BEHAVIOURAL ECONOMICS - An Introduction

I recently completed the IPA Foundation certificate (http://www.ipa.co.uk/) and one of the most interesting topics covered by the course was Behavioural Economics. This popular theory has had a huge influence on public policy in the UK over the last decade, and in the business world has been championed by some high profile members of the advertising industry, including Rory Sutherland, Vice Chairman of Ogilvy & Mather Group UK and former President of the IPA.

So, what’s all the fuss about?

In a nutshell, it’s a field of study that looks at how people’s actual behaviour differs from classical economic theory which assumes that people act rationally all the time (i.e. people try to get the most for the least effort and always act in their own best interests). 

It was popularised by Nudge: Improving Decisions about Health, Wealth, and Happinessa 2009 book written by University of Chicago economist Richard H. Thaler and Harvard Law School Professor Cass R. Sunstein which showed how small “nudges” can encourage people to make better decisions for  themselves, their families and society.

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So how does it work?

The IPA publication Behavioural Economics: red hot or red herring? outlined seven key principles of Behavioural Economics:

1)      Loss Aversion

People work harder to avoid losing something than to gain it. That’s why it can be so difficult to throw things away.

2)      The Power of Now

People engage less with future events than current ones. This explains the popularity of the ‘Save More Tomorrow Pension’ for which contributions are not collected until the policy owner gets a pay rise, so they do not feel the loss of disposable income immediately.

3)      Scarcity Value

If we perceive something to be scarce, we give it a greater value. For example, people will pay huge amounts to see a singer who rarely performs.

4)       Goal Dilution

Multiple goals are harder to achieve than goals pursued individually. Most people prefer to use apps on mobile phones, for example, than the browser available because they can do one thing quickly and easily.

5)      Chunking

Parts are easier to deal with than wholes. Hence, bitesize revisions books are very helpful!

6)      Price Perception

The price that is demanded for something is a factor in how much we value it. Blind taste tests show that people think products taste better when they are more expensive.

7)      Choice Architecture

This looks at all the factors that influence someone’s decision making, bearing in mind that all choice is relative to what is available and not just about what someone wants, and all effort counts. For example, we are more likely to pick the medium cost option on a menu, and we are more likely to donate charity if there is an easy way to do it.

 

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Has Behavioural Economics offered any useful insights for advertising?

Absolutely, some very successful campaigns are rooted in behavioural economics. For example, the Fire Safety campaign in 2013 which called for people to test their smoke detectors when they changed their clocks saved many lives by removing the effort from remembering to do this simple task.

And does it have implications for recruitment communications as well?

Plenty, from the type of language that we include in a job ad (e.g. ‘a unique opportunity’ – scarcity value), to thinking about how we frame the opportunity relative to other opportunities available for that type of candidate (choice architecture), to making sure that benefits offered for a role will be comparable to previous benefits candidates have enjoyed (loss aversion), to removing barriers from the application process (choice architecture), to even making sure that information is structured in such a way as to make it easier to digest (chunking).

Isn’t that just common sense?

Yes, admittedly some of it is! And many communications professionals who know their target audiences will already be familiar with these principles. However, common sense is not always applied and it does help to have another theoretical framework to analyse and inform strategy.

Want to learn more? Here are some useful links:

http://nudges.org/

http://www.ipa.co.uk/be

http://www.forbes.com/sites/johnowrid/2014/02/05/behavioural-economics-gives-the-advertising-industry-a-nudge-in-the-right-direction/

http://www.behavioraleconomics.com/BEGuide2014.pdf