Friday, March 18, 2011

Secrets of the MoneyLab

Readers interested in applying behavioural economics ideas in business should read "Secrets of the MoneyLab: How Understanding People will increase your profits". It is a very readable account of the use of behavioural economics in business applications by Kay-Yut Chen, head economist at Hewlett Packard Labs and journalist Marina Krakovsky. The book's eight chapters look at uncertainty and tailoring to people's risk preferences; reciprocity; rationality; reputation; trust; incentive compatability and prediction. The book advocates an experimental economics approach to business process design, giving a number of practical examples.

The general issue of the application of behavioural economics in business is something we have discussed at a number of events here. Almost all the examples used in the MoneyLab book are "win-win" type examples, where behavioural economics ideas are used to improve products in ways that the customer would probably prefer even if they were aware of how they were being affected e.g. simplifying interfaces, building trust in the company, establishing fairness norms etc., And I think it is fair to say that a lot of the business and policy applications of BE are like this. I think though it is worth thinking about cases where what we know about consumers can be used to get them to do things they wouldn't choose were they better informed. The best example I can think of is the use of default options where it is not perfectly clear how to opt-out. One message that might come from the literature is that such "tricks" are self-defeating in the sense that losing trust and reciprocity with consumers might be more costly in the long-run. And yet, it is obvious that many companies set interfaces up not to help us make the "right" decision but in the hope that we will purchase things that we probably wouldn't if we thought about it properly and that such companies are probably calculating that the gains from doing this outweigh reputational costs (I remember wondering once why "no travel insurance required" had suddenly entered into the list of countries on a popular airline website but I still booked the flight!). I think the literature on behavioural economics is becoming really helpful in pointing out how these work. One aspect that people like Cass Sunstein have been emphasising is that if we know how these effects operate, then it will become possible to establish, at the very least, social norms and sanctions for companies that try to make money from confusing people rather than providing them with a valuable product. Whether the literature goes further and points to a direct motivation for stopping companies from doing things like this through regulation is a question being debated fairly vigorously at present.

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