First published in Research World September 2010
Simon Chadwick talks to best selling author Dan Ariely about marketing, emotions and the future of market research.
It’s my pleasure to have with me Dan Ariely, who is the James B. Duke Professor of Psychology and Behavioural Economics at Duke University, and the author of the bestselling book Predictably Irrational. Dan, welcome!
So behavioural economics, and Predictably Irrational in particular, is about observing how people actually behave, in particular with money. What does behavioural economics teach companies about marketing?
A lot I think and it depends on how you think about marketing. I believe that marketing is generally misunderstood. You have two functions for marketing: one function revolves around what to do with a product once it is already in existence, and how do you sell it - this is not always useful. The second approach, looks at product design. Imagine a specific product that you are going to design. The question is how are you going to design it so that it fits your customers? So that it’s actually useful for them. From that perspective, understanding how people behave, exactly how they behave, what motivates them and so on, is an incredibly useful piece of information to have.
I’ve heard this described as marketing that is related to the jobs to be done in people’s lives. Is that what you’re talking about?
I haven’t heard this description but I think it’s very nice. Let me give you an example. I was at a big company two weeks ago which manufactures mealtime insulin – something that people would need to take just before they have a big meal. If people don’t take it before the meal it has obvious negative consequences, but the problem is that only about thirty percent of people take it on time. Now the medication itself is good, it helps to dramatically slow down the progress of a terrible illness called Type 1 and Type 2 diabetes. If the disease progresses beyond a certain stage, there’s nothing you can do, you will have eye problems and vascular problems, amputations and so on.
So the mechanics and the biology of this disease have basically been solved, but the problem is human psychology and motivation, which, it turns out, is the bigger barrier of the two. If companies can actually start understanding this psychology, they can take tremendous steps forward.
And how do you approach actually looking at what people do … what the motivations are behind those seventy percent of people who don’t take it on time?
The fact is that it’s really hard – I mean, medical compliance in the US is very low. There was a time when I had to take a very difficult medication for about a year and a half. Each time I took one of these injections I basically felt sick for about sixteen hours. This was a medication that could have been really good for me in the long term, it would have prevented me from getting liver cirrhosis, but in the immediate term it was very unpleasant to take. That’s what happens with most medications, it’s a trade-off between now and later. As it turns out when we’re facing these trade-offs, we usually fail. It’s the same with overeating, under saving, not exercising, medical compliance, and having unprotected sex. We have good long-term plans but bad short-term plans, and it turns out that we just end up failing.
In understanding how human beings react and how they behave, there are also attitudes that we have to take into account. For example, you talk about there being a natural distrust of marketing. Can you explain that a little bit more?
Yes. I don’t think that it’s a natural distrust, it’s just that this is the current nature of how things are. So here is what happened. You know the expression, ‘the tragedy of the commons’?
The tragedy of the commons started by describing a situation in which there were a group of farmers, each farmer had one cow, and the cows grazed in an area which was called the Commons. As long as every farmer had one cow, all was well. But one day one farmer decided to have two cows, and all of a sudden there was just not enough food for all the cows. Slowly the cows dwindled, didn’t have enough milk, and everybody suffered. I think this is a very good analogy for what’s happening to marketing in general. It could be potentially beneficial for an individual company to cheat, or be dishonest, or exaggerate claims. But overall, it’s bad for the whole industry and has caused people to have a really high level of mistrust.
You talk a lot about emotions and you’ve found that our decision-making can actually fluctuate tremendously depending on our emotional state. I’d be interested to hear a little bit more about how that works and what that means for interacting with people and asking them what they’re going to do.
Emotion is the most basic part of our brain, it is the most basic building block of the brain. You do not find emotion and cognition working together – when emotions are invoked by the outside world, they basically get played out. You get annoyed, you have an automated reaction to deal with annoyance. You get aroused, you do it. You feel happy, you do something with it. The big challenge is that we have a hard time understanding how our emotions work. For example, you can sit here now and say, ‘When I go to a restaurant, and the waiter shows me a chocolate soufflé, I am going to resist the temptation and I’m going to say no thank you’. But the fact is that you’re not smelling the chocolate soufflé, and you don’t see it close to you. You can have all the good intentions in the world, but execution at the right moment will be much, much more difficult.
OK. Let me switch subjects for a moment here. In the book, you discuss the difference between market norms and social norms, and the dangers that exist from mixing them up. Can you elaborate on that a little bit?
Yes. Here’s the basic story, if I ask you, “Would you help me change a tyre on my car?” You will decide whether you’ll do it or not. If I ask, “Would you help me change the tyre on my car for three dollars?” The norm has changed. People then say to themselves, ‘I was happy to do it for free, but now that you’re paying me I feel very differently about it, and I will charge you’. There is no pleasure in helping plus three dollars – instead now it’s just about the three dollars. At this stage you think to yourself, ‘I don’t work for three dollars!’ We can give people an additional amount of money and actually decrease the amount of motivation they have.
Consumers are the same, they are willing to do lots of stuff, think about all the times you’ve been a beta tester. Risking your computer to help a company test their product. The reason we’re willing to do it is because we have a relationship with companies, we appreciate what they’re doing and we’re willing to do things in return. But if companies tell us that this is not the case, and they don’t care about us as consumers, then we say ‘No thank you’. I’m not willing to do anything out of the ordinary for you. It means that if I’m upset with you, I will leave you immediately, I will badmouth you if that’s what I feel, it just basically means no loyalty and no caring.
And that has an implication for marketing. Let’s take – I think you had an example in the book of a bank that markets itself as, ‘We’re all family here’, and if you end up overdrawn they immediately stings you with a $35 fee.
Right. I’ll give you an example, from this weekend. My bank started charging me $25 a year insurance for a tiny overdraft. This seemed unreasonable. For a long time I was a, silver, gold, platinum, whatever they had, customer and there was a relationship with the bank, so I stayed with them. I probably had too much money there, I did too many things with them and I kept money there even though they have a very low-earning CD. But now that they are starting to negotiate over $25 for this overdraft protection, I’m probably going to switch banks.
In the book you talk about professional ethics as a social norm. The market research profession has laid great emphasis on ethics and its ability to self-regulate as a result. What would be the dangers, in your mind, of our breaching those ethics? Or our breaching them?
The problem is a slow painful downward spiral, where everybody suffers. It’s the tragedy of the Commons. Think about online dating as an example – it’s standard to lie, and because of that everybody lies, and everybody expects to be lied to, and the whole system is just not working as well as it should. It is really hurting everybody in the profession. Again, it helps individual people who are lying, in the short term, but not in the long term.
So finally Dan, given that people are not rational, but are predictably irrational, what advice would you have for the market research profession as it tries to understand and predict what people will do?
I think the first point is to re-examine how people do market research. If you agree that people’s intuitions are mediocre, then the question is how much do you want to trust these intuitions? Maybe a great starting point, is to say, ‘Let’s stop doing as many focus groups as we’re doing, let’s stop getting cold, calculated reactions to decisions that have an emotional component.’ Let’s also try to understand the environment of the decision, because, we are different in different decision environments, and unless we understand how different we are and how it influences our decisions, we are not going to capture the consumer. We need to understand this connection to a greater extent.
Dan Ariely is the James B Duke professor of Psychology and Behavioral Economics at Duke University and the author of “The Upside of Irrationality,” and “Predictably Irrational.” He was interviewed by Simon Chadwick, Managing Partner of Cambiar, USA and Editor in Chief of Research World