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Feb 28, 2010 | Comments

A fascinating story: a South African bank once desired to make more loans. Sendhil Mullainathan, a consultant, devised a direct mail campaign and developed a letter to mail to prospects.

Mullainathan ran a huge multi-cell test, varying several elements of the letter:

“In one corner there was a photo—varied by gender and race—of a bank employee. Different types of tables, some simple, others complex, showed examples of loans. Some letters offered a chance to win a cell phone in a lottery if the customer came in to inquire about a loan. Some had deadlines.” He also varied the typical element: loan interest rate [via Marginal Revolution]

Having worked at American Express, I’ve witnessed marketers slave over junk-mail letter credit card interest rates and fees. It makes sense–shouldn’t this be what customers care about?

Surprisingly, the most important factor was the photo. In fact, if it was a woman’s photo, it increased male response rates by “as much as dropping the interest rate by five points.” The rational lever, the interest rate, was not even the third most important factor [via Harvard Press].

Even more surprising is that Mullaianthan, who directed the research, is not a marketer, but an academic. He’s part of the growing field of behavioral economics in academia.

Behavioral economics is an emerging academic field, ignoring traditional economics’ view of people as rational, utility-maximizing folks. Instead, it creates models to embrace our irrational brain (albeit unconscious). It recognizes that we’re peer pressured, affected by context, and easy swayed by a host of cognitive biases.

And as a big fan, I’m perplexed why marketers don’t worship behavioral economists for such insightful research. Behavioral economics is beating marketing at its own game.

So I was stunned to find this article by advertising guru Rory Sutherland, of TED-talk fame. It’s a call-to-arms: behavioral economics will save marketing

I couldn’t agree more.

Sutherland argues that behavioral economics is marketing’s unknown language. Instead of relying on fuzzy marketing terms, we can refer to scientifically tested frameworks. For example, every marketer knows (hopefully) that savings should be framed as an avoidable loss. We just didn’t know to call it: loss aversion.

Ogilvy: back from the dead

Sutherland’s proclamation is fitting. He’s an Ogilvy employee, sharing the same dogma once avowed by the firm’s founder, David Ogilvy. I consider Ogilvy the academic of advertising–he hated advertising based on intuition. He would use only advertising factors known to work. That is, quantitatively and scientifically proven tactics (Ogilvy claimed to have memorized 96). In his book, he cites research that photographs of finished food dishes attract more readers than photographs of raw ingredients. Now, 30 years later, behavioral economists perform this same research, but give it an academic name: framing.

I have no doubt Ogilvy would have rejoiced at the growth of the behavioral economics establishment. But he would be sickened by our lack of enthusiasm, choosing to rely on the same old level of intuition that he despised.

I’ve come across only few examples of marketers following behavioral economics’ lead. Richard Thaler, an academic, describes numerous examples in his book Nudge, but it’s mostly within the public sector. There is a rogue marketer at Campbell’s that spent two years of “neuromarketing” research to redesign soup cans, creating a label based on scientific research and biometrics [via Bud Caddell].

Contrast this with the “logic” used in Pepsi’s logo re-design. Can “oscilattions” and “energy fields” ever be used to justify brand identity? It’s this ubiquitous bullshit that gives The Onion license to write “World’s Worst Person Decides To Go Into Marketing.”

To quote Ogilvy, “I cannot think of any other profession which gets by on such a small corpus of knowledge.”

Why Behavioral Economics?

Behavioral economics (and really any research-based aggregation of marketing insights) could have such a positive impact on marketing. Not everything in behavioral economics is gold–no real-world value bullshit exists here as well. But it does a much better job explaining how to influence behavior than marketing’s existing frameworks (4Ps, 5Cs, hierarchy of needs, etc.).

It provides loads of frameworks to move past the old marketing toolbox of price and quality (that is, functional benefits) and start focusing on what really affects behavior. Mullainathan sums it up beautifully:

“We tend to think people are driven by purposeful choices…we think big things drive big behaviors: if people don’t go to school, we think they don’t like school. Instead, most behaviors are driven by the moment. They aren’t purposeful, thought-out choices.” [via Harvard Press].

This is where the opportunity lies–the emotional, contextual, and situational factors that so heavily affect our choices. And thankfully, behavioral economics has passionately worked against naming, codifying, and developing great insights–everything marketers should have been doing all along.

So what are these insights?

There’s no master list (that I’ve found). But Nudge by Thaler is great start. Here’s a digestible TED video from Mullainathan. And there are plenty of articles that define the rock-star factors, like prospect theory, framing, the diagnosis bias, and the confirmation bias. Watch this epic 9-hour master class from the behavioral economics rock-stars.

Finally, back in August 2009 I wrote about a project that I created: MakeYourCopyLonger. It’s an archive of research-based marketing facts that I’ve come across–a great place to house all of those pearls of wisdom.

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  • Nice post Matt.

    I've bookmarked the last group of links you provided. Although I haven't read it yet, "How We Decide" by Jonah Lehrer is also supposed to be a good book for those interested in BehavEcon.

    @DennisDemori

  • Hey Matt,

    I really like you MakeYourCopyLonger project. Many efforts of mine all my scraps, e-mails to myself and notebooks in one place have failed!

    This post was very interesting!

    I have always been interested in the metrics that surround marketing. Especially the discussion about advertising as a brand building tool versus generating direct sales.

    I thought I discovered something when I enrolled in this class called Marketing Models. The aim was to build models which could explain sales depending on the levels of advertising and promotion. But even using econometric modeling on very simple examples (data sets from the 20s) showed that there was still a lot unexplained. Let alone modern day examples where models quickly get very very complex.

    The behavioral economics path definitely offers a new way of looking at things. The some elements are there and it looks very interesting. But it is still to see how marketeers can connect the dots and use these things to explain the whys behind campaigns and advertisements.

    I'll definitely put my mind to work as well!

  • I work for a company that does many multi-variate regressions to connect advertising to actual hard data like sales. They claim it works, but I'm not so sure how much marketers trust numbers that require a PHD in statistics to generate.

    I'm definitely looking for case studies to connect the dots. Hopefully I can find a few so this is all worthwhile.

  • I agree, at times your ROI on using those statistics are minimal at best. If you're a big brand and looking to eek out those last few percentage points of growth, it may be worth pursuing.

  • So small businesses shouldn't be worrying about ROI?

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