How predictably irrational are customers?
Why marketers need to understand the irrational side of their customers and how Behavioral Economics supports them.
Homo Economicus – a strange creature
Some people cringe at the term homo economicus; to others, he has become an old familiar (and quaint) friend. No doubt, the term has taken hold and remains ubiquitous. Even though the homo economicus concept is well accepted in many economic circles as a fait accompli, the term has not always brought positive reactions. The one-sided image of man has been criticized for a long time – mainly because the late 19th century theory portrays humans as consistently rational and self-interested, pursuing their ends for monetary gains.
Critics point out that scientific experiments have shown that human beings tend to award fairness while shunning unfair behaviour even if it is to their own disadvantage. This behavior would be unthinkable for a typical homo economicus.
Economic standard models put to the test
The homo economicus theory is without question a powerful concept. However, it does not work well when applied to real decision-making processes in today’s economy.
Research in behavioral economics has taken this criticism into account. By constantly adding realistic assumptions (e.g. psychological findings, conclusions from social sciences) to existing standard economic models, they are regularly put to the test. In order to gain this knowledge in the first place, experimental laboratory and field studies are carried out.
Critics of behavioral economics fear that this might lead to inaccurate conclusions of established models without reflection or, moreover, emphasizing negative aspects of these models. However, this is not the goal of behavioral economics. After all, testing the standard economic models is only a means to an end. Ultimately, this methodology is all about improving the way we analyze, understand and predict the decision-making of people in economic situations and see the consequences.
«To understand human behavior in its economic context is more important than ever for marketers in increasingly complex market conditions.»
Patrick is Board Member of the Zurich Behavioral Economics Network.
Customers are intuitive
The cornerstone of entrepreneurial activity and the center of the marketing strategy should ultimately be the customer’s purchase decision.
As marketing focuses on the ideal decision-making process, behavioral economic knowledge helps to sharpen the understanding of the modern consumer. In this context it is crucial to see how the real decision process takes place – not how it was projected for an ideal situation. At the end of the day, rational and well-informed customers are rarely encountered in economic situations.
Irrationality as a business opportunity
Human beings make conscious or unconscious decisions. We tend to simplify, often act against our own best interest, and are easily influenced by others. These irrational behavior patterns manifest themselves mostly in evaluations, judgments and decisions.
What is the best way to apply our knowledge of the irrational side of the customer? Ideally we combine classic marketing with evidence-based data from behavioral economics experiments. This allows us to explain why we can achieve a customer’s decision in favour of a certain product or service. The ultimate challenge for marketers remains to first learn how to predict irrational consumer behavior – and then turn it into an opportunity.
Benefits for marketing
Using behavioral economics for marketing purposes might reveal customer preferences, while still hiding others. What we call ‘preference’ is nothing more than the inclination that people have when they can choose among several goods or services: for instance, preferring the sea to the mountains as their holiday destination. Furthermore, we have to remember that their preferences are dynamic and dependent on context.
- McKinsey Business: Irrational consumption; how consumers really make decisions
- The Atlantic: The irrational consumer; why economics is dead wrong about how we make choices
- Yale Business School: Better Marketing with Behavioral Economics
- Zurich Behavioral Economics Network