Behavioural Economics and Nudge Theory

An introduction to Behavioural Economics and why it is used in modern-day market research.

Behavioural Economics, sometimes referred to as BE in short, is an important discipline for market research companies and clients alike and explores why people sometimes make irrational decisions, and why and how their behaviour does not follow the predictions of economic models. Some of the best-known individuals in the study of behavioural economics are Nobel laureates Gary Becker, Herbert Simon, Daniel Kahneman and George Akerlof.

For a brief introduction watch this excellent video on Behavioural Economics:

Some recommended reading on the subject of Behavioural Economics, includes;

• Influence: The Psychology of Persuasion
• Nudge: Improving Decisions about Health, Wealth, and Happiness
• Think Twice: Harnessing the Power of Counterintuition
• Predictably Irrational: The Hidden Forces that Shape our Decisions
• Thinking Fast and Slow

Perhaps some of the most important theories and models from a market research users perspectictive are:

Anchoring (heuristic)

Anchoring is a particular form of priming effect whereby initial exposure to a number serves as a reference point and influences subsequent judgments about value. The process usually occurs without our awareness (Tversky & Kahneman, 1974), and sometimes it occurs when people’s price perceptions are influenced by reference points. (Often the first thing they hear or see).

Availability (heuristic)

Availability is a heuristic whereby people make judgments about the likelihood of an event based on how easily an example, instance, or case comes to mind.

Bounded rationality

Rationality is bounded because there are limits to our thinking capacity, available information, and time (Simon, 1982). Bounded rationality is similar to the social-psychological concept that describes people as “cognitive misers” (Fiske & Taylor, 1991) and represents a fundamental idea about human psychology that underlies behavioural economics.

Framing effect

Choices can be worded in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness. This technique was part of Tversky and Kahneman’s development of prospect theory, which framed gambles in terms of losses or gains, but is also of vital importance and highlights the importance of how you present ideas in research.

Halo effect

This concept is well known to marketers and has been developed in social psychology and refers to the finding that a global evaluation of a person sometimes influences people’s perception of that person’s other unrelated attributes.

Heuristics

Heuristics, which are commonly defined as mental shortcuts or rules of thumb that simplify decisions, represent a process of substituting a difficult question with an easier one and can be seen in much of our grocery shopping behaviour.

Inequity aversion

Human resistance to inequitable outcomes is known as ‘inequity aversion’, which occurs when people prefer fairness and resist inequalities. In some instances, inequity aversion is disadvantageous, as people are willing to forego a gain, in order to prevent another person from receiving a superior reward.

Loss aversion

Loss aversion is an important Behavioural Economic concept associated with prospect theory and is encapsulated in the expression “losses loom larger than gains”. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining, and since people are more willing to take risks to avoid a loss, loss aversion can explain differences in risk-seeking versus aversion. In many ways, much of marketing exploits Fear and Loss aversion to good effect.

Priming

Priming is a technique and process applied in psychology that engages people in a task or exposes them to stimuli. The prime consists of meanings (e.g. words) that activate associated memories (schema, stereotypes, attitudes, etc.). This process may then influence people’s performance on a subsequent task. In qualitative market research (e.g. focus groups) it is often important not to prime unless a particular state/frame of mind is required.

Confirmation bias

If you ever listened to any focus groups, then you will have come across the Confirmation bias. The Confirmation bias occurs when people seek out or evaluate information in a way that fits with their existing thinking and preconceptions.