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Behavioral Economics: Social Norms and Recession Adjustment

June 12th, 2009 by

predictably irrational Behavioral Economics: Social Norms and Recession Adjustment

I was happy to meet Dan Ariely yesterday, the known behavioral economist, author of the best seller book “Predictably Irrational” and to discuss with him some of the implications derived from his research studies.
Out of many insightful studies I wish to present two subjects which I believe to hold many implications for today’s business environment. The first presents the power of social norms. The second evolves around immediate and delayed gratification, and to my perception can conceptualize much of the consumer behavior observed in times of economic recession.

I. The Cost of Social Norms
“Why we are happy to do things, but not when we are paid to do them”.

Empirical research:
Ariely and Heyman asked subjects to drag circles from one side of a screen into a square.  They were instructed to drag as many circles as they could in 5 minutes (a very boring assignment). The rewards given for the task were: $5, $0.50, and zero.
Results: Participants worked harder under non-monetary social norms than for payment ($5: 159 circles were dragged, $0.50: 101 circles, Zero: 168 circles).

A real-life example: The AARP asked lawyers to participate in a program where they would offer their services to needy employees for a discounted price of $30/hour. This offer was not accepted. But, when the program manager instead asked if they’d offer their services for free, the lawyers overwhelmingly said they would participate.

Implications for marketing:

  • Companies that try to market based on social norms (“like a good neighbor…”) but fail to follow through (e.g. imposing nuisance fees) end up in a worse position. Consumers take personal offense when a relationship framed as a social exchange turns out to be a market one.
  • “If you’re a company, you can’t have it both ways. You can’t treat your customers like family one moment and then treat them impersonally (or worse, as a nuisance or competitor) a moment later when this becomes more convenient or profitable. This is not how social relationships work. If you want a social relationship, go for it, but remember that you have to maintain it under all circumstances.”
  • If you think you need to play rough, don’t waste money making your company the fuzzy feel-good choice. State what you give and what you expect in return–it’s just business.

Implications for organizations:

  • “If companies want to benefit from the advantages of social norms, they need to do a better job of cultivating those norms….It’s remarkable how much work companies (particularly start-ups) can get out of people when social norms (such as the excitement of building something together) are stronger than market norms (such as salaries stepping up with each promotion). If corporations started thinking in terms of social norms, they would realize that these norms build loyalty and–more important–make people want to extend themselves to the degree that corporations need today: to be flexible, concerned, and willing to pitch in.  That’s what a social relationship delivers.”
  • “A salary alone will not motivate people to risk their lives. Police officers, firefighters, soldiers–they don’t die for their weekly pay. It’s the social norms–pride in their profession and a sense of duty–that will motivate them to give up their lives and health. Money, as it turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.”

II. Why We Can’t Make Ourselves Do What We Want To Do

Ariely conducted an experiment on his MIT class.  Students were required to write three papers.
•    The first group was asked to commit to dates by which they would turn in each paper. Late papers would be penalized 1% per day. There was no penalty for turning papers in early. The logical response is to commit to turning all three papers in on the last day of class.
•    The second group was given no deadlines; all three papers were due in the last day of class.
•    The third group was directed to turn their papers in on the 4th, 8th, and 12th weeks.

The results:

  • Group 3 (imposed deadlines) got the best grades. Group 2 (no deadlines) got the worst grades, and Group 1 (self-selected deadlines) finished in the middle.
  • Allowing students to pre-commit to deadlines improved performance
  • Students who spaced out their commitments did well; students who did the logical thing and gave no commitments did badly.

“These results suggest that although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for pre- commitment and by doing so, help themselves overcome it.”

Implications:
“We have problems with self-control, related to immediate and delayed gratification. But each of these problems has potential self-control mechanisms. If we can’t save from our paycheck, we can take advantage of our employer’s automatic deduction option; if we don’t have the will to exercise regularly alone, we can make an appointment to exercise in the company of our friends. These are tools that we can commit to in advance, and they may help us be the kind of people we want to be.”

TrendsSpotting insights:

Implications for consumer behavior: cutting back during recession

The buzz around the recession and consumers’ shared experiences in confronting the need to cut back on expanses helped many consumers to adopt self control mechanisms. It made consumers realize they need to follow self restrain behaviors and assisted them in finding ways to address new life styles.

You are welcome to read our previous recession research indications. A new recession review – is coming up in few days.

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2 Responses

  1. Jason Grant Says:

    Very interesting insight. Very much worth considering for general life, as well as business and social tasks we do.

  2. Physics Videos Says:

    Thank you for your thoughtful post!

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