Below is a piece I wrote for the October issue of USIS Review:
There are a lot of similarities between behavioural marketing and economics. Charlie Munger in his Harvard address pronounced “How could economics not be behavioural? If it isn’t behavioural, what the hell is it?”. And so it is with marketing. This brief article will explain some of the most powerful forces driving successful behavioural marketing today to help with it’s application to investment strategy.
It’s important to understand that this is one of the most nuanced subjects, and there are a myriad of things that influence behaviour, with new science on the topic regularly refining and falsifying old data. Broadly speaking it’s a mixture of three core categories; cognitive biases, environmental factors and personality types.
We all have cognitive biases, Johnathan Haidt the Professor of Ethical Leadership at New York University’s Stern School of Business has the perfect analogy for this called the elephant and the rider, used to explain conscious or reasoned behavioural processes and automatic or implicit behavioural processes. Cognitive biases effect the automatic and implicit brain processes or what Nobel laureate Daniel Kahneman calls system one thinking. This is the fast, instinctive and emotionally driven behaviour that we carry out, a lot of the time in complete juxtaposition to how a sequentially rational thinker would behave, the elephant unconsciously and automatically drives behavioural action in which the rider doesn’t accurately give reasoning for our emotional states but is phenomenally good at post-rationalising the irrational behaviour. There are about 25-30 cognitive biases that play the largest part in behaviour and all have different relevance dependent on the context of the situation.
Environmentally, culture drives behaviour. D
r. JosephHenrich, Harvard’s distinguished evolutionary biologist has a body of research that puts down the secret to our success as humans to come from our pre-eminent superpower for advanced social learning, which includes the ability to rapidly download and adapt to the cultural norms of behaviour. This is in tune with Matthew Lieberman’s book Social which accounts
that our brains default state is for social relativism, of which being responsive to changes in cultural norms is in our nature and own best personal interests. Thus placing importance of understanding the in-group out-group mentality of identity symbolism, trends and rituals gives a clearer indication of future predictive behaviours.
Personality types can attribute to behaviour from certain choices being more appealing to individuals than others. Unlike other models the big five personality traits has been a reliably consistent indication of behaviour from a diverse range of papers and studies. Our behaviours manifested in the big five personality traits is something that advanced marketers are utilising in campaigns. Cambridge Analytica are infamous for running the big five data points on audiences by comprehending how open to experience, conscientious, extraverted, agreeable or neurotic individuals are, to then create tailored messages that resonate with individuals. Being able to connect tailored messages to individuals based on how they score across the big five within audiences and then using look-a-like targeting on advertising platforms provides them with ways to move people to action at scale.
De facto, ignore the role of behavioural biases in investment’s at your peril. The context that your investments appear, are just as important as the objective characteristics of the product or services themselves. Moreover knowing the factors that are influencing your own behaviour can help you separate the wheat from the chaff when making decisions. Usually finding a case study to illustrate the point of taking a brilliantly proven product and taking it to market in an unappealing way doesn’t normally get approved by the board. However there is a great example involving the worlds most popular singer when he gets paired with a couple of comedians. The point of the viral Hamish & Andy $2 Peep show experiment is very simple, without the proper positioning and an understanding of how behaviour drives action, no amount of rationalising will make a psychologically unattractive proposition attractive. Which explains why Ludwig Von Mises could be right when he said “There is no sensible distinction to be made in a restaurant between the value created by the man who cooks the food and the value created by the man who sweeps the floor”