January 12, 2016

Busting The 3 Myths About Behavioral Economics That Are Holding MR Back

There are many factors that may be preventing some from using behavioral economics and others from realizing its full potential.

Ian Murray

by Ian Murray

Partner at House51

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By Ian Murray

My favorite business book of 2015 is ‘Misbehaving: The Making of Behavioral Economics’ by Richard Thaler. It’s a memoir of 40 years of ground breaking academic endeavor in which Thaler concludes that behavioral economics has gone mainstream:

‘Behavioral economics is no longer a fringe operation and writing an economic paper in which people behave like Humans is no longer considered misbehaving, at least by most economists under the age of 50.’ (p. 347)

Back in the summer, Thaler was the star attraction at Nudgestock 3, positioned by Rory Sutherland of #ogilvychange as a ‘coming of age’ for the application of behavioral science in marketing and advertising.

Contrast this with the latest GRIT report which shows just 17% of research clients and 23% of research suppliers are using behavioral economics frameworks as part of their toolkit.

So why is market research lagging behind? I think there are a number of persistent myths that are holding us back:

Myth 1: Behavioral Economics tells us that ‘all market research is wrong’

“The trouble with market research is that people don’t think how they feel, they don’t say what they think and they don’t do what they say.” (David Ogilvy)

The advertising industry’s relationship with MR has always been mixed. In the era of Mad Men they were pioneers of consumer research and psychology. But more recent generations are more likely to blame MR for ‘killing creativity’ and being just plain wrong. So the idea that market research has been completely undermined by behavioral economics is particularly seductive to MR’s critics.  It also reinforces some of the deepest insecurities of market research professionals.  What if skeptics like Faris Yakob are right? What if ‘all market research is wrong’?!!!! Rather than rise to the challenge it seems that many in MR simply prefer to avoid the debate and stick with business as usual.

Faris is right- to a point.  Market research, like most other business disciplines including advertising and marketing, has clung to the standard rational model of economics for far too long. We may not be changing fast enough but the MR skeptics overstate their case when they argue that MR has no value.

There are many innovative approaches (implicit research, prediction markets, etc.) that are enhancing the ability of MR to capture real world decisions and behavior.  But BE shouldn’t be seen as a niche offering. In fact BE is a collection of frameworks that help researchers build real world hypotheses and identify appropriate methods for any brief.

BE is not a ‘technology’ and you don’t need to be at the bleeding edge to apply it. In fact the MR skeptics seriously underplay the role of ‘traditional methods’ (i.e. asking people explicit questions and recording their answers) in many of the seminal experiments of behavioral economics.

How did Kahneman and Tversky develop their Nobel Prize winning prospect theory? They framed the same question in different ways and modeled people’s answers. How did Thaler and Kahneman design their classic work on fairness and the endowment effect? Among other things, they constructed a telephone survey, presented lots of different scenarios to people and asked them which ones were ‘fair’.

So all MR methods have their place in the BE toolbox. But to get the methodological balance right market researchers need to have a comprehensive knowledge of behavioral economics principles and how they can be applied.  The persistence/resilience of 2 further myths indicate that there is some work to do.

Myth 2- Behavioral Economics tells us that people are ‘irrational’

‘To exchange one orthodoxy for another is not necessarily an advance’ (George Orwell)

In market research the discourse around behavioral economics typically sets up as revolutionary struggle between two opposing paradigms (System 1 v System 2). System 1 is the new orthodoxy that threatens to sweep System 2 into the dustbin of history.

But System 1 has also become synonymous with ‘irrational’ behavior.  And, of course, ‘Irrationality’ is bound up with a multitude of negative connotations. The collective psychology of market researchers is important here. BE has a real ‘do they mean us?’ problem. Researchers are real people too and it is simply very difficult for people to reject a hard wired (normative) rational paradigm in favor of an ‘irrational’ one that seems to focus only on flawed or stupid behavior.

The pejorative tone of much of the coverage of BE in market research inevitably creates barriers to its adoption. We need to make BE more palatable for people and easier to live with.

Thankfully, all that is required is a slightly more careful reading of the BE classics. This quickly reveals that the binary choice between System 1 and System 2 paradigms is spurious- we really don’t have to look too hard for this- the clue is in the title of Kahneman’s book- it’s about Thinking Fast and Slow…..

Kahneman is also concerned that System 1 has gained a ‘bad reputation as the source of errors and biases’. Again, a closer reading of the conclusion to ‘Thinking Fast and Slow’ reveals a more balanced and positive view of System 1 decision making:

‘System 1 is indeed the origin of much that we do wrong, but it is also the origin of most of what we do right-which is most of what we do’ (p.416).

It is important to keep things simple, but not simplistic. Advocates of BE in market research would do well to add a little more nuance to the story.

Myth 3- Behavioral Economics is a ‘qual thing’

Ray Poynter addressed this one back in 2013 noting that ‘there seem to be a remarkable number of market researchers who seem to assert that BE is mostly a qual thing, or that the main implications of BE for market research will be a focusing on qual’. Ray forcibly and eloquently argues that BE is ‘mostly a quant thing’

Parochial infighting between quant and qual must be one of the most debilitating things in market research. Of course we should be designing integrated approaches with no a priori preference for quant or qual……But until that day comes there is no escaping the fact that quantitative models are the currency of BE.

The standard economic model has proved remarkably resilient in all areas of business and policy making because it generates precise, falsifiable predictions from mathematical functions based on quantifiable parameters of choice such as expected utility and probability of outcomes.

The pioneers of behavioral economics understood that merely observing or describing anomalies in the standard model would not be sufficient. To challenge its normative status behavioral economics had to offer new quantitative models that made superior predictions about people’s real world behavior. Thus Kahneman & Tversky’s prospect theory provides an alternative mathematical function that makes predictions that have become the cornerstone of much of the latest thinking in business and marketing (e.g. reference dependence, framing, overweighting of small probabilities etc.). The ability to make accurate and quantifiable predictions is what gives BE this power.

So the template for promoting the value of behavioral economics in the boardroom has already been established by BE pioneers like Kahneman, Tversky and Thaler.  And it is quantitative not qualitative.

Thankfully advocates of behavioral economics in market research do not need to concern themselves with developing new value and utility functions! But they do need to take their lead from the BE pioneers by focusing on providing the kind of robust quantitative evidence that will convince the boardroom of anomalies in their existing models and drive adoption of the new framework.

Of course, I’ve barely scratched the surface. There are many factors that may be preventing some from using behavioral economics and others from realizing its full potential.  But busting these 3 myths in 2016 would be a good start.

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The views, opinions, data, and methodologies expressed above are those of the contributor(s) and do not necessarily reflect or represent the official policies, positions, or beliefs of Greenbook.

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