Making the Most of Our Irrationality

An Ad Age Stat Q&A With Dan Ariely

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Dan Ariely points out that human beings are about 97% similar. Trying to segment your audience is important to some extent -- those 3% of differences can be profound -- but many of the drivers of behavior are universal and not always rational, as standard economics would presume. Behavioral economics looks at the areas where that breaks down.

Ad Age gave you a great primer on behavioral economics in July. We wanted to drill deeper into some of Mr. Ariely's theories, so we chatted with the Duke University professor, frequent speaker for idea-sharing nonprofit TED (Technology, Entertainment, Design) and author of "Predictably Irrational" and "The Upside of Irrationality," about how his work could help marketers make more money.

Ad Age: Your books suggest that people don't always make rational decisions when it comes to economic choices. How can marketers use that to their advantage?

Dan Ariely
Dan Ariely

Mr. Ariely: If you think that people are inherently rational and doing the right thing, what should you do? You should get out of their hair, right? At most what you should do as a marketing organization is give them information because people would do the right thing. If you look at the recent campaign in New York to add calorie labels to fast-food restaurants, that's a [standard] economic argument. It turns out that this experiment in New York yielded basically no change in calorie consumption, which says that information is not the key to this problem. When you go beyond information into mechanism design, behavioral economists have a lot to say to marketers.

Ad Age: In "The Upside of Irrationality," you talk about the human need for revenge. How does that apply to marketers?

Mr. Ariely: Revenge is a useful thing because revenge allows for trust. If your computer crashes, you might get upset but you wouldn't feel the same need for revenge as when a human being betrays your trust. The anger that can be caused by bad customer service is really kind of incredible. That's the first thing that companies just need to understand. Things can quickly deteriorate to a level to which there's no return. You can really calm people very easily if you do it at the right moment.

Ad Age: How does social media change that?

Mr. Ariely: The development of things like YouTube adds a whole new level of complexity. It creates a huge challenge because it shifts the power equation to the consumers when they're revengeful. You can compare it to terrorism. In the old days, let's imagine that terrorists only had knives. How much damage could they really cause?

Ad Age: Can you talk a little bit about the Ikea effect?

Mr. Ariely: The Ikea effect is kind of simple: You build something and you fall in love with it. When marketers do sell you a product, their theory is about preference fit. You like pink and I like orange and I like this a little higher and everyone knows their preference. That's important. But I think the more important issue is not the preference fit but the investment in the product. Say you like orange and pink. Imagine that in one universe you found shoes that are orange and pink and in other you had to invest five minutes of effort and attention and care to choose the exact shades. What we show is that when you've invested into it, you would appreciate them more and you would think about them more. You might talk about them more, you might be more likely to buy them again from the same vendor, your connection would be much higher. It takes very little investment to make something your own. ... It's sometimes surprising how little that is.

Ad Age: Let's look at one more concept from your books: self-herding.

Mr. Ariely: The basic principle with self-herding is that people don't know what they want very often. Figuring out our preferences is in fact very hard. If I ask you, "What is the best place to eat?" you have many choices. These are hard questions with lots of possible answers. They way we often answer these is by asking, "What have I done before? What I did before must have been a good decision, after all I wouldn't have made it if it wasn't a great decision, let me repeat it." We can consult our preferences or we can consult our memory. It turns out it's often easier to consult our memory.

What does it mean to marketers? To the extent that you can get people to behave one way there's a good likelihood that people will keep on doing that later. If you can remind people how they behaved, there's a good chance that they will keep on behaving that way. So the logic suggests that the efforts of marketing should be particularly concentrated when people make first decisions about the product, like people in college who are making first decisions for themselves. It could include product introductions. It could also include things that happen when there's a shift in the economy. The recession caused many people to reconsider their habits.

This is the fifth in a series of AdAgeStat Q&As with researchers who have extensively studied pieces of the demographic puzzle. Earlier we spoke to Richard Florida about cities, Paco Underhill about women, Rose Cameron about men, and Tammy Erickson about Generation X.

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