Understanding Consumer Behavior through the Lens of Behavioral Economics

Not surprisingly to Cialdini, only the last message moved the needle, based on the power of social proof. The experiment points to the fact that anticipating rationality as the driving force behind consumer behavior can bea flawed approach.

In a professional capacity, the challenge lies in encouraging employees to care about their job and be dedicated to the success of the organization. At ADP, we have the opportunity to examine at all the different areas of HCM in which we play a pivotal role across industries, and we are trying to understand how behavioral economics can be applied to design better and more effective products and services. Moreover, behavioral economics may help us achieve outcomes that were otherwise impossible in the past.

Background

Having graduated college with a BSin consumer economics, I was trained as a classical economist to build models based on the assumption that people’s behavior is driven by rational self-interest. In receiving my Master’s degree in Industrial / Organizational Psychology, I gained far more insights into non-rational drivers of human behavior. Subsequently, I design behavioral models considering various organizational scenarios relative to actual, as opposed to rational, human behavior. In other words, I prioritize the “would” over the “should.” As an example, consider employee motivation. Motivation can be categorized into two types: intrinsic and extrinsic. Extrinsic motivation is driven by external factors and rewards and punishments. These might include promotions, commissions, professional recognition, or demotions and demerits. Intrinsic motivation is driven by internal factors. In other words, doing something simply because someone wants to. Compared to extrinsic motivation, intrinsic motivation is far more potent. Applied to the workplace,it makes an employee treat a job like a hobby, experiencing inherent joy and thereby investing more time ensuring success. Unfortunately, intrinsic motivation is something that most employees lack in the workplace.

The Real Motivation

Organizations can trigger intrinsic motivation by focusing on three essential elements identified by Deci and Ryan in their seminal Self-Determination Theory: autonomy, mastery, and relatedness. In the business world, autonomy is the freedom to determine how to perform the job, while mastery refers to the ability to demonstrate expertise and achievement in that performance. Relatedness refers to the ability to connect professionally with other people, such as colleagues, customers, and clients. By designing jobs and workplaces that enable and empower these elements, organizations can drive the intrinsic motivation of employees, leading to sustained excellent performance.

In behavioral economics, framing explains how an identical piece of information presented differently, can induce wildly divergent reactions. For example, consider a doctor counseling a patient. The doctor could tell a patient about having contracted a disease with a 90 percent survival rate, or with a 10 percent mortality rate. Although the information is the same, people will have widely different reactions.

At ADP, we wanted to put this technique into practice around feedback and leadership development. Let’s consider a leader who received feedback that he/she is not providing sufficient recognition to the team. We found that when the feedback was presented in terms of deficiencies of the leader, it triggered a defensive reaction. Leaders receiving feedback this way tended to discount and discredit it, thereby not using it as the basis for future development work. When the feedback was presented in terms of team needs, it led to much more productive reactions. When leaders heard, “Your team has high needs for recognition,” they were much more likely to embrace the feedback than if they heard, “You don’t give your team enough recognition.” We baked this insight into a product called Compass, and it is leading to extraordinary results. It’s a great example of how using behavioral economics can help us to be more impactful in our efforts to positively influence our clients, customers and employees.