A Look at Behavioural Economics

I have previously written about my gripe with digital algorithms being used as an analogy for decision-making in the real world. My passion is to understand how people make decisions in the real world and they do not seem to use rationalistic algorithms. Often, the study of rational decision-making has been done in the realm of economists. Emulating the ideas of the natural sciences a lot of economists have often attempted to make assumptions in their models that people act rationally. Over the last 50 years an alternative research program has been evolving that is often referred to as “behavioural economics”. This behavioural economics tradition has started to pejoratively call the rational being from economic textbooks “homo economicus” and argued that people consistently show deviations from this supposed rationality. Behavioural economists have defined the rational decisions in economics texts are based on the idea that rational people:

  • “have well-defined, stable preferences along with unbiased beliefs;

  • make optimal choices based on these beliefs and preferences; and   

  • their primary motivation is self-interest" (Thaler, 2016).

There have been over 200 different biases identified by now – each showing people as more and more fallible. But has behavioural economics gone too far? Has human nature been downgraded from the perfectly rational “Homo Economicus” directly to Homo Simpson who has inbuilt biases? Behavioural economists argue that instead of full rationality we have this thing called bounded rationality. The story of Homo Simpson goes that because of the bounds of our cognition we use these things called “heuristics” or rules of thumb which are: “cognitive shortcuts or rules of thumb that simplify decisions, represent a process of substituting a difficult question with an easier one” (Kahneman, 2003).  

This view of heuristics has become famous due to the work of Daniel Kahneman and Richard Thaler that center on what happens in people’s heads when faced with difficult decisions.  Our System 1 thinking is supposed to be fallible and error prone compared to our slow and deliberate System 2 thinking. The practical implication here is that people need to be “nudged” towards a “System 2” thinking where possible. This focus on people’s psyche in isolation of their environment has been useful to an extent but in the field of place branding where we are interested in the interaction between people and place (or at least the images of place), we can benefit from another perspective.

A Look at Evolutionary Psychology

Through my PhD research in place branding and work as a user experience designer I have uncovered another strand in the behavioural economics discipline that focuses not on people’s heads being studied in isolation. The focus in what is called the “fast-and-frugal" view of heuristics is on people’s interaction with an “environment”. In this tradition the interpretation of what rationality is can be summarised by the concept of “ecological rationality” as opposed to the narrower understanding of what “bounded rationality is. Heuristics in this view become not an inconvenience of our fallible minds but rather detailed descriptions of how we approach different situations through a multitude of adaptive strategies that we have evolved to us in a complex and uncertain world:

“A heuristic is a strategy that ignores part of the information, with the goal of making decisions more quickly, frugally, and/or accurately than more complex methods." Gigerenzer and Selten (2002)  

So, having outlined the usefulness of heuristics does not mean that I will diminish the work of those behavioural economists who focus on the study of the bias associated with a heuristic. I just think it is a lot more useful and fun to study the exact ways in which a decision-making process works rather than... for want of a better word “gaslighting” a decision as biased. Even if a decision is wrong – the study of the exact process that someone went through to reach that conclusion is useful knowledge. 

An Example of the Usefulness of Heuristics in Digital UX Design

The focus on the useful side of heuristics is nothing new to the field of design which is becoming ever more involved in the building of digital representations of places or services provided by those in charge of the management or brand management of places. In the early 1990s Jakob Nielsen summarised 10 Heuristics for good user interface design and these are still in use today as a good starting point in designing usable digital interfaces. Does the digital presence of your place violate any of these. Nielsen recommends that 3-5 non expert users can spot 80% of the usability problems in an interface if they are given these 10 rules of thumb and instructed to spot if they are violated by the design of the interface. This method has limitations and of course the Homo Simpson bias but it costs very little and can remove design problems before paying for formal research.

#1: Visibility of system status

The system should always keep users informed about what is going on, through appropriate feedback within reasonable time.

#2: Match between system and the real world

The system should speak the users' language, with words, phrases and concepts familiar to the user, rather than system-oriented terms. Follow real-world conventions, making information appear in a natural and logical order.

#3: User control and freedom

Users often choose system functions by mistake and will need a clearly marked "emergency exit" to leave the unwanted state without having to go through an extended dialogue. Support undo and redo.

#4: Consistency and standards

Users should not have to wonder whether different words, situations, or actions mean the same thing. Follow platform conventions.

#5: Error prevention

Even better than good error messages is a careful design which prevents a problem from occurring in the first place. Either eliminate error-prone conditions or check for them and present users with a confirmation option before they commit to the action.

#6: Recognition rather than recall

Minimize the user's memory load by making objects, actions, and options visible. The user should not have to remember information from one part of the dialogue to another. Instructions for use of the system should be visible or easily retrievable whenever appropriate.

#7: Flexibility and efficiency of use

Accelerators — unseen by the novice user — may often speed up the interaction for the expert user such that the system can cater to both inexperienced and experienced users. Allow users to tailor frequent actions.

#8: Aesthetic and minimalist design

Dialogues should not contain information which is irrelevant or rarely needed. Every extra unit of information in a dialogue competes with the relevant units of information and diminishes their relative visibility.

#9: Help users recognize, diagnose, and recover from errors

Error messages should be expressed in plain language (no codes), precisely indicate the problem, and constructively suggest a solution.

#10: Help and documentation

Even though it is better if the system can be used without documentation, it may be necessary to provide help and documentation. Any such information should be easy to search, focused on the user's task, list concrete steps to be carried out, and not be too large.

Link to Nielsen’s 10 Heuristics

For the l

ove of Place

For the second episode of the Adapt Inc. Places Podcast I managed to speak to Martin Boisen from For the Love of Place. Martin is a Danish geographer with a MSc. degree (cum laude) from Utrecht University He lives and works from the heart of the beautiful city of Utrecht in the Netherlands. Martin is a leading advisor, a respected academic and a passionate speaker. Marting is also the vice chairman of The International Place Branding Association who put on an annual conference where key issues in the field get discussed.

Conceptual clarity Our discussion with Martin centred around a key paper he co-authored that has helped the discipline move away to a stage where we can distinguish between:

  • Place promotion

  • Place Marketing

  • Place Branding

The paper titled Reframing place promotion, place marketing, and place branding - moving beyond conceptual confusion handles key issues that we discuss with Marting at length. After spending two hours in conversation I had to edit our conversation into two parts. In the first part we talk about Martin’s approach to distinguishing between the concepts before the practical discussion in Part 2 about how this conceptual clarity affects practice. Some of the key discussions in this first part include the status quo of perceived challenge of inter-urban competition: “...There are lot of basic assumptions that cities are competing for citizens and so forth. I always ask what information, those assumptions are grounded or founded on. And a lot of times, those are untested assumptions. So that does not mean that those assumptions are wrong per se. It just means that we have no idea to what extent there is actual competition. This can lead to envisioning grand strategies and spending a lot of taxpayers money.”

Part 2 will be released soon and will cover how the conceptual distinction between place promotion, place marketing and place branding can help us think about what is (non)essential practical activity. Given the unprecedented opportunity we have had with the global pandemic to see which human activity may be deemed essential we have a unique opportunity to have a realistic discussion about which place related activities are essential and which ones may not be a good way of spending (often) public money. 

Thanks to the placebrandobserver.com for organising the interview with Martin.

About the Adapt Inc. Places Podcast

The Adapt Inc. Places podcast helps me reach out to others interested in my area of PhD research. I am interested in understanding how people make place related decisions. I am also a digital user experience (UX) researcher in my day job. Merging the worlds of digital UX with the physical of place sounds like an exciting area to explore. Given how much online presence places have – I am quite interested in championing the UX of places and reaching those that want to go on a digital transformation journey.

In this first episode of the Adapt Inc. Places Podcast Gunter Soydanbay a brand strategist with a keen interest in place branding talks about some simple tools that you can apply in order to communicate clearly during times of crisis. My passion for simple tools (or heuristics) meant that I was listening intently and already applied some of his insights in my work. Günter is an insight-filled brand strategist with significant experience in working with big brands, complex stakeholder organizations, and places. You can get in touch with him by visiting soydanbay.com

Place Branding

We discussed Gunter’s experience in place branding and got to clarify some of our definitions before delving into his prescription of how to communicate as a place brand in a time of crisis:

"One might say that business to business branding is similar, and I would concur with that. And what makes it particularly different with places is that when you're working with any type of traditional brands you have to work outside in. So you look out in the market, you identify your target, you identify the needs the ones, you look at the competition, and you create your own niche based on what you observe out there. With places you cannot do that, because the place already exists, you have minimal control over the place. There are only the perceptions about the place. So you have to work inside out.”

Complexity and Lack of Control

I asked Gunter about his understanding of complexity and what this means for place brand management. How can we manage a place brand given the complexity and now the crisis situation imposed by Covid-19:

“Well, at the granular level, we can say that the metaphor [of a flock of birds] represents the key stakeholders. When you're working with a, with a place you have to deal with so many stakeholders, everybody has a different vision for the city for the region for the country. So in that sense... none of them is completely in charge, they just hold a piece of the power, and they all have to fly together in order not to crash into each other. And at the more macro level, it is actually the place itself, you know, with its inhabitants, hundreds of thousands of people or millions of people, because at the end of the day, the perceptions that we have of place is partial”

Psychological Concepts to be Aware of when Communicating in a Time of Crisis

Our discussions about place and complexity helped set up the discussion but they did not make it into the final edit of the podcast. I wanted to keep the podcast action oriented - focusing on how to communicate in a time of crisis. Here is a brief overview

Gunter talked about how change can’t always be managed in the traditional ways – sometimes we deal with crisis situations. Crisis situations require that place managers are aware of 4 concepts from psychology: 

_mental noise - When we are stressed, anxious, panicked or afraid, our ability to process information goes down significantly.

_risk perception - Crisis communications have to deal with a paradox: the risks that kill or harm people and the dangers that alarm and upset people are often very different. The real threat and the perceived risk are virtually unrelated.

_Trustworthiness - In the absence of trust, no communication objective can be achieved. Determination of trust takes place in the unconscious mind.

_Systematic error (bias) - we are all have a deviation away from traditionally understood rationality that under stress may be even more pronounced

I was curious to learn from Gunter’s background in psychology as I am a marketer by training and only in my PhD am delving deeper into evolutionary psychology and some of it’s applications in behavioural economics and decision-making. As I have been reflecting on heuristics as adaptive strategies rather than fallible replacement for full rationality I wanted to probe how Gunter sees their relationship with cognitive biases. After all the point of our discussion was for him to give us rules of thumb or heuristics to help communicate in a time of crisis but at the same time he acknowledged the fundamental nature of our minds always having some inbuilt systematic errors (or bias):

“I guess the deep fundamental thing about the idea of nudging is it doesn't work on everybody, right? It just makes marginal improvements. on on certain things. Let's say that you can reduce like late payments by 12% If nudging can help you with that, then by all means use it but it doesn't make the problem disappear. That itself tells you that there is no one knowledge that solves everything, there is no one cognitive bias, which you can identify that can solve the entire problem.”

The Crisis Communication Tools:

The psychological concepts discussed earlier in the conversation led us to discuss 4 communications tools that work in time of crisis:

_Average Grade Level Minus 4 - Due to mental noise, messages should be greatly simplified. A good guide recommends aiming at the average grade level of the intended audience, minus four.

_3 Positives for Each Negative - positive here was discussed as meaning constructive rather than positive in clearly uneasy times

_Rule of 3 Messages - Again, due to mental noise, in high-stress situations, we can process fewer messages than we usually could. Consequently, you should limit yourself to having three key messages.

_9 Words in 3 Seconds - Finally, messages should be concise and precise. It is recommended that each of the three key messages should be organized into sound bites containing a maximum of 9 words that can be spoken in three seconds.

Here is a website recommended by Gunter with some of the academics he follows recommending how to communicate in a time of crisis: