The Food & Drink Innovation Network

Innovation is difficult.
The decisions that people make about new ideas are not rational.

So how do people make decisions?

It’s a question that many in business have been asking for years. Academic psychology has been looking at it too; they refer to it as the rationality debate. It is recognised that decision-making is not rational but how, exactly, does it differ from the rational?

They’ve made progress. One of the more prominent academics involved in the rationality debate, Professor Daniel Kahneman, won the Nobel Prize in 2002 for his work on how people make decisions. Kahneman is a psychologist yet he was awarded the Nobel Prize for economics for, amongst other things, showing how the rational model in economics is incorrect.

Because all this started in economics the study of how decision making differs from the rational has become known as behavioural economics. You might well have heard of the name, but not necessarily all about it.

Underlying behavioural economics is one concept that is both pivotal and extraordinarily useful. It explains much of our behaviour and puts most of what we have learnt from trial and error and best practice into context.

The concept is known as two-system thinking.

Two psychologists, Stanovich & West, coined the term in 2000. Two-system thinking quite literally proposes the presence of two minds in a single brain. The idea can be likened to your computer. A computer can multi task, you can have one programme running on the screen whilst others are working in the background. Our brains are similar. We have one programme running on our ‘screen’ – conscious, whilst other things are being processed in the background of which we are unaware. Significantly what goes on in our consciousness and what goes on in our unconscious work in different ways.

Stanovich & West gave the two Systems generic names, System 1 and System 2, it is how these two systems work and interact with each other that determines the decisions we make.

We instinctively understand one system, but not the other.

The higher of the two systems – System 2 – is the one we instinctively understand. One of its key characteristics is the truly wonderful gift of consciousness. We listen in on ourselves thinking all day, every day. It is this system you are aware of as you read this. Two further characteristics are that it is controllable and it follows rules. Essentially, this means that it is rational. But that doesn’t mean that we are rational. Much of what we think about and most of our decisions come from the more primitive System 1.

Let me illustrate how System 1 works and how the systems interact by asking a question. Before you read on just answer this…

A bat and a ball together cost £1.10.

If the bat costs £1 more than the ball, how much does the ball cost?

Think about it for a moment before you read on. Got an answer? …

Most people, including the highly numerate, find that an answer – 10p – pops into their minds. The answer arrives without conscious calculation, effortlessly and quickly. It’s intuitive, not reasoned. But, as you’ve probably guessed, it’s wrong. The correct answer is 5p. For a few people, not many, the right answer is the one that pops into their heads, but again it does so quickly, effortlessly and without conscious calculation.

The point of this question is not what sum popped into your mind, but where it came from and how it came into your consciousness.

When an answer pops into your mind without conscious effort it comes from System 1. You might then go on to question it – ‘is that right? I had better think about this’ – and proceeded to work out the right answer. If that happened, then that was System 2 at work. System 2 is conscious, we are aware of ourselves thinking, it requires an effort and it follows rules: the way in which you calculated the correct amount was logical and structured. But what it was working on was the answer provided by System 1.

System 1
We all get thoughts and feelings popping into our minds. We call this intuition or gut feel. It happens all the time. These thoughts and feelings are so familiar and so effortless that we rarely consider where they come from and why they contain the messages that they do. They come from System 1, and increasingly we understand how the system works and why it sends the messages it does.

System 1 is the more primitive system. It evolved before the more sophisticated, conscious System 2. It is thought to have evolved to protect the ‘selfish gene’. Our unconscious works to keep us alive and find good mates for the continuation of our genes.

Imagine you are a small predator out in the jungle, hunting. You’re relying on instinct to keep you alive. There’s a rustle in a bush a few hundred yards behind you, there’s something hiding there: it might be something you could eat, but it might be something bigger that could eat you. Could it be a lion? You weren’t even looking in that direction, you were concentrating on something in front of you, but System 1 drew your attention to it with a message containing a strong emotion – fear. You run for your life, hungry but still alive. The very purpose of emotions is thought to be that they are the mechanism by which System 1 gets System 2’s attention and influences its decisions.

Much of the evaluation of stimuli has nothing to do with danger. As well as protecting themselves our genes evolved to propagate themselves. Our unconscious attributes inanimate objects with emotions and human characteristics so that we can evaluate them. We look for characteristics in things that are relevant to us in humans as prospective mates. We avoid nasty characteristics and we are drawn to products that convey qualities such as intelligence, sociability, extroversion, agreeableness. This is why design matters so much. At a glance people will take all sorts of social meaning from how your product looks and is packaged.

Everything we sense is assessed as to whether it is significant. System 1 does this quickly and effortlessly, we are not aware of it doing it. It picks up clues from a stimulus; it is particularly good at noticing change and anything with strong emotions attached. These clues generate associations with memories and their emotions stored in our brain and compares them to the stimulus.

One thing that the higher system, System 2, is good at is balancing probabilities and possibilities. When we ponder the pros and cons of a decision, it is System 2 that we are using; but this also illustrates a key weakness of System 2: it is not decisive. Most of us have experienced how the more we think about a decision, the more we go round in circles and fail to reach a conclusion. In the event that it was a lion behind that bush, this is not decisive or fast enough. By the time we reach a conclusion, we could be lunch. By contrast, the more primitive System 1 is decisive and fast. It is this system we use when we make decisions. And it works in a different way to System 2: it doesn’t consider possibilities and probabilities and is not rational.

It is possible for our conscious System 2 to override our unconscious System 1. But it’s rare for us to do so. In a moment we will look at the relationship between the two systems but most of the time we go along with the message from System 1. Modifying the message is hard work; it requires effort, is slow and quite difficult to do. Overriding your emotions is quite difficult and uncomfortable. We do not have the time or inclination to alter most of our decisions and even when we do System 2 is fundamentally indecisive.

So most of the time we go along with the feelings that emerge from System 1. These decisions are biased in 3 ways. Together the 3 ways make System 1 err on the side of caution when it makes decisions:
- It prefers what it knows, this is known as status quo bias.
- It is more sensitive to loss than gain – loss aversion.
- It responds to the immediate, not the deferred – immediacy.

Status quo bias
Samuelson & Zeckhauser first described status quo bias in 1988.
Status quo bias means what it says, people have an inbuilt bias in favour of the status quo. The natural inclination is to stay with the familiar.

In order to make to keep you safe System 1 needs to make decisions quickly.

In order to be fast System 1 takes shortcuts; this explains the 10p answer to the question asked earlier. The answer was wrong but 10p divides into £1 and 10p easily, thus quickly, and is roughly of the right order of magnitude. For System 1’s purposes it was near enough. So the 10p answer was quick, easy and safe. When faced with a decision that we have made before – what soft drink shall I choose, say – it is quick, easy and safe to make the same decision that you have made before. The more established a mental pathway the more comfortable that pathway becomes. This is why we conform, why we have habits. This keeps you safe – but it’s not necessarily rational.

System 1 learns shortcuts for decisions we take regularly. The more we take a decision in a particular situation the more likely we are to continue taking that decision when next faced with it. Say you enjoy Coke, even though Pepsi is pretty similar the more you choose Coke the more likely you are to continue choosing it. Or Colgate when buying toothpaste. These learned decisions are referred to as heuristics. These decisions are quick, easy and safe. You won’t make a mistake and the more you make them the more the pattern in your brain is reinforced. It becomes habitual. If you are involved in FMCG then this effect is central.

Another way status quo bias affects us is that the start-point of any decision is not the absolute merit of that decision but how it compares to the familiar. There is a political debate on whether Britain should renew its nuclear missile system – Trident. Back in the general election of 1982 Labour’s manifesto, under Michael Foot, included the commitment to unilateral disarmament. Consider for a moment if Labour had won and Britain had disarmed; in a world exactly as it is now (with just that change) would we be considering re-arming with nuclear weapons? I expect not. We would have become comfortable with the idea of not having them. Are we considering renewing the weapons now not because we need them, but because we have them? I suspect so; some of us are uncomfortable with the idea because it is unfamiliar.

The decision is not driven by the rational case for nuclear weapons (is that the right description?), but the familiarity of having them. That’s status quo bias at work.

This effect, the start point of a decision being the familiar, is known as framing.

Imagine for a moment that you are buying bottle of wine in a supermarket. The amount that you consider a normal, sensible amount to spend could be around £5. However change the location to a restaurant and the normal amount will be 3 or 4 times that, £15 to £20 perhaps. Your frame for the amount you are prepared to spend is different in the two locations.

The frame has an enormous influence on decisions.

Loss aversion
Kahneman & Tversky first described loss aversion as long ago as 1979.

Any decision involves gains and losses relative to the frame.

We know now that System 2 – conscious, rational – balances two inputs from System 1: the gains involved in the change, and the losses, relative to the frame. The more powerful of these stimuli relates to loss.

It’s easy to see how this might have evolved. Think back to the story of the small predator. Is the rustle caused by some animal it could eat…or is it a lion? There is clearly a survival benefit in erring on the side of caution however remote the possibility that it is a lion.

Kahneman & Tversky have calculated that the prospect of loss is up to twice as powerful in preventing change than that of gain is in promoting it.

Let’s restate this. In any decision, not doing badly is up to twice as significant as doing well. I suspect that the behaviour of most in advertising and marketing doesn’t reflect this. Arguably, we act as though the opposite is true, that making the positive case for our products is the more potent route. I am not saying we shouldn’t promote the positives; I’m suggesting that handling the negatives is possibly more powerful.

What constitutes a negative stimulus is not necessarily the same as one our rational, conscious self sees as negative. Status quo bias tells us that something unfamiliar, regardless of merit, is negative. It’s why people resist change.

It also explains some qualitative research reports that we’ve all read, where respondents rip into a new idea and tear it to shreds, giving all sorts of reasons why they don’t like it. Many of the criticisms are easily answered, but do that and the respondents change tack, they find other problem. Their problems are insoluble – because they’re not rational. The criticisms are attempts by rational System 2 to explain the discomfort coming from loss-averse System 1 coping or, more accurately, not coping with something unfamiliar. I’ve written a few reports like that in my time so I’m as guilty as the next qualitative researcher. There are ways of handling this research issue better; it helps to understand it for a start, but that’s another article.

Immediacy

That lion that we’ve been talking about, the one that System 1 is doing its best to protect us from – if you knew that he wouldn’t be along for a fortnight you’d relax. System 1 protects us from immediate danger. We react differently when it’s deferred.

How this works has emerged recently from work conducted by a group of neuroscientists. They found that System 2 considers all gains and losses –immediate and deferred – rationally, but emotional System 1 considers only immediate gains and losses. This is significant because System 2 is indecisive, it weighs up possibilities and probabilities, whilst System 1 is decisive. This means that with deferred gains and losses, when System 1 isn’t involved we become indecisive. We might think about the gains or losses in the issue a lot but we tend to end up putting off any decision.

This has enormous implications and, if you think for a moment, you already know some of them. Deferred gains – saving for your pension, say – are easily put off. So are deferred losses: tell a smoker they might die of lung cancer in 20 years time and it has little effect. It’s more effective if the loss is immediate. Make people who want to smoke in a bar stand outside in the rain. According to a cardiologist I know, this has resulted in a dramatic decrease in people suffering cardiac arrests on a Saturday night.

It seems that any decision that is remote, distant or somehow does not resonate with System 1 is likely to be put off. Even when we are reasonably well informed about the decision, we are uncomfortable making it. We are used to System 1’s emotional kick. Without it, we remain in our natural default position: we stick with the status quo.

How the Systems work together

The more primitive, intuitive System 1 influences our more sophisticated System 2 in almost all decisions, and does so profoundly.

It is rare for us to make a decision that goes against our intuition. System 2 – the higher, conscious system is capable of making decisions. However, according to Kahneman, it is surprisingly rare. That is because rational decisions are difficult, for a number of reasons.

A rational decision, based solely on rational criteria without any input from emotional System 1, is extremely hard work. You have to assemble all the facts and that in itself can be difficult. Sometimes the information required is not available ‘will I get good service from a new supplier?’ Who knows until you try. It can be disparate; how do you balance fuel economy versus safety when deciding which car to buy? You could construct a weighted mathematical model and feed information on all the cars into it. But could you do that for all the characteristics of all the cars, could you get the information, could you be bothered?

When you bought your present car did you do that – construct a weighted model? Does anyone?

System 1 makes decisions easily and effortlessly. Complex judgements come to mind quickly and easily in everyday life. And we are used to the emotional prompt that we get. More often than not, we go along with it.

Most decisions we make are made easily – we do not question the judgement of System 1. Clearly other decisions are more difficult, and there are a few to which we give considerable thought; but even here it is difficult for most people to make a purely rational decision. People do not have the time, the necessary information or the feedback to make rational decisions, and most are not prepared to make the effort. We rely on the instant, effortless emotional steer that System 1 gives us.

Four types of decision
In his work Kahneman has looked at how the two systems work together and has found four types of interaction. No one, yet, has found a way to quantify them by frequency, but Kahneman suggests the following from casual observation.

The most usual, by some margin, is that a judgement comes from System 1 and System 2 endorses it. We go along with our gut feelings. We don’t think about it much. Let’s call these unconscious decisions.

Unconscious decisions are very common. We make hundreds every day of our lives and they are very successful. System 1 learns throughout our lives and can make extremely good decisions, with experience, in very complex situations. A chess grandmaster can spot a brilliant move in a split second; a surgeon encountering a problem knows what to do. Unconscious decisions work for easy, everyday situations – what brand of coffee should I buy – and complex situations where a decision is needed under pressure.

These are by far the most common decisions of all. It can be argued that most of our normal everyday behaviour is a sequence of this type of decision. However because there is very little conscious involvement we do not appreciate how influential our unconscious System 1 is on us.

If I ask you whether you’d like tea or coffee you do not appreciate how your unconscious calculates the answer based on what is familiar in the circumstances (tea at tea time?) just that the answer pops into your head. You don’t question it. You go along with it. Just as you go along with the feelings that pop into your head when standing in front of a display in the supermarket.

There is now plenty of evidence that these decisions are made in our unconscious before we are aware of them. Our unconscious makes the decision. All that our conscious does is go along with it. Choosing coffee, white, no sugar was not conscious.

The second type of decision is where a judgement is evoked that serves as an anchor for adjustment to other features of the situation. An example of this is our bat & ball question. You might well have questioned the 10p answer that popped into your mind because aspects of the situation made your System 2 question the judgement. We all know that a question like that, in a paper like this, won’t be straightforward. However 10p was used, as Kahneman puts it, as the anchor for our subsequent thinking…how and why is 10p wrong?

Let’s call these anchored decisions.

This is the second most common form of decision-making. But because there is much more conscious involvement we can tend to believe that they are the most common type of decision.

When choosing a car, it is System 1 that decides which car appeals and what characteristics matter to you. What System 2 then does is look at the fuel economy or safety or performance of the car you are interested in. You are aware of your thinking, you might have a pile of car magazines by your bed and put a lot of time and effort into investigating the details but this is not as rational as it appears. Both the car itself – the one you are interested in – and the characteristics that you investigate come from System 1. Because we are aware of ourselves thinking about fuel economy or performance, etc, in a logical, structured way we think we are being rational. But System 1 sets the agenda and determines what it is we think about.

In an anchored decision conscious System 2 weighs the prospective losses and gains relative to the frame. We looked at the frame earlier- it is what is familiar about the decision. In the Trident decision it would be that we have nuclear weapons, what would be the gains and losses in not having them?

When choosing a car the frame is often the car you have now. What has been good about it, characteristics you want to keep, what other characteristics do you want to be better or different? These will become the characteristics that you investigate. The frame is your present car; the decision is how the new one should differ.

And, as we looked at earlier, gains and losses are not weighed equally. We attribute roughly twice the significance to loss than we do to gain. If I normally buy Coke what would be the gains and losses in buying another drink? The possibility that I might not enjoy an alternative to Coke is about twice as powerful in influencing my decision as the possibility that I might enjoy the alternative more.

For anyone handling innovation or dealing with non-habitual purchases anchored decisions are important. In the final section of this note we will look at what a new product must do to overcome the in built preference that established products have over new comers. (If you are the established product defending yourself, read it – metaphorically – backwards).

On to the third type of decision; this is where System 1 doesn’t respond, it fails to send a decisive message to our consciousness, System 2 is on its own. There are a number of reasons why System 1 might have difficulty in responding. The case for the new idea might be overly rational. It might not be immediate, there may be too much choice or too much complexity for System 1 to cope. More often than not the outcome of this is indecision.

Let’s call this rational indecision.

This is not an uncommon problem in marketing today. There is so much choice in today’s crowded markets that much of it can be overwhelming. Complexity, too, is common. Does anyone over about 25 really understand all of the alternative price plans for mobile phones?

The solution to this is to make the decision easy and intuitive. The art of making decisions easy is known as choice architecture.

It is apparent that tiny details can make an enormous difference at the point of purchase. Tiny details can block a sale; changes to tiny details can make a sale. How you can do this is a big topic in its own right and some companies are recognising ways of handling how you do this. Changing these details is probably not expensive and so can be overlooked. What companies are doing is creating directors of details whose job is that of understanding how to go about it and who have the authority to make changes.

One of the best ways to understand choice architecture is to observe your own behaviour when shopping. When out shopping you might look at 100 items of clothing but only buy one or two. You might be looking at something quite seriously but something tiny will put you off. When out shopping we don’t buy much more often than we do buy. Or you might be shopping online, how often have you aborted the purchase at the last moment? Perhaps you’d filled in a form incorrectly and you were returned to do it again and thought ‘sod it’ and clicked off. In future try to observe your own behaviour and notice how easy it is for a tiny detail to put you off making a purchase.

The last situation is where the gut feel that comes from System 1 contradicts a rational rule and is then blocked. Essentially you don’t trust your own feelings. Again more often than not this ends up in a mental impasse. You don’t actively decide against the new, you stick with the old out of indecision. Status quo bias – the default decision. This type of decision is cognitive dissonance.

Cognitive dissonance can be very useful. If you are in a marketing situation where you are challenging a very well established brand you need to overcome the familiarity of that brand. Well established brands are likely to be bought out of habit, people will make unconscious decisions in its favour. They really don’t think much about what they are buying, it will be habitual. If you can make people think then the decision becomes an anchored decision where your pros and con’s relative to the familiar will be considered.

Of these four situations the first two are where we do make decisions, the last two where we are indecisive, one because of an absence of input from System 1 the other because of the wrong input.

There is one particular situation, Kahneman has observed, where it is easier to make rational, more objective decisions, where System 2 is the dominant. And that is when making decisions for others. Kahneman refers to this as the external lens, decisions for others, versus the internal lens, decisions for yourself. Again we are all semi-aware of this: when we want a dispassionate view we ask a friend’s opinion. It’s much easier to see things rationally when you’re not involved.

Rationality in business
There is an absolutely whopping consequence of this, one that affects us all.

There is a bias in business in favour of the rational. We like to think that people make rational decisions. That’s because when business plans, it plans with an external lens. Most innovations are thought through very carefully. All the characteristics of System 2 are evident in how business plans; they’re structured, controlled, thought-through. The plans will cite ways in which it is better than what people are buying or doing now. But while business plans in System 2, people respond in System 1. Those well-thought-through rational plans, all set out in a document 3 inches thick that took a year to write are judged in the blink of an eye by a system that isn’t rational.

It’s one of the reasons why innovation is so difficult.

It is clear that System 1 is the start point of any decision. If people subsequently think rationally about a decision it is only after System 1 has set the agenda. I suspect that in most cases business puts things the other way round; they start with the rational and then think about emotions. People make decisions in the opposite order to business. If you don’t get System 1 right, you’re not going to be on their agenda.

How do you start using this?

There are 3 steps.
The first step is to understand the decision.
The second step is handling immediate impressions.
The third step is to overcome in-built preference for the familiar.

First step – understand the decision

There are only 4 types of decision.

Only 4.

Knowing which type of decision they’ll be making tells you a lot. It’s usually pretty obvious which it is. Knowing which it is tells you the role of System 1 and System 2 immediately and by knowing that you have an immediate grasp of the main issues.

And as there are only 4 types everything gets a little bit clearer.

Clearly we cannot cover every kind of decision here, what we will cover is the situation that most NPD faces. Here a new product is entering a market to compete against established products. The established products have the advantage of familiarity, many will be bought with an unconscious decision; people will buy them with little conscious thought because they are familiar. This has two consequences, your brand has to make an immediate impression and it has to overcome the innate preference for the familiar of the incumbent. This is an anchored decision where System 1 sets the agenda – the frame and creates impressions of the strengths and weaknesses of your product.

None of these are rational.

So the second step is immediate impressions.

People will have an immediate impression of your brand when they see it. They might well not be aware of it but that impression will determine whether they do go on to consider it. That impression needs to be clear and attractive.

Are there any related products that you can reference, are there any design features from related products that automatically help familiarity? How clearly can you convey what this product is? What character can you convey? We looked earlier at how we assess things in the same way we value character in people, from the way your product presents itself does it appear intelligent, agreeable, what character, if it was human, does it present? Think about how you talk to someone you really like, does your pack talk to your customers as though you really like them?

Crucially, consider if, on first glance, there are any negatives? Is there anything generating negative impressions. Tiny, tiny clues matter enormously here. Here, more than anywhere you have to be self-critical, the smallest negative will stop the sale. Use your own self-knowledge on the little things that stop you making a purchase to look at your own product. Is there anything tiny that might put people off?

Lets move onto the third area, overcoming in built preference for the familiar.

This is enormously powerful for not only is there a preference for the status quo there is a similarly powerful bias against making a mistake when buying something new – loss aversion. This is probably the single biggest factor in explaining why new products fail. Because it is so important we will spend more time looking at it and how to handle it.

Loss aversion tells us that the fear of loss is up to twice as powerful in preventing change as gain is in promoting it. But there’s more to it than that. Loss is not just more powerful, it is operating in several parts of the decision. In any change the new idea is competing with the status quo. The status quo is familiar and comfortable; the natural inclination is to stay with it, regardless of merit. With the new idea the reverse is true. It is unfamiliar and thus uncomfortable; again regardless of merit people will feel uncomfortable. The discomfort emerging from System 1 will be rationalised by conscious System 2. They don’t know why they are uncomfortable, but they know they are, so they try to rationalise it. Those rationalisations aren’t the problem, the problem is loss averse System 1 exhibiting its habitual aversion to the unknown.

Loss aversion is working in two ways7. It is working for the status quo and against the new idea. It is not undermining the status quo to any great extent. Even if people have areas of dissatisfaction they are quite likely to stay with the familiar. At the same time loss is undermining the new idea. Even if it’s a very good idea unfamiliarity will make it uncomfortable. People will look for the ways in which it is worse rather than the ways in which it is better than the status quo.

For any change to happen you have to do 3 things. Create a vision of the new; make the ways in which it is better tangible, immediate. Build on dissatisfaction with the status quo, ideally in a way that complements your strength. Perhaps you can target the most dissatisfied. Lastly you need to make the decision about trying the new, easy. Make it instinctive, small steps, easy to try, straightforward and immediate.

All three steps are necessary. They’re necessary because loss is more powerful than gain.

If change isn’t working find out in which area you’re weakest. Do all 3 and you’ll overcome resistance to change.

We can show all this on a diagram. On the diagram below there are four thought bubbles. These bubbles represent emotions coming from System 1 up into System 2; they are the emotions that the lower System uses to influence our decisions. (Ignore for a moment the words written beside each bubble, we’ll look at those in a moment)

On the right hand side of the chart we see the emotions System 1 attaches to the familiar way of doing things, on the left the emotions it attaches to a new idea.

Red bubbles represent the negatives of an idea, what worries us about it, green the positives. Because of loss aversion red is always more powerful than green. Some bubbles are bigger than others to represent status quo bias; we are more comfortable with the familiar than the unfamiliar.

The possible negatives of a new idea are very powerful indeed; status quo bias and loss aversion work together to produce a large red bubble for the new idea. This is the most powerful emotion on the chart. We look for what is wrong with any new idea and the smallest problem puts us off.

Conversely the negatives about the old way are familiar, thus comfortable – the devil you know – and they do not undermine the benefits of the old way.

If we now look at the green bubbles, that for the familiar is large and the unfamiliar small because they are respectively familiar and unfamiliar. This is status quo bias in action.

Contrast the two sides and you can see why we resist change. We are comfortable with the weaknesses of the familiar and we like its strengths; in contrast we are very apprehensive about any problems with the new and downplay its strengths. These are regardless of the merits of the new and the old; they are the emotions that colour any rational appraisal of those merits.

How do you change this?

In 1987 a group of academics looked at the problem of resistance to change and worked out that you need to change 3 areas. The equation they published became known as the Gleicher change formula and is remarkably useful to anyone in marketing and, equally remarkably, little known. The formula is this;

D x V x F needs to be greater than R

D is dissatisfaction with the status quo, V is the vision of an alternative and F is easy first steps. These are all shown on the chart above. The three multiplied together need to be greater than R – resistance to change.

An Example Using this in practice

The purpose of an example is, of course, that of facilitating understanding; an example needs to be real to bring the issue to life. I thought long and hard about what example might fit best here….

This piece is all about behavioural economics, how people make decisions, so I thought that an example that could work well, that you the reader who has got this far might appreciate, could be that of starting to use behavioural economics in practice.

You could think of behavioural economics as NPD. It is a new method of marketing that offers a better understanding of consumer behaviour. In this example you – the marketeer – are the consumer. How do we get you to use this new method?

So how do you feel about starting to use behavioural economics? A bit daunted perhaps, thinking it’s all a bit academic and doesn’t really help with your day to day concerns, secretly a bit concerned about making a fool of yourself by getting something wrong? You’re not alone; these concerns are your System 1 sending up emotions to influence you, to keep you in the comfortable territory of what you are familiar with.

We can start by working our way through the Gleicher change formula.

So what dissatisfaction do people feel about marketing at present? I’ve talked to a few and dissatisfaction is widespread. Marketing is expensive, unpredictable, we don’t know if our plans will work and it’s an insecure career. Whilst we learn from experience it is not underpinned as much as it could be with solid, professional, academically endorsed theories of human behaviour.

Contrast this with the vision of the alternative, marketing if we adopted behavioural economics. It is the opposite of the weaknesses of current practice. It is soundly based on a rigorous academic footing. It is based on the way people really do think and make decisions. Using behavioural economics we are capable of performing better; behavioural economics addresses issues such as the reputation and job stability of marketing.

Next let us look at easy first steps. This is the most powerful emotional area of all involved in change. Tiny issues have enormous significance. If there is the smallest area of concern about something new we avoid trying it. So what stops us from giving behavioural economics a go?

There are three whoppers.

I don’t understand behavioural economics.
I don’t know where to start using it.

Underpinning that, for many, is a very powerful emotion, insecurity.
Now – recession and all, is not a good time to try something new and make a mistake.

There is one last bubble on the diagram that I haven’t mentioned. That’s the big green one at the bottom right. This is the frame. It’s the immediate issues that ‘frame’ how people think when they do their jobs. Effectively it’s their agenda, what matters at the moment. I’ve talked to a few people in marketing recently, here’s what one said;

‘It’s precarious out there in the marketplace at the moment.
Making a profit is hard.’

Many are concerned over the effectiveness of their spend.
On a day-to-day basis rather a lot of people in marketing are looking for ways to use social media.

None of these issues require the immediate use of behavioural economics.

There are some who are interested in behavioural economics (probably including you if you’re reading this) but it is not really on the agenda for most, something that people feel they need to get to grips with urgently.

So what does behavioural economics tell us about the issues surrounding the adoption of behavioural economics?
1) It is not on the agenda. It’s not immediate.

2) Its benefits are not clearly understood. The ‘vision of the alternative’ bubble is, so to speak, too weak.

3) By far and away the biggest issue is easy first steps. People don’t know where to start.

Let’s deal with these three points in turn.

Point 1 Put behavioural economics on your own agenda.

Recognise that your own System 1 will try to make you prevaricate over starting something new. I’ll do it tomorrow – you’ll think. But if you’ve read this far you should have a well-functioning System 2. Use it. Tell yourself you need to start. Consciously override the temptation to prevaricate. The act of doing this is your first conscious use of behavioural economics.

Point 2 The benefits of behavioural economics need to come to life.

Think of them this way. Imagine we were using behavioural economics and a new way of marketing was suggested. The proponents of this ‘new’ method of marketing comparing their method to behavioural economics would have to admit that their way was worse, less efficient, was not based on a real understanding of human behaviour, would involve more chance of mistakes and was probably more expensive. Would you be tempted to use it?

What I’ve done here, of course, is describe what we do now when we don’t use behavioural economics. If that makes you think, it is because negatives are more powerful than positives in changing behaviour; increasing dissatisfaction with the status quo is more potent than increasing the vision of the alternative.

Point 3 How do I start – easy first steps.

The biggest issue here is the fear of the unknown, how do you try it safely?

The Gleicher Change Formula and the emotion bubbles are all you need to know to get started. The next time you have a problem that involves human decision making sit down and write down the issues around the 4 bubbles. Work your way around the strengths and weaknesses of the old and the new then, using the Gleicher change formula as I have done in this article, think about how you bring the immediate benefits of the new to life – possibly by emphasizing the weaknesses of the old. Then think about how you make it easy to try, this is probably the single most important step. Make it as simple, easy and risk free as possible.

You’re reached the end. Well done, this isn’t easy.
All that’s left is a bit on why this is important.

In the past we learnt a lot about how people make decisions by trial and error, but it was almost a black art. Not quite respectable, half understood. Not something that has a place in a rigorous, rational boardroom. Academia has given us a theory that is central. It unifies a lot of what we try to do. It has impeccable academic credentials – including a Nobel Prize. It deserves a place not just in the methodologies of researchers and insight departments but also in the planning methods of companies, at the most senior level.

With the information coming out of academia we can examine the decisions people make when we put our ideas or products in front of them. We can pinpoint much more precisely those who choose our ideas and those who do not. We can see more clearly why they behave as they do; we can quantify the numbers of each. We can put System 1 at the start of our planning. Based on better information and understanding, we can then make better decisions about the decisions people make.

Understanding their decision-making improves our decision-making.
How people make decisions – System1 – should be a part of every plan.

Bubbles and Gleicher. That’s all you need to start using behavioural economics. Your System 1 will try to make you prevaricate. Don’t let it. Give behavioural economics a try now.

Give me a call if you’d like some help.

Tim Reid
Tim Reid Partnership

35 Godolphin Rd
London w12 8jf UK

T: 00 44 (0)208 743 9366
m: 00 44 (0)7940 598285
E: tim@timreidpartnership.com
www.timreidpartnership.com

Tim Reid

Tim Reid is an independent qualitative researcher. He started his own business nearly 20 years ago. Prior to that he had worked in advertising, initially with JWT and subsequently with ABM where he was Director of Business Planning.

As a qualitative researcher he was particularly absorbed by the discrepancy between what people say and what they do. This lead to his work on the subject of how the unconscious affects decision making and people’s behaviour.

He works with companies in 3 ways.

Conducting qualitative research where his understanding of two
-system thinking leads to more insightful work.

Working with companies on change.

Helping companies understand how System1 affects their business.