What is Behavioural Economics?
Behavioural Economics is the study of the economic analysis of the human psychological decision making process which leads to an understanding of why humans do the things they do. From the businesses – customer relationship, insights into human behaviour, particularly in the fast changing environment, is a fundamental requirement and the most important question is why? Why do humans do the things they do and why do they change tastes from one product to another? Humans are continuously making decisions and as they make them, businesses make them also. However, technology is changing and businesses do not need to wait for customers to change their preferences or habits. Businesses can actually do this for them, therefore putting themselves ahead of the competition and this is where behavioural economics and technology is helping today.
The fundamental question today in behavioural economics is why? Every individual employs a product to fulfil a certain function. This is similar to employers hiring employees to do a particular job. If our car breaks down, we take the car to a mechanic to get the car fixed. But what is the process behind the garage we take the car to? For example, some individuals may take the car to an independent mechanic working for himself because: (i) the mechanic is cheaper than a main dealership; (ii) the customer will be prioritised; (iii) the mechanic is highly reliable and values your business; (iv) there is a friendly and honest relationship between the mechanic and the customer. This is not to say that these parameters do not exist with a main dealership. However, once any part of these parameters change, the customer could relinquish his relationship with the mechanic in favour of an alternative.
The competitive edge for businesses (the behavioural 'nudge')
Changes could also in part be due to changes personal circumstances in humans. The decision making processes in humans are the lifeblood of businesses and without this knowledge and understanding, how do businesses know what their customers desire. Technology today has changed this and businesses need to use the functions of behavioural economics and technology to this end. With this in mind, and taking into account that learned behaviour is at the centre of our understanding (behavioural traits passing from one person to the next), changes in taste can often be uniform and occurring at the same time. Behavioural Economists have often induced a behavioural 'nudge' to influence people's decision preferences. This is a new method of 'testing' the market whilst at the same time, prompting or manipulating people to make the decisions you wish them to make. This method provides a competitive edge to businesses, and has become increasingly important for managers today.
Perhaps the most incredible story at the end of the last century is that of the author JK Rowling who as an aspiring writer, created a fictional set of novels aimed for a specific market. Having completed the first book, she sent the first few chapters to 12 publishing houses who were tasked with identifying whether her transcript had commercial value. In each instance, the transcript was rejected with feedback to the author in some cases. Having failed at this point, the author sent the transcript to a final publisher who's chairman gave the script to his 8 year old daughter. The daughter excitedly requested more, and the rest is history. Sadly, the initial publishers failed to understand the behavioural mindset of the average 6 - 10 year old. Behavioural Economics suggests that children enjoy mystery, wizardry, magic and adventure and if these concepts were part of the process of the publishing houses, they would have realised the potential, rather than rejecting what has now become a multi-million pound concept.
Adaptation to innovation
Central to this is the analysis of how human preferences change and how businesses adapt. For many businesses, adapting to preference changes can be a little too late. For example, central banks make policy decisions with respect to interest rates by monitoring inflationary pressures building in an economy. They tend not to wait until the pressures have built up, then react – rather, they react as the build up is begins. This is no different to changing preferences. Businesses must be in a position to react to changing preferences, and this is the point at which businesses innovation plays a part. As preferences are changing, humans are often not entirely sure as to what their exact desires are. They simply know that they need something different. This is where product creation in the form of innovation can drive customers towards a particular product or desire. This is where businesses can ‘get ahead of the market’ and move before the main market moves. Innovation is the key to business’ success and once businesses take advantage of technology and grasp the understanding of human behaviour, market share and profits would result.
Dr. Victor Chukwuemeka
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