How to apply behavioural economics in market research: Advice from Dan Ariely

Elina Halonen

After a couple of years of hype and debate, most market researchers have now heard of behavioural economics yet many still remain skeptical what, if anything, it has to offer for us as an industry. While the findings of this newly-popularised science can be highly intriguing, how do we apply them? Despite the plethora of books now available on the subject, they are often not aimed specifically at market researchers so tailoring their insights into our everyday working life can be tricky. Luckily, some months ago I had an opportunity to catch up with Dan Ariely after his talk in London and ask this master of behavioural economics what advice he would give us as market researchers and whether he thinks that, instead of tricking people, marketers can use behavioural economics to make people happy instead.

Elina – In your lecture you talked about how people often see opportunity cost through substitution within a product category (Honda or Toyota, etc.). This is a really pertinent one for market researchers as many of the popular methods currently used in the industry operate on this assumption that the “competition” for a product is from the same category.  Given how hard it is for us to think about money and consumption in terms of opportunity cost, what advice would you give to marketers and market researchers who want to understand what something is really worth to a consumer and what they’re trading off?

Dan – First of all, it is far easier to understand how much something is worth in relative terms rather than absolute – if there’s something else that we know how much it’s worth, we can more easily find relative value. However, that’s a non-satisfying answer so another thing is to try and think about an object in more concrete terms: understanding the value of something in terms of money. This is actually really tough to do, but if we compare it to something else, something concrete it becomes easier. For example, I could say “what would you rather have: a new phone, or would you rather have a new bike, or would you rather go to a restaurant five times?” Those tradeoffs are ones that people can make more easily and therefore they’re more valuable in terms of their impact on decision making.

The pain of paying is also an important concept for market researchers as many studies are also trying to gauge what consumers would pay for a new product or what the optimal price point for it would be. Answering questions in a survey is naturally quite far removed from the actual pain of paying, which would suggest the results are fundamentally biased. Would you have any advice for market researchers on how to address this? 

That’s actually very difficult because the pain of paying is the agony of parting with your own money, and it’s hard to replicate that in a survey, especially if it’s something hypothetical. The only thing I can say is that every time we do research, or when you do market research, it’s a good idea to try to replicate the environment in which people are actually going to make the decision in.

Sometimes when people come to an online survey we’re tempted to ask them more questions just to get more out of them but the reality is that what we want is to try and spend some time and effort to put them into the mindset they might be in later, try to make them imagine it in the best way possible, and then ask them how they would behave. However, that takes time which uses up some of our ability to get answers, because if we spend 10 minutes putting them in the right mindset, we’ve taken up 10 minutes. Do I still think it’s worthwhile to do? Yes.

And of course the last answer is that when we start with market research, we often learn the relative value of different options but to find which one is truly appealing it’s good to go out of the web, out of the lab and test something in a more concrete way. If you have ten different ideas, maybe you test them all online, reduce it to seven, down to three, and test the last three in a more systematic way.

You’ve talked a lot about different types of nudges as a way of improving people’s lives. However, some research is now starting to suggest that people sometimes get habituated quite quickly, which can reduce the effectiveness of nudges. How serious an issue do you think habituation is for nudging? And how could we best address it? 

Well, you can think about good habituation and bad habituation. There’s a study, for example, by Uri Gneezy showing that if you pay people to go to the gym for the next six weeks, they basically acquire the habit and once they’ve acquired the habit, they’re more likely to continue going to the gym afterwards. I’m sure this is not a general statement about all activities because some activities are habit creating and some are not habit creating, so we do need to think about the long term of effect of habits and activity, and basically ask ourselves whether the nudges are going to have a short term effect, or whether they’re going to continue to be effective themselves, and whether the activity is going to change the motivation it provides in terms of the habit. There are also some activities you can think about – for example reading. What happens in reading is that the beginning is not that much fun but later on it becomes fun, so what we need to do there is something that pushes kids over the initial period of reading and that’s the important part. Then even if there’s habituation later on it’s still very effective.

In your talk you also mentioned the now widely known research that suggests experiential purchases make us happier than material purchases. To what extent do you think cultural norms around consumption and societal development level (e.g. cost/affordability of everyday consumer goods in relation to disposable income) influence what makes us happy? 

There is no question that our happiness is socially constructed. We are inherently relative creatures & we compare what we have to what the people around us have. The research shows that buying stuff makes us less happy than buying experiences but you can imagine that social pressures can convert stuff into an experience. For example, consider the cell phone. To some extent it is clearly stuff but you can imagine a society in which you take your phone out all the time, you put it on the table when you have dinner with people, and you always have it nearby. You set alerts to indicate when you have new messages, etc. Thereby transforming it, to some degree, to an experience.

Your examples of removing the pain of paying reminded me of some critics’ concerns of marketers using behavioral economics to manipulate consumers by tricking them. In addition to helping people make better choices, do you think marketers can use behavioral economics to make people happy instead?

I think there’s first the question of what we talk about as happiness – are we talking about short term or long term happiness? Are we talking about happiness that comes from feeling good at the moment, or living a meaningful life? I personally like the idea of having long term happiness and a meaningful life, but I think that the moment we think about trying to maximise an objective function like happiness, then I think tricking people or getting them to see, view, or behave as if they care about their long term happiness is a good thing.

Elina Halonen is Partner at The Irrational Agency and Dan Ariely is Professor of Psychology and Behavioural Economics at Duke University and author of Predictably Irrational and The Honest Truth about Dishonesty.