Behavioral Economy is transforming the way we live. Here’s why it is important
We are rapidly becoming a behavioral economy — a world in which human behavior is a commodity that can be influenced, quantified, standardized and packaged at scale. This shift is driven by the maturing of disciplines such as behavioral economics and affective computing, giving companies and governments the ability to analyze and shape our behavior as never before.
The imperative to understand and influence behavior has perhaps never been more important than now, when the COVID-19 pandemic has driven profound shifts in consumer and citizen behavior across everything from healthcare to shopping, learning and working.
The EY Future Consumer Index survey found that 77% of consumers have changed the way they shop, and 49% of consumers believe their lives will remain significantly changed, even after the COVID-19 pandemic is brought under control.
Amid these sweeping and enduring behavioral changes, companies cannot afford to sit still. Established assumptions about individual preferences and patterns may no longer hold, and it is critical for businesses to understand users’ changing needs and expectations — both to align their offerings with new market dynamics and to influence and shape individuals’ decisions.
We recommend three ways leaders can adopt behavioral economy tools and principles to empower their organizations and successfully manage this shift:
- Build behavioral competencies, such as expertise in behavioral economics and affective computing, along with the technologies to effectively deploy them.
- Be transparent and consistent to build trust.
- Ensure the power of the behavioral economy is deployed to empower, not exploit, stakeholders.
Harnessing the behavioral economy can help organizations drive value and growth. But what is the behavioral economy? And how can its capabilities be deployed?
Understanding the behavioral economy
The behavioral economy is, as the name suggests, the economy of human behavior — in which behavioral capabilities are becoming the key driver of value and growth. Its emergence is being driven by the confluence of four trends and disciplines:
- Behavioral data
- Behavioral economics
- Affective computing
- Human augmentation technologies
Behavioral data has exploded in recent years. Already, our search engines, smartphones and social media platforms gather more data about our behaviors, preferences and states of mind than we may realize. Emerging technological breakthroughs promise to further the trend, from smart speakers that learn about our shopping and entertainment preferences to on-demand autonomous vehicles that gain insight into our social networks and travel patterns.
Insights from psychology into businesses
Behavioral economics applies insights from psychology to better understand and influence human decision-making. While academics have studied behavioral economics for decades, the discipline has only gained mainstream adoption in recent years.
By understanding and compensating for widespread human heuristics and biases, governments and companies are helping people lead healthier lives, save for retirement and make more environmentally sustainable choices. Meanwhile, marketers and advertisers have been using behavioral economics principles to boost sales and profits.
Using behavioral economy capabilities
The tools and principles of the behavioral economy are particularly relevant at this point in time, as companies and governments seek to better understand the changing behaviors and preferences of their stakeholders. Here are three examples of ways in which these capabilities can be deployed to meet this challenge:
1. Becoming a listening organization: Companies need to become listening organizations that use data analytics and AI to better understand consumers’ changing needs to adapt products and services accordingly. Behavioral economy tools can help companies strengthen their listening muscles.
For instance, behavioral economics can help elucidate counterintuitive patterns in customer behavior, which allows companies and governments to better predict behavioral shifts and account for their psychological underpinnings. The sensors embedded in human augmentation technologies allow organizations to listen in real-time, real-world conditions. Meanwhile, applications of affective computing allow for an entirely different kind of listening: recognizing and modulating users’ emotional states in real time. This is tremendously relevant in the wake of the pandemic, which has fueled a silent epidemic of stress and mental health issues.
2. Nudging consumer behavior: The real power of behavioral economy tools is not just in their ability to listen to consumers, but also in their potential for influencing and shaping behavior. What pricing strategies would most appeal to consumers at a time when majorities across multiple countries have become more cost conscious?
As some countries move toward recovery from the pandemic, how might messaging and emotional cues appeal to individuals who are proceeding with a sustained sense of anxiety? How might the design of physical spaces reassure people who are prioritizing health concerns like never before? Behavioral economics and affective computing can provide answers to these questions and more.
3. Maintaining social cohesion and trust: While social cohesion and trust had been under strain across much of the world well before the pandemic, COVID-19 has only amplified these trends. The pandemic has widened the economic divide by exacting a disproportionate toll on the economically disadvantaged. Disinformation and conspiracy theories have run rampant and increased social distrust.
The EY Connected Citizen survey finds that 32% of citizens across the world fear that technology will make them feel less connected to their community. Behavioral economics helps explain the psychology behind these trends, pointing the way to actionable solutions. The work of social psychologist, Jonathan Haidt, for instance, highlights how tribalism influences our perception of information across a swath of issues.
Behavioral economics explains why technology — in particular, the algorithms and design of social media platforms — has had such a deleterious impact on trust and cohesion. For leaders in government — and, increasingly, in business as well — such behavioral insights provide the basis for understanding the drivers of polarization and the foundation for steps to remedy the problem.
TEJASWINI PAGADALA is an independent communications consultant. She has previously worked with the Andhra Pradesh Chief Minister’s Office as the Communications Officer where she has written English speeches for the CM, managed English media communication from the CMO and handled social media accounts of Andhra Pradesh Chief Minister and the Government.