Behavioral Economics integrates insights from psychology with classical economic theory to understand the economic decisions of consumers. Rory Sutherland makes a compelling case for agencies to adopt this newly fashionable discipline, which offers a valuable new insight into human behavior and a new way to provide clients with market moving ideas.

Rory Sutherland is currently serving as President of the Institute of Practitioners in Advertising (IPA), Britain’s equivalent of the 4A’s, and is Vice Chairman of Ogilvy Group UK. He can be reached at rory.sutherland@ogilvy.com. Collaborator Dr. Nick Southgate, an eminent account planner, is the IPA’s Consultant on Behavioral Economics. Thanks to both for a fascinating and thought-provoking piece.

This article was originally published in Campaign on October 23, 2009; we thank them for allowing us to make it available to 4A’s members.

“It is the unchanging man who is the proper study of the communicator.”
                                                                                         —Bill Bernbach

Julian Barnes, the British author, once observed that “when you buy a newspaper in America you watch your home country disappear.”

If you work in advertising or marketing you can pull off a similar trick: just buy a copy of the Wall Street Journal, the FT or The Economist and “watch your discipline disappear.” To most casual readers of business publications, it must seem that marketing has ceased to exist.

Anyone reading them would now be forced to conclude that the best means of creating business value and growth lies in mergers, balance-sheet manipulation, takeovers, outsourcing, off-shoring, downsizing, tax-avoidance, restructuring, leverage … anything, in other words, that does not involve the tedious business of finding out what people want and then providing it profitably over time within a relationship of deepening trust.

Marketing marketing

Why is marketing—and, more important, the vital study of human behavior—so little celebrated in the wider world of business? And why have marketers and agencies not fought back against a left-brained business culture, which seems to place human understanding so low on its list of priorities?

Perhaps because we haven’t had much to fight back with.

I mean, frankly, you can’t really fight a spreadsheet with a mood-board. And I can’t imagine it’s much fun seeing your face reflected in six pairs of rimless glasses at JP Morgan while muttering “Sorry about the EBITDA, folks, but just wait till you see our new animated cartoon goat.” So, having no weapons to match the money men, we have either sulked or else acquired a kind of Stockholm syndrome, where we start to take on the worst attributes of our abusers.

We often have ourselves to blame, I think. In recent years, marketing’s models of human behavior have been mostly naïve or else self-interested. Every discipline (advertising, DM, online, sales promotion, PR, design) has simply created a model of human persuasion designed to suit whatever proxy measure their own discipline moves most. Hundreds of agencies have developed models of “how advertising works” or “how direct marketing works” when what has really been needed is a discipline-agnostic model of “how people work.” Worse, the models of persuasion prevalent in the industry mostly hark back to a pre-digital media age, where commercial communication was largely one-way and occurred at the behest of the advertiser, not the consumer.

As a result, agencies and marketers have formed no common philosophy—making it all the harder to put up a united front. Without a coherent world view, it is now assumed that the only way to grow an agency is at the expense of another agency; the only way to grow a discipline is at the expense of another discipline; the only way one medium can grow is at the expense of another. Our Balkanised sector, hence, spends most of its time in snarky infighting, rather than promoting the value of marketing ideas in general and trying to grow the category as a whole.

If not now, when?

Behavioral economics—a decades-old yet newly fashionable field of study—might help us answer this. It has a vocabulary (unlike that of marketing and brands) that can play in the boardroom or the corridors of government. It is an area of study that might earn us consideration in the WSJ and The Economist—and in government policy-making—in a way that simple pleas for creativity won’t. Most important of all, it provides us with an intellectual framework that allows us to better justify (and charge for) the many ideas we already generate and to help generate new and better ones.

My interest in this field follows several rest stops on the road to Damascus.

The first came while reading “Nudge,” by University of Chicago economists Dick Thaler and Cass Sunstein. In this groundbreaking book, Thaler describes his idea for the “Save More Tomorrow Pension”—a new pension format designed to appeal to young people, a group who are famously averse to saving. Using the concept of Loss Aversion, Thaler created a pension plan where investors signed up for a pension which costs nothing until they receive a pay rise—at which point a percentage of their pay rise would automatically be directed into their pension fund. By making sure the saver never saw a reduction in his disposable income, the plan was both ingenious and effective: pension contributions among this group saw an increase of around 200%.

Why didn’t a marketer or an agency come up with this idea?

Possibly because we didn’t know about Loss Aversion. Or, more likely, because we knew of it instinctively—but didn’t know what to call it.

Why advertising needs Behavioral Economics

But this is only one small example. Below are a few more—large and small. As you will see, Behavioral Economics is not in itself a grand theory. It is in fact marvelously scaleable—allowing you to ask questions on, for instance, the optimal rate of inflation—or equally to ask why people are prepared to pay such exorbitant prices for cinema popcorn. By understanding and categorizing the disparities between actual human behavior and the theoretical behavior predicted under Classical Economic theory, it can help us improve marketing effectiveness. And prevent millions being wasted on activities, which, while ostensibly logical, run contrary to human nature.

The nine examples below are merely an indication of some of the concepts so far revealed in experiments. Significantly, many of these non-rational behaviors affect us unconsciously, and hence will not be revealed by conventional market research.

1. Loss aversion
People will work harder to avoid losing something than they will to gain it. Indeed, Behavioral Economics tells us that it can be twice as painful to lose a dollar as it was enjoyable to acquire it in the first place. This has simple consequences.

• People hate to see a fall in their net earnings. An argument that increasing sales taxes may be an easier sell than raising income tax.
• People who never normally use a debit card will suddenly remove it from their wallet to avoid a credit card surcharge when booking online for flights. If you want to persuade people to use a debit card, you are better off referring to a “surcharge” for using a credit card than to a “discount” for using a debit card—we are more eager to avoid a loss than to bank a gain. Likewise, don’t tell people they can “save $200 a year with loft installation”—tell them they are wasting $200 a year by not having it.

2.  I'll have what she’s having
People frequently simplify decisions by mimicking the actions of people around them and by adhering to social norms. In Australia, water consumption was cut dramatically by simply printing the average consumption figure for his street on an individual’s water bills (see “Superfreakonomics” for more on this).

3. The power of NOW—and of instant feedback
We tend to respond to stimulus and feedback in proportion to its immediacy, not its strength.

• Vehicle-activated signs that instantly flash your speed at you do more to reduce accidents than cameras that trigger a fine that will only arrive days later. An immediate “nudge” is more motivating than delayed punishment (this finding has helped change the British Conservative Party’s policy on speed cameras).

4. The Power of Channel preference and Interface
People’s propensity to respond to marketing is hugely dependent on their individual channel preference—and the introduction of new channels attracts new customers.

• Interestingly, while young people typically don’t give much to charity, if you allow them to give via text message they can become quite generous.

5. Scarcity value
When we perceive something to be scarce it has a greater value in our eyes. Conversely, when we perceive it to be plentiful its perceived value falls.

• The turnaround in popularity of the potato was due mainly to them being declared as only fit for royalty. Frederick the Great declared the potato a royal food. As a result, the people pilfered the king’s potato fields, and the plant quickly ended up in gardens all over Prussia.
• In the 1960s live music was plentiful and cheap and recorded music (and the equipment to play it on) relatively scarce and expensive. This produced the golden era of the LP—beautiful, treasured and coveted items. Now recorded music is so plentiful as to be virtually free. Live music, however, is increasingly in demand.

6. Goal dilution
When items promise multiple benefits, they are less convincing than items that appear to do only one thing.

• Ever wondered why Google is so successful? At a time when everything else was a portal, a page trying to do many things, Google was a single-minded search engine. We hence believed it must be very good at the one thing it did. Generally if you give someone a combined TV and DVD player, they assume it’s effectively a crap TV yoked to a crap DVD player.
• Now take the example of the success of apps and widgets versus browsers on mobile devices. Browsers are designed to access all of the Internet. Apps and widgets only do one thing—so their focus and specialism makes them feel far more effective. On 28, September 2009, Apple announced it had sold 2 billion
  i Phone apps …

7. “Chunking”
Parts are easier than wholes. The way a task is presented affects people’s willingness to take it on and complete it.

Something presented as one long task to be conducted in a single act will be less likely to attract people than something ‘chunked up’ into bite-sized stages.

• There is a huge risk incurred when people fail to complete courses of antibiotics. If people were given 20 white pills and eight blue ones and were told to take the white pills first followed by the blue ones, would people be more likely to take them?

8. Price perception
In theory, price should be a consequence of the value people attach to something. We should be willing to pay what we think something is worth. In practice, this causality runs backwards. The price that is demanded for something makes us value it more.

Blind taste tests have long alerted us to the fact that consumers do indeed ‘taste the brand’ with many food and drink products.

However, Behavioral Economics has gone further.

• Studies have shown that the efficacy of a soft drink that claimed to help mental acuity was affected by price. People who paid more for the drink performed better on mental acuity tests, benefiting not just from a trivial taste effect, but apparently gaining extra mental powers.
• Similarly, people who paid more for the same over-the-counter pain relief products reported more effective pain relief despite price being the only variable.
• The effect is also observed with cultural products. In a notorious example, a violinist who could sell out concert halls above ground struggled to gain a few dollars underground busking in the subway. The context determined the value.

Price-cutting can and does reduce perceptions not just of product quality, but of experienced efficacy.

9. Choice architecture
Choosing is relative to what you can have, not absolutely about what you want.

In broad terms, ‘choice architecture’ concerns itself with how people gather information when they choose and how absolute values are crowded out by other influences.

The area of Behavioral Economics dedicated to choice architecture is perhaps one of the richest seams for our industry, and the one we believe we should make into a special subject for priority investigation of its potential applications.

• We are all familiar with the experience of choosing the second cheapest wine on the wine list. We are also familiar with never choosing the most expensive item on the menu. However, having one very expensive item on the menu can increase the average value of dishes ordered, even if the most expensive choice is rarely chosen.
• In an ingenious exploitation of framing effects, one salesman sold Rolls-Royces at a yacht show. Seen alongside a $10 million yacht, a $500,000 car seems like a bargain.

Our vision of the future

Where might a fuller understanding of Behavioral Economics take agencies? 

• Imagine a future where product and service innovations can be offered by agencies to provide a greater value added service to clients. And where we can comment intelligently on every single brand interaction, not just messaging.
• Imagine a future where agencies are invited into board level discussions with clients in both the private and public sectors to explain how better choice architecture can help them structure their organizations to make it easier for people to choose from their offerings.
• Imagine a future where the first step in answering a communications brief is to engage the client in a workshop with all roster agencies to investigate the order effect of different communication channels and the role of each in the consumer decision-chain.

What this discipline offers us is some badly needed common ground upon which agencies can make common cause. It is too early to say how quickly we can learn to turn this study to our advantage, but one thing above all makes me optimistic. At every event we have hosted on the subject in Britain (including a superb talk by Professor Geoffrey Miller, from the University of New Mexico, author of Spent) we have attracted sell-out audiences from a spectacular mix of backgrounds: planners, creatives, account people … from media agencies, ad agencies, digital agencies, promotional agencies, direct agencies, promotional agencies.

If there is another field with the same power to unite and enthuse agency staffers badly bruised by recession, I don’t know what it is. And this enthusiasm, in truth, provides the deciding argument for agencies’ greater investigation of Behavioral Economics: it makes the business interesting again.