Wavey Economics

Behavioural economics is a brave attempt to fill a gaping hole in our knowledge by providing a science of human behaviour. It is brilliant at post rationalising the things people actually do, and of course it is supported by credible research. So it must be true. What has always fascinated me about it, therefore, is how useless it is in practice. This may seem harsh, but it is I’m afraid true that the best insights in behavioural economics always seem come when it is dealing with highly predictable behaviour, such as confirmation bias. If you want to identify how and when confirmation bias is disrupted, though, it has little to say.

The most obvious reason for its uselessness is the one I have mentioned, which is cited in support of its validity. Basing something in research is all very well, but research is by definition retrospective. You are looking back at things people have said or done in the past, even if that past is recent and carefully constructed. You can’t research what they will do until the moment they do it. You only have to look at electoral opinion polls attempting to predict the simplest yes/no choices to see the futility of that. Almost always, understanding what people did is very different to understanding what people do.

This is because of the nature of cause and effect. Everything has a cause and happens for a reason, and that creates a number of fallacies about the extent to which we can determine future events. Looking back, events and actions seem to draw a logical path of cause and effect which might have been unexpected but which does appear, when you look back at it, inevitable. In fact, the only thing that makes an event appear inevitable is the fact that it happened. At every step there are choices and chances, and these are massively complex. This is because everything that happens to us is the result of multiple other events, most of which belong to entirely different chains of cause and effect. How we actually respond is down to our interpretation, mood and chance. This is why any given sequence of events has moments when a different path could have been taken, and everything could have been different. We often look at the events which lead to disasters like this. “If only,” we say. 

There are therefore many choices we make which are highly improbable and unpredictable. We don’t make them because we are irrational, but because they are posed by the way the world we live in behaves. Unexpected things happen all the time, and we react to them and anticipate them, rightly or wrongly. If we ignore this fact of life in our behaviour we are unlikely to survive, but if we get it right the rewards are great. Consider a plain of long grass containing food and a tiger. Survival depends on our assessment of a complex set of risks, some of which might lead us to be daring (admired) or stupid (dead). 

Critically, it is risky action that will be influential in either case. How did we get away with it, or why are we now dead, are questions that immediately draw interest and attention.

In the highly complex and connected world we now inhabit, this is all hugely amplified, if sometimes less life threatening. Improbable actions or events can change our world very quickly, and these are the most important actions and events in our lives. They have a permanent effect because an improbable event will make a subsequent highly unlikely event much more likely, and that revised probability will ripple down the whole chain of possible events and actions like a wave of water. 

This is a stormy sea, an unpredictable and volatile environment which means that attempts to make valid rules for the way we behave are extremely difficult. However, our brains are fortunately designed to operate best here. Unlike the crude binary computers we build, our brains don’t make simple either/or choices. We are able to understand, constantly and simultaneously, that any number of things might happen. We are contextual beings. We assess and re-assess risk and probability every second we are awake. The importance of this cannot be underestimated. We might invent and follow some rules, but they comfort us in a dangerous way. We know we are foolhardy to believe the old adage that tigers don’t appear within two days of rainfall. 

This is bad news for people who want to be certain of things, or are looking for the Holy Grail – a set of guidelines that will help us to predict and influence other people’s behaviour. 

The good news, for advertisers and marketers, is the fact that judging risk correctly gives us authority. This means that behaviour is still influenceable if you go about it in the right way, by ignoring rules and seeking out the improbable. Improbability is highly detectable precisely because it is highly influential, and it is detectable immediately if you are on the lookout for it. Better still, if you can work out how to make an improbable event you can start a wave of influence yourself. How do you do this? There are of course no rules. If you want to do something exceptional, though, you do have to understand two things. You have to be exceptionally aware of what is going on, not just around you but around the lives of the people you want to influence, and you have to have an exceptionally sensitive understanding of how those people feel. 

This is not rocket science, and many people who believe strongly in behavioural economics will say yes, that is exactly what we do, and it is why we do research. The caveat here, again, is that in order to really influence behaviour you have to be just ahead of events as they happen. Empathy is as important as data. To succeed, you have to think like the people you are talking to, and you have to use your imagination and creativity to see what might happen next. I said before that events influence other events like waves, so maybe we can think of it as surfing. Data and research can spot and even predict waves, up to a point, but they are just observers. By the time you have reported a wave it is history. To catch a wave properly you have to be in the water, and just in front of it.