Many marketers assume that people are logical processorswith infinite processing capacityand have complete insight into the factors determining every choice they make. But we know from Behavioral Economics that it's much more nuanced than that.

Take these questions from Yale Professor Shane Frederick, for example:

  1. A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
  2. If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?
  3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?
Did you answer these correctly? Read on to find out.

There is attractive simplicity to the notion that consumers choose what they want. It makes the work of marketers relatively straightforward: give the right people the right information and they’ll synthesize it, weigh their various interests, and make the most informed choice.

Consumer decision-making is not, in fact, just about availability of information. It’s much more nuanced than that.

“But consumer decision-making is not, in fact, just about availability of information,” says Ravi Dhar, Director of the Yale Center for Customer Insights. “We know from Behavioral Economics (BE) that it’s much more nuanced than that.” BE injects the standard marketing approach with insights from psychology, economics, and marketing research. It serves to sharpen our focus on how and why people make the choices that they do—and what will most effectively influence outcomes.

A BE lens on consumer choice helps explain why some marketing efforts are not effective, sheds light on ways to construct marketing programs that work—and renews our understanding of how consumers approach choice. But let us first take a step back and consider the real star of this burgeoning field of study. It is perhaps one of the most amazing parts of the human anatomy: your brain.


System 1 & System 2 Thinking

Your brain is working all the time—so naturally there are some serious energy constraints in play. The brain stores no fuel, and running on empty degrades performance significantly. Therefore, it needs frequent breaks from high energy usage. In his book Thinking, Fast and Slow, Daniel Kahneman describes that our brains have two distinct modes of thinking to help us make the most of our resources.

System 1 Thinking

Michael Scott

System 1 (Fast) is the “easy” type of thinking that we use whenever we can. It’s also referred to as intuitive thinking. It’s subconscious and automatic. It takes very little effort for System 1 thinking to kick in, so it’s also pretty energy-efficient. For many daily tasks and decisions, System 1 thinking works fine. For example, deciding whether it’s safe to cross the street is System 1 thinking: if we’ve looked both ways and see no cars, we don’t need to do any further analysis on the decision. However, System 1 is the home of a collection of mental shortcuts, called cognitive biases, that shape our judgment—so they can lead our thinking and decision-making astray. System 1 can also be unjustifiably confident—think of Steve Carell’s long-time character from The Office, Michael Scott. So when we rely solely on this intuitive thinking, we make lots of errors and omissions, often unknowingly.

One of the places we see System 1 thinking most acutely in the innovation business is during the idea generation phase. This phase is usually fun and fast. Our brains are making lots of subconscious and intuitive connections, and we're often drawing pictures and playing games to stimulate new thinking—deliberately trying to get past the logical and limited. For most people who participate in it, it's an engaging and enjoyable process. 

But, we have to stay aware that System 1 thinking, while it can be effective for certain tasks, is also home to our subconscious cognitive biases. These mental shortcuts are ALWAYS affecting our thinking, and potentially hindering the range of ideas, even when it feels like ideas are really flowing.

And when it’s time to choose which ideas to move forward, cognitive biases also influence our decision making if we don’t bring some awareness to the task. Because it’s intuitive, System 1 thinking can be dangerous—as we’re often blind to the cognitive shortcuts we make, making it very difficult to catch our own errors.

Rodin - The ThinkerSystem 2 Thinking

System 2 (Slow) is thinking that requires more effort, more focus, and more conscious thought. It’s also called reflective thinking. Picture Auguste Rodin’s The Thinker. Because it’s the more deliberate part of our thinking process, System 2 requires a lot more energy—and must be coaxed into action. Our brains don’t like to be bothered prematurely or unnecessarily if System 1 thinking can handle the task. So while both modes of thinking are happening all the time, System 2 mostly just monitors, and is prone to ratify System 1’s decisions. System 2 only engages in unusual circumstances, like: 

  • When risk is perceived to be high.
  • When there’s an obvious error detected.
  • When it’s blatantly clear that rule-based decisions or reasoning are needed.

Now, a robust innovation and creative problem-solving process requires some serious System 2 thinking. While there's plenty of System 1 thinking involved along the way, if you avoid (or limit) the System 2 thinking when it's needed, you will (at the least) miss out on really good ideas—and (at the worst) make some bad judgment calls that you might have avoided completely if you had effectively called on System 2. One of the phases where we frequently see our clients trying to avoid System 2 thinking is immediately after idea generation, when it's time to select which ideas will move forward. It’s the time when we have to take a deliberate look at all the great ideas we have and narrow them down to a manageable set to move forward. Suddenly, it all becomes…A lot. Less. Fun.

At this point, it’s pretty typical for teams to start trying hard to avoid System 2 thinking (even though they’re not consciously aware that’s what they’re doing)—and as innovation facilitators, it’s our job to be prepared to counter the objections, and ensure that the needed deliberate thinking will happen. The objections will be couched in seemingly rational arguments. For example, people will say, "It takes too long to review all the ideas. We don't have time." or, "Let's just have everyone champion a few ideas instead of reviewing all of them. The ones we remember are probably the best ones anyway." But don’t be swayed by the excuses. It’s merely a group of brains trying to conserve energy.

To be clear, System 1 thinking isn’t just a dismissive gut-check. There are some real benefits that can be used to our advantage for fast decisions when the stakes aren’t too high, because either:

  • The choice between Option A and Option B just isn’t a big deal. Think about different brands of eggplants, or weekend video-on-demand options. These choices aren’t ones you’re going to take too much time on…unless you’re a really discriminating connoisseur of aubergines—or have a deep-seated love for John Cusack movies.

Ravi Dhar video

  • We have developed enough expertise in a given area that we can rely on our well-honed powers of pattern recognition to guide us quickly without having to think very hard. This is actually the hypothesis behind Malcolm Gladwell’s best-selling book Blink—not that gut decisions per se are fantastic, but that quick insights from experts are often dead-on. If you go to the rodeo enough, you eventually get pretty good at anticipating when the clown needs to come and distract the bull.
Interested in learning more about System 1 and System 2 thinking? Check out this video by Yale Professor Ravi Dhar: Why Do You Buy What You Buy?

System 1 & 2 & You

While scientific advances in how the brain works continue to unfold, BE experts are finding that one of the greatest teachers is letting people experience System 1 and System 2 thinking for themselves. Shane Frederick, a tenured professor of Marketing at Yale University’s School of Management, is an experienced researcher and authority in Behavioral Economics. He is also the creator of the “Cognitive Reflection Test,” or CRT—a form of intelligence test designed to measure a person’s tendency to override an initial System 1 response that is incorrect and switch to System 2 to find the right answer. The test is composed of the three questions at the beginning of this article:

  1. A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
  2. If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?
  3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?
These questions showcase System 1 vs. System 2 thinking in action. In the first question, for example, it seems obvious that the answer is 10 cents. However, after giving it just a bit more thought (and making your brain switch to System 2), you realize that if the total cost is $1.10, then the price of the ball cannot be 10 cents—because the bat would only cost 90 cents more than the ball. So the correct answer is 5 cents.

 

Through studies using the test, Professor Frederick has found interesting correlations between a person’s intelligence and the way they make decisions—along with other factors such as their willingness to gamble with finances, or how patient they may be to receive a reward. And, if you found the questions challenging, take heart: when more than 3000 students, at nine different universities, were posed with the questions, only 17% answered all three correctly. (Find the rest of the answers at the end of this article.)


Lessons for Marketers

Given that most consumer decisions are made using System 1 thought processes, marketers have many inexpensive opportunities to persuade potential customers. 

While the work of BE continues to reveal that consumer decisions are more complicated than previously thought, it also uncovers new realms of opportunity for marketers. Given that most consumer decisions are made using System 1 thought processes, marketers have many inexpensive opportunities to persuade potential customers. Simply framing messages properly—catering to the processes that dominate System 1—can produce outsized results. As one among many examples, System 1 reacts much more favorably to the promise of a $15 credit with a purchase of $35 than to the promise of 30 percent off purchases of $50.

These types of questions and lines of inquiry, once far from the minds of marketers, are of central importance today as BE fills out the modern consumer portrait. If competitiveness is synonymous with understanding what makes consumers tick, then it’s also now synonymous with Behavioral Economics.


Answers:
1. 5 cents.
2. 5 minutes.
3. 47 days.


2015 Yale Customer Insights Conference

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