Category Archives: Emotional context

The Psychology of Pokemon Go

Learn the psychological secrets of Pokémon Go’s success!

In just two weeks Pokemon Go, the augmented reality smartphone game designed by Niantic, achieved over 21 million active users in the US, more than Candy Crush did at its peak. The game’s popularity has quickly spread in other countries  and it is now becoming a global phenomenon. So, why did Pokemon Go become a such an instant success and what are the psychological buttons that it pressed to create so many engaged users?

1. Nostalgia from a childhood brand:

Pokemon is a brand that has been established and has grown across multiple entertainment categories for over 20 years. This provided Pokemon with the opportunity to target an existing and passionate audience of players who grew up in the 1990’s and wanted to indulge in an old obsession. This instantly helped Pokemon Go establish itself on a new platform (smartphones and tablets) and created the conditions for the game to spread through social networks to a more diverse and younger audiences.

Image of implicit goals
Source: Decode Marketing

The desire for adventure and escapism is just one of a number of implicit psychological goals that motivate brand choice. Using the latest research from psychology and neuroscience marketing consultant Phil Barden has identified 6 key psychological goals that brands can be perceived to meet. The extent to which people perceive that a brand will fully meet certain psychological goals that they find compelling will help determine which one they choose.

Image of Pokemon Go in App store
Source: Pokemon Go, Niantic Inc, iOS App Store

Learning: Leverage brand equity by targeting existing engaged customers to give you a head start to building your app store presence.  Ensure brand communications target appropriate psychological goals that can help generate a strong emotional response to your game or product.

2. Herd mentality:

As social beings our decisions are heavily influenced by what we think other people around us are doing. When in a new or uncertain situation we naturally look to see what other people are doing as a guide to desired behaviour.  Pokemon Go benefited from copy-cat behaviour as our herd instincts assisted the spread of the awareness and adoption of the game through our social networks. Once the number of downloads gave Pokemon Go entry into the download charts this would have further boosted its desirability among trend seekers or gamers unsure about the nature of the game.

 

Top iOS apps in USA for 23rd July 2016
Source: App Annie top iOS apps in USA for 23rd July 2016

 

Learning: Using social proof and encouraging people to interact with your brand across offline and online social networks is a powerful influence on success or failure. How people interact with each other and what they do with your product or idea will determine the nature of your brand, not what you set out in your brand guidelines.

3. Novelty gets attention:

Our brains are hard-wired to be wary of change and so the blending of the real world with the digital world of augmented reality brings fantasy into the game experience in a seamless and engaging manner. This creates a novel user experience that attracts attention. Novelty is a powerful psychological trigger for stimulating our brain. Although augmented reality has been around for a number years, Pokémon Go cleverly integrates it with a real-world game that also activates user’s curiosity.

Image of Pokemon Go Drowzee

Learning: Use novelty to grab attention and create curiosity about your brand.

4. We desire control:

The design of Pokémon Go means that players have a good chance of intercepting a monster where ever they travel. There is no necessity to head for a Pokestop or Gym if it doesn’t fit in with the user’s plans. Monsters often pop-up randomly as players go on their daily business.

Pokémon Go allows players to remain in control and it is up to the user to decide how much effort they want to put into the game. This is important from a psychological perspective as autonomy is one of three basic drivers of human behaviour identified by psychologist Daniel Pink that make people happy and engaged in activities.

Image of Pokemon Go with Venonat showing

 

Learning: Autonomy and our desire to act with choice is something people naturally seek and psychologists believe that it improves our lives. Where possible always offer people choice as we dislike doors being closed or being forced down a particular path.

5. Mastery :

Pokemon Go uses achievements to reward players for progressing through the levels of the game. People love to obtain a high degree of competency in activities they undertake, but can easily get frustrated and abandon a game if a task is not realistically achievable. On the other hand if it is too easy to complete players can lose interest in the game. Pokemon Go achieves a balance by setting a low degree of initial difficulty for new players and using a distance/time barrier to ensure it takes some physical effort to discover more creatures.

Learning: Ensure challenges and tasks are realistically achievable, but not so easy that players lose interest. Mastery is one of our most powerful and intrinsic motivators which drives our passion for achievement.

Pokemon medal for 10 normal Pokemon
Source: Pokemon Go, Niantic Inc

6. Variable ratio schedule reward model:

In the 1950’s the American psychologist B.F. Skinner conducted experiments to understand how people respond to different reward schedules. He discovered that a variable ratio schedule, where the reward is based upon the number of times the task is undertaken, but the timing is randomised to make it unpredictable, is the best method for encouraging repetitive behaviour. This type of schedule encourages people to complete the behaviour over and over again as they are uncertain when the next reward will be received. It is also resistant to extinction by its very nature and can make some behaviour addictive.

Learning: Link rewards to the frequency of the behaviour, but use a variable ratio schedule to make the timing of the reward unpredictable.

Pokemon Go level up 4
Source: Pokemon Go, Niantic Inc

7. Use classical conditioning to obtain an automatic response:

When a user walks near a Pokemon, gym or Pokestop, their smartphone gives an audible buzz. As the players is then rewarded with a new Pokemon or other creature this sound becomes associated with the forthcoming reward in the same way that Pavlov’s dog would salivate at the sound of a bell. Classical conditioning creates automatic behaviours by paring a stimulus (a sound) with a response (search for monster nearby).

Learning: Use audible sounds, smells or movement to create automatic behaviours through classical conditioning by pairing a stimulus with a response. Once users have become conditioned to react in a certain way, you may pair another stimulus to the desired behaviour and create a new automatic response.

Image of Pokemon Zubat before capture
Source: Pokemon iOS app

 

8. We are all social beings at heart:

Unlike most apps, Pokemon Go provides the opportunity to meet new people because it requires you to visit local landmarks and walk to places nearby to find Pokémon’s. As human beings we are hard wired to connect and interact with other people. Indeed, social isolation and loneliness are harmful to our long term health and can trigger depression. Playing Pokemon Go therefore benefits are psychological health by creating opportunities for gamer’s to meet and interact with other people.

 

Image of Pokemon Go gym

Learning: Allow people to share or interact with other people as this is an important human characteristic with many benefits for the individuals concerned.

 

9. We benefit psychologically from walking:

There is increasing evidence to suggest a sedentary lifestyle is harmful to our health and that walking is beneficial from both a psychological and physical perspective. We have an innate desire to get outside and research suggests that walking can reduce depression and our risk of diseases such as diabetes.

 

Learning: Creating a game or product that requires or encourages physical exercise has health benefits for the customer and can create natural breaks in product usage which improves attention and engagement.

Image of Pokemon Go map
Source: Pokemon Go, Niantic Inc

10. Good timing:

Launching the game in the summer and just at the start of the holiday season meant that people are already primed and ready to go outside and explore. We are naturally drawn to sunlight because it increases the amount of vitamin D in our bodies which can help prevent cancer and improves our alertness and mental performance.

Learning: Always consider timing and how it may influence usage to give your product or campaign the best chance of success. Research your audience to identify key factors influencing adoption or likelihood to view your content.

Image of Pokemon Rattata outside Pets at Home store
Source: Pokemon Go, Niantic Inc

 

11. Easy equals true:

The app is so simple and intuitive to use that it does not require any detailed instructions or much practice to become competent. This means there is little friction associated with getting started and this minimises cognitive load which encourages continued engagement with the app.  Many apps are so poorly designed that they require extensive onboarding instructions and navigation aids. Such complexity can cause cognitive strain and frustration which often leads to apps being abandoned.

Learning: If your user interface requires detailed instructions or navigation aids to allow users to learn how to use it you have failed. Keep user interface designs simple and intuitive.

 

Image of Pokemon Gym description
Source: Pokemon Go, Niantic Inc

12. Piggy back on existing habits:

People are creatures of habit and so adoption is much easier if you can piggy back off an existing habit rather than having to create a new habit. Most smartphone users take their devices with them as they go for a walk or travel to the office or the shops. Pokemon Go was therefore able to benefit from habitual behaviour which assisted take-up of the game.

 

Learning: Where possible identify existing habits that your product or campaign can benefit from rather than trying to create a new behaviour.

Image of Pokemon Horsea creature
Source: Pokemon Go, Niantic Inc

13. The power of free:

We are attracted by free apps because people are inherently afraid of loss and free is a powerful motivator because we don’t like to miss out on a bargain. Further, allowing users to play for free minimises the perceived risk of signing up to Pokemon Go because there is no monetary cost to the player if they subsequently find they don’t enjoy the game.

In addition, even partial ownership (e.g. a free trial) tends to make people more attached to what they have and make them focus on what they could lose rather what they may gain. This is why free trials offered by the likes of Spotify and Netflix are so successful.

Pokemon Go generates revenues by players purchasing  virtual coins to exchange for items such as Pokeballs to capture monsters. Once players have moved up a number of levels they may also want to pay to store, hatch, train (in the gym) and battle opponents. Companies also have the ability to sponsor locations to attract players to a real location.

 

Learning: Ownership changes are our perception of things and our aversion to loss makes it more difficult to give up things that we have. For non-fremium apps, offer a free trial to give users ownership and allow them to check out the user experience. To monetise a free app allow players to buy in-app currency to spend on digital goods or enter competitions.

Image of loading screen for Pokemon Go
Source: Pokemon Go, Niantic Inc

 

What should we take out from Pokémon Go’s success?

Good marketing planning and having the right partners for a venture certainly help. Although we may not be lucky enough to have a global brand that has 20 years of heritage behind it, we can still be careful to create a compelling proposition and ensure that implementation is not rushed. What Pokémon Go does show is that if you can align your marketing with human psychology you will benefit from important drivers of consumer behaviour.

Thank you reading my post. If you found this useful please share with the social media icons on the page.

You can view my full Digital Marketing and Optimization Toolbox here.

To browse links to all my posts on one page please click here.

  • About the author:  Neal provides digital optimisation consultancy services and has worked for  brands such as Deezer.comFoxybingo.com, Very.co.uk and partypoker.com.  He identifies areas for improvement using a combination of approaches including web analytics, heuristic analysis, customer journey mapping, usability testing, and Voice of Customer feedback.
  • Neal has had articles published on website optimisation on Usabilla.com  and as an ex-research and insight manager on the GreenBook Blog research website.  If you wish to contact Neal please send an email to neal.cole@outlook.com. You can follow Neal on Twitter @northresearch and view his LinkedIn profile.

The Psychology of Brexit – Why Emotions Won Over Logic!

The UK European Referendum captured world-wide attention and generated intense and passionate debate in the UK. Despite the economic arguments being clearly in favour of Remain, as no one could accurately predict the impact of Brexit, the UK is now heading out of the EU.

The Remain camp and their “Project fear” strategy completely failed to win the hearts and minds of older voters in particular. The fatal error the remain camp fell into was to rely almost solely on rational considerations. Emotions, social influence and mental short-cuts  are often more powerful drivers of behaviour than logical analysis of a problem.

But why was the Leave campaign more successful at  engaging people at an emotional level? The Leave strategy focused on messages that triggered strong emotional responses (e.g. autonomy – getting back control) and encouraged voters to discuss issues that they were concerned about (e.g. immigration).

Herd Mentality:

 

Sheep on the road image
Source: FreeImages.com

We are super social creatures who seek out and interact with other people as part of natural bonding processes. As a result our opinions and behaviour is more heavily influenced by our social networks  and what we think other people are doing than we are aware of. For this reason controversial statements that spark a conversation between people are more persuasive than simply communicating a  rational argument to inform voters. The Leave campaign extensively used emotive promises and narrative about the EU to encourage word of mouth conversations that spread across social networks.

Image of YouGov poll showing EU referendum intentions by age
Source: YouGov

 

Our herd mentality appears to have helped the Brexit campaign gain momentum as they were initially well behind in the opinion polls. David Cameron hugely underestimated the depth of feeling in the provinces about factors such as immigration and economic inequality, and a general disillusionment with the EU among older voters.

People copy opinions and behaviour if they want to fit in with their social networks. The Leave campaign galvanised support using strong psychological narrative (e.g. taking back control) to grab attention and generate discussion. This was helped by a very negative,  almost bullying strategy by the Remain campaign which probably alienated many undecided voters .

 

Emotions Override Rational Thinking:

 

Image of faces showing the 7 emotions
Source: http://www.affectiva.com/

Emotions are one of the most powerful influences in our decision making tool kit. Many of our judgements and behaviour are directly influenced by feelings of liking or disliking rather than rational consideration. And yet Remain constantly focused on rational arguments and the negative consequences of leaving the EU.  Perhaps as a consequence of this leavers appeared more motivated than remain supporters because those parts of the country that voted remain had the lowest turn out.

Leavers cared more

People also have a tendency to like (or dislike) everything related to a person and so having a popular politician spearheading (i.e.  Boris Johnson) Brexit may have been sufficient for some people to align themselves with the leave campaign.  In this sense the Remain campaign may have lost support from Labour voters because David Cameron was of course the leader of the Conservative Party. Continued austerity and a Government focused on London and the South East may have further alienated many voters from supporting a campaign strongly associated with the leader of the Conservative Government. This was probably further compounded by the low key profile of Jeremy Corbyn during the campaign as he did not appear totally committed to the cause.

Loss Aversion:

 

People are more concerned about losses than gains.

The Brexit campaign were especially good at using basic psychological triggers to cut through the noise. They consistently used loss aversion, our tendency to be more concerned about potential losses rather than gains, to grab attention. Leave played on gut feelings around jobs being taken due to immigration, the subsequent drain on the NHS, and wage stagnation. An emotion often linked to loss aversion is regret which people try to avoid at all cost. The Brexit campaign used this to their advantage by emphasising  that the referendum would be a once in a life time opportunity to break away from Europe.

Autonomy:

People are also strongly motivated by the desire to be in charge of their own destiny. Leave tapped into the issue of a lack of power and control by talking about the EU being un-democratic, and limiting our ability to set laws and manage immigration. Immigration is again a deeply emotional subject for many people and although the Leave campaign may have been regularly criticised for focusing on this issue it undoubtedly resonated with older voters. But most importantly all these issues were framed around “taking back control” even though they could not offer any guarantees that immigration for instance would actually fall.

What You See Is All There Is:

People are heavily influenced by what information they can easily access about a topic. Few people have the time or inclination to seek out alternative sources of information to validate stories they read in the media. Indeed, Boris Johnson confessed to a fellow journalist to making up stories about the EU when he was the EU correspondent for The Telegraph newspaper. Given the amount of misinformation about the EU circulated over the years it was always going to be difficult for the EU to get a fair hearing.

Project Fear:

As humans we hate uncertainty and suppress ambiguity because it makes us feel uncomfortable. Project fear certainly communicated uncertainty about an exit from the EU. This is one reason why status quo bias often leads us to avoid change because outcomes are more predictable if we stick with existing option.

However, project fear was a tactical mistake because it was almost entirely a negative message and it mainly related to macro-economic matters. This was too rational a strategy as such issues often appear remote from daily life and less relevant ordinary people.  Further, project fear was reinforced by various threats from both the Remain camp (e.g. emergency budget & more austerity cuts), and external parties (e.g. Obama & OECD). This may have came across as bullying rather than a considered argument and probably resulted in anger which would have alienated voters from the Remain point of view.

Telling a positive story:

People are naturally much more motivated when they have a clear purpose in life and can see how their actions relate to personally meaningful goals. The EU was originally set up with the intention of bring once warring countries together in a peaceful and collaborative community.

And yet the Remain campaign failed to tell a positive story about the overall goals and achievements of the EU. For instance the EU has been successful at encouraging the advance of democracy and western economic thinking in Eastern Europe, improving workers rights and protecting press freedom. Very little attention was paid to this aspect of the debate and yet having a purpose is one of our strongest psychological motivations.

Some of the most passionate speakers for Remain (e.g. Shelia Hancock) focused on these higher goals, but the official campaign completely ignored these more emotionally engaging and meaningful messages. The Remain campaign failed because those in charge did not understand basic human psychology and motivations.

Related to this post is:  Are referendum a device of dictators and demagogues?

Do opinion polls influence voters?

Why do people prefer to follow gut instinct to research?

Thank you reading my post. If you found this of interest please share using the social media icons on the page.

You can view my full Digital Marketing and Optimization Toolbox here.

To browse links to all my posts on one page please click here.

  • About the author:  Neal provides digital optimisation consultancy services and has worked for  brands such as Deezer.comFoxybingo.com, Very.co.uk and partypoker.com.  He identifies areas for improvement using a combination of approaches including web analytics, heuristic analysis, customer journey mapping, usability testing, and Voice of Customer feedback.  By  aligning each stage of the customer journey  with the organisation’s business goals this helps to improve conversion rates and revenues significantly as almost all websites benefit from a review of customer touch points and user journeys.
  • Neal has had articles published on website optimisation on Usabilla.com  and as an ex-research and insight manager on the GreenBook Blog research website.  If you wish to contact Neal please send an email to neal.cole@outlook.com. You can follow Neal on Twitter @northresearch and view his LinkedIn profile.

Is It Time To Kill-Off The Conversion Funnel?

What Does Behavioural Economics Tells us About Conversion Funnels?

 

We Are Connected:

Most conversion funnels appear to be based upon linear models of decision making such as  A.I.D.A (Attention, Interest, Desire, Action). However, this ignores the fact that people are connected and use their networks extensively to identify who they can trust. This means they don’t mindlessly go though each step in the mythical conversion funnel until they complete their task.

Behavioural economics supports the idea of a non-linear decision making process as it provides clear evidence of how important our interactions with other people are in the choices we make. We use our network to reduce the chances of our decisions being a disaster. This is because if someone is known to our network they risk damaging their own reputational capital if they sell us something not fit for purpose.  Behavioural economics also shows how underlying emotions, social norms, traditions,  and many contextual factors such as our environment influence decisions. If any of these ring alarm bells we may reconsider our goals or abandon the purchasing process.

Image of paper people holding hands

Source: Freeimages.com

This often produces an erratic, on-off and on-again decision making process. Plus as we employ our unconscious brain when we can to conserve cognitive energy we may not even be consciously aware of many of the  factors that drive our decisions. This undermines much of the market research that organisations use to design their marketing campaigns.

Multiple Purchasing Processes:

 

In addition, when people are online they often simultaneously look at alternative solutions and so could be in more than one purchasing process at the same time.   This means the funnel metaphor is misleading when it comes to understanding real-human decisions as it over-simplifies the process.

A Leaking Bucket:

 

Image of behavioural economics decision bucket

 

A better metaphor may be a leaking bucket that is constantly being filled by a stream of water from a tap. People frequently swing from one decision to another and the importance of factors in our decision making can quickly shift as our emotions, social interactions and our environment alter our motivations.

Our brain filters out a lot of the information that we are targeted with and  cognitive biases  further distort our perception of the information we receive. Having a simple and compelling message is therefore essential if we wish to cut through the noise that surrounds us.

Imperfect Memory:

 Image of computer memory chips

Source: Freeimages.com

We don’t have a memory like a computer as each time we recall a memory it has to be recreated and elements inevitably get changed or lost. This means our memories are heavily dependent upon what happened at the peak and at the end of an experience. Get these wrong and chances are customers will not recall an experience in a positive light. It also explains why we need to regularly repeat our brand messages through advertising and other media as our memory degrades over time.

There is also evidence that high advertising and promotional spend acts as a kind of costly signalling which demonstrates the organisation has long-term time horizons and is likely to be in good financial health. This behaviour may increase trust in the organisation or product as people interpret this as an indication of confidence about the future of the brand.

Goals Motivate People:

When we create an unmet need  this forms an explicit goal (e.g. I want to have a reliable car to get to work). But for our brand (or website) to be chosen we need to communicate that we can deliver on key psychological or implicit goals, such as security and enjoyment. If we can convince customers that we are the most likely brand to meet these implicit goals we may generate an emotional response which can ultimately help close the sale.

Image of implicit goals
Implicit Psychological Goals from Decoded by Phil Barden

 

Provided the brand is available and the experience meets our expectations this may help form a habit which creates brand loyalty. In reality though, this can be broken by lack of availability or the creation of a new habit. Indeed, if the product does not deliver what it promised we are unlikely to create a new habit and may buy another brand next time we have the same explicit goal.

Don’t Ask Why:

If asked why we purchased a product we will post-rationalise and come up with what we think are rational reasons for our choice of brand. But as we don’t have full access to our subconscious processes this is a pointless exercise.  However, there are implicit forms of research that try to tap into these underlying motivations.

Conclusion:

The funnel is dead, or at least it should be on life-support as they are a misleading way of describing the decision-making process.  Funnels may also result in too much focus on customer acquisition and short-term thinking because they imply there is only one goal (conversion).  Instead we should be looking to ensure our product meets the needs and expectations of customers and try to create sustainable habits to encourage brand loyalty.

Dave Trott sums it up nicely in his book One Plus One Equals Three: A Masterclass in Creative Thinking:

“The product creates the experience.

The experience creates the reputation.

The reputation creates the brand.”

                                    Dave Trott, One Plus One Equals Three

Thank you for reading my post and if you found it of interest please share using the social media icons on this page.

Recommended reading:

Decoded by Phil Barden

Herd by Mark Earls

You can view my full Digital Marketing and Optimization Toolbox here.

To browse links to all my posts on one page please click here.

  • About the author:  Neal has worked in website optimization and A/B testing  for over 5 years with online brands such as Deezer.comVery, Littlewoods, Foxybingo and partypoker.  Using  a combination of approaches including web analytics, heuristic analysis, customer journey mapping, usability testing, and Voice of Customer tools, Neal identifies opportunities to align the website design and performance with the organisation’s business goals. This may involve A/B testing  to validate the benefit of proposed changes and/or implementation of best practice recommendations.
  • Neal has had articles published on website optimisation on Usabilla.com  and as an ex-research and insight manager on the GreenBook Blog research website.  If you wish to contact Neal please send an email to neal.cole@conversion-uplift.co.uk. You can follow Neal on Twitter @northresearch, see his LinkedIn profile or connect on Facebook.

 

Are People More Rational When Buying Financial Services & Big Ticket Items?

Insights From Behavioural Economics:

I’ve worked as a customer insight and research manager in financial services (FS) for most of  my career. During this time I’ve noticed that colleagues often assume that people are more rational when buying financial products compared to other categories of goods and services. There is a perception that FS products are more ‘serious’ than your average fast moving consumer goods product (FMCG).

This view is sometimes supported by The Consumer Involvement Theory. The theory suggests FS purchases fall into the high involvement and rational segment of the model. This is due to the relatively high cost of FS products and that purchases are more about logic and less about emotion. You don’t buy a pension everyday!

Image of mri-head scan
Source: Freeimages.com

But what does the evidence from experiments in behavioural economics and neuroscience indicate about rational decision making in the face of risk and uncertainty?  Are consumers’ really discreet, self-determining individuals who make considered, rational decisions?

This view increasingly looks misguided and is probably a fallacy created by our own minds to make us feel in control of our behaviour. As Mark Earls points out in his book Herd:

“Our failure to acknowledge the truth about human nature distorts our attempts to understand human behaviour and frustrates our attempts to change it. Bad theory = Bad Plan = Ineffective action.” Mark Earls on Stephen Pinker, Herd

Behavioural economists Dan Airely and Nobel laureate Daniel Kahneman have uncovered strong evidence that rational decision making is often an illusion. That is not say people don’t behave differently when considering money issues. Dan Ariely found that just thinking about money makes people more selfish, self-reliant and less charitable. However, these traits don’t necessarily make people more rational in their FS decision making.

image of US $100 notes
Source: Freeimages.com

Insight identified from behavioural economists challenge many of the basic assumptions of traditional economics and related theories of decision making. Some of the Key insights are:

  • Emotions – Human decision making is unconsciously driven by our emotions and social norms much more than we have appreciated in the past. This is due in part by our reliance on our fast, intuitive, but largely unconscious mind. Daniel Kahneman refers to this as system 1. This makes the majority of our decisions. But its frequent use of  rules of thumb (heuristics)  make people prone to biases that can lead to sub-optimal decisions.
Image of woman looking happy and holding word Joy
Source: Freeimages.com

 

  • Answering an easier question – Because we find cognitive thought hard work, system 1 will often substitute an easier question for a difficult question to answer instead. It will do this automatically if we are unable to easily retrieve an answer to a hard question.
  • Context dependency – Our state of mind and the decisions we make are heavily influenced by the environment within which we find our selves. This leads to inconsistencies in our decision making that we are largely unaware of.
Image of computer memory chips
Source: FreeImages.com

 

  • Memory – Our recall of events is unreliable and heavily biased towards the beginning, the peak of activity and the end of an event. We neglect the duration of an event and have little awareness of our true motivations. Indeed, every time we try to retrieve a memory our brain has to reconstruct it and inevitably this changes what it contains. This explains why sometimes we create false memories that we genuinely believe are accurate.
  • Illusion of understanding – Kahneman uses the acronym WYSIATI (What You See Is All There Is) to describe our tendency to think that the limited information we have about the world is all that there is to know.  Humans create narrative fallacies in an attempt to make sense of what are often random events.

“Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.” Daniel Kahneman, Thinking, fast and slow

Image of Herd of Wildebeest and Zebras walking in Masai Mara, Kenya 1995
Source: FreeImages.com

 

  • People herd –  As Mark Earls points out humans are a “super social species”. Our behaviour is unconsciously influenced by what other people do and more so than we realise or like to admit. In the face of uncertainty we look to how other people behave and will often follow their lead.
  • Demand is social – Mark Earls  argues that market size and market share are primarily a function of consumer-to-consumer interaction. The implication being that rather than focusing on supply side factors, marketing should pay more attention to understanding and modelling interactions that generate mass behaviour (i.e. consumer-to-consumer interactions).

“You have to understand the rules of interaction – the accepted behaviours and rules of thumb of the individuals whose interaction generates the complexity of behaviour that you are studying – because these will shape the outcome of interactions.“ Mark Earls, Herd

  • People care about others – Real people are also sometimes generous and willing to contribute to the good of the community. These are not the characteristics of a rational person described by traditional economic theory.
  • We think of a reason after the event – So peoples’ decisions are mainly influenced by factors that they are not consciously aware of. Humans review and post-rationalize decisions. This suggests that our perceptions of a product or brand are likely to change after an action rather than before as implied by traditional marketing models like AIDA (Attention, Interest, Desire, Action).  It should probably be changed to Context, Attention, Emotion/social norms, Action, Review, Memory (C.A.E.A.R.M). Not a great acronym, but I still find marketing people using the old AIDA model so we do need to encourage them to move on from it.

 

PROSPECT THEORY:

So what specifically does behavioural economics have to say about FS decision making?  Risk and uncertainty is at the heart of Daniel Kahneman and Amos Tversky’s Prospect theory. Three cognitive principles form the basis of the theory:

  • The perceived value of a decision outcome (the utility derived) is dependent upon the history of one’s wealth (the reference point). This may seem obvious, but traditional economics does not recognise that a poor person will perceive a gain of £1,000 as generating more utility than would a millionaire. A person’s reference point is often the current status quo.
  • People experience diminishing sensitivity to both sensory changes (e.g. light) and to changes in wealth. So for example the subjective difference between £1,000 and £1,100 is much smaller than between £100 and £200.
  • Humans are loss averse. When compared against each other people dislike losing more than they like winning. Thus losses loom larger than gains even though the value in monetary terms may be identical. This explains why investors find it painful to sell shares that are below their purchase price and find it easier to sell shares that are in profit. This is not rational behaviour.

 LOSS AVERSION:

Loss aversion is key to understanding how people perceive financial services, and  gambling of course. Extensive research has been undertaken to estimate the psychological value of losses and gains. These studies have identified a loss aversion ratio of between 1.5 and 2.5. This means that a loss that is identical in money terms to a gain is valued up to 2.5 times more than the gain.

Image of roulette wheel
Source: FreeImages.com

Interestingly, professional risk takers such as fund managers and full-time gamblers  are more tolerant of losses. This may be because they are less emotionally aroused than the amateur investor. Loss aversion leads to predictable behaviours in a number of situations:

  • If a potential loss could be ruinous or would threaten their lifestyle, people will normally dismiss the option completely. Only obsessive gamblers would normally consider this type of situation.
  • Where people are presented with a situation where both a gain and a loss are possible people tend to make extreme risk averse choices. For example a person is presented  with the choice between a small guaranteed gain over 5 years (e.g. a deposit based account) and a stock market linked product that carries a low risk of a large loss. People have a tendency to focus on the large potential loss and often select the former, less risky option. This is why advisers will focus on the large upside potential of a stock market linked investment and try to play down any potential for large losses.
  • Where the choice is between a certain loss and a larger loss that is just a probability (i.e. there is a chance of no loss), diminishing sensitivity can result in  excessive risk taking. This explains why private investors sometimes refuse to cut their losses on poorly performing shares and instead invest more money (to reduce the average purchase price) in the hope that the price will recover sufficiently to avoid a loss. This is known as the sunk-cost fallacy.


“Loss aversion is a powerful conservative force that favors minimal changes from the status quo in the lives of both institutions and individuals.” Daniel Kahneman, Thinking, fast and slow.

 

THE POSSIBILITY AND CERTAINTY EFFECTS:

 

  • When considering FS decision making it also necessary to understand how consumer evaluate risks. There are two key biases that relate to the psychological value (weight) given by people to different probabilities or risks.

Image of royal flush poker hand

  • The possibility effect results in highly unlikely (low probability) events being given more weight than they justify. This helps explain the attractiveness of both gambling and insurance policies that cover unlikely events (e.g. extended warranties).
  • The certainty effect leads to events that are almost certain being given less weight than their probability justifies.
  • Indeed, research shows that unlikely events (1% to 2% probability) are over weighted by a factor of 4. However, for an almost certain event the difference is even larger. In experiments a 2% chance of not winning was given a weighting of 13% (or an 87.1% chance of winning).

RARE EVENTS:

  • Where the odds of an event are very small (e.g. around 0.001% or less) people become almost completely indifferent to variations in levels of risk. Rather emotional factors and how a risk is framed are the key drivers of how people react to these levels of risk. This explains why after a terrorist attack there tends to be more focus on whether insurances cover such risks even though the level of risk (to an individual) remains extremely low. It also helps to explain why people are often too willing to bet on extreme events happening.

“When the top prize is very large, ticket buyers appear indifferent to the fact that their chance of winning is minuscule.” Daniel Khaneman, Thinking, fast and slow

  • Kahneman also found evidence that rich and vivid descriptions of an outcome (e.g. the lifestyle of a lottery winner) helps to reduce the impact of probabilities. In particular he found that people are more heavily influenced (in terms of weighting of probabilities) if an event is described by using frequencies (e.g. the number of people) than by abstract concepts such as chance or risk.

RISK AND NARROW FRAMING:

  • Due to our use of intuitive thinking (system 1) and the laziness of system 2, most people have a tendency to evaluate individual risks separately and independently. People tend to make decisions when a problem arises rather than trying to look at the bigger picture.

 

  • What Khaneman found was that this approach will almost always lead to sub-optimal decisions due to our focus on loss aversion. The best solution is to aggregate decisions together. A professional investor achieves this by always looking at individual shares as part of a balanced portfolio. This reduces the impact of loss aversion on our preferences.

MENTAL ACCOUNTS:

  • People hold their money  in different accounts, some of which are real and some are only mental (e.g. money from my dad to buy my daughter a present). There is normally the everyday spending account, general savings, savings assigned for emergencies, maybe savings designated for private education and so on. People use mental accounting as an aid to self control. They have a clear hierarchy of willingness to use these accounts to cover their immediate needs and have an emotional attachment to the state of their mental accounts.
  • Mental accounting is a form of narrow framing and can have disastrous consequences in financial services. It often leads to private investors to set up a separate mental account for each share they own. This results in investors wanting to close each account as a gain. So when they need money for their daughter’s wedding what do they do? They have a very strong preference to sell winners rather than losers. It also helps to explain why consumers might have an outstanding credit card balance of £2,000 (with an APR of around 20%), and yet have savings of £10,000 (paying just 4% interest). These are not rational behaviours.
Image of man with hands over face
Source: FreeImages.com

REGRET:

  • Emotions are also an important factor in how we evaluate gains and losses. Most theories of decision making assume that people evaluate available options in a choice separately and independently. This does not reflect human nature. People feel regret when the experience of an outcome is affected by an alternative option that was open to them, but they did not choose. Thus missing out on selecting the top performing managed fund may influence the perception of your investment choice.

ARE PEOPLE REALLY MORE RATIONAL WHEN BUYING FS PRODUCTS?

  • The evidence clearly suggests no. People are prone to the same biases when purchasing FS products as they are when buying consumer goods. Even the result of the 2016 UK referendum  on membership of the EU appeared to be more driven by gut instinct and emotion than rational deliberation. Similarly,  FS decisions are often subject to powerful disruptive forces (e.g. loss aversion and mental accounting) than every day purchases.  This demonstrates the importance of regulation to protect people (e.g. cooling off periods) and consumer education in the FS sector.

WHY DO FS MANAGEMENT BELIEVE IN RATIONAL CONSUMERS?

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Source: FreeImages.com

 

  • Senior management in the FS sector is dominated by a series of very numerate professions who are highly skilled at estimating risks and calculating probabilities. There are actuaries in life & pensions, underwriters in general insurance and lending, bankers, accountants, and a smattering of economists. Given their training and experience of dealing with risk and uncertainty they are less prone to key cognitive biases such as risk aversion and mental accounting. For this reason FS management are less likely to appreciate how strongly consumer behaviour is influenced by these biases.

I observed an example of this when I worked for a large UK life assurance company.  We developed a Guaranteed Capital Bond that protected your initial investment and provided some limited potential to benefit from any rise in the stock market. It researched well, but the CEO (who was an actuary) thought it wouldn’t sell. It didn’t offer enough upside potential if the stock market grew strongly. The Director of Sales & Marketing (a sales person) was supportive of the launch because he understood how loss averse people can be. I don’t need to say who won the argument when it went on sale.

IMPLICATIONS FOR MARKETING:

 I could write a whole post on the implication for market research arising from the above insights. Instead I would like to finish with just a few suggestions for consideration:

Google Analytics homepage

  • Use analytics to better understand current customer behaviour. In the digital age we can now use web analytics to track and measure online customer behaviour. We also have the ability to conduct online experiments (i.e. A/B and Multivariate testing). But even in the off-line world there are many sources of data to explore and analyse before we need to conduct primary research.
  • Fewer focus groups please! In some FS organisations focus groups appear to be the default research tool. In a previous post, Should you stop using focus groups, I pointed out my own concerns about this method of research. Interestingly John Kearon of BrainJuicer made a similar observation:

“Yes, they (Focus groups) can reveal powerful insights in the hands of a great researcher, but all too often they are just the lazy default of unquestioning research buyers and produce little or no insight on the subject at hand.” John Kearon, BrainJuicer

  • Don’t ask direct questions but instead observe behaviour. People are unreliable in their recall of why they make decisions. Insights are more likely to emerge from observing human behaviour during key experiences than trying to ask direct questions. This can be carried out in a number of ways including ethnography, auto-ethnography, eye tracking  and analysis of customer interactions (e.g. telephone calls) with customer facing staff.
  • Covert monitoring of behaviour. There is plenty of evidence to show that people behave differently when they know they are being observed. I used video mystery customers (using a hidden camera) to evaluate training and development needs for one company’s sales team. I was informed that almost all of them met agreed standards when they were accompanied on visits by a trainer. However, almost the opposite was observed when we analysed the videos of the mystery customer appointments. Unless you have regular monitoring of service standards in place you can’t be sure what level of service your customers are receiving.
  • Customer facing staff. Listening to sales people, advisers, brokers, telephone agents, people who speak with customers on a daily basis can very insightful. People are better at observing how other people behave than trying to explain their own behaviour. Experienced sales people collect a wealth of knowledge about how customers respond to different strategies, what turns them off, what excites them, what confuses them and what appears to motivate them.
  • Co-create. A collaborative approach to research encourages mutual respect and shared learning. Including social influencers (i.e people who shape attitudes and behaviours of their peers) in the process helps ensure the generation of more innovative ideas than would be the case with only experts and working parties involved. Collaboration also helps break down barriers between different stakeholders and speed up concept development and refinement.
  • Crowd sourcing. There is growing evidence that asking large groups of people to participate in predictive markets can be a very good way of selecting winners. James Surowiecki’s book, The Wisdom of Crowds, has a mass of evidence to support this approach.

“By examining the interactions and behaviours that a particular group of people has, it is possible to identify the underlying rules that drive it.” Mark Earls, Herd

  • The mistake many organisations make is to see Word of Mouth (WoM) as a channel rather than the way consumers interact and influence each other. To benefit from this insight it is necessary to understand the conditions of interactions (e.g. the environment) and the rules of interaction (e.g. how people engage with each other).  By making small changes to either or both of these elements of interaction we may be able to significantly influence individual and ultimately group (e.g. private investors)  behaviour.

Now published on the GreenBook Blog market research website!

Thank you for reading my post. I hope it challenged your thinking about consumer decision making and the implications of behavioural economics for marketing.

You can view my full Digital Marketing and Optimization Toolbox here.

To browse links to all my posts on one page please click here.

Further reading:

Thinking, fast and slow – By Daniel Kahneman.

Herd  – How to change mass behaviour by harnessing our true nature – By Mark Earls

Thinking, fast and slow by Daniel Kahneman, Herd by Mark Earls (@Herdmeister), Influence by Robert B. Cialdini, PHD (@RobertCialdini) ; Predictably Irrational by Dan Ariely (@danariely); the Upside of irrationality by Dan Ariely; The Wisdom of Crowds by James Surowiecki; Consumer.ology by Philip Graves (@philipgraves); Nudge by Richard Thaler (@R_Thaler).

  • About the author:  Neal provides digital optimisation consultancy services and has worked for  brands such as Deezer.comFoxybingo.com, Very.co.uk and partypoker.com.  He identifies areas for improvement using a combination of approaches including web analytics, heuristic analysis, customer journey mapping, usability testing, and Voice of Customer feedback.  By  aligning each stage of the customer journey  with the organisation’s business goals this helps to improve conversion rates and revenues significantly as almost all websites benefit from a review of customer touch points and user journeys.
  • Neal has had articles published on website optimisation on Usabilla.com  and as an ex-research and insight manager on the GreenBook Blog research website.  If you wish to contact Neal please send an email to neal.cole@outlook.com. You can follow Neal on Twitter @northresearch and view his LinkedIn profile.