Behavioral Economics. Implications for Consumer Research and Insights. Marcus Cunha Jr

Transcription

1 Behavioral Economics Implications for Consumer Research and Insights Marcus Cunha Jr

2 Agenda What s Behavioral Economics Examples heuristics and biases from your data Theories that predict the heuristics and biases How to overcome the heuristics and biases: Nudges Research techniques that tap on the consumer unconsciousness

3 Are We Rational Beings? Conventional economic theories are normative They suggest what we ought to be doing to maximize utility

4 Classical Economics: Assumption of Rationality We always pursue and achieve optimal options We are excellent at calibrating chances and risks Preferences are consistent across time and places Goods, services, and money of equal value are perfectly substitutes of each other States of wealth determine how we fare against others

5 Are We Rational Beings? Behavioral economic theories are positive They describe how we actually behave Individuals use mental shortcuts (heuristics) that lead to errors in perceptions and decisions (decision biases) Bounded rationality

6 Let s Play! I need 2 volunteers to play a game Preferably two people who do not work in the same office and who do not interact often Rules: 1 I ll randomly select one of the players to receive hypothetical $10 2 In order to keep some of this money, the player who won the draw will have to offer a certain portion of the $ to the other player (>$0) 3 If the player who received the offer accepts the offer, each player keeps his/her portion of the $10 4 If the player rejects the offer, neither player gets to keep any $ and I get my $10 back!

7 We think in two distinctive ways System 1 System 2 Fast, intuitive, efficient, habit based, good at managing simple tasks, and relatively nonconcious Simple Decisions Reflective, controlled, resources consuming, and good at complex tasks Complex Decisions

8 Examples of Irrationality (or bounded rationality) Anchoring and inefficient adjustment Mere measurement Context effects Mental accounting and sunk costs Enjoyment of money Prospect Theory (an explanation for irrationality ) Hedonic editing Framing effects Corrections (Nudges)

9 Anchoring and Adjustment

10 Anchoring and Adjustment What is it? Judgments tend to be anchored on numbers to which people are exposed (and people generally fail to adjust their judgments as a result of the anchoring effect) Usually people are unaware of the influence of an anchor

11 Mere Measurement Effect Recent research has shown that merely measuring intentions influences one subsequent behavior (e.g., how likely are you to buy a car influence the brand level purchase decision) When asked the product category (vs. no question control group) participants elicit brands toward which they hold positive attitudes, increasing memory accessibility of these brands and increased future purchase behavior

12 Implications for Marketing and Sales Buy Snickers Bars for your Freezer, vs. Buy 18 Snickers Bars for Your Freezer Marked down prices (increase the per customer limit) Multiple uses ( 101 uses)

13 Implications for CR&I The range of options and the magnitude of values may influence responses (Anchor effect) Answers to questions may be anchored on prior ratings/values This may happen REGARDLESS of the meaningfulness of the anchor (e.g., last digits of your ph#, SSN, address) Research questions may influence future behaviors (mere measurement) Fix: pre exposure to a wide range of values (prices, attributes, sizes) may attenuate some of these issues

14 Context Effects Does information seemingly irrelevant to the choice/judgment matter?

15 Contextual Decoys (and Phantom Decoys) $1.31 $1.29 $0.71 $ % 30% 50% 50% 90% 10%

16 The Psychology of Decoys : A perceptual contrast phenomenon Bush s (A) Perceived Quality (A ) (B ) Great Value (B) Price Desirability

17 Decoy case study The large majority of new subscribers chose the $56 option although the publisher preferred the $125 option The Economist then introduced a decoy option which they knew nobody would choose: $125 for print only Nobody chose the middle option but shares for the online & print grew significantly

18 Implications for Marketing and Sales Use dominated options (decoys) with features similar (but inferior) to the most profitable offering Skew the distribution of prices/quality/features to make your most profitable offering more attractive When possible, bundle products in a way that one of the products is offered for free

19 Implications for CR&I Context may strongly influence judgments The skewness of a distribution affects perceptions about the target stimuli Dominance of alternatives in a survey (decoys) affect perception of value and choice

20 Mental Accounting Thaler (1985)

21 Opening and Closing Accounts A transaction is opened when we pay for a good/service, and remains open until the good/service is received/consumed Unlike the GAAP, our minds are not good at "writing off" bad debts As a result, we are prone sunk cost biases

22 Mental Accounting by Categories Mental accounts are usually compartmentalized (money for hedonic versus utilitarian spending) Funds are assigned into different sub categories (Fun: vacation, entertainment, etc.) Funds are not fungible across categories ( this is my vacation money, I ll save it and make a minimum payment in my high APR credit card )

23 Mental Accounts Lead to Sunk Cost biases Suppose you bought two tickets for $100 for a concert a month in advance On the day of the concert, a winter storm made driving almost impossible You can either forfeit the tickets and not go to the concert, or you may pay an extra $60 for a taxi roundtrip Which would you choose? What if somebody gave you the tickets for free? What would a rational economist predict?

24 Implications for Marketing and Sales Create upfront sunk cost (e.g., down payment) to increase escalation of commitment (think gym membership) Keep the mental account in the red. Consumers do not like to close mental accounts in the red and that will prevent switching behaviors (gamblers escalate betting the more they lose to avoid closing the account as a loss) Set payments in a way that is consistent with the enjoyment of the account The Ikea Effect (Co Creation)

25 Implications for CR&I The more time spent upfront on a survey or focus group, the more likely participants will commit to finish it Research participation compensation may create a windfall account and respondents will be more likely to agree that they would buy a given product ( this money wasn t budget and is different from my other monies. I can splurge now. )

26 Prospect Theory Understanding Choice under Risk Kahneman & Tversky (1979)

27 Probability Function You have two lottery tickets: Ticket #1 has 55% chance of winning $2,000 Ticket #2 has 95% chance of winning $1,000 You are given the opportunity to boost one of the tickets winning chance by 5% for a small fee, which ticket would you want to boost?

28 Probability Function Jerry has two vehicles, a car and a motorcycle. In the event of an accident, The chance of fatal injury is 2% in a car; The chance of fatal injury is 52% on a motorcycle. He received a voucher for a free vehicle inspection from his insurance company that could decrease the chance of fatal injury by 2% for either vehicle. Which vehicle would you recommend him inspecting?

29 Probability Function

30 Value Function $50 loss $50 gain Properties: Events are judged relative to an (adaptive) reference point Losses loom larger than gains People are extremely averse to losses People savor multiple gains

31 Loss Aversion Examples For example, some workers may prefer not to work overtime because they do not want to pay more taxes even if they would benefit financially from additional after tax income (the additional tax loss looms larger than the income gain ) Disposition effect: Even though the most rational behavior would be to hold on to winning stocks and sell loosing stocks, the opposite is often observed

32 Hedonic Editing Segregate Multiple Gains Aggregate Multiple Losses Aggregate Large Gains with Small Losses Segregate small gains from large losses (the silver lining )

33 Based on hedonic editing, how can Mr. A tell this story to his friends in a way that makes him feel happier? When Mr. A left the store, he realized he had parked in an illegal zone and received a $50 parking ticket. Segregate Multiple Gains Aggregate Multiple Losses Aggregate Large Gains with Small Losses Segregate small gains from large losses (the silver lining )

34 Framing effects: Gains and Losses: Negative Frame Positive Frame 10/30/

35 Implications for Marketing and Sales Frame offers as gains versus losses depending on the intended behavior (risk seeking vs. risk averseness) Hedonically edit offers (e.g., two separate gains and one combined loss) Insurance is based on (small) probabilities, what lessons can we learn from the probability function? (people overweight small probabilities) When offering a bundle, discount the least desirable product

36 Implications for CR&I The framing of a question (as gain/loss/neutral) has relevant impact on the results of research People will hedonically edit a question to justify their answers

37 We think in two distinctive ways System 1 System 2 Fast, intuitive, efficient, habit based, good at managing simple tasks, and relatively nonconscious Simple Decisions Reflective, controlled, resources consuming, and good at complex tasks Complex Decisions

38 B.E. Criticism of Market Research The vast majority of consumer decisions are based on System I However, a large bulk of Market Research is designed to evoke System II ( Walk me through your laundry detergent purchase decision ) People often feel the need to comply with a request/question and will provide answers (even if meaningless) Fix?

39 How do we Influence System I? Nudge Theory (Thaler and Sunstein 2008) Designed to encourage changes in how we behave in response to System I Based on indirect encouragement rather than on enforcement Traditional Enforcement vs. Nudge Counting calories Weekly food shop budgeting Smaller plate Use a basket instead of a cart

40 Enforced Nudged

41 From Insights to Nudging in the Marketplace: leveraging System I heuristics Purex

42 How can B.E. Improve Consumer Insights? Use Behavioral Economics to guide hypothesis and insight generation Use Behavioral Economics to improve research design (Nudging is being a choice architect) Is the context of research appropriate for the studied decision? Create social contracts when possible

43 Implicit/Biometric Measures in Market Research

44 EEG EEG is a brain imaging method that records the brain s electrical activity at the surface of the scalp. Can be used to assess consumers unconscious reactions to advertisements or other product related materials

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46 EEG PROS Reaching the unconscious mind More reliable than traditional MR techniques CONS Cost Ethical concerns

47 Eye Tracking Background Software can detect to where people s eyes are naturally drawn Can be applied in Ad Testing to observe which portions/elements of the Ad attract attention Assumption: Eye gaze = attention

48 Eye Tracking Eye tracking can improve understanding of behavior and experience Not a replacement for other qualitative research methods

49 Learning from eye tracking 80

50 Eye Tracking in Retail Settings

51 Mercedes Ad Eye Tracking

52 Facial Coding Facial coding is moment by moment analysis to pinpoint exactly what emotions people feel and when Facial coding is commonly used in marketing for ad testing

53 Facial Action Coding System (FACS)

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55 THANK YOU! Marcus Cunha Jr