Feb 5 2014, 10:15am CST | by Forbes
The idea that the advertising industry might benefit from a greater appreciation of economics is one of the oldest jibes around. Profligate advertising being curbed by economic realism is a script that most of the industry’s critics warm their hands to, especially in tough times, which has undoubtedly helped swell the idea that advertising and economics occupy opposing planets.
However there are signs that all this could be about to change. Dovetailing surprisingly well with the challenges facing modern day MadMen, behavioural economics is a relatively new school of thought at the intersection of economics and psychology that is changing the way that people – and consumers especially – are understood to behave.
First acknowledged by Adam Smith in the eighteenth century, who noted that human psychology is imperfect and negatively impacts on economic decisions, behavioral economics largely disappeared off the radar until the Great Depression. Then, economists such as Irving Fisher and Vilfredo Pareto started thinking about the “human” factor in economic decision-making as a potential explanation for the stock market crash of 1929 and the events that transpired after.
Further impetus was given to the discipline in 1955 when another economist, Herbert Simon, coined the term “bounded rationality” as a way to explain that humans don’t possess infinite decision-making capabilities. But it wasn’t until the early 1980s that anything that might be recognized as a movement started to take shape, influenced by psychologists such as Daniel Kahneman and Amos Tversky. Their paper entitled “Prospect Theory” offered a framework for how people frame economic outcomes as gains and losses and how this framing affects their economic decisions and choices.
Since then a number of leading thinkers and academics have swollen the behavioralist ranks, including Nassim Taleb , author of The Black Swan and Antifraglle, Dr Laurie Santos who runs the Comparative Cognition Laboratory at Yale, Paul Dolan , Professor of Behavioural Science at the London School of Economics and economist Paul Ormerod , who has made a lifetime’s work out of studying non linear patterns of behavior in economics.
The emerging discipline has been used to shed light on all sorts of entrenched patterns of behavior, such as why gamblers are willing to keep betting even while expecting to lose, or why people who want to save for retirement, or to eat better, or start exercising and quit smoking, end up doing no such things.
New supporters also include the UK government which set up what has become known as the ‘nudge unit’ which is now slowly carving out a reputation for coming up with better solutions for some of the less fashionable problems that governments have to deal with.
Recent applications include discoveries that homeowners are far more likely to insulate lofts when offered a loft-clearance service instead of simply being presented with the economic arguments for reducing heat loss. Similarly, recipients of tax demands are more likely to respond to handwritten notes than computer-generated ones, and late payers of road tax more likely to respond when presented with a reminder that includes an embedded photo of their car in the letter. (Statements of intended mileage on US car insurance forms apparently increase by 10 per cent if the declaration and signature box is placed at the front of the form rather than the rear).
Whilst all these examples showcase the applicability of behavioral thinking to marketing challenges, this in itself is nothing new. Referencing its history, Rory Sutherland, Vice Chairman of the Ogilvy group and arch-apologist for the cause of behavioural economics says “The line ‘Plink, Plink, Fizz’ was written at the bidding of a psychologist who suggested that, if you could create a social norm around using two Alka Seltzer tablets at a time, sales would double”.
What is new is an interest in systemizing behavioural thinking and using the discipline more conspicuously to shed insight on the challenges advertisers face. Eric Wanner of the Russell Sage Foundation says, “Advertising is a business that tries to shape how people think about their choices. Neoclassical economics can explain ads only as providing information. But if the seller can invest in advertising that frames the choice, that frame will skew the buyer’s decision.”
This is something that retailers have known for decades. If a company wants to sell more soap, you either make a bar that people like more (traditional economics) or display your soap at eye level—where people will see your brand first and grab it (this is what the behaviouralists call ‘choice architecture’).
People like Sutherland see the opportunity to extend such thinking to other theatres of commercial activity as not so much an opportunity but an imperative. He says, “if our ability to understand and predict human behaviour only improves by a few percent a decade, the benefits will be immense. And even a tiny reduction in misdirected effort (by abandoning daft, ineffectual sunk-cost-plagued endeavours such as the war on drugs or, at a more modest level, badly conceived choice-architectures in a new range of cars) all can be economically transformative.”
Ultimately the value of behavioral economics will be proven by some of the more prosaic challenges that clients of advertising agencies face. Mathew Willcox, Executive Director of advertising agency Draftfcb recently said, “one of the perpetual challenges to marketers is getting people to switch brands, and it seems that some way of creating a sense of closure with their old or existing choice could be a very interesting approach.” If Wilcox is right, MadMen the world over might just welcome the nudge.
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