Applying Behavioral Economics to Identify and Diagnose Problems and Design Tools

Behavioral economics
We constantly seek a better understanding of human decision making.

Everything would go according to plan, if it just weren't for the people. People are complex, and we live in complex times. Greater collaboration between units or teams is a desirable trait, it is however still an aspirational goal rather than a reality in many businesses.

As behavioral economics teaches us, to design tools and programs that help people do what they want to do, we need to deal with individuals (and organizations) as they are, rather than as we would like them to be.

Understanding how we make decisions

Is the domain of behavioral economists. A paper published by the Center for Global Development# clearly defines what this means and how it works. From the abstract:

Behavioral economics differs from standard economics in that it uses a more realistic (and more complicated) model for people; it differs from psychology in that it maintains the focus on institutions and the contexts in which decisions are made. Behavioral economists study how the context of decisions interacts with our expanded understanding of human psychology.

Many of the tools used by behavioral economists are about helping people make the choices they already want to make. A sample application we use ourselves to remember something — we set a reminder, or a prompt of some kind. I send emails to myself with notes. From the hand raisers in a recent meeting it looks like many others do as well.

Behavioral economics is the study of environments to identify, diagnose, and design tools to help with intention-action gaps. In Misbehaving: The Making of Behavioral Economics, Richard Thaler demystifies the core premise of economic theory that people choose by optimizing. He says:

the premises on which economic theory rest are flawed. First, the optimization problems that people confront are often too hard for them to solve, or even come close to solving. Even a trip to a decent-sized grocery store offers a shopper a million combinations of items that are within the family's budget. Does the family really chose the best one? And, of course, we face many much harder problems than a trip to the store, such as choosing a career, mortgage, or spouse. Given the failure rates we observe in all domains, it would be hard to defend the view that all such choices are optimal.

Second, the beliefs upon which people make their choices are not unbiased. Overconfidence may not be in the economists' dictionary, but it is a well-established feature of human nature, and there are countless other biases that have been documented by psychologists.

Third, there are many factors that the optimizations model leaves out…

[…] we do not live in a world of Econs.

Humans do a lot of misbehaving, which means “economic models make a lot of bad predictions.” A better course is to developed an enriched approach to research, one that “acknowledges the existence and relevance of Humans.”

Marketing in social

When marketers develop their toolkit for persuasion, they are constantly trying to find new ways to answer: what really affects behavior?

We need to take into account supposedly irrelevant factors injected by humans, leveraging good psychology and other social sciences to gain a fuller understanding of what is really going on. The develop simple rules to produce better decisions.

Learning to create engines that close the gap between motivation, intention, and action by making tasks easier while taking into account the context in which those decisions are made is the new imperative.

While the answer today seems to be data, or big data, my money is on the smart application of analysis. Doing fewer things that scale less to being with, if necessary. In social, this is about analyzing language and uncovering the digital clues that signal intent. Why we call social networks intent engines and use content to both uncover and deliver opportunities.

Once we gain an understanding of how social currency influences behavior, we can expand our ability to close that intention-action gap in public and group settings, not by providing special treatment to customers in social (why customer service in social is not fair), or engaging in questionable brand behavior in social media, but by understanding customer behavior in a post advertising world and applying that understanding to design of tools that make tasks easier.

Here's how a company designs customer support emails for behavior change, or rather to help customers do what they set out or want to do.

Customer behavior is blurring the line between digital and in store experiences and brands have been experiencing the impact of reviews on buying behavior.

Responsive strategy and context

Applied behavioral economics is about identifying and diagnosing problems to design tools that help people close the intention-action gap.

Social influences like peer pressure and social exchange are amplified in public settings. It's like saying "watch this!" An organization and business is also a public setting that provides the context where interactions occur. This is not just about who we are — the environment around us may encourage certain behaviors and tacitly or openly discourage others.

Marketing used to be complicated. With consumer adoption of social media and the fragmentation of attention away from a few uniform and somewhat predictable channels, results have also become more predictably irrational, and programs have become complex, just like the people they are designed to reach and affect.

This calls for responsive strategy. The concept borrows from responsive web design (RWD) — an approach aimed at crafting sites to provide an optimal reading and navigation experience across a wide range of devices by adapting the information to screen size and device characteristics. It combines the idea of adapting to the conditions in which experiences occur with that of designing to the way things are.

Sample applications vary from the placement of items in a store to affect its sales — groceries# are one example to move product, another are items placed on end-caps — to how behavioral science can lower your energy bill# and default opt-in to 401k plans can increase the odds people will save for their retirement.

Tweet: Behavioral economists study how the context of decisions interacts with our expanded understanding of human psychology.

This explains why Daniel Kahneman, a psychologist and author of Thinking Fast and Slow, won the Nobel prize in Economic Sciences.


[do your scenario planning here]