Making Sense of Irrational Buying Behavior
November 02, 2015| Von Marcy Updike |
L/H General Industry
Have you ever started a diet only to cave the first time you are offered a slice of chocolate cake? Be honest…we all do it. I will admit to starting and ending a diet in the same week. Why does this happen? Yes, willpower is a problem, but is it just due to my low level of willpower that I’ve made a few, okay, several irrational decisions?
My desire to dig deeper into the basis of irrational decisions doesn’t end with my diet. As a market researcher, I’m often asked to uncover the “why” behind a certain consumer behavior. Try as I might, I’ve come to the conclusion it is nearly impossible to determine the “aha” moment when the consumer doesn’t even understand the why.
Well fear not, an entire body of research dedicated to uncovering why consumers are prone to making seemingly irrational decisions actually exists; it’s called Behavioral Economics. Like Big Data, Behavioral Economics (BE) is receiving a lot of attention. For those of you who haven’t heard much about it, I hope you find this blog is a good introduction.
Type “Behavioral Economics” into any online search engine and you’ll find a number of references, enough to fill your day reading. Perhaps the simplest description is from Investopedia, which defines it as "The study of psychology as it relates to the economic decision making processes of individuals and institutions.”
The basic design of BE is different from traditional economics in that it's based on the belief that people are irrational in that they exhibit irrational decision making behavior at times. Instead of using predictive modeling to uncover how individuals will behave, behavioral scientists conduct experiments to uncover the how and why of this irrational behavior. Pick up one of many great reads in this field such as Predictably Irrational by Dan Ariely, or MISBEHAVING, The Making of Behavioral Economics by Richard H. Thaler, to mention just a couple. While these books contain some amusing examples of research that’s been conducted in this field, the message should not be lost. Simple concepts - for example, framing and anchoring - can influence a consumer’s decision.
In the end the ultimate goal of BE is to find ways of “nudging” consumers toward a specific behavior - something any business would appreciate knowing how to do better in order to achieve desired results. The insurance industry, like many others, could truly benefit from understanding some of the concepts that are central to BE, such as loss aversion, choice architecture and myopic behavior. By understanding drivers of the decision making process, insurers can make improvements, such as making their products more appealing, optimizing decision support tools, or improving consumers’ honesty on applications. Over the next several months, we’ll be sharing more about the importance of Behavioral Economics, and how it can be applied to improve business outcomes.
In closing, I leave you with a quote from Dan Ariely. Reading his book, Predictably Irrational, was a defining moment for me as a researcher, and I encourage you to read it yourself.
“We are all far less rational in our own decision-making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless: they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.” ~Dan Ariely, Author of Predictably Irrational and DisHonest (the Honest Truth About DisHonesty)