dig in and understand it, you are able to weigh in on almost all brand interactions. Today, many agencies limit themselves simply to messaging.

For a non-technical primer on Behavioral Economics may I recommend, “Nudge” by Dick Thaler and Cass Sunstein? The authors serve up a host of practical suggestions to nudge people to do the right thing without being perfectly rational. It is easy reading but will make you think clearly about when economics and psychology meet.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

1 comment:

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