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Every week we’ll guide you around the latest thinking on a key topic, pointing you in the direction of must-read articles, seminal research papers and essential webinars, to ensure you are top of the class when we all finally return to office life.
Over the past three decades, behavioural economics has re-shaped how brands react to consumers’ emotional demands, and helped marketers to rationalise seemingly incongruous actions. Here we share some of the key thinking around the theory, and guidance on how it can be used to inform marketing strategies.
What is behavioural economics?
Until the 1980s, most prevailing economic models assumed that buyers made rational choices. This was challenged by psychologists Daniel Kahneman and Amos Tversky, who posited that the manner in which people frame a decision can significantly influence their choice. Kahneman was awarded a Nobel Prize in 2002 for his work on the subject.
Behavioural economics has informed many aspects of public policy, and has been used by governments to encourage citizens to live healthier lifestyles and to save for the future. The theory was integral to Barack Obama’s US presidential victories. Meanwhile, advocates including Rory Sutherland and Nick Southgate have popularised behavioural economics among the advertising strategy community.
For a deeper dive:
- Behavioural Economics Primer by The Behavioural Architects (multiple articles, 2016/17)
What does that mean in practice?
Rather than perceiving consumers to be robotic individuals that process information in a logical manner, brands must adapt to subconscious drivers behind purchase decisions.
Marketers need to clearly define the behavioural response required by the customer, and to identify potential behavioural barriers. This impacts everything from communications strategy to distribution and pricing. Organisations can use these tools to ‘nudge’ consumers towards the ideal outcome.
To maximise results, Nick Southgate argues brands should focus on seven key behavioural economics principles. These include:
- Loss aversion: People will work harder to avoid losing something than they will to gain it.
- Scarcity value: When we perceive something to be scarce it has a greater value in our eyes. Conversely, when we perceive it to be plentiful its perceived value falls.
- Choice architecture: Choosing is relative to what you can have, not absolutely about what you want.
- Red Hot or Red Herring: Seven principles of behavioural economics by Nick Southgate (WARC Best Practice, June 2015)
- How to apply behavioural science to build more effective everyday communications by Crawford Hollingworth and Liz Barker, The Behavioural Architects (WARC Best Practice, September 2018)
- Behavioral design: psychology as a tool for marketers by Carin Fredlund (WARC Best Practice, April 2019)
For a deeper dive:
- Behavioural economics in action (WARC Webinar, June 2015)
- Getting the best out of behavioural economics (WARC Webinar, November 2016)
- Behavioural economics: Habits, experiments and advertising creative (WARC Webinar, April 2020)
OK, so what else do I need to know?
Behavioural economics, and its application to brands and advertising, is by no means a static body of thinking. New theories are constantly emerging, from Richard Shotton’s thinking around the biases informing consumer choice, to fresh models devised by academics and behavioural psychologists at organisations including Stanford (B=MAP) and University College London (COM-B).
Kahneman’s work has also influenced the understanding of creative best practice, and the role of heuristics (mental shortcuts that lighten the cognitive load) in changing consumer behaviour. He proposed that people make decisions according to two mental systems, one (‘System 1’) fast and largely intuitive, the other (‘System 2’) slower and more effortful. This has underpinned much research into the value of distinctive brand assets.
Most recently, Ogilvy and Kantar have deployed a new tool they claim can effectively decode individuals at scale using a series of proven behavioural science lenses. The paper by Christopher Graves and Jon Puleston outlining its approach was awarded Grand Prix at last year’s Market Research Society Awards.
For a deeper dive:
- The real why and the hidden who: Fixing the weak links in how we measure personality to make better use of behavioural science in marketing by Christopher Graves and Jon Puleston (ESOMAR paper, 2019)
- New Frontiers in Behavioural Science by The Behavioural Architects (multiple articles, 2019/20)
Does everyone agree about the value of behavioural economics?
Not everyone. Following its widespread implementation by the UK government, a House of Lords report questioned whether a “nudge” is sufficient to deliver major behavioural change. Questions have also been raised about the ethics of manipulating consumer behaviour – harking back to concerns raised by Robert B. Cialdini in his seminal ‘Influence: Science and Practice’ text from 1984.
Elsewhere, some doubt the certainty with which advertisers can assume insights gained via behavioural economics represent universal human tendencies – not least as an estimated 96% of psychology research is based on populations in Western countries.
Researchers are beginning to understand the ways in which culture can affect biases and heuristics, in order to accurately predict consumer decision making. What might appear irrational on a global basis could actually be quite rational when framed against local factors in regions such as Asia, Africa and Latin America.
- The limits of behavioural economics: What brands can learn from the public sector's experience by Colin Strong (Market Leader, 2014)
For a deeper dive:
- Fun, fast and easy: Research's war on rationality by Tom Ewing, Head of Marketing and Market Intelligence of System1 Group (ESOMAR paper, June 2013)
- Globally irrational, locally rational? Localising behavioural economics for the Asian market by Elina Halonen, co-founder of The Irrational Agency (ESOMAR paper, May 2015)
- Common objections to behavioural economics (WARC Webinar, September 2018)
Any real-life examples?
- Unilever applied ‘nudge theory’ to minimise disruption caused to consumers and improve the chances of a successful brand relaunch in APAC. The FMCG firm designed a context of choice in order to maintain consumer behaviour, rather than to drive behavioural change.
- Technology companies including Amazon, Netflix and Google have used behavioural science to simplify user experience. For instance, Netflix’s personalised recommendation algorithm is responsible for 80% of all viewing on the platform.
- Wrigley Extra, the Mars-owned gum brand, used behavioural economics to revive a near-dead brand. Appeals around taste had ceased to have an impact. Instead, the advertiser realised it should re-focus communications around the power of sharing and happiness.
- Read further examples from liqueur brand Baileys, insurance company Sovereign, and the UK government’s fire safety
We hope you enjoyed this guide to behavioural economics and found it useful. Please do share any feedback, and get in touch with the WARC team if you would like to find out more.
How have your consumers’ behaviours changed during the COVID-19 crisis? And which behaviours will remain during the recession and recovery? Richard Shotton has teamed up with WARC Advisory to help marketers understand which behavioural frameworks can be put into action to make their brand easy, attractive, social and timely to buy. If you’d like to know more, please get in touch at firstname.lastname@example.org.