We are coming into the big spending season, with Black Friday, Cyber Monday, the run-up to Christmas and then the winter sales. So will we all be rational maximisers and weigh up the utility we expect to receive from items against the price we pay (plus any other cost, such as time spent searching/shopping)? Or will we use a set of heuristics which make life easier and that we have found to be useful in helping us choose – heuristics such as buying things we’ve liked before, or going for things on special offer?
The answer is that we do probably use a set of heuristics, at least for many items. And don’t the retailers and the marketing firms they employ know this!
They will use all sorts of tricks of the trade to persuade us to part with our money. These tricks are designed to nudge us (or push us), without us feeling manipulated or conned – at least until we’ve bought their product.
And the tricks are getting more sophisticated. They include special offers which are not as good as they seem, time-limited offers which stimulate us to buy quickly without carefully thinking about what we’re doing, cunning positioning of products in shops to encourage us to buy things we had not planned to buy, adverts which play to our idealised perceptions or the ‘good life’ or what we would like to achieve, and packaging or display which make the product seem better than it is.
Also we are increasingly faced with targeted advertising where our smart devices capture information about our spending habits and tastes through our previous online spending or our search behaviour. This is then fed to advertisers to tailor adverts specifically to us on our mobiles, tablets, laptops and even, soon, on our smart TVs.
We may have a general desire to maximise utility from our spending, but market failures, such as consumers having imperfect information about products and a present bias (see also) in decision making, make us easy targets for the advertising and marketing industry. They understand the heuristics we use and try to take maximum advantage of them.
How shops use tricks to get you spending The Conversation, Cathrine Jansson-Boyd (16/11/17)
ColourPop looks to Qubit for next-gen personalization guidance Retail Dive, Dan O’Shea (13/6/17)
Channel 4 to offer 100% ad targeting across All 4 platform, seeking partners for linear equivalent The Drum, Jessica Goodfellow (14/11/17)
How Google aims to bring TV advertising into the 21st century The Drum, Ronan Shields (19/10/17)
How to Use Heuristics to Your Marketing Advantage MarketingProfs, Cam Secore (12/11/15)
- Does the use of heuristics contradict the assumption that consumers behave rationally?
- Give some examples of heuristics that you yourself use.
- Other than those identified above and in the first article, what ‘tricks’ might companies play on you to persuade you to buy their products?
- Is advertising personally targeted to individual consumers desirable for them?
- Give some examples of present bias in people’s behaviour.
- What factors should a retailer take into account when deciding whether to make pre-Christmas discounts?
- Explain what is meant by ‘affect heuristic’ and how the advertising industry uses the concept in setting the background to or scenario of an advertisement.
- Have you ever been persuaded into buying something you didn’t want? Why were you persuaded?
The term ‘Google it’ is now part of everyday language. If there is ever something you don’t know, the quickest, easiest, most cost-effective and often the best way to find the answer is to go to Google. While there are many other search engines that provide similar functions and similar results, Google was revolutionary as a search engine and as a business model.
This article by Tim Harford, writing for BBC News, looks at the development of Google as a business and as a search engine. One of the reasons why Google is so effective for individuals and businesses is the speed with which information can be obtained. It is therefore used extensively to search key terms and this is one of the ways Google was able to raise advertising revenue. The business model developed to raise finance has therefore been a contributing factor to the decline in newspaper advertising revenue.
Google began the revolution in terms of search of engines and, while others do exist, Google is a classic example of a dominant firm and that raises certain problems. The article looks at many aspects of Google.
Just google it: The student project that changed the world BBC News, Tim Harford (27/03/17)
- Is Google a natural monopoly? What are the characteristics of a natural monopoly and how does this differ from a monopoly?
- Are there barriers to entry in the market in which Google operates?
- What are the key determinants of demand for Google from businesses and individuals?
- Why do companies want to advertise via Google? How might the reasons differ from advertising in newspapers?
- Why has there been a decline in advertising in newspapers? How do you think this has affected newspapers’ revenue and profits?
Many or us make New Year’s resolutions: going on a diet, doing exercise, spending more time studying. But few people stick to them, even though they say they would like to. So how can people be motivated to keep to their resolutions? Well, the experiments of behavioural economists provide a number of insights into the problem. They also suggest various incentives that can be used to motivate people to stick to their plans.
Central to the problem is that people have ‘time inconsistency’. They put a higher weight on the benefits of things that are good for them in the future and less weight on these benefits when they have to act now. You might strongly believe that going to the gym is good for you and plan to go next Monday. But when Monday comes, you can’t face it.
Another part of the time inconsistency problem is the relatively high weighting given to short-term gratification – eating chocolates, watching TV, spending time on social media, staying in bed. When thinking about whether you would like to do these things in, say, a couple of days’ time, you put a low weight on the pleasures. But thinking about doing them right now, you put a much higher weight on them. As the well-known saying goes, ‘Hard work often pays off after time, but laziness pays off now’.
So how can people be motivated to stick to their resolutions? Behavioural economists have studied various systems of incentives to see what works. Some of the findings are as follows:
|People are generally loss averse. To get us to stick to New Year’s resolutions, we could devise a system of penalties for breaking them, such as paying 20p each time you swear!
|Given people’s time inconsistency, devising a system whereby you get treats after doing something you feel is good for you: e.g. watching TV for 30 minutes after you’ve done an hour’s revision. Rewards should follow effort, not precede them.
|Having simple clear goals. Thus rather than merely saying ‘I’ll eat less’, you devise a meal plan with menus that meet calorie and other dietary goals. Rather than saying, ‘I’ll exercise more’, you commit to going to the gym at specific times each week and doing a specific amount of each exercise.
|Ritualising. This is where you devise a regime that is feasible to stick to. For example, you could always write a shopping list to meet your dietary goals and then only buy what’s on that list; or you and your flatmates could have a rota for household chores.
|Social reinforcement. This is where people have a joint plan and help each other stick to it, such as going to the gym at specific times with a friend or group of friends, or joining a support group (e.g. to lose weight, or give up drinking or smoking).
|Avoiding temptation. For example, if you want to give up chocolate, don’t have any in the house.
|Using praise rather than criticism. People generally respond better to positive incentives than negative ones.
Behavioural economists test these different incentive mechanisms to see what works best and then to see how they can be refined. The testing could be done experimentally, with volunteers being given different incentives and seeing how they respond. Alternatively, data could be collected on the effects of different incentive mechanisms that people have actually used, whether at home or at work.
The advertising and marketing industry analyses consumer trends and how people respond to pricing, quality, display, packaging, advertising, etc. They want to understand human behaviour so that they can ‘direct’ it in their favour of their clients. Governments too are keen to find ways of encouraging people to do more of things that are good for them and less of things that are bad.
The UK government’s Behavioural Insights Team looks at ways people can be ‘nudged’ into changing their behaviour, see the blog A nudge in the right direction?
But back to New Year’s resolutions, have you made any? And, if so, have you thought about how you might stick to them? Have you thought about the incentives?
Dan Ariely talks “Payoff” WUNC 91.5: North Carolina Public Radio, Dan Ariely talks to Frank Stasio (3/1/17)
Articles and blogs
50 New Year’s Resolution Ideas and how to Achieve Each of Them Lifehack, Ivan Dimitrijevic (31/12/16)
5 New Year’s Resolutions You Can Keep (With The Help Of Behavioral Science Research) Forbes, Carmen Nobel (3/1/17)
The science behind keeping your New Year’s resolutions BT, SNAP PA (30/12/15)
The Guardian view on New Year resolutions: fitter, happier, more productive The Guardian, Editorial (3/1/17)
The Behavioral Economics of Your New Year’s Resolutions The Daily Beast, Uri Gneezy (5/1/14)
The psychology of New Year’s resolution The Conversation, Mark Griffiths (1/1/16)
Apply Behavioral Economics for a Better New Year Wharton Blog Network, William Hartje (16/1/14)
The Kardashians Can Help Your New Year’s Resolutions Huffington Post, John Beeby (29/12/16)
Using economics to score with New Year resolutions The Hindu, Venky Vembu (4/1/17)
Be It Resolved The New York Times, John Tierney (5/1/12)
stickK ‘Set your goals and achieve them!’
- Explain what is meant by time inconsistent behaviour. Is this the same as giving future costs and benefits a lower weighting than present ones (and hence having to discount future costs and benefits)?
- Give some examples of ways in which your own behaviour exhibits time inconsistency. Would it be accurate to describe this as ‘present bias’?
- Would you describe not sticking to New Year’s resolutions as ‘irrational behaviour’?
- Have you made any New Year’s resolutions, or do you have any plans to achieve goals? Could you alter your own personal incentives and, if so, how, to make it more likely that you will stick to your resolutions/goals?
- Give some examples of ways in which the government could ‘nudge’ us to behave in ways that were more in our own individual interests or those of society or the environment?
- Do you think it’s desirable that the advertising industry should employ psychologists and behavioural economists to help it achieve its goals?
This rather strange question has been central to a storm that has been brewing between various celebrity chefs, including Jamie Oliver and Hugh Fearnley-Whittingstall, and the supermarkets. Supermarkets say that consumers don’t want irregular shaped vegetables, such as carrots, parsnips and potatoes. ‘Nonsense’, say their critics.
At the centre of the storm are the farmers, who find a large proportion of their vegetables are rejected by the supermarkets. And these are vegetables which are not damaged or bad – simply not of the required shape. Although these rejected vegetables have been described as ‘wonky’, in fact many are not wonky at all, but simply a little too large or too small, or too short or too long. Most of these vegetables are simply wasted – ploughed back into the ground, or at best used for animal feed.
And it’s not just shape; it’s colour too. Many producers of apples find a large proportion being rejected because they are too red or not red enough.
But do consumers really want standardised fruit vegetables? Are the supermarkets correct? Are they responding to demand? Or are they attempting to manipulate demand?
Supermarkets claim that they are just responding to what consumers want. Their critics say that they are setting ludicrously rigid cosmetic standards which are of little concern to consumers. As Hugh Fearnley-Whittingstall states:
‘It’s only when you see the process of selection on the farm, how it has been honed and intensified, it just looks mad. There are many factory line systems where you have people looking for faults on the production line; in this system you’re looking for the good ones.
What we’re asking supermarkets to do is to relax their cosmetic standards for the vegetables that all get bagged up and sold together. It’s about slipping a few more of the not-so-perfect ones into the bag.’
In return, consumers must be prepared to let the supermarkets know that they are against these cosmetic standards and are perfectly happy to buy slightly more irregular fruit and vegetables. Indeed, this is beginning to happen through social media. The pressure group 38 degrees has already taken up the cause.
But perhaps consumers ‘voting with their feet’ is what will change supermarkets’ behaviour. With the rise of small independent greengrocers, many from Eastern Europe, there is now intense competition in the fruit and vegetables market in many towns and cities. Perhaps supermarkets will be forced to sell slightly less cosmetically ‘perfect’ produce at a lower price to meet this competition.
Hugh’s War on Waste Episode 1 BBC on YouTube, Hugh Fearnley-Whittingstall (2/11/15)
Hugh’s War on Waste Episode 2 BBC on YouTube, Hugh Fearnley-Whittingstall (9/11/15)
Hugh Fearnley-Whittingstall rejects Morrisons’ ‘pathetic’ wonky veg trial The Guardian, Adam Vaughan (9/11/15)
Jamie Oliver leads drive to buy misshapen fruit and vegetables The Guardian, Rebecca Smithers (1/1/15)
Hugh Fearnley-Whittingstall’s war over wonky parsnips The Telegraph, Patrick Foster (30/10/15)
Asda extends ‘wonky’ fruit and veg range Resource, Edward Perchard (4/11/15)
Wearne’s last farmer shares memories and laments loss of farming community in Langport area Western Gazette, WGD Mumby (8/11/15)
Viewpoint: The rejected vegetables that aren’t even wonky BBC News Magazine (28/10/15)
Viewpoint: The supermarkets’ guilty secret about unsold food BBC News Magazine (6/11/15)
- What market failures are there is the market for fresh fruit and vegetables?
- Supermarkets are oligopsonists in the wholesale market for fruit and vegetables. What is the implication of this for (a) farmers; (b) consumers?
- Is there anything that (a) consumers and (b) the government can do to stop the waste of fruit and vegetables grown for supermarkets?
- How might supermarkets estimate the demand for fresh fruit and vegetables and its price elasticity?
- What can supermarkets do with unsold food? What incentives are there for supermarkets not to throw it away but to make good use of it?
- Could appropriate marketing persuade people to be less concerned about the appearance of fruit and vegetables? What form might this marketing take?
The 2015 Rugby World Cup is now well under-way, with record crowds, surprising results and some heartbreak. But what about the economic impact of the Rugby World Cup? Big sporting events bring in spectators (estimated to be 466,000), athletes and crucially they all spend money. But what happens when the host country doesn’t make it through? Unfortunately for all England fans out there, this is a very relevant question.
Go to the area surrounding a stadium on the day of a rugby world cup match and you will barely find a pub with any room to move. Spending on drinks and food in local pubs and restaurants on match days is extremely high and many hotels are at breaking point with reservations. Predictions were that there would be an increase in direct expenditure by international visitors of £869 million. A report by Ernst and Young looked at the Economic Impact of the Rugby World Cup 2015 and it provides detailed analysis of how such sporting events can generate benefits to the host nation. The highlights are:
- £2.2 billion of output into the economy
- £982 million of value added to national GDP
- £85 million in infrastructure
- 41,000 jobs across the country
- £1 billion of added value
But, what happens when you take out the host team? Suddenly we see less interest in the daily matches and the feel good spirit takes a dive. Of course, the other home teams are still around and English fans are being encouraged to support them, but commentators suggested that this early exit will have a significant economic impact. Alex Edmans from the London Business School suggests that when a host nation exits a rugby sporting event at an early stage, the pessimism can wipe 0.15% of the stock market the following day. This translates to around £3 billion for the UK. He noted:
A defeat makes investors more negative about life in general. If England were to lose, they wouldn’t just be negative about the England rugby team but also about economic outcomes in general.
Advertising revenues may also be hit, with a significant impact on ITV, who are showing all matches. With England out, the value of advertising slots has fallen and the advertising impact on some of the key England sponsors, such as O2, may be significant. However, English ticket holders may use this as an opportunity to make money, selling on their tickets to fans of surviving teams! The following articles and report from Ernst and Young consider this latest major sporting event that has come to the UK.
The Economic Impact of Rugby World Cup 2015 Ernst and Young 2014
An England Rugby World Cup exit could have knock-on effect for our stock market The Guardian, Sean Farrell (1/10/15)
Brands cheer on Rugby World Cup in face of England’s exit Financial Times, Malcolm Moore (4/10/15)
Rugby World Cup 2015: Early England exit could cost country £3bn International Business Times, Alfred Joyner (6/10/15)
Rugby World Cup brands play down commercial losses of England’s ‘lacklustre’ exit The Drum, Seb Joseph (5/10/15)
- What is an Economic Impact Analysis?
- How would you estimate the size of the multiplier effect of a sporting event, such as the Rugby World Cup?
- Following England’s exit, what happened to the stock market?
- How will media companies be affected by the Rugby World Cup and by England’s exit?
- Why do emotions affect the stock market?
- Do you think England’s exit will lead to greater spending in other parts of the country, such as Scotland and Wales, as England fans defect?