Making Money from Behavioral Social Science?

13 August 2014 at 2:42 pm 7 comments

| Peter Klein |

Longtime readers of this blog expect skepticism about behavioral social science. One of my issues is the assumed, but unexplored, assumption that private actors and market institutions cannot deal with behavioral anomalies, and therefore government intervention is necessary to make people act “rationally.” But if we can really improve health outcomes by putting the chocolate cake behind the carrot sticks in the display case, why wouldn’t profit-seeking entrepreneurs exploit this fact? Consumers pay substantial price premiums for organic produce, grass-fed meats, and other healthy products, even when the purported health benefits are long-term and uncertain. Wouldn’t some patronize the behavioral-economics-influenced grocer? “Our shelves are arranged to encourage healthy food choices.” Add earth tones, hipster music, an onsite juice bar, and the place will make as much money as your local Whole Foods.

To be a little less flippant: consider adverse selection theory. Many people misread Akerlof’s famous paper as a call for government regulation of used-car markets (or, worse, as a demonstration that used-car markets can’t exist). In fact, as Akerlof states plainly in the original piece, his theory explains the existence of private assurance mechanisms such as warranties, third-party certification, quality signalling, and the like.

A recent Forbes piece puts it this way: How do you make money by helping mitigate behavioral anomalies? Cognitive biases “have been accepted into the mainstream of economics and pop culture, particularly since the recent publication of popular books such as Richard Thaler and Cass Sunstein’s Nudge, Dan Ariely’s Predictably Irrational, and Daniel Kahneman’s Thinking, Fast and Slow. Even so, relatively few companies have attempted to use behavioral economics to try to change people’s behavior around overeating, smoking, or other bad habits many are desperate to break.” The focus is on the diet company StickK, which takes advantage of loss aversion (pun intended) to help people achieve weight and other goals. 

StickK is a cool site, and I hope it is successful. But, if behavioral theory is so powerful and general, why aren’t more entrepreneurs taking advantage of it?

Entry filed under: - Klein -, Food and Agriculture, Management Theory. Tags: .

Microeconomics of Central Banking Evaluating New Ideas: Looking Across and Looking Beyond

7 Comments Add your own

  • 1. michaelfto  |  13 August 2014 at 8:57 pm

    There is one insight from Tversky/Kahneman that I have seen consistently work.

    Business opportunity sellers of payphones, vending machines, and similar items all employ a version of anchoring.

    I found this out after interviewing over several thousand victims of business opportunity frauds.

    All of their material had this anchoring effect.

    “Imagine how many vends this machine might do in a hour. 5, 10 or even 50″

    Then there was a “do the math” calculation – which anchored them on a very high daily payout.

    The reality is that the vending machines, payphones, or dvd kiosks might only do 5, 10 or 50 a week & not an hour.

    It was a very clever use of the anchoring principle -although not one of the business opportunity fraudsters knew the principle. But, they all could use it.

    (The FTC tried to make this form of representation a section 5 violation, but failed)

  • 2. alex  |  15 August 2014 at 10:40 am

    As a side comment, it seems to me that – with respect to weight loss – the approach StickK promotes is rather short term. As far as I could understand from the website, they say nothing about whether people then regain their previous weight or not, which is what happens with the overwhelming majority of diets based on privation and prohibition. Incentives might help to partly counterbalance misbehaviors but if they only targets consequences (weight loss) and not routines (how people regularly eat) they will often fail to deliver in the long term.

  • 3. Randy  |  15 August 2014 at 3:55 pm

    For every dollar that can be earned “nudging” people to change their consumption habits, there are $10,000 to be made serving (cosseting?) the panoply of observable consumption behaviors. To call some of these behaviors “anomalies” and seek to change them is no blueprint for business success. Yes, there is always the multi-billion dollar diet-and-weight-loss industry as an exemplar, but I’d find it easier and more profitable to market to the self-indulgent (even self-indulgent dieters who treat themselves on the weekend…), recidivists, and empty-nesters who will passionately feed their “anomalies”.

  • 4. michaelfto  |  15 August 2014 at 6:40 pm

    We tried to do a franchise deal with StickK – their ideas stem from Schellings’s notion of commitment as an irreversible loss of decision-making.

    It is not “behavioral economics “- unless you want to extend that term back to Pascal and Jacob/David Bernoulli.

    But, to Peter’s point, it is unlikely that the regulators have an appreciably better understanding of how to get people coordinating better than a market mechanism.

    The regulator has one solution to the multi-person dilemma game, pay a penalty – and no solutions to the multi-person many equilibrium game.

  • 5. Jose Guerrero  |  16 August 2014 at 1:10 pm

    The big bags half empty , the labeled weight but bigger than needed?
    BTW: I dont know if you are aware but Zola´s The Ladies´ Paradise has plenty of insights about behavioral economics use my merchants

  • 6. Jon Bingen Sande  |  17 August 2014 at 2:14 pm

    Dan Ariely is actually trying to profit from the insight from behavioral economics. He is “chief behavior officer” in Timeful (www.timeful.com) – a calendar app.

  • 7. Interesting blog bits | The Dismal Science  |  20 August 2014 at 2:00 am

    […] Klein on Making Money from Behavioral Social Science?Longtime readers of this blog expect skepticism about behavioral social science. One of my issues is […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Authors

Nicolai J. Foss | home | posts
Peter G. Klein | home | posts
Richard Langlois | home | posts
Lasse B. Lien | home | posts

Guests

Former Guests | posts

Networking

Recent Posts

Categories

Feeds

Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

Follow

Get every new post delivered to your Inbox.

Join 277 other followers