Working on a paper

So I'm finished with the paper. Now I'm working on an article. Hence the amount of time it's taking to post on behavioral economics. It's an interesting exercise. If I do this for every paper, it will take forever. On the flip side, I'm analyzing this paper quite rigorously. I'm looking forward to the end product. I have a sense I know what it will be but it's form is still hazy.

Natural integration

What I like most about this stool design concept is the integration of both the manufactured and the natural.

Hat tip [Industrial Design Served]

Behavior Economics and Purchasing Behavior

It all started with an article in Admap. February 2010 to be exact. I'm getting hooked on Behavioral Economics (BE). I guess it shouldn't be that much of a surprise. It's the merger between two of my passions – psychology and economics. I'm glad that the planning community is getting on board. In reality, planners have been thinking this way from the start of the discipline – mapping consumer behavior to the purchase process, capturing 'shortcuts' that consumers use, and exploring what preconceived notions are triggered along the way.

BE entered popular culture with the publication of 'Freakeconomics,' a book I have not recently started. There have been a number of articles in the NY Times that incorporate BE in their analysis, largely in light of the current financial crisis and the behavior of the markets. David Brooks mentioned it in the midst of the Wall Street melt-down in this article dated October 29, 2008. John Tierney talks about 'Saver's Remorse' in this blog post from March 23, 2009.

My interest piqued, I decided to explore the discipline from the source. For that, I'm grateful to MIT and their OpenCourseware. I'm currently auditing – I guess you could call it that – their Behavioral Economics and Finance class that was taught by Prof. Xavier Gabaix in 2004. It's only now that textbooks are appearing for the discipline so much of the reading is centered on original academic papers that ushered in the discipline. As part of this process, I'd like to share some insights from one paper that I'm reading; it helps me grasp the material better. The first paper is by Daniel Kahneman, "Maps of Bounded Rationality: Psychology for Behavioral Economics" that was published in the American Economic Review (December 2003).

In this article, Kahneman acknowledges that people are "not accustomed to thinking hard' and rely upon snap judgements unless they are forced to do otherwise. One example would be laundry detergent; many people use what their Mom's use and rarely question their choice unless circumstance warrants it, some of those being the need to save money, improve efficacy, brand availability at the store they shop etc. This behavior flies in the face of economic theory, which treats purchases are rational beings that ruthlessly evaluates every purchase. In reality we do both.

There are two systems of thought that we use to make it through the day. System 1 is what I would call 'auto pilot' or intution. It's automatic, effortless, habitual and often difficult to control. The other is System 2, which is rational, slow, and deliberate. System 1 generates impressions of the attributes of objects of perception and thought. System 2 is involved in all judgements calculated rationally, whether they are expressed or not.

It's often interesting to see where the two meet and which gets activated first. One example would be the purchase of a car. We have that list of things we are looking for in a vehicle – number of doors, zero-to-60 speed, cargo space, etc. In the dealer showroom, many a buyer has been romanced by something zoomy, sleek, stylish, and completely impractical. Sports cars would not exist without System 1.

Key to research and purchasing behavior is the accessibility of these judgements. Some attributes are more accessible than others in both perception and judgments. The term 'natural assessments' are those that are routinely and automatically produced by the perceptual system, System 1. Things that influence System 1 are called precepts and include size, distance, loudness, similarity, casual propensity, "surpringingness" and mood.

Using familiar precepts, the dominant 'private label' strategy has traditionally been to be to mimic competitor established brands as closely as possible; it's just like your favorite brand but cheaper. Walgreen's is a master of this, to my frustration on many occasions. Their NY competitor, Duane Reade, took a very different tack – creating a private label brand that capitalized on their NY roots and pared it with a reductionist style popular with Apple aficionados. Judging by the number of Apple products on NY streets, cafes, and restaurants, it was a wise pairing aesthetically. It will be interesting to see if the new Walgreens retains their brand mimicry or embraces Duane Reade's style.

One point that made the most impact on me as a researcher is the concept that for many, assessments are quite binary – good or bad. These assessments are carried out split second and then reevaluated if additional data warrants. So often we ask consumers to evaluate things on the basis of a scale – zero to ten or zero to five – when in most people's minds, it's simply good or bad. Rationalizing why happens later. The scale exercise taps into System 2 but System 1 is where the decision is initially made. Using this insight,I plan to be more insistent in capturing the 'good/bad' first.

The last point for today is about familiarity and its' importance in System 1. Someone with greater category experience relies upon their intuition (system 1) in greater amounts than those with less experience. Kahneman mentions that doubt is a System 2 process. That makes sense because being familiar with your own insecurity is a conscious and rational process. The research process that consumers undertake when approaching a new category – e.g. shopping for a flat-screen television – is a desire to feed System 2 and minimize errors with System 1 or intuitive decisions. You feel better about choosing that sexy flat-screen design or that brand when you have done your homework.

Based on this one could argue that the primary job for most new product introductions needs to be seeding doubt, activating System 2. Without it, consumers remain in default mode and that mode leaves little room for something new. That doubt need not be rational. It could be something like – this product is sexier.

I'll have more from this paper next week.