Consumers are irrational – a myth

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[Transcript of my talk from NewMR: Explode A Myth. The accompanying slide is here and you can listen to the recording of the talk and Q&A here]

 

If you’re the type of person who tunes into NewMR events, you can hardly have missed the library of behavioural economics books that have poured out of the typewriters of various academics in the last few years. Nudge, Thinking Fast and Slow, and Predictably Irrational have hammered into us the idea that we’re all irrational. We don’t make choices in our best interests and we’re always making mistakes. We don’t even know what we want. How can we be trusted to make our own decisions in life! We’re idiots!

Even the name of my own agency, the Irrational Agency, plays up this idea.

Today I’m going to tell you all this is nonsense. Consumers aren’t irrational at all. Not that they’re rational either…and thank goodness for that.

The fact is: if we really did behave the way economists say we should, we’d all be dead. The only people who make decisions in the way economists tell them to are people with specific types of brain damage. These people cannot use their intuition or feelings to make choices – they have to calculate all the costs and benefits of every decision they make. As a result, they can’t make any practical decisions in life: not even whether to get out of bed in the morning. They end up unable to live outside of an institution.

We’ve all probably experienced this on a small scale – they call it “analysis paralysis”. Any time you’ve found it really hard to make a decision between two options, and you’ve put it off and thought it over and worked it out and still been no closer to deciding – you’ve been in this mode. And eventually you probably picked one path or the other, and chances are it worked out OK.

Imagine you weren’t in a comfortable office (or living room) in a modern economy, but instead in a threatening environment, with only just enough food to survive on, and a wide variety of creatures waiting to kill you. In other words, imagine you were your great-great-great-great-grandmother 300 generations back. Now imagine you stopped to calculate and weigh up the potential costs, benefits and associated probabilities of every decision before making a choice. It wouldn’t be long before you ended up as lion food.

Any “rational” person – rational in the sense that economists would like us to be – would quickly be eaten out of the gene pool. Only those who are willing to make decisions quickly, find shortcuts and do what’s “good enough” would have survived. And those people are your ancestors, and mine, and the ancestors of the people who buy our products.

This isn’t just a matter of whether our brains are big enough, or if we just happen to be a bit too stupid and slow to calculate the right answers. It’s mathematically impossible for any imaginable creature to calculate all the pros and cons and predict the future consequences of their actions and weigh them up and make decisions, every minute or every second of the day. If you dedicated all the computers in the world, programmed by the smartest programmers, helped by all the people in the world and gave them a hundred years to calculate in exact terms the best sandwich for you to order today: they wouldn’t even be able to do that. There is so much information in the world; it’s such a complex place, and everything influences everything else; that nothing and nobody could process it all, even if given aeons to do it in. And certainly not in time to dodge that lion. It’s simply not an option.

So instead of calculating everything, we use heuristics. Heuristics, contrary to the impression given in some books, are not flawed or error-prone ways of thinking. They are brilliantly designed techniques to let you make a good-enough decision in less than a second, 99.9% of the time, without even being aware you’re doing it. The only reason we can navigate the world in a practical way is because we have these heuristics to make our decisions for us.

The heuristics are what let us choose products we know we’ll like. They’re what help us to drive to work safely, or talk to people without having to calculate and plan out every individual sound that every word will be made up of. It’s heuristics that tell us what brands we can trust and let us know we’re not being ripped off by a high price.

And that one time in a thousand that the heuristics don’t give us the right answer? Well that’s a better hit rate than any computer algorithm you can think of. Sure, algorithmic step-by-step calculations can give us the right answer to a small number of carefully defined mathematical problems: and there’s no harm in learning those situations so you know when not to use a heuristic. I wouldn’t recommend using a heuristic to calculate your tax bill. But don’t start believing the heuristics are wrong, or bad, or useless. And above all, don’t let them tell you consumers are irrational. Not even someone who runs an agency named after irrationality. (Sometimes I wish we’d just picked a nice acronym like GFK or TNS. But there you go.)

Don’t let your fantasy of that unattainable, perfect calculating machine be the enemy of recognising what a brilliant object your brain is, to have found its way past those lions on the savannah, through all the dangers of history, and past the supermarket till without buying the National Enquirer.

Consumers aren’t irrational, but you might be irrational if you think they are.

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