Editor's note: Bill Pendry is vice president of Morpace Inc., a Farmington Hills, Mich., research firm. This article appeared in the April 11, 2011, edition of Quirk's e-newsletter.

In an October 17, 2010 article in The New York Times, David Segal lamented that "... Economics will forever have to contend with the biggest X factor of all: people. ... As a result, a certain amount of psychological guesswork is part of an economist's job, which accounts for the rise in popularity of behavioral economics, an effort to account for the slippery, indefinite nexus of money and humans."

The behavioral economics Segal refers to is an emerging field of academic investigation seeking to unite insights from psychology and economics as they relate to human judgment and decision-making. Economics, prior to its linkage with psychology, posited humans as rational economic beings. Psychology asserts that when confronted with limited resources (e.g., ability, time, information) human beings are not rational and do not make the same economics decisions as if complete and certain information were available and properly understood. Behavioral economics' key innovations are the synthesis of economics' and psychology's contributions to understanding human behavior and the emphasis on experimentation.

This article is meant to contribute to thinking about what the field of behavioral economics has to offer the marketing research profession, including nine behavioral economics precepts and each's implications for marketing research.

Over the past century, economists were advancing mathematical models to predict consumer behavior, eventually coming to the realization that their modeling using the assumption of rationalist utility maximization was not holding up. In the meantime, psychology was advancing from structuralist through behavioral and, most recently, cognitive theory, hoping to further understanding of the behavioral and cognitive mental processes of perception, memory and decision-making.

Different objectives

The two professions' different objectives would mean differences in their research emphases. However, economists began looking at psychology for solutions to forecasting, with results starting to appear in the literature around 2000, dubbed behavioral economics. Reference lists in much of this literature show authors and anthologists reaching as far back as the 1950s, and sometimes into the 19th century (e.g., William James), to cite psychologists for their contributions that economists were only recently discovering. Psychologists Daniel Kahneman and Amos Tversky, for example, first described prospect theory in 1979. Ideas about purchase paralysis, risk-aversion and framing and priming all came out of psychology but are now economic watchwords.

From the other direction, cognitive psychologists Richard Nisbett and Lee Ross (1980) expressed concern about "our field's inability to bridge the gap between cognition and behavior, a gap that in our opinion is the most serious failing of modern cognitive psychology." Behavior has always been a concern of economists.

Continues to merge

Behavioral economics continues to merge psychological tenets into economic thinking. Its practitioners seek to use cognitive psychology theory to facilitate practical prediction of real-world behavior in economic analysis. Behavioral economics has also borrowed psychology's emphasis on experimentation; examples reported by Dan Ariely (2008) in Predictably Irrational, in How We Decide by Jonah Lehrer (2009) and in Barry Schwartz's Paradox of Choice (2004) have been performed and repeated to confirm behavioral economics' predictive ability.

To be sure, behavioral economics has yet to attain status as a distinct academic discipline. The field of economics, and not psychology, is claiming ownership. This may not be unexpected as the new field evolved, in a sense, through economics adapting established psychology precepts to its own needs. It is largely taught at the graduate level in some university economics departments but as yet one cannot find a behavioral economics department. Ariely, perhaps the best known of the new breed of behavioral economists, suggests that those interested in the field should have a foundation in microeconomics, social psychology, cognitive psychology, research methods and statistics. (The order of this list, provided via e-mail on November 15, 2010, is Ariely's, and any course or program titled as behavioral economics is noticeably absent.)

Correcting the shortcomings

Might behavioral economics change both economics and psychology and then, well, dissolve? No. More likely is that behavioral economics will continue to develop, correcting some of the shortcomings that have left it open to criticism in its formative years. Hugh Schwartz (2004) asserts that: ... an approach that began with concern whether economic analysis was sufficiently realist has been reticent to undertake empirical work that deals with the reasoning of consumers and producers in real-world settings or that attempts to subject its laboratory participants to follow-up verification in the real world (the limited number of field studies in "natural surroundings" notwithstanding).

Fair? Perhaps. But practitioners in the new field could legitimately respond that they simply have not had time for more real-world investigation - especially for longitudinal studies.

What it all means

Regardless of any criticism, enough has been written and disseminated about behavioral economics to raise a question about what it all means for marketing research practitioners. In short, does behavioral economics point to change or redirection in how we do what we do? The answer is, probably. The following includes some specific behavioral economics precepts and outlines each's implications for marketing research.

1. Prospect theory

Kahneman and Tversky (1979) contend that humans are risk-averse when considering positive potential outcomes but risk-seeking in the domain of potential losses. The endowment effect (Thaler, 1980) is contributive here, meaning that a new acquisition is endowed almost immediately with ownership qualities, among them being worthy of protection.

Marketing research implication: We often group product owners and intenders together for analysis. Prospect theory suggests that we should judiciously avoid combining them, as the intenders are not imbued with the endowment effect.

2. Risk-avoidance

In more fallout from prospect theory, risk-avoidance is what consumers are doing when considering a price. They are trying to hold the line against potential dissatisfaction or disutility vs. an expected positive return in services or products under consideration.

Marketing research implication: Pricing research should identify a threshold price where risk is balanced against projected return. This is not merely an acceptable price. Nor is it a single point on an elasticity graph. Rather, it is the price that suddenly causes the projected return to outweigh perceived risk. As this could vary among individuals, it should be expressed as a distribution. Questioning would have to be reframed to foster a risk/reward respondent mind-set.

3. Framing

Another focus of Kahneman's and Tversky's research (1984), framing is exemplified by one gas station offering gasoline for $3 per gallon with a $.10 discount to $2.90 for using cash and another that offers gasoline for $2.90 with a $.10 surcharge to $3 for using a credit card. The idea is that how we frame an offer influences its acceptance. (This example is borrowed from Schwartz [2004] with prices updated to reflect current market conditions.)

Marketing research implication: Pricing research should include an investigation of framing alternatives.

4. Complexity

Too many or too much of just about any product or service is a condition that pervades the North American marketplace, confounding consumers' ability to sort through choices in a rational fashion. Reducing the number of options makes people likelier not only to reach a decision but also to feel more satisfied with their choice.

Marketing research implication: We should be helping clients with portfolio retrenchment as a tool to fight complexity.

5. Bounded rationality

Herbert Simon (1955) reported that facing a complex choice, consumers first draw boundaries around a zone of consideration, possibly ignoring valuable information, and only then employ rational decision-making. In the process, consumers employ heuristics, or rules of thumb. Kahneman and Tversky (1979) identified availability, anchoring, adjustment and representativeness as key heuristics. Later writers have added loss-aversion, ambiguity-aversion, regret theory, cognitive dissonance, melioration and affect to the roster of heuristics that people use in decision-making.

Marketing research implication: How many marketing research questionnaires measure heuristics? If the number is exceedingly small, as I suspect, this may be why Hugh Schwartz (2008) writes, "As critical as work in this area is to behavioral economics, lack of a satisfactory theory of heuristics hampers any generalizable analyses." He adds that loss-aversion, once thought to be an anomaly, is now recognized as a heuristic operating across a wide array of decision behavior. We should be developing batteries of questions that would increase sensitivity to how respondents are employing heuristics in their responses.

6. Bias

We all bring bias of various sorts to our decision-making. Lovello and Siboney (2010) identified five general categories of bias, with two-to-five subcategories in each. In the general category of stability biases, they include the subcategories of anchoring and insufficient adjustment, loss-aversion, sunk-cost fallacy and status-quo bias. Notably, where some might consider loss-aversion to be a heuristic, others consider it a bias. From a behavioral standpoint, this difference may not matter.

Marketing research implication: Even without formally measuring bias, we can see it in data where respondents are rating alternative brand choices. Holders of each brand will almost always rate theirs higher than its competitors. But which bias is it? And wouldn't our clients like to know since it would guide their advertising and promotion messages to conquest targets? As is the case with heuristics, more formal measures of bias are probably needed.

7. Implicit cognition

This is psychology-speak for the role our unconscious plays in our decision-making. We know it does influence our thinking. The problem is that we cannot quantify it. We know it happens but we cannot see it, feel it or touch it, either in others or ourselves. The word unconscious fits here literally. In How We Decide (2009), Jonah Lehrer cites Ap Dijksterhuis' experiments with car shoppers. Dijksterhuis learned that car shoppers choosing a car based on a short list of features made better decisions using rational decision-making. But when considering a dozen features, some attractive and some unattractive, the best decisions arose from subjects employing their unconscious faculties. Dijksterhuis confirmed the one knowable dimension of unconscious decision processes: time. He let one group deliberate over the 12 features and diverted the attention of another group. The conscious deliberators made the ideal choice 25 percent of the time. The diverted group, now relying on unconscious influences rather than deliberation, found the best car nearly 60 percent of the time.

Dijksterhuis and Lehrer want us to understand that both the conscious and unconscious parts of our minds are operating on our decision-making. Lehrer (2010) writes that, "The mind is not a single voice but an argument, a chamber of competing voices." The best evidence of a cultural understanding of this idea in the English-speaking population is the oft-heard admonition to "sleep on it." All know that it works, but few know why. The advertising industry has been leading the charge in researching unconscious reaction. Singer (2010) writes, "What happens in our brains when we watch a compelling TV commercial? For one thing, certain brainwaves that correlate with heightened attention become more active, according to researchers who have used EEGs, or electroencephalographs, to study the brain's electrical frequencies. Brainwaves that signal less-focused attention, meanwhile, tend to subside."

Well and good for an industry where gaining attention is a primary objective for virtually any ad. The fact remains that attention need not - and usually does not - predict behavior, which may explain why behavioral economists are not focused in this direction. This isn't to suggest that the field isn't looking at brain activity. Rather, it would be accurate to say that they are still looking and don't have the answers - yet. Much recent writing from the field of neurology indicates rapid development of insight into brain activity related to cognition and decision-making. 

Marketing research implication: Most and maybe all current survey research makes no allowance for unconscious contributions to responses, though all the evidence suggests that if it did so, our results would be more reliable and predictive. This points to a possible need for entire new research strategies and protocols, though the jury is still out on the form and substance that these should take.

8. Visceral influences

Hunger, fear, thirst, et. al. certainly result in contextual effects on both decision-making and influence behavior. However, Loewenstein (2006) writes, "Changes in visceral factors are predictably correlated with external circumstances (stimulation, deprivation and such) and do not imply a permanent change in a person's behavioral dispositions." When we are hungry we eat and we are no longer hungry. So the food-seeking behavior we exhibited while we were hungry is no longer evident. Visceral factors exist in degrees of intensity; as intensity increases, both influence on behavior and the overruling of both rational deliberation and unconscious confirmation of it can occur. We can be tired enough to go to bed early or tired enough to fall asleep at the wheel of a moving vehicle. Phobics and addicts exemplify this theorem. Visceral influences at their most extreme can be self-destructive.

Marketing research implication: Implicit here is admonishment to take pains in minimizing contextual effects on our respondents, making sure, for example, to the extent that we can, that they are as well-fed and well-rested as possible to optimize the quality of their thoughts and opinions.

9. Purchasing behavior

McCracken (2006) writes that consumers flow through the purchasing funnel in flocks. There are usually five consecutive flocks, different from each other demographically and psychographically. The tie-in to behavioral economics is how consumers bin themselves into flocks. The flocks follow through the funnel in order, each with different goals, meaning that each group should see its own targeted marketing campaign. Companies assuming that all customers at a given point in the purchasing funnel are just like those who were there a year ago, or will be there a year from now, are mistaken.

Marketing research implication: It seems that we should know more than where someone is in the purchasing funnel. We should also know what flock he or she represents. McCracken uses the Kauffman Continuum, which ranges from chaos to rigidity, and is shamelessly (McCracken admits) borrowed from chaos theory. He sees value in understanding how the current group in the funnel differs from those before and after it. Thus, segmenting on the differences among flocks may be more pertinent to marketing objectives than segmenting on differences among buyers within the same flock. He makes a strong case for his views and has subscribers in companies like Coca-Cola, Ikea, Chrysler, Kraft and Kimberly-Clark.

Something to tell us

So, in at least nine different categories of marketing research endeavors the field of behavioral economics has something to tell us. I remind readers that my list of categories and the implications for each is hardly exhaustive. But there needs to be a dialog in the research community about behavioral economics.

So both agency and client-side marketing research professionals would do well to keep a finger on the pulse of this emerging discipline. The field is likely to have more to offer in coming years and is also likely to offer more to us than either economics or psychology alone.

References

Ariely, Dan. 2008. Predictably Irrational: The Hidden Forces that Shape Our Decisions. New York: Harper.

Damasio, Antonio. 2010. Self Comes to Mind: Constructing the Conscious Brain. New York: Random House.

Dijksterhuis, Ap, Maarten Bos, Loran Nordgren, and Rick van Baaren. 2006. "On Making the Right Choice: The Deliberation-Without-Attention Effect." Science 311:1005-1007.

Kahneman, Daniel, and Amos Tversky. 1984. "Choices, Values, and Frames." The American Psychologist 39:341-50.

Kahneman, Daniel, and Amos Tversky. 1979. "Prospect Theory: An Analysis of Decision Making Under Risk." Econometrica 47:263-91.

Lehrer, Jonah. 2009. How We Decide. New York: Houghton Mifflin Harcourt Publishing Company.

Lehrer, Jonah. 2010. "How the Brain Reacts to Financial Bubbles." New York Times Sunday Magazine 31 Oct., MM 24.

Lovelle, Dan, and Olivier Siboney. 2010. "The Case for Behavioral Strategy." McKinsey Quarterly. March.

Lowenstein, George. 2006. "Out of Control: Visceral Influences On Decision Making." In Organizational Behavior and Human Decision Processes, Volume 65. Elsevier Science.

McCracken, Grant David. 2006. Flock and Flow. Bloomington, Ind.: Indiana University Press.

Nisbett, Richard E., and Lee Ross. 1980. Human Inference: Strategies and Shortcomings of Social Judgment. Englewood Cliffs, N.J.: Prentice-Hall.

Ramachandran, V.S. 2011. The Tell-Tale Brain: A Neuroscientist's Quest for What Makes Us Human. New York: W.W. Norton.

Schwartz, Barry. 2004. The Paradox of Choice. New York: Harper Collins Publishers.

Schwartz, Hugh. 2008. A Guide to Behavioral Economics. Falls Church, Va.: Higher Education Publications Inc.

Segal, David. 2010. "The X Factor of Economics," New York Times 17 Oct., WK 3.

Simon, Herbert A. 1955. "A Behavioral Model of Rational Choice." Quarterly Journal of Economics 69:99-118.

Singer, Natasha. 2010. "Making Ads that Whisper to the Brain." New York Times 14 Nov., BU 5

Thaler, Richard H. 1980. "Toward a Positive Theory of Consumer Choice." Journal of Economic Behavior and Organization 1:39-60.