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Applications of Behavioural Economics to consumer insight Testing the model…can we make it work?

Ben Wright Quant Account Director

Direction First

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The learnings from it have been applied

virtually everywhere - even Obama’s used it.

But, where is the application to market

research, specifically, our tools? There is

plenty of action in marketing, but not so much

our research.

So, we set out to test whether new metrics

could be incorporated into market research

surveys to make our models work better

Behavioural Economics has exploded onto the scene in recent years.

From Nobel prize winning Daniel Kahneman’s seminal work “Thinking

Fast and Slow”, to “Nudge”, “Predictably Irrational”, “The Paradox of

Choice” -the list goes on.

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Contents Why the explosion in behavioural

economics? Turns out it’s the brains fault,

so we’ll look at that first.

Then what we did, what we found, and

lastly where to next.

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From 400 million years ago to the present, the evolution of the brain can be divided into four general stages:

reptilian, mammalian, primate, & homo sapiens (including most recently, behavioural modernity).

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Condensing the

timeframe, if the

history of the

universe were

being measured

on a 24-hour

clock, the lizard

brain would have

been around for

41 minutes, the

mammalian for 6

minutes, the

primate brain for

about one minute;

and our modern

brains for around

a second.

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Looking at the timescales

involved, it’s not hard to

see why the more ancient

primal brains within us

might have more impact on

our behaviour, despite

being less accessible to

our conscious awareness.

What makes these stages

distinct is the functionality

associated with each.

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The innermost, oldest brain is the reptilian brain, and as any graduate

student will tell you there are “four F’s of reptile brain behaviour”:

• Feeding

• Fighting

• Fleeing, &

• Reproduction

Instinct, in other words…

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The mammalian brain is

the seat of emotion. It is

also the home of implicit

memory (memory beyond

our consciousness but

that can impact future

behaviour, an example

being riding a bike).

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The top layer is the primate brain, which most recently has evolved into the human brain with all the high level

functioning such as planning, abstract thought, logic and language.

This is where we all live mentally. This is where we see ourselves. But most of our mental existence is unknown

to us, happening sub consciously in the other brains.

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So how have

consumers been viewed

for so long...in a word,

mechanistically.

Economics saw us only

as the modern brain –

rational, utility-seeking

maximisers, acting in a

mathematically optimal

manner.

Behavioural Economics

has shown that our

decision-making is

guided by our

evolutionary baggage,

heavily influenced by

the ancient brains which

have been with us for so

long.

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This is easily demonstrated through a quick check...

Have you ever done any of the following activities on the previous slide?

From a rational perspective it would not makes sense to do many of these...but many of us still do,

and often.

Why?

Well, we basically can’t shut our pesky old brains up. And they aren’t wired for a modern world like

our recent brain bits. So while we have the mental ability to be rational, we tend towards being

irrational.

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Behavioural Economics conceptualises two modes of thinking that broadly reflect this rational/irrational difference:

• System 1 thinking which is spontaneous and intuitive and,

• System 2 thinking which is rational and deliberately controlled thinking.

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A wonderfully simple little test, the Cognitive Reflection Task (CRT) measures the tendency

of an individual towards one or the other of these styles of thinking – rational or intuitive.

Around three-quarters of people (including Harvard graduates) get these wrong.

Those that get them right we call system 2 or rational thinkers. What do they do....well they

monitor and where applicable override their thoughts.

It was these ‘monitoring’ and ‘overriding’ ability that led us to consider two additional

measures that might be related: self-efficacy and self-consciousness.

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Behavioural Economics studies these kinds of biases…and system 1 vs 2 thinking can be explored using Cognitive Reflection Task

(CRT) “The ability or disposition to resist reporting the response that first comes to mind”

A bat and a ball together cost $1.10. The bat

costs a dollar more than the ball. How much

does the ball cost?

It takes 5 machines 5 minutes to make 5 widgets.

How long will it take 100 machines to make 100

widgets?

In a lake there is a patch of lily pads. The patch

doubles in size every day. If it takes 48 days for the

patch to cover the entire lake, how long would it

take for the patch to cover half the lake?

If you answered $10c – you are wrong!

The correct answer is 5c

If you answered 100 minutes – you are wrong again!

The correct answer is 5 minutes

If you answered 24 days – oops!

The correct answer is 47 days

Q

Q

Q

A

A

A

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What is self-efficacy? Basically it’s our

inner roar. Why is it important?

Well the belief you have in your ability to

do something is tantamount to actually

doing it.

Those with higher self-efficacy tend to

approach tasks with a sense of serenity

and goal-activated thinking – in other

words with much greater mindfulness

that we would associate with system 2.

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Self-consciousness is a

dispositional tendency to

focus attention on the self

and it can help explain

self-regulation of

behaviour.

We likened this to the

overriding ability of

system 2 thinkers.

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So what did we do?

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Objectives & Approach

Can scales like CRT (Cognitive reflection), SCS (Self-Consciousness &

GES (Self-Efficacy) be effectively incorporated into a quantitative survey to

add a layer of information to help build predictive models of consumer

choices and add insight to segmentation and profiling

Online study – 15 minute (April/May 2013)

n = 1,030 nationally representative sample

(gender/age/location)

MGBs and recent holiday shoppers

- Screener

- CRT/GSE/SCS exercises

- Shopping behaviour – low

involvement product category

- Holiday Shopping habits –

higher involvement service

category

- 5 point scale

- Shopping behaviour –

Max/Diff exercise

- Scale vs. Max/Diff evaluation

- Survey enjoyment

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We took the CRT, and scales from the Psychological literature

representing the other constructs and put them into a survey.

Big nationwide sample (using both Direction First’s panel – Izatso, and

YellowSquares)

And we looked at shopping behaviours in two categories – fmcg and

holiday, reflecting low and high involvement categories respectively.

Objectives & Approach

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We confirmed that most people are down the intuitive end of the spectrum.

Don’t worry if you got those CRT questions wrong, most do, including Harvard professors. It doesn’t matter how

much education you’ve had in your life, you’re going against 400 million years of ancient brain development.

More intuitive type thinkers are less likely to avoid other cognitive biases (and there are dozens and dozens of

other documented cognitive biases) and have less consistency in their choices over time. They are also over

confident when providing incorrect answers.

If it wasn’t bad enough that respondents tend to lie, give socially friendly answers, etc. even when they aren’t

they’re possibly still misleading us as they are not privy to the erroneous nature of their decision making.

This suggests that most consumers’ future consumption behaviours are likely to be poorly predicted by past

consumption behaviours. That’s a bit of an issue for researchers.

On the flip side, there are a group of more rational thinkers that have an ability to monitor and override their own

cognitive biases.

This group could be called super-respondents, and are certainly very interesting respondents at least, in helping to

explain their own and other consumers mental processes when making purchase decisions.

Findings I

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Self-efficacy – the higher it is, the more likely someone is to be a system 2 thinker. To our

knowledge this is the first study to ever directly link these two constructs.

System 2 thinkers are aware of their own cognitive biases, and are also aware that they can

overcome them sometimes. This gives them confidence.

So what? Well we found that this impacts on shopper behaviour. Those with greater self-

efficacy/rationality are more likely to engage to seek out value in higher involvement

categories, and are less likely to shop on convenience in lower involvement categories.

These measures are helping us define consumer segments in terms of the way they shop.

This enables us to classify consumers on how they respond differently to harder tasks, or

less involved more habitual ‘autopilot’ tasks such as grocery shopping.

Findings II

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I would suggest it could be an even more important predictor of behaviour in the context of

complicated categories such as financial or insurance products.

These results also suggest that these measures would help us explain how consumers

respond differently to the paradox of choice (overwhelmed by choice).

‘Give me lot’s of options vs. just give me what I want’.

The point is that these measures look likely to help us understand consumer reactions to

reduced or greater options – in supermarkets, online, wherever.

The metric gets at the very nature of how consumers approach, frame and make decisions.

Findings II

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Rational thinkers self-regulate mental effort

to the task at hand. Ramping up their

thinking in more involved categories, and

reducing it in low involvement categories.

Intuitive thinkers did not demonstrate this

shift.

To me, that is fascinating. Some consumers

are adjusting how miserly their cognitive

effort is in given contexts, and we’ve got a

measure that is capturing it.

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Part of our research also explored the impact of cognitive type and response to our scales.

While choice-based tasks have long been praised for their more naturalistic representation of consumer

decision-making, consumers preferred the rating scales.

Maybe the max-diff scale is doing its job – making consumers consider their responses more – and also

giving us more differentiated data.

Although, as we’ve just seen consumers differ on how engaged they like to be.

Of particular interest was that system 1 thinkers tended to rate the Max-Diff scale more preferably than

reflective thinkers.

Our more rational thinkers actually dislike the more naturalistic scale.

It shows there is an interaction with our instruments depending on cognitive disposition.…Like culture.

This should feature in our considerations of how we go about capturing data.

Findings IV

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Future Directions

IQ EQ RQ?

Development of a ‘rationality quotient’

“Dysrationalia” or what is missing in IQ tests – is it

missing in MR?

Choice and emotion, making buying decisions can

give rise to a sense of control and thereby increase

happiness in retail therapy

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The potential of a ‘rationality’ measure has most recently been evidenced in the commissioning of research to develop

the world’s first Rationality Quotient (or RQ), which happened smack bang in the middle of our study. The same guys

that did the CRT.

I think rationality as a cognitive metric is missing in market research, and I think we should certainly test it in a whole

host of areas.

It’s not just a self-report measure (which we know is plagued with problems), it’s a performance measure.

In my research I’ve discovered a multitude of findings that increasingly make me think this is a fundamentally exciting

measure.

For example, some recent research has found that buying decisions can even bring happiness into people’s lives when

it gives them a sense of control – this sense of control element relating to self-efficacy and system 2 thinkers’ ability to

monitor and override their mental activity. Who’d have thought we can make people happy through shopping?!

This was a relatively small exploratory study, and some very interesting findings emerged from it. Based on them I

think this could be a revolutionary measure in the market research industry.

As a quantifiable measure the magic of a metric such as the CRT, or the RQ once developed, is that our industry is

perfectly positioned to leverage this to keep us at the frontier, the edge, of research into consumers into the future.

Future Directions

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References Campitelli, G., & Labollita, M. (2010). Correlations of cognitive reflection with judgments and choices. Judgment and Decision

Making, 5, 182 – 191.

Donald J. Scandell & Donald Scandell (1998). Journal of Social Behavior & Personality, 13(4), 579-593.

http://fenwayfranks.tripod.com/selfcon.htm

Ellsberg, Daniel (1961). "Risk, Ambiguity and Savage Axioms". Quarterly Journal of Economics 75 (4): 643–79. doi:10.2307/1884324.

Fenigstein, A., Scheier, M. F., & Buss, A. H. (1975). Public and private self-consciousness: Assessment and theory. Journal of

Consulting and Clinical Psychology, 43(4), 522-527. doi: 10.1037/h0076760

Gardner, Howard ([1985] 1987). The mind's new science : A history of the cognitive

revolution. New York: Basic Books.

Gigerenzer, Gerd and Selten, Reinhard. Bounded Rationality: The Adaptive Toolbox. Berlin: MIT Press, 2001.

Kahneman, Daniel. “Maps of Bounded Rationality: Psychology for Behavioral Economics”. The American Economic Review.

December 2003, pp. 1449-1475.

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References Kahneman, D., & Frederick, S. (2002). Representativeness revisited:Attribute substitution in intuitive judgment. In T. Gilovich, D. Griffin, &

D. Kahneman (Eds.), Heuristics and biases: The

psychology of intuitive judgment (pp. 49–81). New York: Cambridge University Press.

Klonsky, Bruce G. and Dutton, Dawn L. (1990). Developmental antecedents of private self-consciousness, public self-consciousness and

social anxiety. Genetic, Social & General Psychology Monographs, 16, 3, 275-298.

http://www.cla.calpoly.edu/~nschultz/419/Scales/DevelopmentalSCS.html

Marshall, Alfred (1890 [1920]). Principles of Political Economy, v. 1, pp. 1–2 [8th ed.]. London: Macmillan.

Nasby, W. (1997). Self-consciousness and cognitive prototypes of the ideal self. Journal of Research in Personality, 31, 543-563.

Schwarzer, R., & Jerusalem, M. (1995). Generalized Self-Efficacy scale. In J. Weinman, S. Wright, & M. Johnston, Measures in health

psychology: A user’s portfolio. Causal and control beliefs (pp. 35-37). Windsor, England: NFER-NELSON.

Tisdell, Clem. Bounded Rationality and Economic Evolution: A Contribution to Decision Making, Economics and Management.

Cheltenham: Edward Elgar, 1996.

Toplak, M. E., West, R. F., & Stanovich, K. E. (2011). The Cognitive Reflection Test as a predictor of performance on heuristics and biases

tasks. Memory & Cognition, 39, 1275-1289. doi:10.3758/s13421-011-0104-1

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Thank You!

Lets Connect!

Ben Wright

Quant Account Director

www.directionfirst.com

Linked in: au.linkedin.com/pub/victor-ben-

wright/1a/904/260

Email: ben.wright@directionfirst.com

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Thank You!

Lets Connect!

Erica van Lieven

Managing Director

www.directionfirst.com

Linked in: au.linkedin.com/in/ericavanlieven/

Twitter:

@erica_dfirst

Email: erica.vanlieven@directionfirst.com