club catalyst. Why do people misbehave?

The most insightful book I have read this year is Misbehaving , authored by the American behavioural economist Richard Thaler. In this gripping book, written virtually like a racy novel, Thaler sets out to demolish the myth propagated by classical economics that people make all their decisions rationally. He goes on to show how irrationality, biases and idiosyncracies are at the heart of decision-making by human beings. Since marketers need to understand how consumers behave, and how they make purchase decisions, this book is, in my view, a must-read for students and practitioners of marketing.

Here is a small story that Thaler narrates early in the book, which illustrates one specific aspect of how consumers make irrational decisions. “My friend Maya Bar-Hillel was shopping for a quilt to use as a comforter on her double bed. She went to the store and found one that was on sale. The regular prices were $300 for a king size quilt, $ 250 for a queen size quilt, and $200 for a double bed sized quilt. This week only, all the sizes were priced uniformly at $150. Maya could not resist: she bought the king size.”

So Maya ended up buying a gigantic quilt which will clearly not fit her bed, just because it appeared to be the biggest bargain in the store. Many of us will relate to such behaviour. Great deals and discounts can tempt us into misbehaving, by making purchases which are of little utility to us. Such goods then end up in our cupboards or lofts, rarely used.

Thaler gently guides us through the reason for this specific type of “misbehaviour”. He says that purchases by human beings involve two types of utility – the acquisition utility, and the transaction utility. Acquisition utility is the rational value of the purchase, which provides consumers true value through the use of the product. This is the utility that economic textbooks routinely refer to.

Transaction utility, on the other hand, is the perceived quality of the deal at the point of transaction or purchase – that is, the difference between the price actually on offer and the price you would normally expect to pay. Shoppers can get hooked on the thrill derived from transaction utility, because getting a great bargain makes you feel instantly victorious and happy. So Maya bought the extra large quilt because transaction utility of this purchase to her was very high – she was delighted that she had saved the maximum amount compared to the full price. In doing so, she misbehaved, because she ignored the acquisition utility of her purchase.

Marketers and retailers can reflect on this interesting formulation of dual utility as they plan their promotional sales or pricing strategies, and how best these can be communicated to consumers. What will dial up transaction utility?

Conversely, can we specifically trigger acquisition utility to ensure focus on some key products? Marketers should also listen to Thaler when he points out that this misbehaviour is not limited to middle-class consumers looking for cheap bargains, even affluent consumers get a kick from transaction utility.

Yet another space of human behaviour that this book speaks about, which is also relevant to marketers, is the concept of nudging human beings to make the right choices. The premise of “nudging” people is simple: Human beings make predictable errors, which are, in essence, unintended misbehaviours. If policy makers or, indeed, marketers, can anticipate those errors, we can devise strategies that will reduce the error rate and help people take the right decisions. Nudging is about “influencing choices in a way that will make the choosers better off, as judged by themselves”.

For instance, people may not be saving adequately for their retired lives because they have not correctly estimated the savings that they will require for a comfortable life post retirement. This is misbehaviour, because it will impact the person adversely later in life. A bank or a marketer of financial services can “nudge” people in the right direction by helping them come to a well-considered decision on the corpus of savings they need to build for retirement, and therefore the amount they need to begin saving, starting right now. Eventually, the choice of how much to save is up to the person. But the bank can nudge him or her into considering and taking the correct decision.

There are many interesting aspects of “nudging” that this book has made me think about. For instance, it is easier to nudge people to do something if there is proof that many more people who are just like themselves have actually taken a similar action. Because there is safety in numbers, and if many others have chosen something, there must be a good reason they have done so. So, if a middle-aged, married company executive knows that a large proportion of executives in his age and income segment have chosen a certain level and type of life insurance coverage, it may prompt him to think positively about taking out similar insurance coverage for himself. Of course, as Thaler states, responsible policy makers and marketers should only “nudge for good” – to nudge people to save for retirement, or to get more exercise, or to eat healthier food. On the other hand, it would be irresponsible and incorrect for businesses to nudge consumers to drink alcohol every day, or to go on a shopping binge.

Another area which is central to human behaviour that Thaler expounds upon wonderfully is how consumers respond to the framing of choices, around product purchase, overall cost and usage. He narrates a story about a ski resort near New York, which was keen to attract many more new consumers from amongst the local population. What eventually worked well for the owner was a “ten-pack” ticket, which included five weekend tickets and five weekday tickets to the ski resort, at 40 per cent off the retail price when purchased by a particular date. The reason this worked very well was multifold: First and foremost, 40 per cent off provided the customer a bargain, and hence held great transaction utility. Second, the initial purchase of ten tickets was viewed by many consumers as an “investment” in a positive and pleasurable activity such as skiing, and consumers liked making such a commitment to a positive objective, particularly when they could save money at the same time. Thirdly, the ten-pack ticket made ten future ski expeditions anytime during the year “free” to implement, in the consumer’s mental accounting – because the advance purchase decoupled the purchase decision from the decision to go skiing.

There are many other similar areas of human misbehaviour which the book narrates. It takes us on an easy and nice intellectual voyage through fascinating subjects such as common human biases, important phenomena such as the endowment effect and the present bias, and how people treat sunk costs. Each of these areas of irrational “misbehaviour” has implications for marketers, as we think of our consumers and the way they are likely to behave. In addition, the book is superbly written. You will enjoy reading it.

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