Understanding the behavioral economy
The behavioral economy is, as the name suggests, the economy of human behavior — in which behavioral capabilities are becoming the key driver of value and growth. Its emergence is being driven by the confluence of four trends and disciplines:
- Behavioral data
- Behavioral economics
- Affective computing
- Human augmentation technologies
Behavioral data has exploded in recent years. Already, our search engines, smartphones and social media platforms gather more data about our behaviors, preferences and states of mind than we may realize. Emerging technological breakthroughs promise to further the trend, from smart speakers that learn about our shopping and entertainment preferences to on-demand autonomous vehicles that gain insight into our social networks and travel patterns.
Behavioral economics applies insights from psychology to better understand and influence human decision-making. While academics have studied behavioral economics for decades, the discipline has only gained mainstream adoption in recent years. By understanding and compensating for widespread human heuristics and biases, governments and companies are helping people lead healthier lives, save for retirement and make more environmentally sustainable choices. Meanwhile, marketers and advertisers have been using behavioral economics principles to boost sales and profits.
Affective computing, also known as emotion AI, combines insights from computer science, psychology and cognitive science to bring machines into the realm of human emotion. Affective computing enables systems that can both recognize human emotion (for instance, by analyzing eye movements, facial expressions and tone of voice) and convincingly simulate it when interacting with users.
Human augmentation technologies are making these capabilities highly customizable at scale. Already, sensors embedded in smartphones, wearables and scores of other objects are enabling behavioral change in real-time, real-world conditions. In the not-too-distant future, augmented and virtual reality could shape behaviors by customizing interactions in ways far beyond what is possible in the physical world. Imagine a salesperson avatar that can simultaneously maintain eye contact with hundreds of customers while modifying her accent, choice of words and tone of voice based on data about each customer’s preferences.
Using behavioral economy capabilities
The tools and principles of the behavioral economy are particularly relevant at this point in time, as companies and governments seek to better understand the changing behaviors and preferences of their stakeholders. Here are three examples of ways in which these capabilities can be deployed to meet this challenge:
1. Becoming a listening organization
A key finding of the EY Future Consumer Index survey is that companies need to become listening organizations that use data analytics and AI to better understand consumers’ changing needs to adapt products and services accordingly. Behavioral economy tools can help companies strengthen their listening muscles. For instance, behavioral economics can help elucidate counterintuitive patterns in customer behavior, which allows companies and governments to better predict behavioral shifts and account for their psychological underpinnings. The sensors embedded in human augmentation technologies allow organizations to listen in real-time, real-world conditions. Meanwhile, applications of affective computing allow for an entirely different kind of listening: recognizing and modulating users’ emotional states in real time. This is tremendously relevant in the wake of the pandemic, which has fueled a silent epidemic of stress and mental health issues.
2. Nudging consumer behavior
The real power of behavioral economy tools is not just in their ability to listen to consumers, but also in their potential for influencing and shaping behavior. What pricing strategies would most appeal to consumers at a time when majorities across multiple countries have become more cost conscious? As some countries move toward recovery from the pandemic, how might messaging and emotional cues appeal to individuals who are proceeding with a sustained sense of anxiety? How might the design of physical spaces reassure people who are prioritizing health concerns like never before? Behavioral economics and affective computing can provide answers to these questions and more.
3. Maintaining social cohesion and trust
While social cohesion and trust had been under strain across much of the world well before the pandemic, COVID-19 has only amplified these trends. The pandemic has widened the economic divide by exacting a disproportionate toll on the economically disadvantaged. Disinformation and conspiracy theories have run rampant and increased social distrust. The EY Connected Citizen survey finds that 32% of citizens across the world fear that technology will make them feel less connected to their community. Behavioral economics helps explain the psychology behind these trends, pointing the way to actionable solutions. The work of social psychologist Jonathan Haidt, for instance, highlights how tribalism influences our perception of information across a swath of issues. Behavioral economics explains why technology — in particular, the algorithms and design of social media platforms — has had such a deleterious impact on trust and cohesion. For leaders in government — and, increasingly, in business as well — such behavioral insights provide the basis for understanding the drivers of polarization and the foundation for steps to remedy the problem.
Actions for leaders
Here are three steps leaders can take to transform their organizations for the behavioral economy:
1. Build behavioral competencies
Succeeding in the behavioral economy requires a suite of capabilities that most companies lack — expertise in behavioral economics and affective computing, along with the technologies to effectively deploy them. In a world where behavior is becoming a key driver of value, it is critical for behavioral capabilities to have ownership and focus in the c-suite. Yet, most c-suites and boards lack behavioral expertise and are not focused on filling the gap. The EY CEO Imperative survey shows that only 14% of CEOs believe they require new or increased c-level attention on behavioral science competencies to ensure their company’s growth.
2. Be transparent and consistent to build trust
Trust needs to be an integral part of any behavioral economy approach. The shift to the behavioral economy is occurring against a backdrop of declining trust, driven in part by social media and other technology (for more see “Future of Thinking” in Megatrends 2020). The decline in trust has been accelerated by vaccine hesitancy and conspiracy theories during the pandemic. The EY CEO Imperative survey shows that 34% of companies think consumers don’t trust them with their data, yet this data will be critical to success in the behavioral economy. This is particularly relevant with behavioral economy approaches, which are potent tools but also risk triggering concerns about privacy and perceived manipulation — fears that have already spawned the “techlash” against social media companies. The good news is that behavioral economics also offers useful insights for companies looking to address these concerns and build trust — from being transparent about intent to tapping the power of what behavioral economists call “social norms.”
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CEO Imperative study
34%of companies think consumers don’t trust them with their data.
3. Empower, don’t exploit
Behavioral economics has tremendous potential to shape people’s behavior in empowering ways — helping us act in our self-interest with respect to health, finances and more. Unfortunately, these techniques have all-too-often been weaponized to nudge individuals in the opposite direction — to spend instead of save, and to eat unhealthy foods. At a time of diminishing trust and shifting behavioral preferences, leaders need more than ever to ensure that the power of the behavioral economy is deployed to empower, not exploit, their stakeholders.
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Summary
The shift to a behavioral economy is being driven by a convergence of technologies and capabilities, providing companies and governments with a growing ability to analyze and shape behavior. These behavioral capabilities can help drive value and growth. However, leaders must ensure any developments in behavioral economy capabilities put humans at the center of transformation, empowering rather than exploiting stakeholders and building trust between stakeholders and organizations.