Behavioral Economics

Why you shouldn't look for customers for your products

Do you remember Spring 2020, when the first lockdown for Covid-19 was imminent, and we were all surprised that to survive the pandemic and the lockdown, the thing people seem to cannot do without the most was... toilet paper. We were maybe laughing at videos and memes that circulated the internet, but raise your hand if you did feel a little bit nervous, thinking you maybe should have stockpiled some, too, when you saw the empty shelves in the toilet paper aisle of your supermarket.

In the Micro Economics class of my MBA, I was taught to look at everything through the eyes of the resourceful, evaluating, maximizing individual (short: REMI). This model allowed to make assumptions where you could change one or two factors and explain how that would influence consumer behavior or willingness to pay. Looking at the example in the lead or how investors sometimes behave at the stock market, a consumers behavior is difficult to explain with the above charateristics. Behavioral Economics is relatively new field and combines psychology, judgement, decision making and economics to create a more adaptive and true understanding of human behavior.

«Nothing defines humans better than their willingness to do irrational things in the pursuit of phenomenally unlikely payoffs»

Scott Adams, American cartoonist

Rational decision making is a myth

As stated above, traditional micro economics assumes that a consumer makes decisions based on all the available information, trying to maximize personal benefits, independent from everyone else and that this behavior is more or less stable.

In reality, especially the more complex a product becomes, it is very difficult for a consumer to calculate all the costs and benefits correctly. We are influenced by our social networks that influence our independent choices by decisions other people make (e.g. toilet paper). Emotion overtakes logic for immediate satisfaction. Also altruism, making decisions for the benefit of someone else instead of oneself can have an impact on decision making.

Richard Thaler, an economist, Nobel laureate and University of Rochester Graduate, is one of the fathers of modern Behavioral Economics. I am especially interested in his theory of the "Nudge". The theory suggests that there are many opportunities to nudge people's behavior by making subtle changes to the context in which they make decisions.

As with everything, you can use nudges for good and for bad. Good nudges are good, when they benefit both parties involved in the transaction.

Jobs to be done

One of the mega trends of the last decade is "Big Data". With all the information we have, and the possibility to use algorithms to structure even previously unstructured data, we can learn so much more about our customers.

Does this data tell us the entire story? Does the data of the past really allow us to extrapolate the future of customer needs? The data does not tell us for example that the customer picked a specific product, because there was no alternative at the time, or the alternative was too expensive. Data only tells us what was. Of course, there are companies like Palantir, that are very good in recognizing patterns and predicting, where these pattern might lead next. But in the end, it is extrapolation of what was in the past.

If you are looking to grow through innovation, Jobs Theory explains why customers "hire" products and services into their lives to do a job and why some innovations are successful and others are not. Fully understanding a customer's job requires understanding the progress a customer is looking for in specific circumstances and understanding all of its functional, social and emotional dimension - as well as the tradeoffs the customer is willing to make

I recommend the book "Competing Against Luck" for more theory and examples.

Jobs theory will be one of my main theories that I will pursue in my exploration of new ways to substitute the job that has, so far, been done by insurance. That said, one of the questions I need to answer is: Where do I start? What is the relevant progress a customer is trying to make? Looking at mobility, for example, the customer wants to go from A to B. Is the relevant progress getting to B? Does the the relevant progress happen after the incident, that brings the insurer into play and getting it resolved as quickly as possible?

If this topic moves you as well, then don't hesitate to contact me to find out, how we can learn and make progress together.