When Richard Thaler of the University of Chicago was awarded the Nobel Prize in economic science earlier this month, he said he’d try to spend his $1.1 million prize “as irrationally as possible.”
That gave me a chuckle, because Thaler is a pioneer in studying the role that irrational human nature plays in economic decisions. His field, behavioral economics, is also one of the main underpinnings of our customer experience consulting at Beyond Philosophy.
Behavioral Economics and Irrational Behavior
When Thaler began his career, economic theories largely assumed that people would respond rationally to situations. But Thaler was curious about what people actually did, and he found that people often didn’t behave the way economic theory predicted they would. More traditional economists thought human behavior was irrelevant, but Thaler and several other economists used it as a basis for a new economic discipline.
Thaler’s work didn’t just show that people are irrational. He found that people are irrational in predictable ways that can be anticipated. The Nobel committee cited Thaler for his efforts to move economics to a more realistic understanding of human behavior, and for using his insights to improve public policies. In 2008 he co-wrote “Nudge,” a book that argued that governments could make small changes that would “nudge” people toward desired behaviors.
For example, people don’t tend to save enough for retirement because they place short-term satisfaction over long term savings. But it turns out that that people can be “nudged” toward savings if they are automatically enrolled in the company 401K. Since they have to affirmatively take action to get out of the plan, most people stay in.
Economic Theory Helps Explain Customer Behavior Too
In our global customer experience consultancy, we see many companies that act like traditional economists, believing people will behave rationally. For example, they predict that lower prices will bring in more customers looking to spend less of their paycheck. But it often doesn’t work out that way. Thaler, for example, found that when gas prices were low, people spent their savings filling up their tanks with premium – even if it wasn’t recommended for their car. It seems they believed they needed to spend a certain amount of their budget on gas, no matter what.
This kind of irrational thinking is based on subconscious and emotional factors, and our research has shown that it accounts for more than half of a customer’s overall experience. This is why customer behavior often doesn’t make much sense if you only look at it through a rational lens. When you understand the emotional and subconscious factors that really drive decisions, you can do a better job of predicting what customers will do. This lets you design a customer experience strategy that appeals to key emotions and subconscious needs.
Theme parks are a good example of how this might play out. A rational approach might assume that attendance is down because ticket prices are too high or the rides are not exciting enough. An approach that looks at customer emotions would listen to what customers are thinking, saying and experiencing. It might reveal that once at the park, visitors spend almost the entire day in long, miserable lines for rides. No wonder they don’t want to come back! In fact, it is just this sort of feedback that has led top theme parks like Disney and Universal to find ways to minimize the time visitors spend waiting in lines.
The role of behavioral economics in customer experience planning is the theme of my most recent book, The Intuitive Customer, which I co-authored last year with professor Ryan Hamilton of Emory University. In the book, we make the case that there are seven imperatives you must recognize and incorporate if you want to have a winning customer experience program. Among them: customers will go for whatever is easy, and they will make seemingly irrational choices and then justify them with rational reasons. And the real driver of value and loyalty is the memories that your customers take with them.
I’m pleased to see that the field of behavioral economics is getting the recognition it deserves. I hope that in the future, more companies will recognize its value to customer experience.
Can you think of instances where customers behave irrationally? Share your thoughts in the comments box below.
Find out more about behavior economics and its implications for the future of marketing and Customer Experience read our latest book:The Intuitive Customer: 7 imperatives for moving your Customer Experience to the next level
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Colin Shaw is the founder and CEO of Beyond Philosophy, one of the world’s leading Customer experience consultancy & training organizations. Colin is an international author of six bestselling books and an engaging keynote speaker.
Follow Colin Shaw on Twitter @ColinShaw_CX