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Management in Practice

Rethinking Marketing and Customers: Lessons from Behavioral Economics

Four experts gave a wide-ranging overview of how insights from behavioral economics are being applied in governments, businesses, and other organizations.

  • Ravi Dhar
    George Rogers Clark Professor of Management and Marketing & Director of the Center for Customer Insights
  • Emily Haisley
    Vice President, Behavioural Finance, Barclays
  • Michael Sanders
    Principal Advisor and Head of Research, The Behavioural Insights Team
  • Ned Welch
    Senior Practice Expert, McKinsey & Company

The relatively new field of behavioral economics incorporates a range of disciplines, from cognitive science to marketing, in order to paint a more nuanced and whole portrait of human behavior in the marketplace. One of its key revelations has been that consumers are neither fully rational nor fully aware of what drives their own economic decision making.

But turning the tightly controlled and sometimes narrow findings of academia into practicable solutions is not always easy. So how does behavioral economics work (or not work) under real-world conditions?

Coming together to discuss this question on February 6, three experts in the field with diverse perspectives joined in conversation with Ravi Dhar, the George Rogers Clark Professor of Management and Marketing and the director of the Center for Customer Insights at the Yale School of Management. Dhar opened with a broad inquiry, asking his three panelists—one working in government, one from banking, and one from a management consulting firm—for examples of the kinds of questions for which behavioral economics is beginning to illuminate interesting new solutions.

“For any area of government policy, behavioral economics has a place,” said Michael Sanders, the principal advisor and head of research for the Behavioural Insights Team, a “social purpose company” that originated within the British government. The company, established in 2010, applies core insights from behavioral economics to the challenges of governance. Its most famous experiment was designed to—and successfully did—mitigate tax noncompliance, reducing an annual loss to the government exchequer of tens of billions of British pounds. More recently, Sanders and his coworkers have started exploring the application of behavioral economics to issues of unemployment, healthcare, education, sustainability, and even counterterrorism.

Coming from the private sector, Emily Haisley, vice president of behavioral finance at Barclays, offered a specific example of how behavioral economics changed the way she viewed portfolio development for the bank’s individual clients. “The common approach when thinking about investments is to focus on the numbers,” she said. “But we took a totally different approach, and we focused on the role of emotion, of personality, of a person’s irrational side.”

In practice, this meant using a financial personality assessment to determine how a person’s subconscious nature might play into investment decisions. The result of this survey allowed Barclays to assess likely behavioral biases, like low composure in the face of adversity or overconfidence. The goal then became multidimensional—figuring out a way for clients to, as Haisley put it, “trade off optimal financial returns with an emotional journey they can live with.”

Even when there is evidence that behavioral economics can be useful, the discussants said, there are challenges in applying it fruitfully. Ned Welch, a senior practice expert at McKinsey & Company, noted that companies today are “typically factionalized,” in that business leaders, engineers, designers, and marketers are all trained to think in distinct ways about products or services. But applied behavioral economics requires collaboration—a concerted effort to consider the “entire decision journey that a consumer goes through,” he explained.

Welch also described the frequently missed opportunity for the application of behavioral economics in business-to-business situations. “It always surprises me when people say that behavioral economics isn’t relevant for B2B,” he said. Nudging is often considered a tactic for affecting individual behavior, but, as Sanders pointed out, businesses are nothing more than collections of individuals; behavioral economics principles that work when applied to individuals thus tend to work equally well when applied by one business (or government) to another business.

A core focus for practitioners remains the continued translation of academic work into practical tools. “The methods lag behind the theory,” Dhar said, and the panelists agreed. Haisley described persistent skepticism about the reliability of academic results or their replicability “in the noise of the real world.” For Sanders, surmounting such concerns has required large-scale field experiments to rigorously retest published results and tweak them to suit specific contexts.

Dhar also asked about potential consumer fear over manipulation. Do subtle interventions, he asked, ever evoke backlash? Sanders acknowledged that people can at first be hesitant about the effects of behavioral economics; but, he continued, no environment exists that is nudge- or manipulation-free. Given that, Sanders mused, “is there a space for government to intervene?” He also noted that government, as opposed to the private sector, provides a measure of transparency and accountability.

In Haisley’s experience, the consumer reaction to behavioral economics in the banking sector has for the most part not been one of fear or hesitance, but wholehearted embrace. For instance, as part of her work on pension plans, she has asked employees how they felt about systems that are designed to encourage them to shunt more money into their retirement accounts. Employees, Haisley said, “expressed a lot of gratitude for an employer trying to nudge them toward better decisions.”

For Welch, the lesson from pension plans is simple and broadly applicable: “The boundaries around what’s acceptable and what’s not are very hard to grapple with, and my advice to companies is simply to ask.”

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