This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. Find out more here

Sunday, 23 November 2014

The two sides of behavioural economics

Professor George Loewenstein meets ad man Rory Sutherland to discuss behavioural economics in business and academia.

“Why is it that British electrical outlets have a switch on them? If you don’t have anything plugged in, why bother to turn it off? And if you do have something plugged in, why bother to turn it off?” 

As opening salvos go, it was a strange one – especially coming from the mind of George Loewenstein, professor of economics and psychology at Carnegie Mellon University. Members of the London Behavioural Economics Network had been promised an in-depth conversation about behavioural economics between Loewenstein – one of the leading lights of the field – and Rory Sutherland, ad man and vice-chairman of Ogilvy UK, who is a staunch proponent for the commercial applications of the discipline.

Instead, we found ourselves on a boat-turned-pub, bobbing along on the Thames, waiting for an explanation about why British plugs are the way they are. Initially flummoxed, Sutherland had this to offer: “If you go back to the early days of electricity, there was a considerable fear that if you left the switch on with nothing plugged in, the electricity would leak into the room. So it might have been a device by the electricity boards to prevent people from being paranoid.”

“An awful lot of behaviour that is currently seen as ‘irrational’ is meta-rational, or evolutionarily rational. It’s the product of evolved psychological instincts that may or may not be useful in the modern world”

Ahhh, the “irrational consumer”. Familiar ground for behavioural economists. Sutherland, though, is “uncomfortable” with the use of the term. “An awful lot of behaviour that is currently seen as ‘irrational’ is meta-rational, or evolutionarily rational. It’s the product of evolved psychological instincts that may or may not be useful in the modern world.”

Rationality, in neo-classical economic terms, is always about maximising something, said Sutherland. “But I would argue that any sensible evolved system is not going to care about whether something is good or really good, but it would desperately care about the chances of something being fatally terrible.” 

“If you look at [rationality] from the absence of bad, rather than presence of good, an awful lot of human decision-making makes an awful lot of sense,” Sutherland explained. “Satisficing is what most people do all the time to the extent where, when people don’t satisfice there’s probably something going wrong. When people maximise, it tends to be in competitive situations where people are thinking as game theorists.”

“Satisficing is what most people do all the time to the extent where, when people don’t satisfice there’s probably something going wrong”

Loewenstein agreed – sort of. “Sometimes,” he said, “what appears to be maximising, isn’t maximising at all. I had a colleague who always tried to maximise the gain from any kind of negotiation and it was a disastrous strategy because no-one would negotiate with him. Another case is, if you always want to get the parking spot closest to the theatre, you’re going to waste a lot of time looking for a parking place. I’m actually a big believer in satisficing, but really I’m a believer that satisficing can be a form of maximising.”

But to what extent do people individually decide whether something is good – be it a product, service or standard of living? For Sutherland, “I think our vision of what is good is massively driven by our assumptions of what other people think.” Again, Loewenstein agreed, pointing to a paper he recently co-authored on the subject of mattering maps. He explained: “When you’re in a particular situation, let’s say a social group, there’s typically something that matters more than anything else. Among academics it might be publications. If you are a musician it might be how well you play a piece. But one of the interesting features of mattering maps is they can change abruptly as a result of whatever social milieu you’re in.

“So, I couldn’t agree more with you,” said Loewenstein. “Whatever we’re seeking at any given time is completely socially determined. The thing we have some kind of free will about is how we’re going to seek it out. But we don’t really have a lot of control over what we’re seeking.”

“Whatever we’re seeking at any given time is completely socially determined. The thing we have some kind of free will about is how we’re going to seek it out. But we don’t really have a lot of control over what we’re seeking”

Advertisers, of course, have a role to play in setting social norms, and Loewenstein was particularly interested to find out from Sutherland the extent to which behavioural economics had pervaded the advertising and marketing industry.

Not as much as one might believe, he said. “You would think that advertising agencies and clients are full of behavioural scientists and psychologists, devising the next evil way in which to mislead people into buying stuff. I must admit, I was rather hoping to find that kind of thing when I went into the business myself. I always assumed I’d be able to turn some strange corner and find a room full of people attaching electrodes to rats. That room does not exist.” 

Sutherland acknowledged that, while ad agencies and brand owners appear to be fairly good at behavioural science, this is more by accident than by design. “The reason private enterprise looks like it’s good at behavioural science is that it stumbles on things by accident. It happens to produce things that work. Capitalism is sort of semi-Darwinist: if you stumble on something that is disproportionately successful, it makes money, so you tend to expand that particular area.”

“The reason private enterprise looks like it’s good at behavioural science is that it stumbles on things by accident. It happens to produce things that work”

“Now, some time after the early Mad Men era, the links between academic psychology and advertising and marketing were actually quite strong. This was in the late-50s, early-60s, when there were various people dotted around ad agencies with possibly fake, possibly genuine Viennese accents, who claimed to have met Sigmund Freud. These people came up with ideas, like how ‘plink, plink, fizz’ would create a social norm around using two Alka-Seltzer rather than one. They came up with lines like, ‘How else can a month’s salary last a lifetime’ for DeBeers, which was an extraordinarily good piece of framing in terms of anchoring what a man should spend on a commitment device for his future wife. They stumbled on these things by accident, but they made no effort whatsoever to codify it. We had all the information to create a science of behavioural economics back in the 50s and 60s, but we squandered it because nobody tried to make sense of it.”

Instead, it was the psychologists Amos Tversky and Daniel Kahneman who laid the foundations for the field of behavioural economics – not the Mad Men of Madison Avenue. However, Sutherland wanted to know whether Loewenstein accepted the claims made by some psychologists that the term ‘behavioural economics’ steals credit for economics that is actually owed to psychology?

Yes, said Loewenstein. “There are a lot of psychologists who are annoyed at economics, and are annoyed at behavioural economics specifically. A lot of the work on changing health behaviours, for instance, was first done by psychologists, didn’t get a huge amount of attention, and then behavioural economists started doing it, and they have gotten a tremendous amount of attention since then.

“Psychologists are, rightfully in my opinion, bothered about that. In fact, a lot of psychologists have started rebranding themselves as behavioural economists and getting more attention. I think they are right to have a grudge, but I guess Rory could tell us that it’s all a matter or marketing – and behavioural economists are much better at the marketing game.”

  • George Loewenstein and Rory Sutherland were speaking on 23 April at theLondon Behavioural Economics Networkevent at The Tattershall Castle, Embankment, London. Click here to find out more about the networking group

Follow us on
Follow us on Twitter

Have your say

Please add your comment. You can include links, but HTML is not permitted.
Your email address will not be displayed on the site. All comments are moderated.

Mandatory
Mandatory
Mandatory
Mandatory