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, is an important discipline for market research companies and clients alike, exploring why people sometimes make irrational decisions and why 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 user’s perspective are:

Anchoring (heuristic)

Anchoring is a particular form of priming effect in which initial exposure to a number serves as a reference point and influences subsequent judgments of 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 judge 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 describing people as “cognitive misers” (Fiske & Taylor, 1991) and represents a fundamental idea in human psychology that underlies behavioural economics.

Framing effect

Choices can be worded to highlight the positive or negative aspects of the same decision, thereby changing 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, and is also vital for highlighting 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, commonly defined as mental shortcuts or rules of thumb that simplify decision-making, involve 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 forgo a gain to prevent another person from receiving a superior reward.

Loss aversion

Loss aversion is an important Behavioural Economics 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 have ever listened to any focus groups, then you will have come across the Confirmation bias. Confirmation bias occurs when people seek out or evaluate information in ways that fit their existing thinking and preconceptions.

Related topics include: System 1 thinking and neuromarketing, and related books include: The Choice Factory, Misbehaving, Predictably Irrational and Decoded, to name just a few.