Behavioral economics and the art of making choices

by Nigel Hollis | October 11, 2017

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?” (Listen to the interview here). 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.

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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.

3 comments

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  1. Nigel, October 14, 2017
    If the majority of people made irrational decisions most of the time the human race would have died out long ago. I guess that I find it irrational for people to fixate on the errors of decision making rather than the vast majority of times when heuristics and emotion-led decision making serve us very well. 
  2. matthew snyder, October 12, 2017

    Is it possible that building brand disposition (same as brand loyalty?) can only be measured over many years, whereas manipulation can be judged as effective on an immediate basis?

    Also, regarding the comment above:  

    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

    I believe Daniel Kahneman illustrates ample evidence in his book "Thinking Fast and Slow" that the majority of people make irrational decisions most of the time.  Its their own justifications and fault reasoning that make it seem rational to themselves. But when viewed from an objective, rational, third-party point of view, those decisions are highly irrational.

  3. Ed C, October 11, 2017

    I thought you were going to take this in another direction, in that most advertising is irrational (unless it strictly focuses on a product's benefits). I don't think Thaler's premise goes completely against brand building, in that while consumers may make irrational decisions, marketers need to make sure that those decisions skew toward THEIR products and not others.

    My "favorite" tagline is "Love. It's what makes Subaru a Subaru." Really?? Love??? While my wife does indeed own a Subaru and we do like it, is it really, in any way, Love? Talk about an irrational campaign, but a great one nonetheless as it likely connected some irrational consumers (i.e. all of us) to buy or at least feel an affinity toward the brand.

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