How irrationality is affecting your organization

As behavioral economics is gaining popularity, many of us started to pay attention to our irrationality. For example, we now see that we tend to rely on heuristics (e.g., mental shortcuts, gut feeling) to make quick decisions instead of investigating all of the available options and weighing the pros and cons of each option. While this helps us navigate an otherwise overwhelming world, it leads to irrational and inconsistent behaviors. That is, we may do what’s not necessarily be the best thing to do. Or we may select one option over another today but selecting the other option the next day. We may also say one thing and do the other.

Most of us also recognize that we have a limited amount of willpower. For example, how many of us have enough willpower and diligence to always do what’s best for us and our business in the long term by investing in the future? More often than not, we focus on what’s in front of us and fail to follow-through with the long term goals.  

So, let me first ask a couple of questions:

“Do you think people are always rational?”

That is, do people always make rational decisions by investing sufficient time and effort to researching the decision at hand?  Are they also almost always behaving according to one’s best (long term) interests?

When I pose this question to a group of people, I almost always get an immediate, and somewhat strong “no!” followed by abundant examples.

My next question is:

“Do you and your organization interact with your customers based on the assumption that they are rational?”

This often brings a pause.

Let’s take Obamacare for example. Based on the traditional economics assumption that the more options people have, the more likely people can find the most suited plan for themselves, there is as many as 169 plans available in a single county. This logically makes sense: We can find the best suited healthcare plan by going through each of 169 plans and selecting the most appropriate one based on the calculation of the expected cost (e.g., expected number of doctor’s visit and expected amount of out-of-pocket) and our preference (e.g., more coverage vs. lower monthly premium). However, behaviorally speaking, this presents a big challenge as we witness that the market is filled with confusions.

Key here is that, as painful as it is to think, our customers are not invested in our products as much as we do due to bounded resources.

I think most professionals realize that. Yet, they struggle to embrace it. That is, most companies realize that their consumers are more irrational but they approach them as if they were more rational.

What’s going on here? We KNOW we are irrational beings. Behavioral economics as well as anecdotal stories can tell us that. But yet when we’re at work, we somehow behave as if we all are always rational.

I think this is because we tend to use different thinking systems when we are at work and not at work.

When we are at work, we tend to rely more on slow thinking: We tend to, for examples, 1) ask our customers to carefully think and report their attitude and behaviors in our consumer research, 2) judiciously evaluate large amounts of information about our customers and market trends, 3) think intelligently about the challenges company is facing, and 4) make careful business decisions that are appealing to slow thinking.

Outside of work, however, we tend to rely more on fast thinking. Instead of carefully evaluating, for example, what we should eat for dinner we gravitate towards an option that “sounds good” or is easy to make.

Then you go back to work the next day, and try to research how people are making careful decisions about what to eat for a dinner by, say, conducting a focus group or in-depth interview and ask participants to think hard about their opinions on your packaged meals.

This interplay between two thinking systems can cause a lot of confusions and challenges at organizations when it comes to consumer behaviors (or any human behaviors for that matter).

Then what should we do to better understand and ultimately nudge consumer behaviors?

"We all know we are irrational but the organization acts based on the assumptions that customers are rational”

 Let’s first take a closer look at fast thinking and slow thinking.

Fast Thinking:

Most of our decisions are based on fast thinking. Some behavioral researchers, including myself, argue that more than 75% of our decisions are made based on fast thinking or at least heavily based on fast thinking.

It is also important to note that all human being use fast thinking at any given moment, and it’s not something we can just turn it off. It happens automatically and unconsciously. It doesn’t have to follow logics, and we often are unable to describe the reactions based on fast thinking because fast thinking is not linked to language (e.g., try explaining what you like about your favorite artwork or song). This fast and automatic process is necessary to navigate our very complex otherwise overwhelming world. If we took the time, and spent the effort to understand each and every piece of information we come across, we wouldn’t even be able to leave the house in the morning. Therefore, we rely on fast thinking to navigate our life, and we pay closer attention to some of the information only when the slow thinking process is somehow triggered. For example, if your customer has been using your product daily for years, then he would be relying on fast thinking and auto-piloting when using your products.

Fast thinking occurs due to limited resources: We simply do not have all the time, cognitive capacity, physical energy and willpower to carefully evaluate all of the information and decisions we come across.  When we rely on fast thinking, we are more likely to be susceptible to cognitive biases. For example, you might gravitate towards one option over another because of how the decisions were framed instead of the values each decision brings to your business. You also might be susceptible to anchoring effect in thinking about next year’s budget. You might also make decisions that are more beneficial in a short term but harmful in a long run such as skip attending important training program to chase after smaller sales.

Slow Thinking:

Unlike fast thinking, slow thinking involves conscious thinking, and it tends to follow logic. It also involves more cognitive processing, and requires high effort and is much more controlled. Therefore, it takes time and we can only focus on a small set of information at a time.  It’s also linked to a language and therefore the language can navigate our thinking. (If you are multilingual, you may have experienced that you may follow different thinking process depends on which language you are using).

As I mentioned above, most behaviors are guided by fast thinking but it’s not necessarily conscious or linked to language. Then what happens if you ask your customer to talk about their behaviors that are guided by fast thinking (e.g., choosing your competitor’s products)? They will need to rely on slow thinking to come up with sensible hypothesis about what might have happened. For example, they might say they chose your competitor’s product because of the value. When in fact they have never carefully compared the value you and your competitor offer.

This presents a significant challenge in understanding consumer behaviors based on traditional market research methods (e.g., survey research, in-depth interview, focus group). 

In the next blog, I will discuss what we can do to better understand and ultimately nudge consumer behaviors. 

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