Nobel Prize Celebrates the Irrational Consumer – again!
We – unconsciously – make irrational decisions in business and then look for research to back up our choices.
We’ve known for a long time that as consumers, we make a lot of irrational decisions. But we also – unconsciously – make irrational decisions in business and then look for research to back up our choices. This year’s Nobel Prize Winner for Economics, Richard Thaler, has done some fascinating work in the area of Behavioural Economics, where the disciplines of Economics and Psychology combine to help us understand the factors that lead to consumers buying one product over another. He also came up with the term ‘Nudge Theory’ to explain how we can prompt consumers to behave in a particular way.
He follows in the footsteps of Daniel Kahneman, who won the Nobel Prize in 2002, for his work on the influence of bias on our decisions not only as consumers but as voters, scientists, doctors, policymakers and investors. No one is exempt because we are unable to understand how bias is working not only our decisions but on the facts we look for as inputs to those decisions (that’s ‘Confirmation Bias’, by the way!).
When it comes to market research, Kahneman suggests that it is also a most unreliable field. The grandfather of advertising, David Oglivy once said: Consumers don’t think what they feel, don’t say what they think and don’t do what they say. They simply cannot give a reliable account of why they choose one product over another because they don’t understand their own hidden biases.
Kahneman’s Findings on the Power of Bias:
- On risk aversion: We hate to lose more than we love to win. According to Kahneman’s research: “An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can’t easily recognize that they are the same.” And the lesson for marketers: a message framed as a loss if the buyer doesn’t buy is more persuasive.
- On emotions trumping reason: According to Kahneman, “The confidence people have in their beliefs is not a measurement of the quality of evidence but the coherence of the story the mind has managed to construct.” The narrative matters more than the fact as our decisions are driven by our emotional rather than rational brain.
- On thinking: Don’t make your customers think! As buyers, we are cognitive misers and will not thank you for complicated value propositions. Think Ryanair’s cut-through ‘No Frills Airline’ slogan. Simple.
Remove Bias: Build a Market Intelligence Dashboard
The best way to overcome the influence of bias on decision making is to develop a system for scanning and analysing your business environment. This is particularly important for companies as they gear up for exporting to new markets in a post-Brexit landscape.
At the IMI, working with colleague, Gráinne Kennedy, a specialist in market research, we recently ran a workshop on how companies can build a Market Intelligence Dashboard to underpin decision making. A typical dashboard should have no more than 4 – 5 Target Market Indicators, such as market size and share, consumer sentiment, competitor activity, trends and investments in the specific segment, currency fluctuations if outside the eurozone. Done!
The value of tracking these market movements gives great focus and yes – rationality – to decision making. Not only can the Marketing Dashboard save you from making a big mistake but it also steers your decision making to the market sweet spot. Nobel!
Cariona Neary is an IMI associate on the Mini MBA Programme, IMI Diploma in Strategy & Innovation and IMI Diploma in Management. Cariona is a consultant in Marketing Strategy and works with organisations to improve customer engagement and retention using digital and traditional marketing channels.