“A theory stating that there are important psychological and behavioural variables involved in the economic decisions of consumers” Business Dictionary (2011)

Behavioural economics is a subject that keeps emerging within my course and one that I am intrigued by. This theory suggests that as consumers we are motivated by additional factors in the subconscious. According to Thaler (2008) these factors include a number of variables the first being habits; habitually buying a brand without regard to whether there is a cheaper or better quality alternative. Ease is another variable affecting the decisions we make, an example of this online is within internet shopping. Some websites automatically log you in when you visit their page for example Amazon; this may be a small action that would take the user less than a minute to complete themselves but it makes purchasing and browsing a lot easier. Two other factors include heuristics which “is a mental shortcut that allows people to…make judgments quickly” (www.psychology.about.com, 21/04/11) and irrationality.

After reading Dan Ariely’s book ‘Predictably Irrational’ it became very clear to me that the research done on this subject is almost vital to the advertising and marketing industry in understanding how the consumer makes decisions. The video below is a TED talk featuring Dan Ariely discussing his research (something I would highly recommend watching for its rich insights in to our irrational behaviour).

Irrational behaviour, as explained by Dan Ariely, is something that we do without realising and are scarcely able to control. He explains how by simply placing and wording adverts in a particular way it can influence a consumer’s choice. An example he uses is that of a restaurant’s menu; by adding an expensive meal it influences the consumers to choose the middle priced dish. Demonstrating how we irrationally make choices based on relativity. So what does this mean for digital communications?

There are four practical techniques that should be part of a marketers tool kit (Welch, 2010). “Price-cutting can and does reduce perceptions not just of product quality, but of experienced efficacy” (AAAA, 2010). Making a products cost less painful can be achieved by simply delaying the payment even if it is for a short period of time. This is defined as price perception; the price of an object or service determines our opinions towards it an example being with singers. If they perform in a club for free then a few people will turn up to watch them whereas thousands would pay over £50 to see the same artist perform at the 02. You must not overwhelm consumers with choice; this is similar to what Ariely was explaining in his talk and can be defined as goal dilution “When items promise multiple benefits, they are less convincing than items that appear to do only one thing” (AAAA, 2010).

In my previous blog posts I have talked about different aspects of digital communications and there is no doubt that this form of communication is becoming more and more relevant in our tech savvy culture. As mentioned in my post about Mobile technology, the advertising industry has been given a fresh opportunity to communicate with their audience in a new innovative way. Sutherland (2008) says that the study of behavioural economics “provides a robust intellectual link between understanding human nature and knowing how to make money” meaning that the understanding of this subject could be the difference between an advertisement succeeding or failing.

The behavioural economic models applied to digital communications can therefore create new opportunities and encourage a positive rise in both the sales and recognition of a brand. Loss aversion, for example, is “the disparity between the strong aversion to losses relative to a reference point and the weaker desire for gains of equivalent magnitude” (Camerer, 2002). Understanding this enables a marketer to ensure that the customer will feel they are making a loss by not purchasing an item or viewing a web page. An example of when this can be used is within a brands promotional emails by displaying a tick box that reads ‘tick here if you do not wish to receive emails on our latest promotions or discounts’ consumers will be unlikely to tick as they will be losing out on something. Ariely’s (2008) research has shown that this is a much more effective way of encouraging the consumer to sign up to things, in his case organ donation, rather than the option to join.

Cotte et al. (2006) defined four groups of online consumers these being; exploration, entertainment, shopping and information. By understanding the consumer’s online behaviour it allows for a more precise target and choice of behavioural economic model. In creating a seamless brand this will enable the brand to make the online experience suitable to their target audience, for example by creating ease for the consumer. Interacting with the audience in a way that appeals to them most can only mean positive things for the brand and its profile.

I believe that the study of behavioural economics is one of great importance to brands and companies, and can create huge benefit not limited to advertising. Within digital communications it allows us to understand how the consumers mind works enabling a strategy to be created that is targeted precisely and is highly likely to achieve results. The research behind it, I believe, is proof enough that decisions we make are not rational. In fact they are the total opposite, they are driven by pathos and ethos which is something advertisers and marketers can recognise and incorporate into their digital strategies. By creating platforms that can allow the consumer to interact and feel in control of will lead to a decision based on pathos as will a celebrity mentioning a brands name lead to a decision based on ethos.

Rory Sutherland (2009) talks insightfully about his views on behavioural economics in the TED talk below. Something I would recommend watching if you’re interested in this subject.