ECM15: BEHAVIOURAL ECONOMICS - Stephen Young...©Stephen Young [email protected] Slide 1111 Behavioural Economics and Business “Classical economic theory suggests that people

ECM15:

BEHAVIOURAL

ECONOMICS

25 April-1 May 2013

Stephen Young

Senior Lecturer in Economics

Brighton Business School

© Stephen [email protected]

Slide 2

WHAT HAPPENS

WHEN

ECONOMICS

MEETS

PSYCHOLOGY…


Slide 3

…AND

WHY

DOES

IT

MATTER?


Slide 44

My Background

Senior Lecturer in Economics, Brighton Business School.– Undergraduate and postgraduate courses on behavioural economics.

Consultant, United Nations International Telecommunication Union, 2009-2011– ICTs, Climate Change and Behaviour– http://www.itu.int/ITU-D/treg/Events/Seminars/GSR/GSR10/documents/GSR10-paper5.pdf

Background– Senior roles in markets, regulation, policy & strategy in energy and ICT industries. – International track record in advising, consulting, publishing and research. – Long term interest in technology & behaviour changes for sustainability

Qualifications– Diploma in Marketing, Chartered Institute of Marketing; MA Politics & Government (With

Distinction); BA Economics (First Class Honours)

Website & LinkedIn Profile– www.stephenyoung.org.uk– http://uk.linkedin.com/pub/stephen-young/18/129/316

Behavioural Economics


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OVERVIEW


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Course Programme25 April - 1 May 2013

WEEKEND BREAKNo teaching

Day 1 Economics & Psychology

Day 2 Information and ChoiceAltruism and SocietyUncertainty and Risk

Day 3 BE and BusinessBoom, Bust and BubblesBE and Policy

Day 4 ControversiesGuest Speakers (tbc)

Day 5 Assignments Workshop

6Behavioural Economics© Stephen [email protected]


Slide 7© Stephen [email protected]

Behavioural Economics 7

Overview

• Days 1 & 2: – Theories behind BE– Lots of material. Intense

• Days 3 & 4: – Practical Implications of BE. Less intense. More chance to reflect. – Controversies.– BE and SM

• Day 5: – Your chance to recap– formulate your dissertation subject & question– use your peers as a resource– use me as a resource, etc.

Challenging “standard” economics but providing better insight into human behaviour.



Behavioural Economics8

• Economics• Psychology• Judgement • Decision making• Automatic system• Reflective system • Homo economicus• Homo sapiens • Spock • Simpson

• Heuristics• Bounded rationality• Biases• Preferences• Frames• Prospect theory• Anchors• Loss Aversion• Endowment effect




What is Behavioural Economics?

• Public policy• Consumer Policy• Environmental Policy• Financial Policy• Foreign Policy• Business Strategy• Business Investment• Marketing• Advertising• Charity

• Health• Wealth• Spending• Saving• Personal Investing• Drinking• Driving• Sex• Drugs• Rock and Roll• Life• ….etc

“We happen to call the word economics. But it's not economics. You could be talking about crime, you could be talking about many things, in the social domain, the entire spectrum of human behaviour. Anyone who is interested in the broader world should be interested in something we currently call "behavioural economics".

Sendhil Mullainaithan: Professor of Economics, Harvard University, A Short Course In Behavioral Economics, 10.1.08- http://www.edge.org/3rd_culture/thaler_sendhil08/thaler_sendhil_index.html


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8,000 citations for Prospect Theory: An Analysis of Decision Under Risk Source: Evan Goldstein (2011) The Anatomy of Influence. The Chronicle of Higher Education, 8.11.11 http://chronicle.com/article/The-Anatomy-of-Influence/129688/


10Behavioural Economics


Slide 1111

Behavioural Economics and Business

“Classical economic theory suggests that people act rationally, using cost benefit analysis to make choices and come to conclusions. According to this theory people will always choose the option that is objectively best for them (optimal option). Yet, after decades of scientific research, conducted by behavioural psychologists, behavioural economists and marketers, it is now well established that this notion is incorrect.”

Gorkan Ahmetoglu, Simon Fried, John Dawes, Adrian Furnham(2010) Pricing Practices: Their Effects on Consumer Behaviour and Welfare. Office of Fair Trading, March 2010http://www.oft.gov.uk/shared_oft/business_leaflets/659703/Advertising-of-prices/Pricing-Practices.pdf





Behavioural Economics and Business

Joshua S Gans “Protecting consumers by Protecting Competition: Does Behavioural Economics support this contention?”

http://www.mbs.edu/home/jgans/papers/ConsumerProtection.pdf

“Firms are already using behavioural economics to influence consumers – setting prices, offers, contract terms etc.”




Behavioural Economics and Marketing

Ned Welch (2010) A Marketer’s Guide To BehavioralEconomics. McKinsey Quarterly February 2010

”Marketers have been applying behavioral economics - often unknowingly - for years. A more systematic approach can unlock significant value. Marketers have long been aware that irrationality helps shape consumer behavior. Behavioral economics can make that irrationality more predictable. Understanding exactly how small changes to the details of an offer can influence the way people react to it is crucial to unlocking significant value - often at very low cost.”



Behavioural Economics Slide 14

“Marketers have long been aware that irrationality helps shape consumer behavior. Behavioraleconomics can make that irrationality more predictable. Understanding exactly how small changes to the details of an offer can influence the way people react to it is crucial to unlocking significant value - often at very low cost..”

McKinsey on the link between Marketing and Behavioural Economics

Behavioural Economics and Marketing


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“We are all choice architects now.”

The Institute of Practioners in Advertising

Behavioural Economics and Advertising



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Behavioural Economics and Policy

“….we are both committed to turning old thinking on its head and developing new approaches to government…..there has been the assumption that central government can only change people’s behaviour through rules and regulations. Our government will be a much smarter one, shunning the bureaucratic levers of the past and finding intelligent ways to encourage, support and enable people to make better choices for themselves.”

– David Cameron and Nick Clegg (May 2010)Foreword to The Coalition: Our Programme for Government

• http://programmeforgovernment.hmg.gov.uk/files/2010/05/coalition-programme.pdf


GUEST

SPEAKERS


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Guest Speakers: 2011

Michael HallsworthAuthor of MINDSPACE


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Nick Southgate

Behavioural Economics Consultant to the Institute of Practioners in Advertising


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Leigh Caldwell

Chief Executive of INON pricing advisors

Author, The Psychology of Price


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METHODS


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Economics 101: A Selection



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OUT: GraphsEquationsDiagramsTextbooks

Stephen [email protected]

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Behavioural Economics Slide 24

INQuestionsExperiments DiscussionInteractionParticipation ExercisesReading …Bleeding Edge


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QUESTIONS


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1. A rational decision maker

2. Someone who considers how to maximise your outcomes from minimal inputs

3. Someone who acts as a result of thinking carefully about the costs and benefits of your decisions

Congratulations, you have stepped straight from the pages of

an economic textbook:

You are a rational economic man/woman.

Is This You?



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Have You Ever:

� paid upfront for gym membership and then not gone� bought a lottery ticket� not taken your medication� not paid off your credit card bill� smoked tobacco� drunk too much booze� eaten the “wrong” kinds of food� taken out a mobile phone contract with large upfront payments� taken out an “all you can eat” phone or broadband contract� given in to temptation� donated blood� taken pleasure from giving a gift…

If yes, you are a homo sapiens.

If no, you are a homo economicus (possibly an economist!)



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“Standard” vs Behavioural Economics

� Rational decision makers

� Consider how to maximise outcomes from minimal inputs

� Act as a result of thinking carefully about costs and benefits of decisions.

� Homo economicus, as seen in “standard” economics

But how to explain: � Blood donation� Buying Fairtrade� Keeping things longer than you

should � Being fooled by randomness� Buying a lottery ticket� Misjudging risk� Hating to lose more than loving to

win� Giving in to temptation



Slide 29Private Eye, 30.10.09

Too Much Information?





Why Are All His Suits Either Dark Blue or Grey?




Why Do Frames Matter?

Source: banksy vs Bristol Museum, July 2009


Slide 32

Private Eye, 12.6.09

Why Can’t We Judge Risk & Probability?



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Why is this A Bad Idea in Marketing?



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What is the real genius of IKEA?





How Does Apple Use Behavioural Economics?


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ASSESSMENT


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Assessment

Two components to the assignment for ECM15 – the summative and the formative. Both components are compulsory, only one, thesummative, is assessed:

1. Summative AssessmentAn individual essay – 3,000 words (+/- 10%) excluding appendices and bibliography (100% weighting for course mark).

2. Formative AssessmentA reflective statement of 1,000 to 1,500 words (compulsory, but not weighted) on the student’s learning during the course and the assignment.

Submission: Monday 3 June 2013



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Sample Assignment Topics 2011 & 2012

• Brand Names as Heuristics: Effort Reduction for Consumers?• Why People Make Irrational Personal Investment Decisions• Healthcare Professionals as Choice Architects: Using Behavioural

Economics to Support Patients Choosing Optimum Treatment• The Impact of Human Behaviour in an Organisation• Behavioural Economics and New Firm’s Marketing• Choice Overload and Individual Decision Making• The Power of the First Decision• Behavioural Economics and Retail Banking in Nigeria• Behavioural Economics and Customer Decision Making• Behavioural Economics, Corporate Sustainability and UK Supermarkets• Irrational Behaviour in the Consumer Credit Industry • Using Behavioural Economics for Negotiating with Commercial Partners• The Endowment Effect and Online Shopping• Behavioural Economics and The Budget Hotel Sector



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WHICH STUDENTS

TAKE

ECM15?


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Who Takes ECM15?

MSc Management

MSc Int Management - 3 month EMMA

MSc Management

MSc Management Entre

MSc Management (Entrepreneurship) 2 month EMMA

MSc Marketing (Social Marketing)

MSc Management Entrepreneurship

MSc Management


MSc Int Management 4 month EMMA

MSc Marketing - 3 Month EMMA

MSc Marketing 3 month EMMA

PGCert Social Marketing

MBA PT General Year 3

MSc Marketing

MSc Marketing

MSc Marketing (Branding and Communication)


MSc Int Management


Included:


2012

30 students– from a variety of Post

Graduate courses– almost entire cohort of

MSc Marketing students



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Who Takes ECM15?

MSc Management


MSc Management

MSc Management Entre

MSc Management (Entrepreneurship) 2 month EMMA

MSc Marketing (Social Marketing)

MSc Management Entrepreneurship

MSc Management


MSc Int Management 4 month EMMA

PGCert Social Marketing J1BL007

MSc Marketing - 3 Month EMMA



MBA PT General Year 3 J1BF008

MSc Marketing

MSc Marketing



MSc Int Management



2011

21 students– from a variety of Post

Graduate courses– Including many MSc

Marketing students



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STUDENT

FEEDBACK




“the insights of this module in consumer behaviour and psychology form an essential base of knowledge for every marketing student ….I have once again been shown that standard academic theory has to be questioned at any time and that a critical academic point of view can help to improve your way of thinking and keep your mind open forchallenging ideas. This module ties in very well with other modules of the MSc Marketing course and helped me to better understand my

future customers.”

Post Graduate Student Comments: ECM15 Behavioural Economics elective, May 2011

“….I was a little shocked at how un-economic the module was….as the module developed I began to understand what the module was about, and also how it was attempting to answer many of the questions which economics in its traditional sense failed to do.... I found the lectures fascinating, the number and variety of case studies was spectacular and the use of the rea l life experience of people within the group provided an interesting dynamic ."




"I have really enjoyed the totality of this module , it has become perhaps my most favourite moduletaken…….I know that I will continue now to look out for behavioural economic techniques that may be useful for my work, and also where my choices are

being manipulated in the wider world."


"I have found the Behavioural Economic theory and policy documents incredibly useful as they provide a framework in which to understand how best to influence people….."


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“Not only was the subject fascinating , but the teaching material used had clearly had an enormous amount of effort put into it. There was a great variety of methods used to get the various keypoints across, and the different exercises, examples, videos anddiscussions made the whole experience thoroughly engaging , as you were never really sure what would happen next…Brighton Business School would do no harm in using this cour se as a benchmark .”

Post Graduate student comments: ECM15 Behavioural Economics elective, May 2012

“The course structure, and materials provided by Stephen were excellent and refreshing...the delivery and mix of theory, group interaction and media enabled the time to really consider what was being presented and think about the implications of the subject…. I found this course eye-opening and thought provoking in more ways than perhaps any of my previous studies .”


Slide 4646

“.. ….the vivid design of the module, visual stimulus (pictures and videos), idea inspiration, guest speakers and interaction of activities arevery impressive…!”


“Behavioural Economics (BE) has given me the opportunity to see the decision making process of consumers….from a different perspective. In Marketing, we always talk about the decision making process but I have never really looked into or understoodthe cognitive reasons behind decisions….BE has enriched my views in a profound way…..BE will certainly influen ce my personal and my professional life. I believe the mo dule has given me a competitive advantage compared to other marketing students. Although we might all know the theory behind marketing, not many of us looked at the psychology behind it as well. I already see the difference when I compare myself to other MSc Marketing students who did not take BE….”


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“behavioural economics should be a core module on the Marketing MSc - not an elective.”

MSc Marketing Post Graduate Student, May 2012


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REMINDER:

COURSE CAPPED

AT 30 STUDENTS –

REGISTER EARLY!!

THANK YOU

ANY QUESTIONS?

[email protected]

Documents

ECM15: BEHAVIOURAL ECONOMICS - Stephen Young...©Stephen Young [email protected] Slide 1111 Behavioural Economics and Business “Classical economic theory suggests that people