Respondents as Economic Actors: Behavioral Economics & MR
Posted by Vovici Blog on Mon, Mar 14, 2011
Most market research undertakes to understand, at some level, respondents as economic actors. How likely are they to buy a product? At what price will they buy? What will push them to buy a competing product instead? What makes them buy from one channel instead of another? What leads them to trust one brand and not another?
Central to microeconomics from the 18th century through the 20th century has been the idea of a rational actor, what John Stuart Mills described as “a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial.” This was later framed mathematically as individuals maximizing their benefits (utility) while minimizing their costs: rational choice theory.
Some schools of economic thought have been chipping away at this idea. Rational choice theory assumes that individuals have perfect information about their alternatives and that they have the time to weigh every choice against every other choice: in fact, consumers make decisions with incomplete information, with faulty information and without analyzing every alternative. The most prominent objections to tradition come from behavioral economists.
Behavioral economists have highlighted key areas where actual behavior differs from the model of rational economic actors:
- Rules of thumb – Rather than evaluating every option like a computer evaluating alternate moves in chess, humans instead rely on heuristics or rules of thumb to prune the decision tree. They don’t make optimal decisions for themselves but sufficient decisions. As a result, they are more likely to shortchange unimportant decision making (e.g., impulse buys at checkout, choosing where to have lunch).
- Emotional arousal – Human decision-making changes if an individual is in a cool state vs. a hot state. In a cool state, rational long-term thinking prevails, but in a hot state, when a person is experiencing strong emotions, they are more likely to pursue immediate gratification at the cost of their long-term goals.
- Framing – Humans make decisions in the context of unseen and unrecognized influences. Scents, colors, metaphors and word choice all nudge decisions in directions not consciously recognized by individuals.
- Cognitive biases – Individuals overvalue items they own (the endowment effect) or have invested in (the sunk-cost fallacy), assuming that others see an object with the same experience they have of it. Yet at other times they are sensitive to the decisions of others, in ways that interfere with rationality and lead to groupthink or manias.
Economists debate whether behavioral economics invalidates the rational actor or merely adds new layers to old economic models. Rational choice theory may still be useful when describing the behavior of businesses, which are more deliberate in their decision making than human individuals.
What, if anything, should the market researcher do with the understanding that respondents are not perfect economic actors? At the minimum, analyze data humbly. Because of problems with framing, respondents’ answers may not reflect real-world actions. The researcher should recognize that good research creates models of possible market activity, but those models will grossly oversimplify many things important to actual outcomes.
There is an irony in assuming that behavioral economics invalidates traditional research techniques, since many of the findings of behavioral economics are built on survey research and experiments. Market researchers simply weren’t using these methods in the same way; they should apply the philosophy of behavioral economists in order to better predict business outcomes.
For more on behavioral economics, check out Dan Ariely’s books, Predictably Irrational: The Hidden Forces That Shape Our Decisions and The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home.
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