TNS - Behavioural economics: the complete picture?

Brain GameBehavioural economics: the complete picture?

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Behavioural economics: the complete picture?

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The picture here shows a young couple taking part in one of shopping’s great rituals – the search for an engagement ring. It’s a routine that’s been established in the consumer mainstream since the late 1930s – and you would think that by now we would have a pretty robust idea of what takes place on such occasions.

However, our view of this and other

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However, our view of this and other familiar shopping scenes has been transformed in recent years. We now know that an unseen landscape of contextual and unconscious factors has the potential to sway our couple’s choice in ways that they may well, themselves, be completely unaware of. The playing field of choice is by no means level – and we can’t resist the challenge of working out exactly how it might be slanted.


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Choose your heuristics When doing so, we could start by looking at the fast and frugal heuristics, the mental rules of thumb that our brains use to guide our decision-making, and which prevent us agonising over every possible permutation of our choices. These heuristics are the product of our own experiences as well as psychological, social, cultural and market influences. The reality of which heuristics we follow in

can establish whether our couple are likely to be following this consciously created heuristic then we may take a very different view of the price of ring they are likely to buy than if we went on their preferences and purchasing power alone. However, just because a heuristic theoretically exists does not mean that somebody is necessarily following it. This particular heuristic was deliberately established by the marketing of De Beers

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reality of which heuristics we follow in different circumstances is often as individual as we are.

The jewellery industry has worked hard to establish its own convention governing the judgement of wedding ring purchases: a man should spend the equivalent of two months’ income on the ring that he buys for his future wife. If we

established by the marketing of De Beers in the early 20th century, and it is most likely to be followed in western markets, and in particular the USA. Consumers in other cultures may follow it but they may equally be unaware of it – or consciously reject it, if it were pointed out to them (by a helpful sales assistant, for example).


Indeed, there are plenty of alternative heuristics that our couple could be following in this scenario, many of which are shaped by personal experience. Some men, when buying jewellery for their wife or partner (a purchase with more than its fair share of subjective pressures and second-guesses) will follow a version of the familiarity heuristic and buy the item that is most similar to something they have bought for

bounded rationality in action, wherein we deliberately simplify choices to make them more manageable. All involve our jewellerypurchasers effectively putting artificial constraints on their decision; constraints that are designed to steer them towards an acceptable choice whilst significantly reducing the degree of angst involved. Gigerenzer’s ‘stopping rule’ describes how using a clearly defined hierarchy of

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similar to something they have bought for them on a previous occasion; others will always opt for a jewel that matches the colour of their wife’s eyes. Many will make use of brands, which can themselves act as heuristics, to guide their perceptions of quality and value. Such heuristics are classic examples of

using a clearly defined hierarchy of heuristics to judge a decision prevents us from having to weigh up all the options in the style of a wholly rational neo-classical economist. If weighing up our choices according to the first rule of thumb in our hierarchy produces a clear winner, there is no need to consider any further.


Minding the rationality gap An appreciation of heuristics and bounded rationality brings us significantly closer to understanding why many human decisions (wedding ring purchases are one example, although the choice of drink in a pub or breakfast cereal in a supermarket are just as applicable) do not fit with what we might expect if we sat down with pen, paper and calculator and worked out likely courses of action according to the neo-classical economic model; or indeed, if we took brand

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classical economic model; or indeed, if we took brand tracker surveys at face value and expected people to make the choices they say they will and buy the brands they say they prefer. Heuristics are accessed at the moment of decision, by our experiencing self that deals with the day-to-day business of life, rather than by our remembering self, which evaluates and explains it afterwards (and handles the task of filling out questionnaires). As such they help to explain why consumers themselves cannot always accurately predict what they will do. However, heuristics do not in themselves provide us with a complete understanding of our happy couple.


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Contextual triggers In our picture, the importance of physical context begins with the shopping mall itself, or to be precise where the shopping mall is located. Is in an upmarket, sophisticated part of town that has framed the couple’s decision making in a way that tends them towards a more expensive purchase? Did they take special trip to get here, setting expectations that this is a unique

couple to spend more or less on their ring. Transaction utility describes how we are predisposed to pay more for something that we visualise in an expensive setting; priming helps to explain how we enjoy things more when we are told that they are more expensive (through their being sold in an upmarketstore in an upmarket location or simply commanding the biggest price tag); anchoring shows how unrelated

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expectations that this is a unique shopping experience justifying a unique purchase price? Or is the ma in fact, around the corner from their home district, somewhere they walk through every day? Is the jewellery store one they have passed on numerous occasions on the way to buy something else? In such a case they may well be less pre-disposed to paying an ‘out of the ordinary’ price. sorts of subconscious phenomena, defined and described by behavioural economics experiments, could be at work in helping to prime our

anchoring shows how unrelated numbers can affect our judgements, suggesting that if our jewellery store stands next to a display of expensive sports cars it may dispose our couple to pay more for the rings in front of them. And it would be a dangerous oversight to ignore the role of our own visceral mood states in swaying decisions: the types of day that our couple have experienced are themselves a form of context that could exert significant influence over their choices.


Beware the decoy When it comes to comparing rings and choosing the one for them, our couple are likely to be influenced by the manner in which the rings are displayed –and their relationship to one another. Let’s say that they have narrowed their choice down to two rings, one of which is set

which suits them best. Now let us consider a third ring, conveniently placed between the two, which costs US$3,200 and is set with two emeralds and a single diamond. Our couple are unlikely to choose this ring (since its gemstones are relatively far more expensive than the other two), but its

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two rings, one of which is set with three emeralds (matching the lady’s eyes) and two diamonds and costs US$3,000; the other set with a single emerald and single diamond and costing US$2,500. They are torn because it is difficult to weigh up the additional cost against the additional gemstones, particularly given the fact that this is also a subjective judgement about which ring is most aesthetically pleasing, and

than the other two), but its presence significantly increases their likelihood of choosing the first ring over the second. It acts as a decoy, providing a basis for comparison between the other two. Since the first ring is both less expensive than this third ring and contains more gems, it is more likely to be chosen than the second ring, which is less expensive than the third, but contains fewer gems.


Now imagine that our third ring is taken away and replaced by another, which is set with only a single diamond but costs US$2,750. Suddenly the comparison shifts in favour of the second ring, which now contains more gems than the decoy whilst costing less. Our first ring also contains more gems than the decoy but it also costs more. In this scenario, the second ring becomes the ring more likely to be chosen.

absolute value but by their prediction of its value to them. They are buying not a collection of gems and precious metals but a token of their love for one another and a promise of future happiness. In weighing up the cost of rings with the difference their choice may make to their future lives together, they are asked to distinguish between two very different forms of value. The task of assessing which form of value

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likely to be chosen. Or does it? Because at the end of the day, the couple are not diamond or sapphire traders. Their choice of ring is not directed by their perceptions of its

assessing which form of value dominates our judgement in a given situation is one of the most challenging for behavioural economics – and for research in general.


Distinction bias and affect Studies of distinction bias suggest that human beings tend to over-estimate the value of something that can be quantified, whilst under-stating the value of something that cannot. When faced with a choice between a stimulating and fulfilling job paying US$60,000 a year and a tedious one paying US$70,000, it seems that we are predisposed (depressingly enough) to go for the bigger paycheck. This might lead us to conclude that our husband-to-be may hold back from spending more on a ring just because it is more strikingly beautiful and

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a ring just because it is more strikingly beautiful and may make his wife and himself happier for life. But wait: there are other forces stirring in this balancing act. Behavioural economics experiments also point to the influence of affective value (the extent to which things align with our deepest personal motivations and desires) over the monetary decisions that we make –and behavioural economists are well aware of the phenomena of loss aversion, whereby the threat of loss is weighted far more heavily than the promise of gain. How do such factors influence the value that we place on efforts to make our partner happy for life?


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TNS - Behavioural economics: the complete picture?