Friday, January 8, 2016

Exploiting Consumer Irrationality

In 1974, two economists published an article that has had profound implications for our understanding of how people make decisions in their everyday lives.  Nobel Prize winners Amos Tversky and Daniel Kahneman presented strong evidence to suggest that when faced with a decision, people do not engage in what many believed to be a rational, calculated process where they collect all relevant information, evaluate that information, devise alternatives, evaluate those alternatives against criteria and then make a decision. 

Instead we use heuristics or mental shortcuts that supplant this time-consuming and arduous process.  We use these shortcuts all the time without even knowing it.  One of the most common is representative bias where we make decisions based on anecdotal information that we believe is representative of all situations.  We all have generalized a couple of instances of bad customer service by suggesting that this bad service is endemic in all situations.  Another is availability bias where we make decisions based on information that is readily available to us or easier to gather thereby ignoring potentially more accurate information.  How many of us have researched a symptom of an illness by googling the symptom which, as we know, presents completely inaccurate and alarmist information that in most cases is not grounded in any scientific research? 

Another is anchoring.  It suggests that people will rely too heavily, or anchor, on one trait or piece of information when making decisions.  For example, companies often present an often made up manufacturer’s suggested retail price above the retailer’s price.  By anchoring the consumer to the suggested price, the retailer’s price looks much more appealing.  Thus rather than conduct a calculated analysis of the retailer’s price by comparing it with other retailers, looking at how much value one is expected to get our the product, the quality level of the product - all of which is time-consuming and difficult - consumers will resort to this short cut and make the decision based on the perceived gap between the suggested price and the retailer’s price. 

The 1974 paper  was so powerful that it remains one of the top cited articles in the social sciences today with an army of researchers confirming and reconfirming that people use these shortcuts to make decisions and thus make decisions that are likely not in their best interests. 

The implications of this article are profound.  As Harvard Professor Dan Ariely concludes in the below video, “We think we wake up in the morning in control of our decisions” when in fact nothing could be further from the truth.

This is a very powerful notion, one that my students continue to struggle with, despite the reams of statistical evidence available proving them wrong.  My undergraduate students, especially, struggle to accept that their decisions are not made objectively but are in fact reflecting a particular and rather narrow construction of reality. 

Now imagine the implications for business if marketers are aware that consumers do not make calculated decisions when purchasing products or services but instead base their decisions on these aforementioned heuristics:  

The goal of business is no longer to meet the needs and wants of society but instead to exploit these decision-making biases to create and shape needs/wants in ways that better align with profitability. 

I was quite disturbed to read this article, in which the author ultimately prescribes how marketers could take advantage of the heuristics of consumers to increase sales.  In other words, rather than work to better meet the needs of consumers, the idea is to exploit the limitations consumers have in making decisions so that companies can sell products/services that have higher margins.
Let me be clear…it’s articles like these that dampen the hope I have for business in addressing major societal problems.  It’s not only that these articles exist, it’s that they are presented as a natural evolution of business strategy.  Understanding the real needs of consumers plays second fiddle to exploiting their cognitive limitations to manipulate and shape those needs so that they want/need those products and services that better align with financial goals.  

This is a major problem...