Tag Archives: Behavioral Economics

Cases

Feedback leads to virtual progress

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People seek for feedback about progress. When travelers arrive at the Chek Lap Kok International Airport, they catch a train to Kowloon and Hong Kong. In the train, there is a blue-light indicator which shows where the train is right now. This feedback gives correct information to travelers.

However, feedback is not always objectively given but can be subjectively manipulated. Virtual and illusory progress can be made by manipulating feedback. One of my favorite examples is the “purchase acceleration” suggested by marketing researchers. They reported that customers who received a 12-stamp coffee card with 2 preexisting “bonus” stamps (B) complete the 10 required purchases faster than customers who received a “regular” 10-stamp card (A). If the preexisting bonus stamps are presented in a more visually appealing way (like this), virtual progress could be further enhanced.

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Reference

Kivetz, R., Urminsky, O., & Zheng, Y. (2006). The goal-gradient hypothesis resurrected: Purchase acceleration, illusionary goal progress, and customer retention. Journal of Marketing Research, 43(1), 39-58.

The goal-gradient hypothesis denotes the classic finding from behaviorism that animals expend more effort as they approach a reward. Building on this hypothesis, the authors generate new propositions for the human psychology of rewards. They test these propositions using field experiments, secondary customer data, paper-and-pencil problems, and Tobit and logit models. The key findings indicate that (1) participants in a real café reward program purchase coffee more frequently the closer they are to earning a free coffee; (2) Internet users who rate songs in return for reward certificates visit the rating Web site more often, rate more songs per visit, and persist longer in the rating effort as they approach the reward goal; (3) the illusion of progress toward the goal induces purchase acceleration (e.g., customers who receive a 12-stamp coffee card with 2 preexisting “bonus” stamps complete the 10 required purchases faster than customers who receive a “regular” 10-stamp card); and (4) a stronger tendency to accelerate toward the goal predicts greater retention and faster reengagement in the program. The conceptualization and empirical findings are captured by a parsimonious goal-distance model, in which effort investment is a function of the proportion of original distance remaining to the goal. In addition, using statistical and experimental controls, the authors rule out alternative explanations for the observed goal gradients. They discuss the theoretical significance of their findings and the managerial implications for incentive systems, promotions, and customer retention.

Cases

Are fresh fish better than canned fish?

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I love canned sardines. Whenever I visit different cities, I buy a dozen of canned fish on the way back home. I was excited to find Annam Gourmet at Ho Chi Minh city, Vietnam because it has a wide variety of canned fish, along with fresh fish.

Canned fish are fish which have been processed, sealed in an airtight container such as a sealed tin can, and subjected to heat. Canning is a method of preserving food, and provides a typical shelf life ranging from one to five years.

Some say I am obsessed with canned fish. Others suggest me to avoid them. I have long wondered whether canned fish are bad for my health and whether over-consuming canned fish harm my health. Recently, I met an article released from Consumer Reports that canned fish are as healthy for us as fresh fish, particularly for sardines and salmon. For canned tuna, however, we should be cautious about mercury.

Thankfully, my love for canned sardines survives. However, it is difficult to correct a belief that canned fish are dangerous. Updating belief is unbearably challenging.

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Reference

Amir, O., & Ariely, D. (2007). Decisions by rules: The case of unwillingness to pay for beneficial delays. Journal of Marketing Research, 44(1), 142–152.

Since the emergence of neoclassical economics, individual decision making has been viewed largely from an outcome-maximizing perspective. Building on previous work, the authors suggest that when people make payment decisions, they consider not only their preferences for different alternatives but also guiding principles and behavioral rules. The authors describe and test two characteristics pertaining to one specific rule that dictates that consumers should not pay for delays, even if they are beneficial: rule invocation and rule override. The results show that money can function as the invoking cue for this rule, that the reliance on this rule can undermine utility maximization, and that this rule may be used as a first response to the decision problem but can be overridden. The article concludes with a discussion of more general applications of such rules, which may explain some of the seemingly systematic inconsistencies in the ways consumers behave.

Cases

If people avoid meeting with others, do marketers sell products online only?

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Nowadays people avoid meeting others. We could buy products through mobile phones and order food at screens inside restaurants. A recent virus outbreak even encourages us to stop shaking hands with strangers.

Ironically, the more we avoid meeting others, I believe, the easier others sell their products to us. When I visited Prezzemolo & Vitale, a local grocery store in Notting Hill in London, an employee brought a lump of meat on a board, cut it into thin slices, and passed them over to passers by. Interestingly, most of those who tried samples bought several pieces of different types of meat. I was not exception.

When he looked at me with a slice of meat, I inferred, he made an effort to approach me. This inference is rarely made when I stand in front of machines such as mobile phones or kiosks. I conclude that when we meet people and machines, we may have different inference: people make effort to come close to us whereas machines do not. This inferred effort may play a critical role in determining our next behavior such as buying a product.

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Reference 1

Morales, A. C. (2005). Giving firms an “E” for effort: Consumer responses to high-effort firms. Journal of Consumer Research, 31(4), 806–812.

This research shows that consumers reward firms for extra effort. More specifically, a series of three laboratory experiments shows that when firms exert extra effort in making or displaying their products, consumers reward them by increasing their willingness to pay, store choice, and overall evaluations, even if the actual quality of the products is not improved. This rewarding process is defined broadly as general reciprocity. Consistent with attribution theory, the rewarding of generally directed effort is mediated by feelings of gratitude. When consumers infer that effort is motivated by persuasion, however, they no longer feel gratitude and do not reward high-effort firms.

Effort not only dictates our behavior. It helps us enjoy what we do.

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Reference 2

Norton, M. I., Mochon, D., & Ariely, D. (2012). The “IKEA Effect”: When labor leads to love. Journal of Consumer Psychology, 22(3), 453–460.

In four studies in which consumers assembled IKEA boxes, folded origami, and built sets of Legos, we demonstrate and investigate boundary conditions for the IKEA effect-the increase in valuation of self-made products. Participants saw their amateurish creations as similar in value to experts’ creations, and expected others to share their opinions. We show that labor leads to love only when labor results in successful completion of tasks; when participants built and then destroyed their creations, or failed to complete them, the IKEA effect dissipated. Finally, we show that labor increases valuation for both “do-it-yourselfers” and novices.


Cases

Why do people choose beers on the left side of the menu?

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One of the most famous pubs in Prague, Czech Republic, is Strahov Monastery Brewery.

Perched atop the city part of the Strahov Monastery compound and the lush surrounding Petrin Hill, the Strahov Brewery is a delightful find in the bustling city of Prague. Just steps from the massive Prague Castle complex, the microbrewery serves about ten variations of St. Norbert beer (3 all year round and 7 seasonally) and the brews are all delicious and fresh with crisp hints of unique flavors.

This brewery has an eye -pleasing beer menu. It introduced five different beers with color, ABV (Alcohol By Volume), IBU (International Bittering Units) scale, description, hops, availability, price, and food pairing. Much like the positioning map beer menu at the Fairmont Chateau Lake Louise, the Strahov Brewery menu eased the burden of my decision-making.

Interestingly, I found that everyone ordered Amber Larger, Dark Larger, or IPA. These three beers were placed on the left side of the menu and each one was supported by its own comment: representing 70% of the production, award winning, or brew master recommended. I noticed that a vertical line in the middle of the menu plays a role of the “visual barrier” and therefore the two beers on the right side did not attract attention. The menu designer used mere categorization effect smartly.

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Reference

Mogilner, C., Rudnick, T., & Iyengar, S. S. (2008). The Mere Categorization Effect: How the Presence of Categories Increases Choosers’ Perceptions of Assortment Variety and Outcome Satisfaction. Journal of Consumer Research, 35(2), 202–215.

What is the effect of option categorization on choosers’ satisfaction? A combination of field and laboratory experiments reveals that the mere presence of categories, irrespective of their content, positively influences the satisfaction of choosers who are unfamiliar with the choice domain. This “mere categorization effect” is driven by a greater number of categories signaling greater variety among the available options, which allows for a sense of self‐determination from choosing. This effect, however, is attenuated for choosers who are familiar with the choice domain, who do not rely on the presence of categories to perceive the variety available.

Cases

How could we stop cigarette butt litter?

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Cigarette butts are the tail ends of the cigarette left over after someone has smoked it. They are under-acknowledged, but widespread, pollutants. At the Quora, someone said the following.

In fact, thanks to the fact that for decades smokers just didn’t care where they threw them, there are very likely cigarette butts in the Amazon rain forest, at the North Pole, and on the fast-disappearing Ross Ice Shelf in Antarctica. Practically the only place they are difficult to find is where they belong – in the trash bin.

To tackle this issue, various efforts have been suggested. According to Tara Rohan, for instance, posters and videos have been provided to educate people about the environmental impacts of cigarette-butt litter. Alternatively, cans have been installed in select neighborhoods. Most of these efforts aim to nudge smokers to throw cigarette butts in trash bins. Recently, I have noticed an interesting approach in London, UK.

At the Portobello Road market in London, bins are installed for those who want to throw gums and cigarette butts. For an unidentified reason, these bins have baby faces. As research suggests that large, round eyes, high eyebrows, and a small chin yielded the perception of a babyish facial appearance.

Since baby face or Kindchenschema (baby schema) is “related to the vulnerable nature of a living entity, it elicits responses from adults that increase the infant’s chance of survival. These include increased attention to and protection of the helpless infant (Brosch, Sandder, and Scherer 2007; Lorenz 1943) and increased carefulness and caretaking behavior (Sherman, Haidt, and Coan 2009). (Nenkov et al. 2014, pg. 326)”

Although adding a human face to the tip jar backfires, having a baby face even contributes to the success of high-ranking Black executives. Designing cigarette bins like cute babies must be effective to collect cigarette butts. I wish similar bins are installed in other markets and cities as well to stop cigarette butt litter.

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Reference

Livingston, R. W., & Pearce, N. A. (2009). The teddy-bear effect: Does having a baby face benefit black chief executive officers? Psychological science, 20(10), 1229-1236.

Prior research suggests that having a baby face is negatively correlated with success among White males in high positions of leadership. However, we explored the positive role of such “babyfaceness” in the success of high-ranking Black executives. Two studies revealed that Black chief executive officers (CEOs) were significantly more baby-faced than White CEOs. Black CEOs were also judged as being warmer than White CEOs, even though ordinary Blacks were rated categorically as being less warm than ordinary Whites. In addition, baby-faced Black CEOs tended to lead more prestigious corporations and earned higher salaries than mature-faced Black CEOs; these patterns did not emerge for White CEOs. Taken together, these findings suggest that babyfaceness is a disarming mechanism that facilitates the success of Black leaders by attenuating stereotypical perceptions that Blacks are threatening. Theoretical and practical implications for research on race, gender, and leadership are discussed.

Cases

How many items should be displayed in a store?

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When we are curious about value of an unknown object, we often consider how many people surround it. If it is alone, we believe it is expensive. If it is surrounded by many others, we believe it is cheap. This is because, according to O’Guinn’s et al. (2015), as the social density of a given space increases, “inference of the subjective social class and income of people in that space” fall. Although we like different degrees of crowdedness (D&Department in Tokyo) and even view the same degree of crowdedness differently (Kronen Vanlose in Copenhagen), crowdedness decreases the value of a product.

O’Guinn, T. C., Tanner, R. J., & Maeng, A. (2015). Turning to space: Social density, social class, and the value of things in stores. Journal of Consumer Research, 42(2), 196-213.

This article is about social space and material objects for sale within that space. We draw primarily on Goffman’s (1971) concepts of use space and possession territories to predict that as the social density of a given space increases, inferences of the subjective social class and income of people in that space fall. Eight studies confirm that this is indeed the case, with the result holding even for stick figures, thus controlling for typical visual indicators of social class such as clothing or jewelry. Furthermore, these social class inferences mediate a relationship between social density and product valuation, with individuals assessing both higher prices and a greater willingness to pay for products presented in less crowded contexts. This effect of inferred class on product valuation is explained by status-motivated individuals’ desire to associate with higher-status people. To the best of our knowledge, this research is the first to reveal the link between social density, status inferences, and object valuations. As such, it makes a novel contribution to what has come to be known in sociology as the topological turn: a renewed focus on social space.

Then, could we apply the same logic to stores where products are surrounded by other products? In other words, does “product crowdedness” decrease product value as well? This is an important question as stores display items in different ways.

Some stores display various items with a lot of stocks. For instance, at Annam Gourmet, Ho Chi Minh, only a few cans of sea food are on the shelf space with multiple stocks.

Other stores display only few items with few stocks. For instance, Decium, a Canadian cosmetic company introduces a few items without showing their stocks.  

Two contrasting examples show that stocks determine the perceived value of products. Designers and marketers should decrease the number of products displayed in the store to increase their perceived value. There is a 8-minute video about an inside look at Decium to see how the company has managed to find success in the highly competitive, the multi-billion-dollar world of skin care.

Publications

Apply behavioral economics to sell design more

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ADR_2019_v32n1_61_f001

Background People often choose between two competing options: option A (aesthetically superior but functionally inferior) and option F (functionally superior but aesthetically inferior). We hypothesize that people like option A more when it is presented with option F (joint evaluation) than when presented alone (separate evaluation) because people find aesthetic attributes are hard to evaluate. We further hypothesize that this effect holds neither for option F nor among experts.

Methods We briefly reviewed two cases in the Korean automobile industry and then conducted two experiments in China. In the first experiment, we compared preferences about two USB drivers between two evaluation modes. In the second experiments, we compared preferences about two basketball shoes in the joint evaluation between novices and experts.

Results We found from the first experiment that participants increased their preferences for option A in the joint evaluation compared to the separate evaluation. Their preferences for option F did not differ between the two evaluation modes. In the second experiment, only novices preferred option A over option F in the joint evaluation. Experts did not prefer option A over option F.

Conclusions Our findings contribute to the scholarly discussions about form and function. They also provide practical implications to designers and marketers who need to sell aesthetically pleasing products. This work goes beyond design marketing interface to add evaluation mode as an intervention to nudge people to choose aesthetically pleasing products, which has been barely discussed in behavioral economics.

Keywords:

Aesthetic, Behavioral Economics, Function, Intervention, Knowledge, Marketing, Nudge

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Cases

Design Thinking vs. Behavioral Economics

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Crate and Barrel sells various cookware. Most products in this store are grouped into product categories. However, some are grouped into why we need them. There are two “ad hoc” categories.

One is “7 Essentials for Every Kitchen.”

The other is “Everything You Never Knew You Needed.” 

Ad hoc categories, coined by Barsalou, motivate impulse buying. I bought some tools I did not plan ahead and saw some customers standing in front of one of the two sections for a while.

Interestingly, the two ad hoc categories in the Crate and Barrel tap into different psychological processes.

“7 Essentials for Every Kitchen” are the products selected by others. They nudge me to follow others, which is often recommended by behavioral economists. In contrast, “Everything You Never Knew You Needed” are the products useful for me. They help me discover my own unmet needs, which is often suggested by design thinkers.

Then, which framing is more effective between “competing against others” and “following your heart”?

I believe we could answer this question by comparing the sales numbers between spatula and dual citrus squeezer. The two products belonged to the “Everything You Never Knew You Needed” four years ago. Now, only spatula belongs to the [7 Essentials for Every Kitchen]. If spatula sales increased and squeezer sales did not, behavioral economics beats design thinking. In contrast, if spatula sales dropped and squeezer sales did not, design thinking beats behavioral economics.

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Reference

Barsalou, Lawrence W. (1983), Ad hoc categories, Memory & Cognition, 11 (3), 211-227.

People construct ad hoc categories to achieve goals. For example, constructing the category of “things to sell at a garage sale” can be instrumental to achieving the goal of selling unwanted possessions. These categories differ from common categories (e.g., “fruit,” “furniture”) in that ad hoc categories violate the correlational structure of the environment and are not well established in memory. Regarding the latter property, the category concepts, concept-to-instance associations, and instance-to-concept associations structuring ad hoc categories are shown to be much less established in memory than those of common categories. Regardless of these differences, however, ad hoc categories possess graded structures (i.e., typicality gradients) as salient as those structuring common categories. This appears to be the result of a similarity comparison process that imposes graded structure on any category regardless of type.

 

Cases

Why do people exit the bus at the front door?

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At Quora, someone asked “Why do people exit the bus at the front door even when it’s not crowded?” It received seven answers.  

  1. Habit. If a bus has two doors it is actually more efficient for passengers to exit by the back door as any new passengers enter through the front door. However, most people use the front door when exiting out of habit, sometimes even walking the full length of the bus to do so.
  2. I do it for two reasons. First: I do it because I may be transferring to another bus. And believe me, getting out the back door vs. the front can make the difference between making your next bus and missing it. It happens sometimes, and i never know which time it will be. Second: I do it so I can thank the driver personally. They have a tough job. Lots of people abuse them. I like to treat them well.
  3. Because it is safer. Using a back door bears the risk that the bus driver won’t see you and could slam the door on you or depart while you are in mid-air. It has happened to me on more than one occasion.
  4. I do so mostly out of habit but also so that I can thank the driver. These women and men sometimes cop abuse that is quite unwarranted in my view. They deserve the same courtesy as everyone else and for getting me to my destination safely and comfortably. 
  5. Maybe they were closer to the front than rear. Maybe they did not feel like walking to the rear. Maybe they were unsure if the rear is crowded. Maybe they were absent-minded and accidentally took the front. Maybe they figured it doesn’t matter. There could be many ‘maybes’, all with their own reasons, only way to be sure is to ask.
  6. Handicapped people find it easier to use the front. The driver can pull closer to the curb and “kneel” the bus to make it easier for cane-users. Wheelchair-users need the ramp in the front of the bus.
  7. If they are sitting right at the front of the bus it is the closest door. It is normal to just exit at the closest door.

All the answers were based on the assumption that people should enter the bus at the front door. I used to have the same thought before I went to Prague and Nagasaki where the front door of the bus was designed differently.  

At these two cities, passengers get off the bus at the front door. In other words, at Prague and Nagasaki, people exit the bus at the front door not because of habit or convenience but because they are educated and trained. Something that was taken for granted to me was not to them.

Cases

A choice architecture to reuse hotel towels

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Banff Aspen Lodge has an interesting environmental incentive program. If guests stay two or more nights and prefer no housekeeping service in this hotel, it offers a choice of options for the guest’s consideration:

  • Option 1: The hotel will make a donation of $4 on behalf of guests to the Banff Community Foundation, which supports environmental initiatives in their community. To select this option, guests insert the Green Card into the entry door lock.
  • Option 2: Enjoy one complimentary beverage at the Whitebark Cafe, which is located in the lobby. To select this option, guests insert the Yellow Card into the entry door lock. A complimentary beverage coupon is delivered to the guest’s room. 

I suspect someone carefully designed a choice architecture with a psychological intervention to nudge guests to choose “No” housekeeping service. This program will be effective because…  

  1. Three options are provided (housekeeping vs. environmental 1 vs. environmental 2). It differs from the choice architecture commonly observed in the behavioral economics in which two competing options are provided. Having three options may relieve the guests’ burden, which decreases their intentions to defer choices.  
  2. Only two environmental options are highlighted. As guests read and think about “how” to protect environment, the chance they select one of the two environmental options may increase.
  3. Two environmental options reflect the two motivations why people should behave environmentally friendly; helping others (charitable giving) and helping themselves (economic incentive). 
  4. Finally, when guests select one environmental option, they do not speak or write down but simply insert a card into their own entry door lock. This simple behavior has no peer pressure. 

This environmental incentive program might be more effective than making a commitment at check-in, a scientifically proven intervention in the prior marketing paper. 

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Reference

Baca-Motes, K., Brown, A., Gneezy, A., Keenan, E. A., & Nelson, L. D. (2012). Commitment and Behavior Change: Evidence from the Field. Journal of Consumer Research, 39(5), 1070–1084.

Influencing behavior change is an ongoing challenge in psychology, economics, and consumer behavior research. Building on previous work on commitment, self-signaling, and the principle of consistency, a large, intensive field experiment (N = 2,416) examined the effect of hotel guests’ commitment to practice environmentally friendly behavior during their stay. Notably, commitment was symbolic—guests were unaware of the experiment and of the fact that their behavior would be monitored, which allowed them to exist in anonymity and behave as they wish. When guests made a brief but specific commitment at check-in, and received a lapel pin to symbolize their commitment, they were over 25% more likely to hang at least one towel for reuse, and this increased the total number of towels hung by over 40%. This research highlights how a small, carefully planned intervention can have a significant impact on behavior. Theoretical and practical implications for motivating desired behavior are discussed.