28 May 2015

Nudging Rich and Nudging Poor

In the very short time since I moved to the USA, I was fortunate enough to have met a gentleman who works (worked) at the World Bank in research and applications of behavioural economics in development policies. It was very fortunate since we met because he was selling a car and my wife and I were buying one.

While we were waiting for the car to be inspected by a mechanic we had a wonderful chat on behavioural science and its applications. We shared perspectives, points of view, experiences and illustrations of behaviourally informed interventions.

For me this short chat was an eye opener on the differences in Nudging across countries.

When it comes to differences across countries, the first thing that comes to mind is Culture and subsequently, Cultural Differences.

Culture, however, is not the (main) cause for the differences that exist in applying behavioural science in rich and poor countries. (I’m oversimplifying, I know). The main cause is the (invisible) infrastructure that exists in rich countries and, quite often, lacks in poor ones.

In the Western World we have infrastructure that we take for granted and, to some extent, we have become blind when it comes to it. Many western-world nudges and behavioural design features are built on this (seemingly) invisible infrastructure.

The example of the Fly in the Urinal  nudge (Featured in the book Nudge and detailed in this article), it is a wonderful illustration on the how western-world nudges are built on the western-world infrastructure.

The Fly in the Urinal intervention is aimed at tackling a sanitation / health problem – spillage of urine in public toilets.

As you can imagine, sanitation and subsequent health related problems are not specific to the western world; such problems are present everywhere and the western world is (maybe) the least affected by them.

What is essential here is that the Fly in the Urinal intervention assumes that there is a sewerage system.

I know this sounds weird, but it is true. Moreover, I have to admit that I have never thought about this underlying pre-condition of the fly in the urinal intervention. I guess I’m not the only westerner Behavioural science guy who has taken this for granted.

Whereas for westerners the presence of sewerage systems is natural, according to the World Bank Report 2015,

 About one billion people defecate in the open. (see page 17)

For this behavioural problem which brings health problems, flies (in the urinal) will not work. (Flies will appear naturally, but they will only worsen the problem).

The design of behavioural interventions definitely is context dependent and infrastructure might play a bigger role than culture.

19 May 2015

Smart, but Deceiving

Last weekend we went shopping (as usual for most people) and I noticed this very interesting, smart, but deceiving piece of merchandising.

Bottles of (allegedly) lemon juice are placed in the Fruits section and they are presented exactly in the same way as fruits are.

I don't fully know if that is actually lemon / lime juice, but I seriously doubt it since the area is not refrigerated. 

It's a piety that this knowledge is not used for better purposes.

13 May 2015

Branding in Services Explained through Prospect Theory

Branding and brand building are important activities in marketers’ jobs and brands are important for consumers, too. Yet, there is, in my own view, a considerable fuzzy area on what exactly does branding mean and why consumers choose branded services (and products) over non-branded ones.

From the business’ point of view, brands are seen as identification means, differentiation means, assets etc. The process of branding (building a brand) is very well defined and structured in various stages.

From a consumers’ point of view, brands are cues for certain expectations, while the process of branding is a learning / memory process.    

Maybe one day I will write on memory and branding, but for now I want to focus on why people choose branded services over non-branded ones.

The key to this preference is in Prospect Theory (click here if you want to read about PT).

Let’s see the issue of choosing between a branded and non-branded service as a gamble (in prospect theory terms). For simplicity we will use the example of restaurant services.

A person has to choose between Restaurant B – a restaurant belonging to a well-established corporate chain – and Restaurant P – a privately owned, single location restaurant.

Eating at Restaurant P is seen as a gamble with the following probabilities and outcomes:

There is a 10% chance that the food & service will be great (+100).

There is a 80% chance that the food & service will be average / acceptable (+50)

There is a 10% chance that the food & service will be terrible (-100).

Eating at restaurant B is seen as a certainty (100%) for as the food and service will be average / acceptable (+50).

Eating at restaurant P can be translated as:

EV Restaurant P = W(0.1)*100 + W(0.8)*50 + W(0.1)*(-100*λ)

Based on prospect theory, we will consider:
W(0.1) = 0.17;

W(0.8) = 0.55;

λ = 2.1;

 EV Restaurant P = 0.17*100 + 0.55*50 + 0.17*(-100)*2.1 = 17 + 27.5 – 35.7 = 8.8.

Eating at restaurant B can be translated as:
EV Restaurant B 1*50 = 50

Basically, the choice between restaurants B and P is heavily tilted towards the branded one, even if the branded restaurant will deliver only average food and service, without any chance of the client getting great food & service.

The reason for which people prefer branded services is not that they want mediocrity or that they want to avoid getting great food and service; rather it is that (most) people want to avoid the risk of getting terrible food and service.

I am fully aware that what I presented here is an oversimplified situation. I am also aware of the fact that in making a choice between a branded and non-branded service there are more elements that come into play. Nonetheless, Prospect Theory has the power to fundamentally explain what is going on when we make these types of choices.

Thank you Rory Sutherland for the inspiration for this post.

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