Tuesday, September 15, 2009

WSJ: Peer Pressure and Other Pitches

Thanks to Will for passing this along.

More businesses are using behavioral economics to appeal to customers, seeking to capitalize on the notion that people don't always act in their economic self-interest.

Behavioral economics is popular among academics, particularly since two of its early theorists won the 2002 Nobel Prize in economics. Now businesses are applying the concepts in new ways.

Since April 2008, the Sacramento Municipal Utility District has told 35,000 customers in their monthly bills how their energy use compares with neighbors', and with the district's most-efficient customers. Customers who received the additional information cut their energy use by 2%, compared with a similar group of users who didn't get comparison data.

Last month, the district expanded the test to cover 50,000 households. Ali Crawford, a district project manager, says officials want to see if the comparison approach reduces energy use more than direct appeals to consumers' wallets, such as offering rebates on the purchase of energy-efficient appliances.

The preliminary findings support research by Robert Cialdini, an emeritus professor of psychology and marketing at Arizona State University, showing that people are more likely to reduce energy use to keep up with peers than to save money. Mr. Cialdini approached the district with the idea on behalf of Positive Energy, a start-up where he is chief scientist.

"Taking a behavioral approach completely changes the way you view the consumer," says Richard Thaler, a behavioral science and economics professor at the University of Chicago's Booth School of Business.

Economists typically "assume that the consumer sorts through all the possible options and picks the one that is best for them," Mr. Thaler says. "That ignores the complexity of sorting through all of those options."

Behavioral economics isn't completely new to business. Marketers have long tried to appeal to non-economic motivations, such as class status or prestige. But Dan Ariely, professor of behavioral economics at Duke University, says businesses now approach the subject more rigorously, and use behavioral experiments to influence product designs, among other things.


Related books:

Choices, Values, and Frames

Related previous posts: