Behavioral Science Series No. 4: Behavioral Economic Models

Traditional economic models work on many assumptions, but we know that many of the assumptions are not true. The same can be said for marketing assumptions.

Behavioral Economics questions traditional assumptions: an economic model works based on assumptions, as if all are true—they assume that people know their preferences. They assume people are completely self-interested, that people always make rational decisions. However, the reality is that these things are not actually true.

The same applies to marketing assumptions and the rules of brand management that we've been using since the 1950s. These apply as if decisions are context-neutral but, we know that they're not. It assumes true motivations are accessible (in fact, they're not) and future behaviors are easily predicted (but we know that's also very, very difficult). Marketers are now beginning to understand that these assumptions are simply not true.

Here is an illustration of two images. If I ask you which of the middle circles on either diagram is larger, most people would say that the one on the left is larger than the one on the right.

However, most people already know the solution, and they know that the circles are in fact the same size.

Despite knowing the truth, the important part is that even though you know it's a trick your brain still actually sees one of the circles as bigger than the other. This illustrates the two decision systems at work: System 1 and System 2. System 2 knows the answer and knows the circles are the same size. However, system one won't let go of the illusion.

To find out more about System 1 and System 2, click here.