Behavioural Economics

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Is it really possible to understand how companies, teams and brands function without developing a deep understanding of what drives people’s behaviour? Why is it that some our apparently awesome ideas in marketing, performance management, culture development and employee engagement fail dismally? why do our social attempts to change behaviour often accentuate the behaviour we want to change? Behavioural Economics is the study of human behaviour and it’s impact on business.

Erik Vermeulen is one of a handful of Behavioural Economics Strategists working with leadership teams, employees and customers to create a better understanding of human behaviour and interactions.

Let’s take the Harley Davidson example. Harley almost went under in the early 1980’s because the brand became synonymous with gangs, thugs and hoodlums. Remember the “Hell’s Angels”? The company’s fortunes were turned around however when they stopped selling the motorcycles and started selling the lifestyle, in particularly customisation. Today a 42 year-old accountant can buy a Harley (for which he pays a premium), wear a leather jacket and drive through small towns scaring people.

The cola war is another great example of behavioural economics at work. In a blind taste test, Pepsi outscored Coca-Cola leading the soft-drink giant to reformulate Coke. New Coke was a complete disaster and this forced Coca-Cola to do an about turn, re-launch the “old recipe as Coca-Cola Classic and kill off New Coke. They understood the numbers. But they did not understand the psychology of the blind taste test.

In South Africa, government’s failure to understand Behavioural Economics has led to the loss of billions of rands and the current non-implementation of the Gauteng Toll Roads. Again, the concept of a toll road is nothing new and is universally accepted. Doing something slightly different could have meant a totally opposite outcome for SANRAL.

Companies will do well to bear the following in mind…

  1. Other people’s behaviour matters: people do many things by observing others and copying; people are encouraged to continue to do things when they feel other people approve of their behaviour.
  2. Habits are important: people do many things without consciously thinking about them. These habits are hard to change – even though people might want to change their behaviour, it is not easy for them.
  3. People are motivated to ‘do the right thing’: there are cases where money is de-motivating as it undermines people’s intrinsic motivation, for example, you would quickly stop inviting friends to dinner if they insisted on paying you.
  4. People’s self-expectations influence how they behave: they want their actions to be in line with their values and their commitments.
  5. People are loss-averse and hang on to what they consider ‘theirs’.
  6. People are bad at computation when making decisions: they put undue weight on recent events and too little on far-off ones; they cannot calculate probabilities well and worry too much about unlikely events; and they are strongly influenced by how the problem/information is presented to them.
  7. People need to feel involved and effective to make a change: just giving people the incentives and information is not necessarily enough.