Behavioral economics focuses not only on the what and how of consumer behavior, but also on the why. Even more importantly, the theory draws heavily from the field of psychology. It helps to explain “irrational” consumer behavior like spending patterns that ignore statistical odds.
Economics has always been principally a numbers game. But marketing? Marketing is about people – the customers and clients you’re seeking to serve. With a greater understanding of consumers’ buying habits, you have the knowledge you need to create more effective marketing campaigns that speak to your target audience.
Though they’re different disciplines, economics and marketing can be mutually beneficial endeavors. In fact, for marketers looking to build strong, enduring connections with prospective and existing customers, the field of behavioral economics may well be the greatest tool in your toolbox.
Behavioral economics is a branch of economics that deploys psychological principles to analyze and explain how people buy, spend, and save under diverse conditions. This field is predicated on the recognition that people often behave in ways that, from the perspective of a pragmatic statistical analysis, are unpredictable, irrational, or illogical.
It seeks to take some of the guesswork out of the field of economics, understanding that humans are often driven by motives and impulses that defy quantification. From a marketing standpoint, behavioral economics provides a critical new dimension in the effort to profile the target consumer and predict and influence their behavior.
Theories derived from behavioral economics are grounded in the recognition that human beings rarely, if ever, operated under the controlled and predictable environment of the research laboratory. Rather, they live their lives, make their decisions, and enact motivated behaviors under conditions of uncertainty. Essentially, humans are always engaging in some form of risk analysis and management.
Loss aversion and prospect theory are two of the most important behavioral economic concepts you need to understand. These interconnected theories state that humans evaluate prospective losses and gains differently, generally assigning greater weight to potential losses than to potential gains.
This means that people are more likely to act to avoid an unlikely loss than to secure a more likely, but not certain, gain. It explains why people tend to grossly exaggerate the prospect of a loss and underestimate the potential for gain when given a choice between the two.
Research consistently finds that, when given a choice between a small but certain gain and a much larger but uncertain gain, a significant majority will choose to take the smaller reward. This is true even when the probability of securing the much larger reward is very high. An empirical analysis of cost/benefit ratios would likely recommend that the individual take the risk of pursuing the larger gain. But human psychology almost inevitably elects the “safest” option.
For marketers, understanding the psychological underpinnings of loss aversion can be a powerful tool to engage and motivate your target consumer. The key, however, is to define how your target audience understands their risks and weighs their prospects. Tools such as mind maps can help you get inside your consumers’ heads, allowing you to follow their decision-making process, weigh all the factors they consider before purchasing, and tailor your campaigns accordingly.
This is why, for example, promotional campaigns often feature “free” products or services, even if they are of relatively little market value. A free item carries little or no tangible risk. This means consumers are likely to be more motivated to choose a free promotional item over a more valuable option, even though the potential gain may be relatively small.
There’s a great deal of universality in human psychology. Our human needs, motivations, and fears seem to vary very little across demographic categories. However, there are still some salient differences across generations and demographics. If you want to use behavioral economics to power your marketing, you must understand these differences to prevent overgeneralization and poor engagement with your target audience.
For example, research suggests that older generations tend to be more risk averse than younger generations, especially when it comes to avoiding potential losses. This means marketing strategies like gamification — which offer both substantial risk and the potential for instant gratification — can be highly effective when targeting some demographics. For others, gamification offers an unacceptable level of uncertainty.
Given the indisputable motivational variations across the generations, marketing managers would do well to harness the potential of a multigenerational workforce (despite the difficulties this can present). Marketing teams representing all age demographics can serve as a microcosm for the challenge facing marketers who seek to reach target audiences of different ages. At the same time, such diversity can provide a sort of ready-made psychological laboratory, enabling teams to formulate and test marketing campaigns based on the insights derived from the various generational cohorts which comprise the team.
Behavioral economics restores the human aspect to the quantitative sciences. Its mission is to understand why people behave in the often “irrational” ways they do, particularly under risky and uncertain conditions. For marketers, insights derived from behavioral marketing can be a potent tool for defining, predicting, and engaging target audiences.
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