Meet Santa, master Behavioural Economist

Just think, a jolly fat man in a red suit gets billions of people to spend billions of dollars on people they may only see once a year to commemorate someone else’s birthday. This guy’s a genius!

If you are looking for an example of behavioural economics, look no further than Santa.  The man himself may be a fiction, but our irrationality is all too real.

Santa, and by Santa I really mean the rituals of consumerism associated with Christmas, influences us to do things that make no rational economic sense such as;

• Buy more food than we can possibly consume

We find ourselves gorging at tables laden with very type of meat and vegetable as hosts delight in showcasing their generosity.  Such is the social construct that serving a normal sized meal just isn’t Christmas.

• Buy Christmas Trees

We drive to a Christmas tree supplier, buy a $30-$60 tree that at any other time of the year we would not even look at and will survive only a few weeks, strap it to the roof of the car, drag it into the house, throw specially bought plastic bits all over, gather around the tree and distribute gifts. The next week, we watch the tree slowly turn brown before cutting it up to fit in the green waste bin.

• Buy Snow

In Australia, in Summer, we (not me of course) buy snow in a can to spray on windows. Brrr!  Meanwhile we listen to special compilation CDs that trill about snowmen, sleigh bells, and white Christmases. Rational on a thirty degree day?

• Buy Wrapping

We buy fancy paper to wrap gifts that are already packaged so that we can watch the wrapping get torn off on Christmas morning.

• Avoid vouchers…unless we really have to

We worry about the stigma of giving cash or a voucher rather than a ‘gift’ even though the voucher may actually be worth more.  Retailers are working hard to de-stigmatize vouchers and experiential gifts like Red Balloon are helping reshape perceptions of these gifts.

• Go to the supermarket…repeatedly

We tend to freak out that the shops close for one day and so pop down to the shops to get extra supplies just in case, forgetting the jammed car park and queues at the check out.

• Boxing Day sales

The news footage should speak for itself but just to remind yourself not to let the thrill of a discount overwhelm your sense of dignity, check out scenes from the Thanksgiving sales in the US where a $2 Waffle Maker provoked a gob smacking, pant splitting frenzy.

Why do we find ourselves behaving this way at Christmas time?

Well, marketing probably has a lot to do with how we behave at Christmas.  "Special" Christmas deals, scenes of harmonious family gatherings and directive suggestions like “buy this TV for your Dad” use reciprocity (give to receive), loss aversion (make sure it’s a fair value exchange by buying expensive gifts), and social norms (everyone is doing it) to incite us to purchase. That our understanding of red-suited and jolly modern Santa is a marketing construct confirms how persuasive marketing can be, but it is more than that.

We are more influenced by how others act; the values and behaviours displayed by our fellow human beings.  That’s why shoppers went into a contagious frenzy for a $2 Waffle Maker, and why the rest of us, from the comfortable distance of our computer screens, feel we can mock them for their irrationality.  But that’s also the great thing about Christmas; a tacit agreement across much of the globe to devote one day to sharing time and tokens with loved ones.  Irrationality at it’s rational best.  Have a good one, and thank you Santa.

Image from: http://www.gdhta.co.uk/wordpress/2009/12/on-the-first-day-of-christmas/laughing-santa/

Easter Eggxample of Behavioural Economics

Easter Eggs.  If you're ever chatting with someone who isn't familiar with Behavioural Economics or doesn't see the opportunities in understanding the power of irrationality, Egg them.  Let me explain.

We love Easter Eggs. In Australia we consume an average of twenty Easter Eggs for every man, woman and child, and that means it's big business for our chocolate manufacturers.  But in economic decision making terms, our love of Easter Eggs is irrational.  Here's why.

Imagine you visited two different supermarkets.

• The first offered you 100 grams of Cadbury chocolate for $2.98.
• The second likewise offered you 100 grams of Cadbury chocolate, but for $2.15.

You'd opt for the second, right?  After all, it's the same product but you save almost 40%.

Now imagine you are within one of the supermarkets and they have two offers;

• The first is the same offer you took above, 100 grams of Cadbury chocolate for $2.15.
• The second offer is an Easter Egg. 100 grams of Cadbury for $2.98.

Now which do you choose?

Block chocolate vs Easter Egg

Traditional economics, based on rational arguments of supply and demand would have us taking the $2.15 offer every time.  But guess what? We are not always rational.  The fact that the chocolate is shaped like an egg, wrapped in foil, available at a certain time of year and can be given as a gift means that the majority of us will buy the $2.98 Easter Egg and pay a 40% premium.

And Behavioural Economics can help us explain why. 

Relativity

We make judgments about one thing relative to another.  In the examples above, 100g of chocolate that was the same could be judge of the basis of price.  However, when one chocolate was shaped like an egg, the grounds of relativity became different.  Have you ever wondered why Easter Eggs are not in the confectionery aisle?  Because relativity is being confined to the "Easter Egg"  category rather than the chocolate category. (And for anyone who may argue that it would be logistically difficult to have the Eggs in the chocolate aisle I will posit that if Eggs were shown to sell better in the aisle, that 'logistical difficulty' argument would evaporate. It's purely about moving higher margin chocolate, and that is best done when the customer can't easily compare $2.98 to $2.15.)

Social Influence
We are greatly influenced by others around us.  Indeed, that we even have such things as Easter Eggs is a social construct.  To give your child a block of chocolate is just not the same as an Egg.  As consumers we justify the economic irrationality by deferring to such emotional reasons as the magic of an Easter Egg hunt, smiles on faces etc.  And as marketers, that's what we aim to amplify so that our Brands have a reason to be purchased outside purely rational reasons.

And this is a key thing about explaining Behavioural Economics.  All those reasons for paying more can be cited by the consumer as entirely rational because we are great at justifying our decisions. But rationalised isn't the same as economically rational.  Why is this important?  When you next pitch a product or campaign for development, remember it's not just about the 100 grams of chocolate. It's the shiny foil, the social construct, the timing, the gifting, the emotion that your customer will be processing when they are in your aisle.  Get excited because if you can help your consumer rationalise their purchase, the economic rationalisation becomes moot.

And this is the massive opportunity Behavioural Economics presents to marketers, product managers and retailers.  Yours is the opportunity to turn the magic of irrationality into margin for your business.  So tell me, what's your Egg? 

Prices quoted from Woolworths, Moorabbin 8 April 2011