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Can Behavioral Economics Explain The Movements In The Market Research Industry?

I'm almost at the end of the 2nd Week of my online course on Behavioral Economics given by the renowned Dan Ariely. I wondered what these BE findings would tell us about the industry movements in Market Research. Here's my take.

behavioral economics

 

By Edward Appleton

I’m almost at the end of the 2nd Week of my online course on Behavioral Economics given by the renowned Dan Ariely. Week two was all about “The Psychology of Money”. 
What did I learn? Here’s a short summary, aided by a few refresher views of the relevant Lecture sessions:

  • The greater the number of choice options in a given category, the higher the likelihood that we will become confused and buy less or nothing. However, there may be an optimal number of choices, after which purchasing activity drops off.
  • Contrary to what classical economics posits, we do not tend to calculate “opportunity costs” prior to making a decision. If we are sensitized to what else we could do with the same amount of money, it can lead to us avoid a purchase, or trading down.
  • Free is a special price point, leading us to especially irrational behavior, whereby we only see the benefits, and are blind to potential cost.
  • Losses make us more unhappy than gains make us happy. 
  • We’re happy paying more for something that seems to us to have involved effort.

The whole chapter left me feeling slightly uneasy – especially the points made about the value we attach to “free”. The course he’s offering is free – is there a catch involved? Are we being encouraged to blind ourselves to any potential costs? 

On a less meta-level, I wondered what these BE findings would tell us about the industry movements in Market Research. Here’s my take.

1. The Pace of Change to New Market Research is partly driven by Loss Aversion.

I occasionally hear or read about New Market Research agencies wondering about the surprisingly slow movement towards new techniques, given the apparent advantages and assuming cost-parity. Loss aversion perhaps explains this in part: MR Clients are reluctant to give things up, and attach a higher value to the things we “own” (the procedures we have learned over the years) and down-weight the benefits of the new.

I didn’t see any suggestions in the Course about how to accelerate openness to change – or countering loss-aversion. No doubt those reading this in the business of Communications and Marketing will have some ideas – thanks for sharing.

2. The Shift to Online has reduced our Willingness to Pay more for MR.

Dan Ariely points out that when fixed costs are high – as with ATM machines – and marginal ones low, then our willingness to pay is diminished. We don’t see any effort going in, and psychologically don’t reward efficiency – even if that is irrational. The example given of a lock-smith that got better tips when learning his trade – though very slow and inefficient – than when he was expert and speedy in getting the job done is salutary, and mildly depressing.

In MR, the whole shift to online, away from one’s mental picture of interviewers on the phone, in the street, patiently waiting to fill their quota, in all sorts of adverse weather conditions – has in effect diminished our willingness to pay for something, as we don’t see or imagine the effort. 

3. DIY doesn’t just cost less, it heightens our aversion to Paying for Options that Cost Anything.

According to this course, it would seem that DIY is more of an enemy to MR Agencies than I had originally thought. My position up until now is that DIY can be a good thing – it allows more research to be done, and as long as fit for purpose, and carried out with an understanding of the limitation and risks, is not something to be demonized. 

The example of “free” in the course suggests that once something is offered for free, demand shoots up, regardless of any potential costs – time, for example – and to the extreme detriment of anything that costs money.  What also happens is that once people have sampled free, it is very difficult to get them to go back to paying.

This has immense, not to say grave,  implications for MR. I very much doubt that online is going to disappear. Other industries – publishing, newspapers – are presumably much further down this road with “free” online content and paywalls, advertising and subscriptions. Curious if anyone has any experience they can share that go into more detail on this complicated topic.

Overall, the chapter left me feeling hungry for more in-depth, perhaps (dare I say it) nuanced explorations of the psychology of money. I wondered if the experiments were sometimes a little far from real-life situations – many of us believe that there is “no such thing as a free lunch”, for example, that there is always a hidden cost attached to something. We become suspicious. We also know as consumers of media that the price of “free” means advertising of some sort. To me it’s an immensely complex area, and something I definitely wish to explore further.

Debt consciousness is also something I wished the course had touched on, as it is a major problem for many societies and individuals. How might the BE insights apply to real-life situations to the benefit of society overall ? Deferring payment, for example, is something BE highlights as a way of minimizing the pain of paying – that is precisely what Credit Card companies have known for decades and exploit to their own advantage. 

I would also welcome any inter-cultural experiments done on the topics touched on – attitudes towards money and debt differ extremely by culture.

That said, it’s a great course, and a great learning process.

Curious, as ever, as to others’ views.

 

Originally posted on Research & Reflect

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13 Responses to “Can Behavioral Economics Explain The Movements In The Market Research Industry?”

  1. Daniel F says:

    April 17th, 2013 at 3:20 am

    Edward,

    A fascinating post as usual. This should have wider distribution.

  2. Jonathan W. Siegel says:

    April 17th, 2013 at 11:19 am

    Nice post. One comment.
    DIY is not “free”. In my experience, even organizations using something like Constant Contact, which they often buy for other purposes, recognize costs in using it–staff time in particular.
    What DIY does, if you want to support people using these kinds of tools, is require market researchers to find new, more cost effective ways of supporting clients–coaching as much as doing, advising more than consulting. Engagements with many more clients but at much lower budgets. The large traditional full-service firms will find it hard if not impossible to go there.
    But a lot of small agencies will, I suspect, spring up to occupy this emerging niche.
    We’ll see.

  3. Greg Timpany says:

    April 17th, 2013 at 12:32 pm

    Sounds like we need to embrace the pain in order to break through our aversion to paying. As for Jonathan’s comment I agree completely. Smaller agencies can make a nice living off of the crumbs.

  4. Laurent Rochat says:

    April 17th, 2013 at 12:44 pm

    Dear Edward,

    I’m following the same online course as you from Prof Ariely. This is indeed a fascinating topic. I’d like to offer a build to your post.

    The impact on MR is not necessarily limited to the research consultancy side; many of the insights offered on human behavior and economic choices very much apply to general consumer understanding. Moving the academic-type insights from BE professors into solutions to gain superior consumer understanding from research is our job as research agencies. Focusing energy on this area has, i believe, the most potential.

  5. Dana Stanley says:

    April 17th, 2013 at 12:44 pm

    Edward – I’m taking that class too! I wonder if there are any other market researchers taking the class.

  6. Coppelia says:

    April 17th, 2013 at 1:59 pm

    Hi!

    Also taking the course here… Qual researcher, from Mexico. Hey! This should have been your written asignment. Now I envy you with all my heart :).

  7. edward04 says:

    April 17th, 2013 at 3:21 pm

    @daniel – thanks!

    @jonathan – sure, DIY is not free, there are source and minimal software costs, costs of maintianing some sort of a database. However, from the clientside perspective you are essentially looking at fixed or structural costs versus discretionary costs – and when the latter fall away more or less completely, then it is essentially booked as “free”, at least mentally. I do see opportunities for training or coaching – and indeed, the likely demand will go up when and as Marketing gains confidence in conducting certain studies using owned panels and low-cost software.

    @greg – to your point on opportunites for smaller agencies, I would say that all Agencies need to pose the question: why should clients buy stuff, when, and where is the risk of say doing DIY so clear that a client wouldn’t consider doing it themselves. I can think o plenty of studies I wouldn’t touch with DIY.

    @laurent – absolutely agree with you. My fear – or belief – is that MR is actually a sideline regarding MR implications. Plenty of marketing folk, advertising people, branding experts will – probably – see how they could use the insights to their own advantage. I think BE has a touch of naivety – without wishing to be cynical – in always encouraging people to see the light when they point to the darker side of our decision making processes. My view for what it’s worth.

    @dana – great question, so come on folk: how many MR people are on the coursera.org Ariely BE course?

  8. Stephehn Paton says:

    April 18th, 2013 at 2:38 am

    Edward,

    Great post (is this number 2 of 6?) I am also taking the class, the quality of the class is incredible and I would recommend to any market researcher. (Client side researcher in Australia).

  9. edward04 says:

    April 19th, 2013 at 12:39 pm

    Hi Stephen – and no, it’s unfortunately 1 of as many as I can manage. i hope this weekend I’ll be writing on another topic sparked off by the BE Ariely course.

  10. David Forbes says:

    April 19th, 2013 at 1:00 pm

    This reportage, and Ariely’s class as recounted in it, continues the development of a growing wave of anxiety about the future of market research as we have heretofore known it. I think it may be useful in the face of these worries to bear in mind that the core of value in market research – as practiced in the past, and likely as will be practiced in the future, lies in what only begins to take place AFTER the data are collected. For those of our MR brethren whose business revolved around generating simple factual answers to simple questions of fact, then new IT will indeed represent a challenge; for those of us whose work consists of gleaning insights and crafting strategic wisdom from bodies of fact, new IT will simply make it easier to get the raw materials we need to begin the real work.

    I’m not sure how behavioral economics would handle the valuation of bodies of marketplace fact as compared to the value of systems of marketplace understanding. I recognize from my own career that facts are often easily adopted while analyses often require a sale. Will it come to pass that the burgeoning feast of facts will overtake the appetite for sophisticated analysis? If so, then perhaps the danger to MR as we know it is indeed a grave one.

  11. Manmit says:

    April 20th, 2013 at 1:01 pm

    Your post is stimulating, can anyone please share the link to the online course?

  12. edward04 says:

    April 22nd, 2013 at 1:10 pm

    @david – the Ariely class really isn’t about MR, it’s not mentioned at all. I do see MR as challenged to consistently derive value and articulate that value from data analysis – and those people and companies who build a reputation by doing that will be respected for that. How good are we all at that part of the business? Each project is an opportunity to step up and deliver an impactful insight or three. Regarding the tidal wave of information, I really doubt if this will seriously challenge our sphere – how many companies currently really turn big data to their advantage? Or even mine in-house data effectively to help model sales? For one, I think MR is eminently well placed to benefit from all the changes taking place around us – we just need to be seen to be the go-to folk, the experts marketing and sales want to talk to.

    Manmit – you can find the course at http://www.coursera.org, then type in Behavioural Economics

  13. Holly says:

    April 25th, 2013 at 2:34 pm

    Very interesting! I really like the logic behind what you learned especially, “We’re happy paying more for something that seems to us to have involved effort.” So true!

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