CHAPTER 12
Do You Get the Power of Behavioural Economics?
Your authors have agreed on the very large majority of the things we're saying in this book. We've generally agreed quickly, too, with little need for difficult debate or awkward compromise.
This chapter is the exception. It's broadly about the emerging – or perhaps now largely emerged – science of behavioural economics. Anthony believes this is one of the very most important drivers of the new financial services marketing. In essence, he thinks that the insights increasingly available into consumers' wants, needs and above all behaviours open up a whole new world of marketing opportunity. Lucian believes that most of these insights have been well-understood for decades by almost everyone except classical economists. In particular, he thinks that a great many originated in the field of direct marketing, and therefore have little or nothing to teach the marketing community.
Clearly, we need to sort this out between us. But both points of view have merit. So, rather than have the argument privately and then write something we can both put our names to, we thought you might find it interesting if we have the argument publicly in this chapter. We might even finish up coming to an agreement. And if not, you can decide for yourself which of us you think is right.
| LC: | Let's start by pinning down what it is that we disagree about. What exactly are you saying about behavioural economics, and why do you think it's so important? |
| AT: | Before we get to the disagreement, we'd better agree on the vocabulary. I prefer behavioural science. To me that's the big idea. The economics is just a subset. |
| LC: | I'm okay with that, although as an abbreviation I'd have thought you might prefer BE to BS. Still, behavioural science it is. What exactly are you saying about it? |
| AT: | I'm saying that for many years – at least since the middle of the twentieth century – the dominant idea that shaped attitudes and policies in financial services was the confidence of classical economists in the existence of the ‘rational consumer’. But over the past 20 years or so, behavioural scientists have increasingly challenged this belief and have been able to demonstrate, more and more convincingly and in more and more detail, that this ‘rational consumer’ doesn't exist, and instead that consumers' behaviour deviates from ‘rational’ models in ways that are consistent, persistent and reliable. And by understanding these deviations, a whole raft of new and powerfully effective strategies become available to us. |
| LC: | Ah, yes, the rational consumer – an oxymoron that's right up there with ‘cold heat’, ‘German comedian’ and ‘Spurs defender’. (Actually, we have to rethink the last of these examples a bit these days, given my team's awesome recent impregnability.) What did economists mean by this implausible idea? |
| AT: | By economists' standards, it's a remarkably simple concept. They say that given perfect information and a perfectly functioning market, consumers will make financial decisions that, as the economists like to express it, ‘optimise their utility’ – that is to say, give them the biggest available bang for their buck. |
| LC: | And they haven't been discouraged by the fact that billions of decisions made by millions of consumers conclusively demonstrate that this absolutely isn't the case? |
| AT: | Economics is a theoretical science, not an empirical one. But no, they would argue that when consumers make decisions that clearly don't optimise their utility, that must be because either the market is functioning imperfectly, or they have imperfect information. Unless … |
| LC: | Unless what? |
| AT: | Unless it's an anomaly. When classical economists find evidence that seems to contradict their theories, they declare that it must be an anomaly. That means they recognise the evidence exists, but their theory remains intact all the same. |
| LC: | It seems to me it's no big surprise that behavioural science has come along to challenge this obvious nonsense. What happened? Where did the challenge come from? |
| AT: | Long story short, most behavioural scientists would agree that the founding fathers of the discipline were Daniel Kahneman and Amos Tversky, two psychologists who stepped extremely bravely into the economists' lair, so to speak, and demonstrated step by step that most of what they said about consumers was wrong. |
| LC: | Yes, I know about Kahneman and Tversky. You can tell they were important from the fact that Michael Lewis has written a book about them. Not his best, but still. |
| AT: | True. But you didn't pick up on the most significant point about Kahneman and Tversky, which is that they were psychologists. That's important for two reasons. First because they weren't economists, and so they had never bought in to the rational consumer concept. And second because psychology, unlike economics, is an empirical science. Psychologists base their insights on evidence, not theories. |
| LC: | And as we all know, they carried out all sorts of brilliant experiments to prove how far from rational we really are. |
| AT: | I don't think that's quite right. What was really important wasn't so much the proof that we're irrational, but the proof that we're consistently and predictably irrational. It goes right back to the first paper they wrote together, the one about the Law of Small Numbers back in 1969. Basically, this showed how all of us, even the most rigorous academics, are prone to drawing conclusions on the basis of hopelessly small sample sizes – samples so small that the finding, whatever it may be, might very likely simply be the result of chance. There's a big thing in it about whether a coin comes up heads or tails. |
| LC: | Not their sexiest experiment. But I take the point about being consistently irrational, or at least I think I do. ‘Consistently’ isn't the same thing as ‘invariably’ or ‘always’, is it? |
| AT: | No. It means ‘usually’. All of behavioural science is about ‘usually’. Anyway, the Law of Small Numbers work got them going, but it was the stuff about loss aversion that really started to make their names – and that is still often quoted over 40 years later. |
| LC: | Remind me. |
| AT: | They did zilllons of experiments basically offering people bets. Mostly they offered people a choice between two bets, and asked which they would prefer. For example:
Which would you prefer:
Most people took the $30,000, by the way. From this huge programme of experiments, the chaps drew two key conclusions. First, it was indisputably clear that people's choices were being strongly influenced by their emotions, which were having the effect of driving them to strictly ‘irrational’ decisions. And second, the tendency of those emotions was to try to minimise the risk of loss. The big idea that came out of it all was that our aversion to loss is roughly twice as great as our liking for gain. |
| LC: | I can't deny that's a big idea, and obviously one that's massively relevant to financial services marketing. But it's also a sweeping generalization, isn't it? |
| AT: | Yes it is, and fond as I am of the behavioural scientists and their works I have to admit that a lot of their written work doesn't do a brilliant job of clarifying quite how generally their findings apply. And while I'm criticizing my own team, I'd also say that they carried out almost all their experiments among people working or studying at American universities, and although I know a lot of their experiments have been replicated elsewhere I don't really know how much the findings differed. For example, it's a cliché to say that as investors, there's a kind of international hierarchy of risk aversion, with the Germans the most risk-averse, then the Brits, then the Americans and then the Chinese. I don't have any hard evidence for this, but I suspect you could substantiate it by looking at the kinds of investments most often chosen in each market. But I don't know at all whether Kahneman and Tversky would recognise this hierarchy, or reject it, or simply take an agnostic view of it and say that it's not an issue they explored in their research. |
| LC: | But anyway, they did prove that there's a big emotional element in financial decision-making, and that one of its big consequences is risk aversion. |
| AT: | Exactly. |
| LC: | And this came as a surprise to those classical economists. |
| AT: | A huge surprise. There was a legendary conference at the University of Chicago when Richard Thaler, who was one of Kahneman's and Tversky's strongest supporters, presented a behavioural science paper to an audience largely consisting of hardcore monetarists and was virtually booed off the stage. They thought he was having a laugh. |
| LC: | Hmm. I think we're coming toward the nub of our disagreement now. Because I totally accept your story about the University of Chicago conference, and the shock and horror that greeted Thaler's paper. But I have to say that in my perception, academic monetarists are pretty much the only living beings in the universe who could be surprised by the finding that there's an emotional component in financial decision-making. This strikes me quite literally as one of the least surprising things I've ever heard. |
| AT: | Aha. Now I see where you're coming from. But you're completely missing the point. In fact, you're missing two points. Of course you, and I, and everyone else working in financial services marketing, know perfectly well that there's an emotional component in financial decision-making. In fact, many of us would say there isn't much of a rational element. But the first point you're missing is that behavioural science goes much further than that, and says that this ‘emotional component’ can be mapped out as a series of specific biases and heuristics that can be recognised and taken on board, and used as the basis for our planning. And the second point you're missing is that even though no-one except a University of Chicago economist could seriously defend the concept of the rational consumer, nevertheless this mythical figure has dominated many of the thought-processes of those in and around the financial services industry for practically the whole time that you and I have been working in it. |
| LC: | Is that really true? Give me an example. |
| AT: | Okay, take the regulators' approach to what they like to call ‘financial promotions’ and you and I would call financial marketing communications. The FCA has changed its tune very recently, but for far too long the idea was basically to get as close as possible to providing consumers with what those economists call ‘perfect information’ – that is, all the information about all the products that rational consumers could possibly need in order to make a rational choice between them.
As you and I know, the effects of this were disastrous for all concerned. Providers had to spend a ton of money putting screeds of microscopic detail in front of consumers, only for consumers to find the sheer quantity of information overwhelming and off-putting, and so to feel paralysed into indecision. |
| LC: | You're right. And some advertising media, notably radio, became effectively no-go areas for financial services because of the amount of money and airtime you had to spend shouting meaningless gibberish at the public. |
| AT: | Exactly. |
| LC: | Okay, so we've now established that among the people stupid enough to accept the classical economists' view of the rational consumer were University of Chicago economists and regulators. Anyone else? |
| AT: | Well, as far as people's financial wellbeing is concerned, you'd have to say that probably the most important were in the government, and particularly the Treasury and the Department of Work and Pensions. |
| LC: | I think I know where you're going with this. This is about pensions and auto-enrolment, isn't it? |
| AT: | It is. And I'm pleased to say that it's a positive story – it's too early to talk about a happy ending, but we can certainly talk about a happy beginning, if there is such a thing. You know the backstory – end of the era of defined benefit pensions, need to engage people in contributing to defined contribution schemes, horribly low level of opting in, millions facing the prospect of retiring on a diet of catfood … |
| LC: | … until behavioural scientists point out the huge benefits of switching from an opt-in to an opt-out system, and around 90% of people don't choose to opt out, and future prosperity is assured for all, or nearly all, anyway. Or at least it would be if the level of contributions was set a great deal higher than the current derisory 3%. Which indeed they will be when the contributions escalator kicks in with increases in 2018 and 2019. |
| AT: | That's it. Probably the single greatest real-world success so far for behavioural science. And remember, previous governments had tried to encourage people to put money into pensions pretty much exclusively by offering the kinds of incentives that theoretically appeal most strongly to the ‘rational consumer’, namely tax incentives. If we'd stayed with an opt-in system, I don't think tax incentives would have been half as effective – probably not even a quarter as effective – at persuading people to join workplace pensions. |
| LC: | I completely accept all that. |
| AT: | But? |
| LC: | No but. I completely accept that an opt-out process is an amazingly effective way to achieve very high levels of take-up. There's all sorts of proof from all sorts of markets, whether it's about the effect of fluoridation on tooth decay, or moving to an opt-out system on organ donation, or – a bit closer to home – packaging dodgy PPI insurance with personal loans so that people had to opt out if they didn't want it. |
| AT: | Yes, that was a rather less acceptable face of the opt-out principle. In hindsight. |
| LC: | My point is that anyone who knows anything about consumers – or anyone who knows anything about marketing, which as we frequently say in this book should be more or less the same thing – already knew that opt-out systems hugely increase uptake. Maybe the great and the good in the Treasury and the DWP didn't, along with the regulator and the academics at the University of Chicago, but apart from that … |
| AT: | I know, apart from that what have the Romans ever done for us? So your case is basically that Kahneman and Tversky and Thaler and Halpern didn't really come up with anything much that wasn't already well known and understood by Bird, Watson, Wunderman and Barraclough. |
| LC: | Or any other leading figures of the direct marketing industry you might like to mention. Exactly. ‘Cash if you die, cash if you don't’. Perhaps the most successful of all financial services direct marketing headlines, written, I think, for Lloyd's Life by John Watson back in the seventies, although, as with several famous advertising copylines, I've heard quite a few veteran copywriters laying claim to it. |
| AT: | Actually, it's a true marketing case study and not just an advertising one. It was the product itself, not just the copyline, that connected so strongly with that loss aversion bias we were talking about a few minutes ago. |
| LC: | And if it did all happen back in the 1970s, then it would have been before Kahneman and Tversky's work on the subject. In the pattern of cross-fertilisation between academia and direct marketing, it's actually quite difficult to figure out who was cross-fertilising who, or rather whom: late in his life, Amos Tversky actually said that all he and Daniel Kahneman did was to take up ideas that had long been known to advertising executives, and codify and classify them in a recognizable academic format. |
| AT: | I didn't know he said that. Where did you find that quote? |
| LC: | Actually it was given to me in an interview with the great Rory Sutherland, vice-chairman of ad agency Ogilvy Group and one of the very few people I know who can fairly be described as a guru in the fields of both direct marketing and behavioural science. |
| AT: | Should've invited him along to this conversation. What else does he have to say? |
| LC: | Well, Rory has a huge amount of respect for the great gurus of behavioural science. Allow me to quote:
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| AT: | So he's saying it's a pecking order thing, right? That economists are higher up the food chain than direct marketers? |
| LC: | Yes, he is saying that. Sorry about these long quotes, but here's another one:
|
| AT: | How so? |
| LC: | ‘It's very fiddly’, Rory said. ‘It's a real headache. Things can go wrong. And it's not that much fun, because it involves a huge amount of detail, and checking, and legals, and all that stuff’. |
| AT: | So what you're saying here is that direct marketing is sort of behavioural science's drearier brother. |
| LC: | A little bit drearier maybe. But also quite a bit smarter – I'm also saying that most of those astounding Nobel Prize winning behavioural science ideas that have been winning Nobel Prizes at regular intervals ever since the 1970s have been statements of the bleedin' obvious to direct marketers for a great deal longer. |
| AT: | I think you're going to need some more evidence for that part of your proposition. |
| LC: | Okay, well, no question, the single best source of evidence is David Halpern's book about the activities of the behavioural science team (actually known as the Behavioural Insights Team) working within the UK Civil Service since 2010. Honestly, if you read it without knowing anything about Halpern or his team, you'd imagine you were reading a book written by a direct marketing agency, so many of the breakthroughs and discoveries are drawn from the area. His team's remit is all about improving the results of public communications and campaigns from different branches of government, and first and in a sense foremost, their fundamental test-and-learn approach is absolutely in line with good direct marketing practice. And the tests that prove the most successful are the ones that would certainly gladden the heart of Drayton Bird, John Watson (two of the founders of one of the UK's first direct marketing agencies) and indeed Rory Sutherland.
Many are to do with direct mail letter variants. Letters using recipients' names work better than letters that don't. Overprinted flashes and stamps increase response. Shorter, simpler messages outperform longer, more complicated ones. Messages that emphasise the scarcity, or urgency, or popularity of what's being offered generate more response more quickly. Free gifts of trivial value – free pens are the classic – can motivate big and expensive purchase decisions. Halpern, his crew and the civil servants briefing them are delighted by these discoveries. Readers from direct marketing backgrounds couldn't be less surprised. |
| AT: | How about the famous loft insulation story? That isn't about comms. |
| LC: | True, that's a bigger story that starts with the proposition itself. But it's still all about the kind of insight that you need in direct marketing. It's the tale of one of Halpern's earliest and most famous successes, to do with the not-terribly-inspiring subject of loft insulation. The team tries various ways to engage people with this, including some significant financial incentives, but results are mediocre. Finally they come up with a sort of Trojan Horse approach, which offers to come round and clear out people's lofts while, almost in passing, fitting some insulation while they're at it. People like this and business is brisk, which comes as no great surprise to those of us who've promoted free winter safety checks on behalf of tyre and brake centres like Kwikfit. |
| AT: | I may have to concede as far as Halpern and his team are concerned. But you must admit that some of the behavioural scientists' test results go a long way beyond the more or less incremental and obvious things we like to test in direct marketing. |
| LC: | Such as? |
| AT: | I'm a big fan of Robert Cialdini – who, by the way, is absolutely a proper academic, but makes no secret of the fact that he does a lot of his fee-earning work for clients in sales and marketing. One of his big things is the importance of what he calls ‘priming’, by which he means the things that you do to warm up your prospect before you try to make the sale. |
| LC: | Yes, I get that. I remember having a road-to-Damascus moment years and years ago, when we did some focus groups on advertising concepts for Co-op supermarkets' own-label groceries. The researchers fed back that the first few groups had been terrible – the respondents hated the ads, thought they were irrelevant and pointless.
I went along to watch, and I noticed that before they showed the ads, the researchers spent fifteen minutes or so warming up the group by asking them about their experience of supermarket shopping – how important was car parking, what did they like and dislike in store layout, how many times a week did they shop, how did they judge which checkout queue to join and so forth. Then they produced the ads, and of course they seemed totally irrelevant. They were all about the Co-op's own-label tea, and ice cream, and cheese, and French wine – not a word about car parks or checkouts. So then we asked the researchers to run the warm-up differently and ask respondents about cheese and tea and ice cream before showing them the ads. They loved them, couldn't wait to get out of the research groups and head for their nearest Co-op. Well, I exaggerate slightly. |
| AT: | Good story, but Cialdini's stories are far more extreme. My favourite is the one about the consultant whose clients tended to haggle over his fee proposals in meetings. Cialdini's strategy to tackle the problem sounds ridiculous, but he swears it worked. He told the consultant to make sure that shortly before pitching his proposed fee, he should always mention a very much larger number. It didn't really matter what this much larger number might be, or how the consultant introduced it: in Cialdini's example, the consultant simply says, ‘Well, as you can tell, I'm not going to be able to charge you a million dollars for this!’ The client agrees – ‘You're damn right!’ he says. A few moments later the consultant puts forward his actual fee, which is $75,000. The client accepts it without objection.
Or take his supermarket wine-buying story. I must admit that even I find this one quite hard to believe, but it's about a supermarket with both German and French wines on display. When they played classic German oompah-oompah brass band music over the sound system, the German wine flew off the shelves – and when they played French ooh-la-la accordion music, it was the same for the French. And when they interviewed the wine-buyers outsider the store afterwards, they had no recollection at all of having heard any music. |
| LC: | Makes you wonder how far you can take this idea. Waltzing Matilda to sell Australian chardonnays? Moody tangos for Argentinean merlot? |
| AT: | And would it work in financial services? If you provided suitable national soundtracks on your website, would people flock toward the appropriate investment funds? |
| LC: | Someone should run some tests. But meanwhile, we should move on from swapping anecdotes and think a bit harder about the underlying principles involved. Where I guess the academics are somewhat more sophisticated than the direct marketers in the way that they've identified and classified the conceptual biases that result in the examples we've been quoting. In direct marketing we know that, whatever, a handwritten PS at the end of a direct mail letter increases response, but we don't really know why. The academics are better on the why. |
| AT: | You're right, they're very good indeed on the why. In fact, they're now up to well over a hundred biases that influence our behaviour, and still going strong. I wonder whether there is actually an infinite number waiting to be discovered out there.
Some, especially those that go back to Kahneman's and Tversky's research, have become famous, despite, I have to say, the great men's habit of giving them remarkably opaque and unhelpful names. Would you know, for example, unless I reminded you, that what they call the ‘endowment effect’ is in fact our tendency to demand far more to give something up than we'd be willing to spend to acquire it? Or that ‘hyperbolic discounting’ is to do with the way we tend to choose short-term over long-term gratification? |
| LC: | Or that one of their most famous, ‘prospect theory’, is all about the way that we decide whether it's worth buying insurance, and if so what price we're willing to pay for it. You'd never guess. |
| AT: | No you wouldn't. But I'm glad that you mention buying insurance. Because now that we've hopefully figured out the nature of our disagreement, I can go on to make the point I really want to make – which is that the insights available to us from behavioural science open up a whole world of new opportunities for better and more effective financial services marketing.
Prospect theory is a perfect example. I'm going to insert a lengthy footnote from Wikipedia explaining how the theory evaluates our propensity to buy insurance in two different situations. I don't expect you to follow the maths … |
| LC: | Thanks … |
| AT: | … because I don't myself, but the point is that the science identifies a predictable illogicality in people's behaviour. Note the combination of those two words, predictable and illogicality. Understanding how, and why, and how often people are likely to behave illogically is absolute gold dust for marketers. |
| LC: | Provided there's someone in the marketing department who can follow the maths. |
Example
To see how Prospect Theory can be applied, consider the decision to buy insurance. Assume the probability of the insured risk is 1%, the potential loss is $1,000 and the premium is $15. If we apply prospect theory, we first need to set a reference point. This could be the current wealth or the worst case (losing $1,000). If we set the frame to the current wealth, the decision would be to either
- Pay $15 for sure, which yields a prospect-utility of v(–15), OR
- Enter a lottery with possible outcomes of $0 (probability 99%) or −$1,000 (probability 1%), which yields a prospect-utility of π(0.01) × v(–1,000) + π(0.99) × v(0) = π(0.01) × v(–1,000).
According to the prospect theory,
- π(0.01) > 0.01, because low probabilities are usually overweighted;
- v(–15)/v(–1,000) > 0.015, by the convexity of value function in losses.
The comparison between π(0.01) and v(–15)/v(–1,000) is not immediately evident. However, for typical value and weighting functions, π(0.01) > v(–15)/v(–1,000), and hence π(0.01) × v(–1,000) < v(–15). That is, a strong overweighting of small probabilities is likely to undo the effect of the convexity of v in losses, making the insurance attractive.
If we set the frame to −$1,000, we have a choice between v(985) and π(0.99) × v(1,000). In this case, the concavity of the value function in gains and the underweighting of high probabilities can also lead to a preference for buying the insurance.
The interplay of overweighting of small probabilities and concavity-convexity of the value function leads to the so-called fourfold pattern of risk attitudes: risk-averse behavior when gains have moderate probabilities or losses have small probabilities; risk-seeking behavior when losses have moderate probabilities or gains have small probabilities.
Following is an example of the fourfold pattern of risk attitudes. The first item in each quadrant shows an example prospect (e.g. 95% chance to win $10,000 is high probability and a gain). The second item in the quadrant shows the focal emotion that the prospect is likely to evoke. The third item indicates how most people would behave given each of the prospects (either Risk Averse or Risk Seeking). The fourth item states expected attitudes of a potential defendant and plaintiff in discussions of settling a civil suit.
Example Gains Losses High probability (certainty effect) 95% chance to win $10,000 or 100% chance to obtain $9,499. So, 95% × $10,000 = $9,500 > $9,499. Fear of disappointment. Risk averse. Accept unfavorable settlement of 100% chance to obtain $9,499. 95% chance to lose $10,000 or 100% chance to lose $9,499. So, 95% × −$10,000 = −$9,500 < −$9,499. Hope to avoid loss. Risk seeking. Rejects favorable settlement, chooses 95% chance to lose $10,000. Low probability (possibility effect) 5% chance to win $10,000 or 100% chance to obtain $501. So, 5% × $10,000 = $500 < $501. Hope of large gain. Risk seeking. Rejects favorable settlement, chooses 5% chance to win $10,000. 5% chance to lose $10,000 or 100% chance to lose $501. So, 5% × −$10,000 = −$500 > −$501. Fear of large loss. Risk averse. Accept unfavorable settlement of 100% chance to lose $501. Probability distortion is that people generally do not look at the value of probability uniformly between 0 and 1. Lower probability is said to be over-weighted (that is a person is over concerned with the outcome of the probability) while medium to high probability is under-weighted (that is a person is not concerned enough with the outcome of the probability). The exact point in which probability goes from over-weighted to under-weighted is arbitrary, however a good point to consider is probability = 0.33. A person values probability = 0.01 much more than the value of probability = 0 (probability = 0.01 is said to be over-weighted). However, a person has about the same value for probability = 0.4 and probability = 0.5. Also, the value of probability = 0.99 is much less than the value of probability = 1, a sure thing (probability = 0.99 is under-weighted). A little more in depth when looking at probability distortion is that π(p) + π(1 − p) < 1 (where π(p) is probability in prospect theory).*
| LC: | Blimey. If you can get a direct marketing campaign out of that, you're a great deal cleverer than I am. |
| AT: | I must say, I'm surprised you're being so sniffy about this. You're usually the first to say that great marketing depends on great insights, and here is the biggest and richest source of insights available. I'd have thought you'd welcome it with open arms. Particularly when you consider the principal alternative. |
| LC: | Which is? |
| AT: | Well, I'd say, over the years, insights drawn from consumer research, most of which focus on attitudes much more than on real behaviour. |
| LC: | I can see a long line of qualitative researchers queuing up to argue with that statement, especially all those specialists in ethnographic research who trudge round supermarkets with consumers watching how they select items off the shelves. |
| AT: | Fair enough, there is some qualitative behavioural research, and of course a lot of quantitative, although most of it less insightful. But on the whole, the predominant belief of the research-driven insight industry has been that if you can understand people's attitudes, you can predict or anticipate their behaviour. And in fact, the truth is that attitudes are generally very poor predictors of behaviour, and by far the best predictor of behaviour is, you guessed it, behaviour. |
| LC: | I have an obvious problem with that, which is that behaviour only has predictive value when it comes to things that people have done before. What does behavioural science tell you about their propensity to do their banking on their phones? Or choose to increase their auto-enrolled pension contributions from 1% to 4%? |
| AT: | You're looking at this in a very two-dimensional way. Behavioural science may not tell you exactly how many people are likely to increase their contributions, or by exactly how much. But it will tell you a great deal about how you can most effectively present the choice to them, and what biases exist in their minds that will colour their response. The answer, by the way, will very likely be something along the lines of the Save More Tomorrow programme, which was one of Richard Thaler's best ideas (and also best brand names). |
| LC: | I know about this. It's a way of tackling people's reluctance to increase their pension savings level immediately, by giving them the option of signing up to a series of small increases over the years into the future. |
| AT: | Thus, in behavioural science terms, offsetting their bias toward hyperbolic discounting. I could add another extract full of Greek letters at this point. |
| LC: | No, no, you've made your point. But, forgive me if I sound like a scratched record, but once again isn't this a principle that's already familiar to direct marketers? Take the example of the legendary De Agostini partworks. |
| AT: | The what? |
| LC: | De Agostini partworks. You know, those collections of the Great Tank Battles of the Second World War or Complete Works of Beethoven that are available from your newsagent over the next 40 weeks. I suppose it's Spend More Tomorrow, not Save More – Part 1 is just £2.99 with Part 2 free, but after that it's £5.99 a fortnight until the other side of Christmas. |
| AT: | It's a bit unsubtle compared to Thaler's idea, isn't it? They break you in gently for a week or two, and then whoosh, the full cost hits you. |
| LC: | The cleverest bit is getting Part 2 free. Now that you own two parts, you're on your way to a collection and you want to carry on. If you only had Part 1 you'd be much more likely to just stop there. Did Thaler offer you the first month's contribution for just 1% of salary with the second month free? |
| AT: | I don't think he did. But, not for the first time in this discussion, a point you've made has played into my hands. Comparing an approach to the most crucial component of people's long-term financial security devised by a professor at the University of Chicago with a partwork about Great Tank Battles devised by some Milanese direct marketing people highlights the single most important point I want to make to financial services marketers. |
| LC: | Which is? |
| AT: | When it comes to doing big, exciting, insight-based stuff, you need all the help you can get. We agree that one of the toughest problems in financial services marketing is our continuing lack of credibility in the boardroom … |
| LC: | … the colouring-in department … |
| AT: | And although things have improved a little bit and they're moving in the right direction, there's still a long way to go.
So you're working on a new pensions project, and on the basis of all your marketing experience, some of which for all I know may well go back to De Agostini partworks, you're convinced that the way to maximise contributions is by introducing the Save More Tomorrow principle. Adopting this is a huge decision, with millions of people's futures and ultimately billions of pounds of contributions at stake. And now all that's standing between you and this massive new departure is the need to persuade any or all of the Treasury, the DWP, HMRC, the Financial Conduct Authority, the Association of British Insurers, the Tax-Incentivised Savings Association, the FCA's consumer panel and the cautious, conservative and risk-averse directors of the country's leading pension providers. How do you rate your chances? |
| LC: | Could be a bit tricky. |
| AT: | There's a big meeting coming up, and you can choose who you'd like to have on your side of the table to support your cause. Do you choose (a) the Italian marketing director of Europe's leading partwork publisher, or (b) the Ralph and Dorothy Keller Distinguished Service Professor of Behavioural Science and Economics at the University of Chicago Booth School of Business? |
| LC: | Hmm, let me think about that for a microsecond or two. |
| AT: | So bringing this discussion to a close, my last point is very simply that for the smart, ambitious, progressive financial services marketing professional, behavioural science – and behavioural scientists – are the very best, most powerful and most influential friends who've ever come along and offered to fight in your corner. It may or may not be true that you already know and understand much of what they have to say. Remember the words of one of America's most underrated presidents, Harry S Truman, who said: ‘There is no limit to what a man can achieve in life’ (he wouldn't say ‘man’ these days) ‘provided he doesn't care who takes the credit for it.’ Read David Halpern's book about the work his Behavioural Insights Team was able to do from their insider's position within the PM's office, and instead of just saying to yourself, ‘Yes, yes, I know all that’, think how impossibly difficult it would have been for anyone in a less privileged position to do even a fraction as much. Build links with these people. Learn from the great Rory Sutherland, who from a background in direct marketing now bestrides that world and the world of behavioural science like a rather dishevelled Welsh colossus. There is nothing else out there that offers you such potential. |
| LC: | I think I may have to acknowledge that you may have edged this debate. |