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Marketing Is the Original Behavioral Economics

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Marketing Is the Original Behavioral Economics

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Yves here. Funny, it isn’t often that I see someone, better yet an academic, twit economists for acting as if they’ve invented the wheel. Not only has marketing been around long enough to show that people are readily manipulated, so too is propaganda (dating at least to the start of the 20th century, see Alex Carey’s Taking the Risk Out of Democracy), diplomacy, and psychology.

By Philip Kotler, the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management at Northwestern University. Originally published at Evonomics

I often see writers equating “nudging” with behavioral economics.  It’s as if nudging is the essence of behavioral economics.  As much as I respect the nudging concept and its contributions, behavioral marketing calls for a larger scheme than nudging.  That scheme is social marketing.

Let’s start with the meaning of behavioral economics.  Before “behavioral” appeared, economists operated with one model of human behavior.  Whether the person was a consumer or producer, that person was rational and a maximizer.  That person had full knowledge of alternatives, would assign weights to the features of the alternatives, and would choose the alternative that would maximize the person’s goal, which was satisfaction in the case of consumers and profits in the case of producers.

Traditional economists never used the word “nudge” in their theory.  It only came up when two University of Chicago professors, Richard H. Thaler and Cass R. Sunstein decided to challenge the idea that all economic decision makers behaved according to the “rational maximizer” principle.   They recognized that people are infinitely different and complex.  They make many decisions by habit, or impulse, or irrational thinking.

Thaler and Sunstein were not the first to notice this.  The field of marketing has been classifying and explaining the great variety of human behavior for more than 100 years. Marketers drew on the disciplines of psychology, sociology, anthropology and social psychology to describe the great varieties of human behavior.  Marketers were fascinated with examples of “irrational” behavior.  Why do many people continue their smoking habit when they know that it will shorten their life?  Why do poor families have so many children that will keep them and their children poor?  Why is it that a CEO decides to acquire a competitor even when he knows that more than half of all mergers fail.

The core idea that humans don’t behave like rational economic agents was introduced several decades ago by Daniel Kahneman, Amos Tversky, and others.[ii]  People move between hot and cold states of emotions.  In a hot state, persons are emotionally aroused (more irrational) and in a cold state persons are more calm or neutral (rational).  All this states that human behavior is likely to be a mix of irrational and rational episodes.  When you find a totally rational maximizer, he or she is likely to be an odd bird.

Professor Dan Ariely from Duke published Predictably Irrational: The Hidden Forces that Shape Our Decisions in 2008. What a brilliant title that irrational decisions can be predicted!  Ariely carries out dozens of experiments on irrational behavior to find out their patterns.

The irony is that two University of Chicago professors challenged the rational maximizer assumption in the very university that did outstanding work in propagating the image of the rational maximizer.  In the process, they not only introduced the concept of nudging but also the concept of behavioral economics as having a strong relationship.

Nudging itself became an interesting concept. Thaler and Sunstein postulated that an economist needs to map out the “architecture of choice” that might face a decision maker.  One much cited example addresses the need to influence high school students to eat a healthier lunch.  The nudge would be for the dining room to change the sequence of these foods so that the healthier foods are at the beginning so that students’ plates are full by the time they get to the deserts.

Consider another example.  A business is located on the second floor of a two-story building.  Upon entering the building each morning, employees could take the elevator or walk up the staircase.   Their manager prefers that they take the staircase because it would be exercise and contribute more to their well-being.  He doesn’t insist on this but uses a “nudge.”  He put a photo in front of the staircase showing a healthy, happy person.  From that point on, more employees used the staircase.  His nudge influenced their choice behavior.

A final example.  A company is trying to raise $20 from each employee for their Christmas party.  The company could announce that $20 will be deducted from each salary in November unless an employee objects and “opts out.”  Alternatively, the company could leave it to individual employees to “opt in” if they want to contribute $20.  In this example, the company is highly likely to raise more money for the Christmas party by an “opt out” nudge than an “opt in” nudge.

So persons can use nudges to influence behavior.  However, are individual nudges sufficient to create highly important behavioral changes?  Can we develop a nudge to get teenage girls to stop smoking?  Can we develop nudges to get poor families to have fewer children?

Social marketing provides a more holistic approach to influencing behavioral change.  In the 1970s, three marketing professors at Northwestern University saw an ad saying, “Can you sell brotherhood like you sell soap?”  Can you sell brotherhood, better race relations, daily exercise, better nutrition, and other causes using the tools of marketing? Professor Sidney Levy and I wrote “Broadening the Concept of Marketing,” and also “Demarketing, Yes Demarketing,” where we claimed that marketing can help not only sell more products and services, but also to sell fewer products, such as fewer cigarettes and less smoking.  Marketing could be used to “demarket” something as well as to “market” something.

Professor Gerald Zaltman and I wrote “Social Marketing: An Approach to Planned Social Change.” We showed how population experts could use social marketing to encourage families to have fewer children.  We defined social marketing as using market segmentation, targeting and positioning (STP) and the four Ps of product, price, place, and promotion to influence behavior change for social good.

Social marketing became a college course and drew many business students who wanted to apply their skills to mitigating social problems.  Many social marketing workshops were run at the University of South Florida, producing eventually over 2,000 practitioners working with government agencies, nonprofit organizations, and businesses to create targeted behavioral change.  We could have called this “behavioral economics” because we were always concerned about balancing the demand side and the cost side of these efforts.

Let me describe one of the most successful social marketing cases.

Dr. Mechai Viravaidya, a well-respected Thai physician, had a passion for reducing unplanned pregnancies and reducing the spread of HIV/AIDS in Thailand. His big idea was to popularize condoms, thinking a “little fun” might make condoms more acceptable. His creative promotional strategies supported the “fun” theme:

  • He spoke at a variety of events, proclaiming, “The condom is a great friend. You can do many things with it. You can use different colors on different days—yellow for Monday, pink for Tuesday, and black when you are mourning.”63
  • He organized condom “balloon-blowing” contests with prizes for kids and adults. He also made sure the media would take photos that he hoped would appear on the front page or in the evening news.
  • He influenced tollbooths to hand out condoms with their tickets.
  • He created a Cops and Robbers program in which traffic police were given boxes of condoms to distribute on New Year’s Eve.
  • He had monks bless condoms so that Thais would be assured there would be no ill effects after using them.
  • He added condoms to fashion shows, with runs of condoms in different colors.
  • He opened new restaurants branded “Cabbages and Condoms” with the slogan “Our food is guaranteed not to cause pregnancy”— and a condom, instead of a mint, comes with the bill.

In 2007, the Bill & Melinda Gates Foundation announced that Thailand’s Population and Community Development Association (PDA) had received the 2007 Gates Award for Global Health in recognition of its pioneering work in family planning and HIV/AIDS prevention. The prize honored Dr. Mechai Viravaidya. Over a number of years, the desired number of children in Thai families moved down from seven to two.

Marketers were the original behavioral economists.  They recognized the great variety of motivations and behaviors of individual consumers, producers and decision makers.  They rejected the idea that all human behavior is rational and always aiming to maximize some individual “good.” They recognized a whole set of tools – ads, prices, products, nudges, etc., that could be used by behavioral economists to influence the level, timing and composition of demand. In building campaigns to modify behavior, social marketers consider both the expected performance and the cost of producing a specific level of behavioral change.

Social marketers differ from nudgers in preparing larger scale plans founded on many more tools to achieve behavioral change.  Social marketing is used by the World Bank (WB), World Health Organization (WHO) and Centers of Disease Control (CDC).  Social marketing goes much further than nudging to exemplify the work and contributions of behavioral economics.

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