Model Behaviour

George Loewenstein is the is the Herbert A. Simon Professor of Economics and Psychology at Carnegie Mellon University. He is considered to be one of the founders, and most important names in the field of behavioural economics and more recenlty the field of neuroeconomics. He’s the author of Exotic Preferences: Behavioural Economics and Human Motivation, and has published countless papers and articles on the applicaton of psychology to economics.

Here, Mark Earls, author of Herd: How to Change Mass Behaviour by Harnessing Our True Nature, talks to George about ’empathy gaps’ how the brain reacts to issues of privacy, and how researchers can best measure behaviour.

With additional questions from Elina Halonen of the Irrational Agency.

Mark Earls: There’s a lot of excitement in both policy circles and increasingly in commercially based organisations in the field of Behavioural Economics. How would you define BE?
George Loewenstein: Behavioural economics is the application of insights and research findings from psychology to economics.

Why do you think there is so much interest nowadays, especially in the Western world? Is it all just “buzz” and “hype”?
Behavioural economics is at a zenith of popularity now, in part due to the success of a number of different books published on the topic. Inevitably, there is some degree of buzz and hype, and some propensity for people (some not obviously behavioural economists) to use the BE label to increase attention on work that might not otherwise get as much attention. However, behavioural economics has survived, in part, by being inclusive – by taking ‘into the fold’ people who didn’t feel that they fit in the standard economics camp.

BE is popular in large part because it addresses a widespread latent dissatisfaction with the previously dominant economic paradigm – the rational actor model – which assumes that people always make rational decisions that are best for themselves. Anyone who has lived in the real world who has not been blinding by the traditional paradigm can see that there are many ways that people make suboptimal, and even often self-destructive, decisions. Beyond the fact that behavioural economics provides a more realistic account of individual behaviour, in the last decade it has also become clear that behavioural economic thinking can also help to generate creative new ideas for public policy. Traditional economics, which assumes perfect rationality, implies that the only reason for policy intervention is market failure or externalities. By recognising that people don’t always make decisions that are in their own interests, behavioural economics opens the door to a much wider range of situations in which intervention could be beneficial as well as stimulating new ideas for, and approaches to, interventions.

A lot of your work focuses on “intertemporal choice” and unpicking the received wisdom about how individuals make choices about the future. What are the big learnings here about how people really do what they do? What do you think the big implications might be for marketers and how they go about understanding and measuring these kinds? And in how they serve them?
Some of the early, and ongoing, behavioural work in this area highlighted how, contrary to the standard account of time discounting, people often behave extremely myopically, dramatically overweighing immediate costs and benefits in decision making. However, subsequent research has revealed (as research tends to do) a far more complex picture. In some situations – notably when there are immediate costs or viscerally tempting rewards – most people are exceedingly short-sighted. However, in other situations, such as when it comes to investing in education or housing, people can be extremely far-sighted. In fact, there are some people, and possibly many, who may be too far-sighted for their own good; they are always saving and investing for some future point in time that never arrives. In some of my own research, we find that there are more people who classify themselves as ‘tightwads’, whose main problem is to fail to spend when they should, than ‘spendthrifts’ who spend when they should not.

One of your recent areas of study has some very direct challenges for how market researchers go about their business; we tend to assume that people’s ability to predict their own future emotional and states has no real connection with how they feel when you ask them about it. Your work seems to suggest that this is far from the case. Could you explain and suggest better practices for us?
The thrust of my work on ‘empathy gaps’ is that it is very difficult to imagine being in a motivational or feeling state different from the one we are in. When we are hungry, we over-buy at the supermarket, but when we are satiated at the end of a large meal, it feels like we are never going to want to eat again. When we are depressed, it feels like we have always been depressed, and always will be, but if we are feeling happy, it’s difficult to recall having been depressed or to imagine becoming depressed in the future. We never grow out of empathy gaps; it simply isn’t a human capability to truly imagine an emotional state one isn’t currently experiencing. But, as we mature, we can learn to live with empathy gaps. A depressed adolescent dumped by his girlfriend may not only feel, but truly believe, that he will never recover from the loss.  An adult man dumped by his girlfriend may feel the same, but, having lived through the situation before, appreciate at last at a cerebral level that ‘this too shall pass.” Marketers play on empathy gaps all the time, from cookie sellers who duct the smell of baking cookies out onto the street to realtors who push vacation properties to those caught up in the pleasures of their vacation.

Marketers need to be acutely aware of the situation that consumers are likely to be in when the receive marketing pitches or face opportunities to purchase. In my own life, I find that whether I am likely to accept an invitation to give a talk in another time zone depends critically on my current situation. If I’m at home and well rested, the prospect of travel seems much more appealing, and I am more likely to accept, but if I’m in a different time zone and jet lagged, I’m much less likely to accept. If someone who wanted me to give a talk knew about empathy gaps and had access to my travel schedule, they would have a powerful ability to manipulate this decision, and the same goes for everyone and for myriad other types of decisions.

Your work challenges a lot of the ideas and assumptions embedded in marketers’ and researchers’ practices. Where do you think the next big areas for challenge are?
One of my current areas of interest, and lines of research, is on the behavioural economics of privacy. Privacy is one big area of growing importance that researchers have only recently begun to explore. People are incredibly inconsistent, and in fact incoherent, when it comes to privacy. For example, in research with my colleagues Alessandro Acquisti and Leslie John, we find that, in surveys eliciting sensitive information, assurances of anonymity and confidentiality can backfire, leading people to ‘clam up’ instead of divulging more information, probably because such assurances ring ‘alarm bells’, reminding them of privacy concerns that are usually dormant. Likewise, in another paper we just published we find that people are more likely to reveal information when they see other people revealing information or (in yet a third paper, with Laura Brandimarte) when they have an (often illusory) feeling of control.  Many people claim to care about privacy, but most people implicitly share private information, e.g., their moment-to-moment location, via their cell phone or EZ-Pass, and many people deliberately and knowingly share vast amounts of information, often with people they don’t know, e.g., over social websites. Marketing is clearly going to become increasingly personalised; the era of electronic display ads that recognise passersby and convey customised messages (as depicted in the movie Minority Report), will be upon us shortly. How individuals, and by extension governments, will respond to such ever-increasing intrusions on privacy that new technologies will enable, is an important topic for future research.

Your research suggests that consumers’ desires are not stable or fixed – but market researchers tend to ask questions about what products we like, which implicitly assume the opposite. Should we be measuring behaviour in a different way and how?
People sometimes talk as if there is a conflict between the Steve Jobs approach of giving people what they don’t know they want but will want if you give it to them, and the more old-fashioned approach of figuring out what people want. There is no conflict. In some areas, particularly new technologies, people can’t know what they want or will like because their preferences aren’t sufficiently well defined, and in other areas, such as food or music, it may be possible to introduce people to new products they aren’t aware of but will like. But, in many domains people do have relatively well entrenched preferences, in which case traditional methods such as conjoint analysis are more likely to be useful.

Your research suggests that consumers are bad at predicting how much their wants and needs change in the future – do you think it’s ever possible to get an accurate understanding of that, and if so, what methods or approaches would you recommend?
Wants and needs change in the future for many reasons. One reason is that what we desire and like tends to change as we age, and these types of preference changes are very difficult to anticipate (perhaps the best way to predict them is to observe people you perceive as similar to yourself, but older). The more common reason has to do with situational factors, and these, in principle, should be easier to make sense of and predict, because we all get so much information about how our own preferences change. I do think we can learn a lot from experience (as well as from conversations, novels, movies) about these types of short-term preference changes. However, as I mentioned earlier, I don’t think we can ever truly imagine how we will feel in an emotion-evoking situation different from the one we are currently in.

As an industry, we focus on studying liking as the key driver for purchase behaviour. However, your research on curiosity suggests that there is a difference between liking and wanting – that we sometimes want something even when we know we won’t like the outcome because we want to close a gap between what we know and what we don’t know. How do you see that applying to consumer behaviour, and especially market research?
The traditional economic account of behaviour is consequentialist – it assumes that we want things because, and only to the extent that, we anticipate that we will like (enjoy) them. However, humans and other animals have all sorts of motivational mechanisms, such as hunger, thirst, sexual desire, that operate independent of such anticipations. As a result, in some situations we can desperately crave something even if we know that, if and when we get it, we probably won’t enjoy it that much. By the same token, in some situations we might not want something even if we do know we will like it.  In research I’ve done focusing on married couples, for example, we find that many couples stop wanting – and initiating – sex even though both members of the couple are aware (at, at least, a cognitive level) that, if they did initiate they would end up enjoying it.  Consumer behaviour is driven by both factors – wanting and anticipated liking – and these often don’t go hand in hand. I’m not a marketer myself, but it seems to me that understanding the dual nature of human motivation can’t help but be relevant to those who make a living from playing on it.

George Loewenstein will be a visiting professor at the London School of Economics for the coming calendar year. He is also the keynote speaker at the Stirling University, Behavioural Science Centre symposium in September.