An Introduction to Behavioural Economics

A Presenta*on from The Fes*val of NewMR – Training Day

3 December 2012

An Introduction to Behavioural Economics

Bri Williams (B. Acc, B. Psych, CPA), People Pa(erns

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Bri Williams, People Patterns, Australia Festival of NewMR 2012 – Training Day – Session 1

An Introduc*on to Behavioural Economics

Bri Williams (B. Acc, B. Psych, CPA) Specialist in Buying Behaviour

People Pa(erns Pty Ltd 3 December 2012


Consumers are “irra;onal”

3% fat 97% fat free

$2 fee


“Irra;onality” is predictable


The study of emo;onal, cogni;ve and social influences on economic decision making behaviour.

What we do. How we are influenced. What we are likely to do.

Behavioural Economics


Two applica*ons of Behavioural Economics in Market Research firms

1.  Methodology: Controlling impacts

2. Client value: Bridging gap between intended and historical behaviour






Principle 1.

System 1 and System 2 thinking


What?

•  Two systems drive thinking

•  System 1 = auto pilot, habitual,

threats (“Fast”)

•  System 2 = bursts, delibera;ve

(“Slow”)

Principle 1.



Wilson & Schooler (1991)

Delibera;ve thinking changed the results


What?





(“Slow”)

Implica*ons

•  May be engaging System 2 in

System 1 task

•  Ra;onalised response which

won’t translate into real

behaviour

Principle 1.

System 1 and System 2 thinking *


What?





(“Slow”)

Principle 1.


Applica*ons

•  Methodology to engage

System 1 if that is the

business objec;ve

•  Client plan to ‘normalise’

System 2 result as System 1

behaviour (habitua;on)

* Implica*ons

•  May be engaging System 2 in

System 1 task

•  Ra;onalised response which

won’t translate into real

behaviour


Principle 2.

Deple*on effects

70% vs 10%

Levav, Danziger & Avnaiim-‐Pesso (2011)


What?



threats

•  System 2 = intensive bursts,

asks & receives ques;ons

Principle 2.

Deple*on effects

What?

•  Cogni;ve strain accumulates,

impac;ng subsequent

behaviour

Implica*ons

•  Length of session

•  Tasks required

•  Time of day

•  Decisions taken to get to

research (parking, food,

introduc;ons…)

*


What?



threats



Principle 2.

Deple*on effects

What?

•  Cogni;ve strain accumulates,

impac;ng subsequent

behaviour

Implica*ons

•  Length of session

•  Tasks required

•  Time of day

•  Decisions taken to get to

research (parking, food,

introduc;ons…)

Applica*ons

•  Client can use deple;on

to advantage if

‘indulgent’ product

•  Eliminate or leverage

cogni;ve load in buying

process

*


What?



threats



Principle 3.

Status Quo (Default) bias

Opt in Opt out

☐

Thaler & Sunstein (2008)


What?



threats



Principle 3.


What?

•  Strong preference to leave

things as they are


What?



threats



Principle 3.


What?


things as they are

Implica*ons

•  Forcing opinion in session m

ay

not translate to real world

where there is always a defau

lt

– usually do nothing

•  Clients may need help to move

beyond own status quo

*


What?



threats



Principle 3.


What?


things as they are

•  Status quo

Applica*ons

•  Test for do nothing – it may

be the most realis;c

outcome

•  Overcoming iner;a requires

deliberate strategies

•  Request pre-‐commitment

from client about what they

will do with results

Implica*ons

•  Forcing opinion in session m

ay

not translate to real world

where there is always a defau

lt

– usually do nothing

•  Clients may need help to move

beyond own status quo

*


What?



threats



Principle 4.

Anchoring

6, 7, 8, 9

1, 2, 3, 4

$

Ariely, Loewenstein & Prelec (2003)


What?



threats



Principle 4.

Anchoring What?

•  Value anchored by first

available informa;on

•  Does not have to be

contextually relevant

•  Adjustment in reference



What?



threats



Principle 4.

Anchoring What?






Implica*ons

•  Subjects will be anchored by

content available to them in

the research environment

•  Anchoring will impact results in

real world

*



What?



threats



Principle 4.

Anchoring What?






Implica*ons

•  Subjects will be anchored by

content available to them in

the research environment

•  Anchoring will impact results in

real world

Applica*ons

•  Control for research effects

of anchoring

•  Manage client expecta;ons

re anchoring in real-‐world

context

*


What?



threats



Principle 5.

Framing

80% chance of survival

20% chance of mortality

X 2


What?



threats



Principle 5.

Framing What?

•  Respondents and Clients will

draw different conclusions

depending on how data is

presented


1-‐4 5-‐8 9-‐12 13-‐16 17-‐20 >20

1-‐2 3-‐4 5-‐6 7-‐8 9-‐10 >10

Avg 9-‐12 hrs

Avg 5-‐6 hrs

Please es;mate the average number of hours you watch television per week…

Shafir (2005) cited by Ian McAuley


What?



threats



Principle 5.

Framing What?




presented

Implica*ons

•  Results may be tainted by

framing that is ar;ficial vs

real world

•  Everything about the

research process is framed

•  Decisions about how

informa;on is presented

must be deliberate

•  Selec;ve use of verba;ms

and data

• 

*


6/10 did… 4/10 did not…

60% did…

Six people out of ten…


What?



threats



Principle 5.

Framing What?




presented

Applica*ons

•  Control effects of framing;

randomisa;on or isolate

consistent use

•  Use the topic of research as th

e

frame to determine its effects

•  Separate data from narra;ve?

•  Pre report-‐out workshop wit

h

emphasis on un-‐interpreted data

?

Implica*ons

•  Results may be tainted by

framing that is ar;ficial vs

real world

•  Everything about the

research process is framed

•  Decisions about how

informa;on is presented

must be deliberate

•  Selec;ve use of verba;ms

and data

• 

*


Methodology: Controlling impacts

1.  System 1 & System 2

2.  Deple;on effects 3.  Status Quo bias 4.  Anchoring 5.  Framing

5 Principles we’ve covered:






Businesses seek to resolve issues


When they are really looking to resolve behaviour


From

Browser

Competitor

Occasional

Low spend

Small

To

Buyer

You

Frequent

High spend

Large

Business is about behavioural change


Our issue Research Resolution

Businesses turn to Research to resolve this uncertainty


I will… I would… I think…

They did… I observed…

But most research is based on

might do or have done




When clients want will do

What will they do?




Behavioural Economics can

bridge the gap

Behavioural Economics

They are likely to…


How I apply Behavioural Economics

We navigate the world through filters


Ambiguity effect Anchoring

Bandwagon effect

Certainty bias

Choice bracke;ng

Clustering illusion

Decoupling

Endowment effect

Diagnosis bias

Framing

Hedonic framing Hyperbolic discoun;ng

Informa;on avoidance

Actor-‐observer bias

Availability bias

Impact bias

Mental accoun;ng

Loss aversion

Representa;veness

Resolving cogni;ve dissonance

Status Quo(default) bias

Adapta;on

Comple;on

Contra free loading Drop in the bucket effect

Herding

Ikea effect

Not invented here bias

Pa(ern recogni;on Procedural fairness

Rela;vity Revenge

Short term bias

Self herding

Sunk cost

Vividness Fluency

Judgment heuris;c Halo effect

Systems 1 & 2

Scarcity percep;on

Heuris;cs

Deple;on effects

Free

Inter temporal choice

Confirma;on bias Choice paradox Rules of thumb

Behavioural Economics iden*fies and labels these filters


I’ve mapped each behavioural principle to one of four higher order themes




I’ve mapped each behavioural principle to one of four higher order themes




The four layers framework can be u*lised across each stage of research

Proposal Method In field Analysis Report Extension

✔ ✔ ✔ ✔ ✔ ✔

Behaviour

al

checklist


Our issue Research Resolution

And applied to help resolve the client issue






Bri Williams

Email bri@peoplepa(erns.com.au

Call 0408 392 173

Follow @peoplepa(erns

Visit www.peoplepa(erns.com.au

Read more on Behavioural Economics

Bri’s blog www.peoplepa(erns.com.au

Bri’s book 22 Minutes to a Be(er Business


Marketing

An Introduction to Behavioural Economics