MAY - 2019CONSTRUCTIONTECHREVIEW.COM 19By Jordan Birnbaum, VP and Chief Behavioral Economist, ADPUNDERSTANDING CONSUMER BEHAVIOR THROUGH THE LENS OF BEHAVIORAL ECONOMICSIn a fast-changing world where organizations struggle to under-stand and anticipate the behavior of customers, thedomain of consumer behavior is gaining prominence. With the emergence of cutting-edge economic models, consumer behaviorhas evolved to blend behavioral economics, behavioral psychology, and market-ing theory into an interdisciplinary field,helpingcompanies comprehend consumer behavior in depth. Amid fluid economic conditions, companies across industries arealso looking for ways to mitigate their costs and increase the efficacy of their workforces. To achieve efficiency and higher profit margins, organizationsrequire new insights to guide them in their decision making. However, many of the classical econom-ic models that can be used to predict consumer behaviorcan be quitelimited in effectiveness, because they assume perfect self-interested rationality in decision-making. Behavioral econom-ics--which is making inroads into the commercial world, especially the CPG space--addresses these challenges by equippingmarket researchers with new insights to more accurately predict con-sumer behavior in multiple markets, pre-cisely because they incorporate predic-tions of irrationality in decision-making. Trends and Challenges in the CPG IndustryBehavioral economics is such an intriguing discipline that it is garnering global attention, primarily because of its ability to provide insights into unconscious psychological factors thatinfluence consumer behavior. Classical economics is premised on the idea that human beings are perfectly rational and that people's decision-making capability is based on self- interest. However, behavioral economics abandons those assumptions and instead reliably anticipates how behaviors might be influenced by irrationality and imperfect decision-making. By drawing on insights from human psychology, behavioral economists have achieved better success rates in predicting humanreactions to a broad range ofcircumstances. Regardless of the intended outcomes, organizations can significantly improve predictions ofconsumer behavior by incorporating concepts from behavioral economics.Consumer behavior encompasses several useful elements that can be incorporated into market research and data analysis to effectively communicate the value of products/services. For instance, Robert Cialdini, the author of theseminal work `Influence,' outlines several factors that disproportionately influence consumer behavior including (among others) reciprocity, social proof, and scarcity. Borrowing these ideas can drive buying decisions and increase customer loyalty to a greater degree. The concepts can be tested in randomized controlled trials to measure their impact in the marketing of CPG. In a famous experiment, Cialdini himself tried to determine the most impactfulcommunication techniques to encourage consumers to decrease their electricity consumption. The author placed banners at random houses with messages such as "use less energy to save the environment," "use less energy to save it for future generations" and "use less energy because your neighbors use less energy." Not surprisingly to Cialdini, only the last message moved the needle,based on the power of social proof.The experiment points to the fact that anticipating rationality as the driving force behindconsumer behavior can bea flawed approach.In a professional capacity, the challenge lies inencouragingemployees to care about their job and be dedicated to the success of the organization. At Jordan BirnbaumCXO INSIGHTS
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