consumer psychology: new experiments that use science to ... · – arranged marriage vs. “love...
TRANSCRIPT
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Tim Baker
Director, Baker Richards & VP, The Pricing Institute
Sara Billmann
Director of Marketing & Communications, UMS
Ron Evans
Principal, Group of Minds
Consumer Psychology: New Experiments That
Use Science To Grow Your Audience
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Agenda
• Introducing Behavioural Economics and our hero: Daniel Kahneman
• Relating Behavioral Theory to Practice: marketing
– An experiment at UMS
– Psychophysics, anchoring, and so much more
• Relating Behavioral Theory to Practice: personal development
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Classical economics is based on rational person
‘homo economicus’ with perfect information
“If you look at economics textbooks, you will learn that
homo economicus can think like Albert Einstein, store
as much memory as IBM’s Big Blue, and exercise the
willpower of Mahatma Gandhi.”
Dan Ariely (‘Predictably Irrational’)
Human decision-making is based on the interplay of
the conscious and un-conscious mind.
A battle between two systems of thought: the reflective
system and the automatic system.
Thaler and Sunstein (‘Nudge’)
Challenging Classical Economics
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Introducing Behavioural Economics
Automatic System
‘uncontrolled, effortless,
associative, fast and
unconscious’
Reflective System
‘controlled, effortful, deductive,
slow, self-aware and rule-
following’
versus
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Introducing Behavioural Economics
Automatic System
– ‘uncontrolled, effortless,
associative, fast and
unconscious’
‘Homo Economicus’
‘controlled, effortful,
deductive, slow, self-aware
and rule-following’
versus
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Introducing Behavioural Economics
Homer Economicus
– ‘uncontrolled, effortless,
associative, fast,
unconscious and skilled’.
‘Homo Economicus’
‘controlled, effortful,
deductive, slow, self-aware
and rule-following’
versus
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Thinking, fast and slow
Thinking Slow…
SYSTEM TWO
• When an easier question is not
available to answer, we switch to
slow, effortful, “System 2”
thinking.
• Only System 2 can follow rules,
compare multiple attributes and
make deliberate choices.
• System 2 is also in charge of
doubting and unbelieving.
Thinking Fast…
SYSTEM ONE
• System 1 detects and uses
simple relations (e.g. one is
bigger or better than another)
and is pre-disposed to trust and
believe (it favours uncritical
acceptance of suggestions)
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System 1 versus System 2
• System 1 uses simplifying shortcuts and intuitive thinking.
• This is an essential part of the machinery of cognition: it would be too
effortful to use System 2 to rationally weigh up EVERY decision.
• It is not necessarily the case that the choice is irrational but that the
choice may be affected by a range of other factors, including:
• Limits to the information that is available to System 1 (it focuses on the
available information and ignores absent evidence)
• Loss aversion
• Showing diminishing sensitivity to quantity (psychophysics)
* Kahneman, D. ‘Thinking, Fast and Slow’, Allen Lane, 2011
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You can’t switch System One off…
System 1 continually constructs a coherent interpretation of the world in an instant,
giving System 1 decisions the appearance of informed choice
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Relating Behavioral Theories to Practice
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Biases of Intuition: Representativeness
• You see a person reading The New York Times on the New York
subway. Which of the following is a better bet about the stranger:
– She has a PhD
– She does not have a college degree
• Consider with respect to performing arts – we are extremely willing to
predict the occurrence of unlikely events without considering the base
rate
• Don’t assume the numerator without considering the denominator.
• Think like a statistician
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The Paradox of Choice
• Barry Schwartz: 2004, eliminating (reducing) consumer choices can
reduce anxiety for shoppers and lead to higher sales: more choice and
more information can be overwhelming
– When 24 jams offered, only 4% purchased
– When only 6 jams offered, more people stopped and 30% purchased*
• Stanford Business School Study** (September 2012):
– Arranged marriage vs. “love marriage” and happiness levels
– Another chocolate experiment: are you happier when your choices are
presented sequentially, or simultaneously?
*Dawnay, E. and Shah, H. ‘Behavioural Economics: Seven Principles for Policy Makers’, New Economics
Foundation, 2005, p.12-13 - http://neweconomics.org/publications/behavioural-economics
**Baba Shiv (Stanford University), Sheena Iyengar (Columbia University), Cassie Mogilner (Wharton), 2012
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Applications of Prospect Theory
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• “The fear of regret is a factor in many of the decisions people make…”*
• Risk of regret favours conventional and risk-averse choices.
– In a retail context: “Consumers who are reminded that they may feel regret
as a result of their choices show an increased preference for conventional
options, favouring brand names over generics.”
• Not only do the disadvantages of change loom larger than the
advantages (so there is a bias towards the status quo), but people also
try to keep something that they consider is ‘theirs’.
• There is no loss aversion in routine commercial exchanges but it does
apply on items “for use” – to be consumed or enjoyed.*
The Endowment Effect
* Kahneman, D. ‘Thinking, Fast and Slow’, Allen Lane, 2011, p.293
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• Those who receive an offer with a voucher worth a
certain amount of money will be more apt to redeem
the offer than those who receive a discount.
– Think Macy’s Cash, GymBucks at Gymboree, other retail
offers that encourage you to come back a few weeks later
to redeem your “cash” on a future purchase.
– People “will go out of their way to avoid losses, while at the
same they would not bother to go out of their way to gain
something” - we focus on minimising threats/losses before
realising opportunities.
Loss Aversion: The hypothesis
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• Lapsed ticketbuyers from the 10/11 season
• Experiment Design: each receives same letter but three different
offers:
– Control Group: Just the letter, no offer
– Discount Group (COMEBACK): $20 discount per ticket for any
event in 2012
– Voucher Group (FREEGIFT): Receive “UMS Cash” worth $20
per ticket for any event in 2012
– Some restrictions (minimum spend of $30 per ticket before offer,
limited time offer)
Loss Aversion: The UMS Experiment
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Loss Aversion: Response Rate
3.18%
1.87%
1.14%
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50%
UMS Cash
Discount
Control GroupDiscount performed 63%
better than the control.
“UMS Cash” Voucher
performed 70% better
than discount and 178%
better than control.
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$4,053
$2,798
$1,905
$1,346
$1,199
$- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000
UMS Cash
Discount
Control Group
Loss Aversion: The Results
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Loss Aversion: Average Revenue per Piece Mailed
$2.32
$1.70
$0.81
$- $0.50 $1.00 $1.50 $2.00 $2.50
UMS Cash
Discount
Control Group
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Average # of Tickets Purchased per Household
2.74
3.25
1.93
0 0.5 1 1.5 2 2.5 3 3.5
UMS Cash
Discount
Control Group
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Loss Aversion: Average Ticket Price
$26.60
$27.95
$36.63
$- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00
UMS Cash
Discount
Control Group
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• Psychophysics is a field of psychology that relates a varying physical
quantity on one side (the brightness of a light or the amount of
money) with the subjective experience of brightness or value on the
other.*
• A power curve applies to our perception of price increases.
Basically, we lose perspective: the higher the overall amount the less
we notice differences (we experience diminishing sensitivity)
• As the numbers get bigger, the thresholds move further apart –the
difference between $110 and $120 is perceived as less than the
difference between $10 and $20.
Psychophysics
* Kahneman, D. ‘Thinking, Fast and Slow’, Allen Lane, 2011, p.272
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Everything is relative…
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Price range and relationship
Price
break
Price
/Difference +%
I £50
£10 25%
II £40
£8 25%
III £32
£7 28%
IV £25
£10 67%
V £15
£5 50%
VI £10
- -
Price
break
Price
/Difference
I £50
£10
II £40
£8
III £32
£7
IV £25
£10
V £15
£5
VI £10
-
Price
break
Price
I £50
II £40
III £32
IV £25
V £15
VI £10
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Context is King
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Anchor Pricing
Decoy Pricing
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Anchoring
Solitaire Diamond
Rings Left to Right
$80. $175. $690.
Tiffany ad from
1942
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Anchoring • New Yorker: “Downsizing Supersize” (August 13/20, 2012):
“In a classic experiment by Itamar Simonson and Amos Tversky, people
asked to choose between a cheap camera and a pricier one with more
features were divided more or less equally between the two options.
But when a third option – a fancy, very expensive camera – was added
to the mix, most people went for the mid-range camera. The very
expensive camera made the middle one
seem less extravagant.”
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Anchor Pricing and the Primacy Error
• People are more heavily influenced by the first information they receive,
because later evidence is interpreted in light of the beliefs already
formed by first impressions.
• Implications:
– The first prices customers encounter (the location or order of prices in
printed materials, or how prices are presented online or over the phone) set
the anchor and context for the value being offered.
– ALWAYS present prices top-down rather than bottom-up
* Sutherland, S. ‘Irrationality’, Pinter & Martin, 2009, p.18
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Using anchoring to maximise donations…
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Trade-off contrast
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Joint Evaluation
£4.00 £8.00
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The Reference Price Effect
• “Buyers are more price sensitive the higher the product’s price
relative to the prices of the buyers’ perceived alternatives.”*
• Perceptions of the substitutes and their prices differ widely among
customers and purchase situations
• Reference prices are formed by:
– Your own prices
– The customer’s experience and memory of prices
– Comparator and competitor prices, which depends on your market
positioning…
* Nagle, T. & Holden, R ‘The Strategy & Tactics of Pricing’, Prentice Hall, 2002, p.84
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Positioning: set your own reference price
• Market positioning is a key component of your pricing strategy
• Targeting: the motivations (needs) you seek to meet will affect your
customers’ competitive set
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Applying these concepts to you
We've talked about the marketing applications, but there
are important personal ways to use these concepts to
make you more happy and more effective in what you do.
Let's talk about three areas:
• Being more effective in your own performance
• Being more aware of the way you make decisions and
interact with co-workers
• The concept of "experienced well-being"
The "fast" brain is impulsive. Reactive. Primal. Protective.
Usually not a good thing for stressed & tired workers.
The "slow" brain can help you focus on the bigger picture
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Easy to get caught up in small stuff
Let's have an example of this -- in the following video, be totally silent.
Count the number of passes made by the players wearing white, ignore
players wearing black.
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Easy to get caught up in small stuff
Thousands of people have watched this video, and 50% of them don't
notice anything unusual. Like a big gorilla in the middle.
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Decision making and interactions
Kahneman states that "rewards for improved performances are more
effective than punishments for mistakes."
• Personal goals are more able to be accomplished when we set a
reward for ourselves
• This also works for employees -- there should be a recognizable
reward for measurable performance.
• Praise is a reward -- I started scheduling praise with a couple of my
contractors, and they exploded in productivity
• Small changes make a big difference
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Illusion of validity
It's very hard to change what’s been happening for awhile, even if it
isn’t working.
• Change is very hard for some people
• The "known" is easier to deal with than the unknown (remember that
the Type 1 thinking will go for the easier option is given the choice)
• Your "intuition" can lead you to experiment, but it should be backed
up by actual data -- measure, measure, measure
• It is useful to have benchmarks to measure against -- this takes out
the emotional component and allows you to compare your findings to
the findings of others
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Happiness
• We measure marketing effectiveness, we can also measure our own
effectiveness, our happiness, and our sense of well being, and we
should
• Many apps, journals, diaries, and other methods to do this
• Remember that you must have a benchmark before you try to move
the needle, in personal development too
• You can improve happiness and effectiveness over time, and learn
how much work is too much for you.
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