By Jennifer White
Why do people make the decisions they do? It’s an age-old question that has now spawned an entire field of study called behavioral economics.
“Practically speaking, it’s the science of decision-making,” said Evelyn Gosnell, lead behavioral researcher at Irrational Labs, a nonprofit that applies behavioral economics findings to product, marketing and organizational design problems. It’s the study of what truly motivates people and the choices they make as consumers. Many companies and organizations, from Google to The World Bank, are turning to insights from behavioral economics to solve business challenges.
As a frequent speaker and current instructor for a UC San Diego Extension workshop in behavioral economics, Gosnell believes these are the four ways behavioral economics is changing the face of business and organizations:
1. Provides business shortcuts
What makes customers buy a product? What makes customers think a certain price is reasonable to pay? “Most jobs involve understanding and/or influencing other people's decisions. From the product manager who needs to figure out the product features that will make customers into raving fans to the accounting rep who is trying to get people to pay their bills on time. What we find is that too many employees go through multiple iterations of trying to figure this out. Product managers continuously try new releases, with more and more features, trying to ‘get it right.’ By providing insights into the true drivers of motivation, behavioral science gives people shortcuts to create a winning product or campaign in a much shorter timeframe.”
2. Encourages experimentation
A common practice for many companies is to make business decisions based on data collected over time with the idea that if current customers are behaving a specific way, future customers will do the same. But as Gosnell suggests, this may not be the case. “For example, when Netflix made a dramatic price increase for current customers, everyone hated it, people were really upset. Many of them cancelled and Netflix’s stock dropped dramatically. The problem was that they tested the new pricing on new markets instead of with existing customers. New customers were willing to pay for it, but they should have run a small experiment with existing customers,” said Gosnell. “The newest wave, the most cutting-edge companies are choosing to look past existing data. They’re now doing really small-scale experiments, tweaks, to their existing programs using email because it’s easy and cost efficient. Whatever data is collected can then be used to improve the product.”
3. Enables company savings
Companies spend an immense amount of money on employee benefits with financial incentives. But new data shows that financial incentives no longer drive employee behavior. “I analyzed research from seventeen nation-wide companies and put together a conference to inform about all the things they were doing wrong and all the ways they were wasting their money,” said Gosnell. “I made suggestions about how they could do things differently. Some of the changes are as simple as redesigning the layout of the cafeteria. I’ve also worked a lot with HR groups to redesign employee benefits programs to influence healthy behavior, which will save companies lots of money in the long run.”
4. Influences policy
Governments are starting to use behavioral economics as a tool to develop and implement policy decisions that affect constituents. “For example, certain states are moving toward defaulting you into automatically registering to vote,” said Gosnell. “As you sign up for your driver’s license, there is no longer a separate box you have to check to register to vote. There’s this bias for inaction where people won’t check the box, so what’s the best thing to do from a policy standpoint? If we want to encourage people to vote, they have to be registered so instead of making it a choice, let’s just automatically register them to vote.”
Like explanations short and sweet? Download the infographic to share how behavioral economics works.
Interested in learning more about the application of behavioral economics to the business environment?
UC San Diego Extension offers a Behavioral Economics workshop. The two-day workshop explores the key principles of behavioral economics and how to apply them in a business context. For more information and to register, call (858) 534-8139 or visit the course page.