The Four Horseman of the Consumer Behavior Apocalypse

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The Four Horseman of the Consumer Behavior Apocalypse

From MediaPost's Search Insider Column, first published March 25, 2010

Right out of the gate, let's assume that we all agree consumer behavior is in the throes of its biggest shift in history. And the cause is generally attributed to the Internet.

While I don't disagree with this assessment, I believe there may be some misattribution when it comes to cause and effect. Did the Internet cause our consumer behavior to change? Or did it enable it to change? The distinction may seem like mere semantics, but there's a fundamental difference here.

"Cause" implies that an outside force, namely the Internet, pushed us in a new direction that was different from the one we would have pursued had this new force not come along. "Enable" is a different beast, the opening of a previously locked door that allows us to pursue a new path of our own volition. I believe the latter to be true. I believe we weren't pushed anywhere. We went there of our own free will.

Free Will? Or Hardwired Human Behavior?

But, even in my last statement, language again gets us in a sticky place. "Will" assumes it was a conscious and willful decision. I'm not sure this is the case. I suspect there were subconscious, hardwired behaviors that had a natural affinity for the new opportunities presented by the online marketplace.

For most of our recorded history, we have assumed that rational consideration and conscious will forms the basis of human thought. If we did seem programmed automatically to respond to certain cues, this was as a result of being conditioned by our environment, the classic Skinner black-box approach. But when we were on top of our game, we were carefully considering pros and cons, making consciously deliberated decisions. These were the forces that drove our society and our behaviors. This theory formed the basis of economics (Adam Smith's Invisible hand), Cartesian logic, and most market research.

But in the last few decades, this view of rationality riding triumphant over human foibles has been brought into question. In particular, there were three concepts put forward by four academics that caused us to question what drove our behaviors. These folks uncovered deeper, subconscious routines and influences that lay buried beneath the strata of rational thought. And it's these subconscious behaviors that I believe found the new online opportunities so enticing. Let's spend a little time today looking at these four thinkers and the new paradigms they asked us to consider.

Amos Tversky and Daniel Kahneman - Prospect Theory

Adam Smith's Invisible hand, driven by the wisdom of the market, has been presumed to be the ultimate economic governing factor. The assumption was that each of us, individually making rational economic decisions, would ultimately decide winners and losers and capitalism would stay alive and well.

But Tversky and Kahneman, in their paper on Prospect Theory, showed that the invisible hand might not always be guided by a decisive and logical mind. We all have significant hardwired cognitive biases that often cause us to make illogical economic choices. For example, if I offered you $1,000, with no questions asked, or a chance to win $2,500 based on a coin toss, you'd probably take the sure bet, even though mathematically, the odds for net gain are better with the coin toss.

Prospect Theory shot some holes in the previous theory of Expected Utility, a model where we carefully weighed the pros and cons of a potential purchase based on a return on investment model. Emotional framing and risk avoidance played a much bigger role than we suspected, handicapping our logic and often guiding us down non-rational paths. Tversky and Kahneman single-handedly found the new discipline of Behavioral Economics and changed our thinking in the process.

Herbert Simon - Bounded Rationality

Simon's concept of Bounded Rationality superseded Kahneman and Tversky's theory, but it dovetailed with it very nicely. Even if we are rationally engaged in a decision, Simon argued, we couldn't possibly optimize it, especially in complex scenarios. There were simply too many factors to consider. So, we took "gut feeling" short cuts, which Simon called "satisficing," a combination of satisfy and suffice. We short-listed our consideration set by using beliefs and instincts.

To make the satisficing short list is the goal of any brand campaign. At some point, logical weighing of pros and cons has to give way to calls based primarily on instinct. And, as Kahneman and Tversky showed, those instinctive calls may well be based on irrational emotional biases.

George Akerlof - information Asymmetry

The last piece, and the one that really drove the online consumer revolution, is George Akerlof's Information Asymmetry theory. Traditionally, there has been an imbalance of information between buyers and sellers, to the seller's advantage. The seller always knew more about what they were selling than the buyer did. This made purchasing inherently risky.

With an absence of information, consumers created strong beliefs about brands as a way to guide their future buying decisions. Brand loyalty, whether rational or not, filled the void left by a lack of information. Manufacturers and retailers carefully controlled what information did enter the marketplace, pushing the positives and carefully suppressing the negatives.

These three concepts, intertwined, defined the psychological make-up of the market prior to the introduction of the Internet. In my next column, I'll explore what happened when these behavioral powder kegs were exposed to the fanned flames of the digital marketplace.

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Print | posted @ Monday, April 05, 2010 7:42 AM

Comments on this entry:

# re: The Four Horseman of the Consumer Behavior Apocalypse

by Brian Hayashi at 4/8/2010 2:22 PM

Hi Gord, long time follower, first time poster. Big fan of ye olde Kelowna and not sure of what to make of all the recent growth. But that's something for another day.

I totally agree with your choices. Game theory, economics and psychology are all converging and the playing field has changed dramatically.

But I think that only scratches the surface of what I call a quiet discontent.

People are sick and tired of the status quo, thanks to literally decades of discontent at being ignored and disrespected by brands, politicians, the media, the church...virtually a who's who of authority figures, as chronicled in excruciating detail by our friends at Yankelovich. I spent a lot of time in the 90s talking with international communication companies that wanted to get their countries out of Third World status, and if they were going to upgrade their wireline telephony to wireless, they wanted to get TV and broadband in at the same time.

And so, the broadband haves-and-have-nots flip-flopped. And just as broadband enabled South Korea to deliver a big "Nyah Nyah Nyah" to the surprisingly broadband-challenged US, likewise social media allows people to do an end-around on everyone who has treated them poorly. If we lived in a culture where we gave as good as we got, people would be happier, more content with the way they were governed, more trusting of the media, etc. But we're not. We are SO angry at our circumstance, our blood is boiling. You read it in the vitriol on message boards of newspapers and blogs. New media like Yelp and Craigslist got a foothold because people were discontent with the Establishment and eager to explore alternatives. And so you have a combustible environment where people don't care if their daily newspaper goes away, or if the Catholic Church puts the once-infallible Pope into jail, or if politicians come or go.

Perhaps I'm putting a bit too much ire and vitriol in, but as the old saying goes, where there's a will, there's a way. Right now there's a lynch mob that wants to tear down institutions, some in search of social justice and others just looking for a bigger and better deal. Their selfish interests have converged into a destructive maelstrom that is splintering complex business models and strongly favors simple, highly focused interactions that can be daisychained with other simple activities.

I saw all of this, from my lofty vantage point that enabled me to meet the guys at Netscape, Excite (then Architext), the NYTimes, IAB, etc. when things were just spinning up. The Internet didn't pull us into the 21st century. We were pushed because billions of discontented consumers can't be wrong.

re: The Four Horseman of the Consumer Behavior Apocalypse

by Gord Hotchkiss at 4/8/2010 3:07 PM

thanks Brian..and glad you're a fan of Kelowna. I'm actually partial to Colorado myself. Denver always reminds me of my hometown, Calgary. No doubt there's something massively game changing here. What is fascinating to me is not so much the technology, but the new doors it's opening up for people. As I said, I don't think technology changes behavior, it just enables people to change. I think I'll explore this more in a future post. Thanks for the comment though!