Commentary

Why Behavioral Economics Is Really Marketing Science

Ironically, the discipline of marketing was started by economists!

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By Philip Kotler

Economists rarely mention marketing. Occasionally an article appears in the American Economic Review on advertising or promotion or warranties. But to most economists, marketing is a sideshow in the economy. It is filled with too many particulars and virtually no theory. A cynical economist would even hold that marketing activity hurts the efficiency of the economy. Promotions distort the true price and lead consumers to buy on brand name, not real value.

Ironically, the discipline of marketing was started by economists! Marketing textbooks first made their appearance in the 1900-1910 period. Their authors were economists who were institutionally oriented rather than theory-oriented. These economists wanted to examine the role that different distribution organizations – wholesalers, jobbers, agents, retailers – played in the economy. They also wanted to describe and analyze the different promotion tools – advertising, sales discounts, guarantees and warrantees—and determine whether they actually shifted demand.

Somehow classically-trained economists didn’t view marketing as an intrinsic economic activity. They couldn’t fit it into either macroeconomic theory or microeconomic theory. They didn’t see a role for mathematics in the discipline. Marketing was seen as much more of a psychological and sociological discipline than an economic discipline.

An irony today. If you picked up a recent copy of the Journal of the Academy of Marketing Science (JAMS), you can easily mistake it for the American Economic Review in terms of the articles’ mathematical sophistication – they are almost unreadable to the lay reader. Although traditional economists are not doing much mathematical analysis of marketing tools and strategies, marketing scientists are producing quite interesting and complex analyses of marketplace economics.

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The greatest irony is that traditional economics is now facing a new competitor, namely behavioral economics. Behavioral economics attacks the crucial assumption that consumers engage in maximizing behavior. Aiming to maximize utility or profits is the key to building economic decision models. Otherwise, economists would have to work with another assumption, that consumers are basically “satisficing,” stopping short of spending time to maximize and being happy enough to achieve enough of what they want. But the mathematics aren’t there for this behavior and hence the claim of economics to be a science is also weakened.

Behavioral economists, instead of assuming that consumers and producers are maximizers, have to study how different marketing actors actually behave. This involves collecting empirical data. This will lead to recognizing many instances of non-rational or even irrational behavior. How do we explain people paying so much more for coffee at Starbucks or ice cream from Haagen Dazs? How do we explain some low income people voting for Republican candidates when the empirical evidence shows that poor people have done better during Democratic administrations than Republican administrations?

If economists now have to study and explain how consumers actually make their choices, they need to turn to marketing. For a hundred years, marketers have collected data on what, how and why consumers buy what they buy. The data is there. The only conclusion we can draw is that behavioral economics is, ironically, another word for marketing. Marketers have been the behavioral economists!

What about producers’ decision making? Traditional economics says that producers aim to maximize their profits? But this ignores the role of risks. Every producer can take on higher levels of risk in the pursuit of higher profits. But producers, in practice, have risk aversion. They have different appetites for risk. This undercuts the notion that they only concentrate on profit maximization. When risk is include, we might say that producers aim for a balanced ratio of profit to risk.

When producers face a big risky decision such as buying another company, many market estimates must be made. What will happen to market size and market share? Many different scenarios can take place. Estimating their respective success probabilities is difficult. Many acquisitions in practice are motivated by CEO’s egos that leave them less sensitive to actual risk. Again, the task of behavioral economists is to collect data on how these difficult acquisition decisions are actually made. And part of it is to determine how much marketing estimation and game-theory thinking occurs in the process.

The main conclusion is that economists, both traditional and behavioral, will benefit from paying closer attention to developments in the marketing discipline and marketers looking for more theory will benefit from paying closer attention to both traditional and behavioral economics.

For related discussion, see Philip Kotler, Confronting Democracy: Real Solutions for a Troubled Economic System (AMACOM 2015). Also see the author’s site, www.fixcapitalism.com 

2016 August 24


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  • Again, all this is true enough in a sense, and it misses completely something much deeper, much more important, and something fundamental to evolution.

    Evolution doesn’t care how. All that matters is survival.
    Any “hack”, that works in practice, survives (with some significant probability).

    Games theory gives us a theoretical framework for interpreting why it works in practice, but doesn’t necessarily drive anything (reality only needs to be a sufficiently close approximation).

    One fundamental thing to get about evolution, is that it operates on all aspects simultaneously.

    If evolution stumbles upon a “hack” (a heuristic, some simple algorithm, or reaction, or molecule, or idea, etc) that works in practice to deliver an outcome that is near enough to some ideal, and uses a lot less energy than calculating, then it will be selected for.

    Every aspect of our biology and our culture is like that.

    Applying games theory is great, and necessary, if we are to go beyond our evolutionary past (genetic and cultural and experiential), and in order to put games theory into context, one has to get a real handle on the complexity that is present in biology, and the degrees of pure randomness that can at times and places completely overwhelm any sort of order.

    To the degree that we can identify these “hacks” both in our biology and our culture, then to that degree we can develop higher order systems to mitigate any risks we identify from such hacks in our exponentially changing present and future.

    In this sense, and this requires at least three levels of abstraction, our current conceptual systems of economics and marketing are becoming the single greatest threat to our survival, as they are tuned to contexts that are becoming exponentially less relevant.

    How many people worry about the cost of air?

    We are very close to delivering technologies that allow us to produce any defined good or service in similar abundance to air.

    What use economics in such a context?

    What point markets?

    What strength is the sense of injustice against those who consciously work to prevent such a context from emerging?

    If we don’t start thinking about and planning for existence beyond scarcity, then the scarcity based hacks of our neural and cultural systems will overwhelm any technical abundance that does exist and lead us into destruction on a scale that delivers significant risk to everyone, even those in the deepest of nuclear powered underground bunkers.

    We have the ability to deliver security and freedom to every person on the planet.

    We need to action a plan to deliver that outcome, and soon, or the hacks in our brains that make us fight against injustice will take someone, somewhere, in a position to do something real about it, over the edge of a precipice (in some dimension of strategy space) from which there is no return.

    Even a very small probability in respect of any individual, in a large enough population, over a long enough period, delivers an outcome probability that approaches unity.

    • spaghettimonster

      I concur.

      We must recognize the capitalist system and the useful idiots that propagate as part of an existential threat to our existence.

      It is fight or die, when it boils down to it, whether it be us, or some other downtrodden and devastated generation down the short line.

      If we do not change the system, we will crash.

      The main issue is we would have to deal with an large global populace that has been traumatized by business as usual.

      Tech needs to help in that realm via therapeutic neural bands that help stabilize PTSD that has afflicted pretty much the whole planet from having to deal with the ails of human history up to the modern age.

      • Using the term “fight” doesn’t work for me.
        One cannot both hold individual life and individual liberty as values, and condemn individuals for holding values different.
        One can work at introducing ideas to others that reduce the risk they pose to others.
        Threatening another with death is only ever a last ditch approach, when all other avenues have been exhausted, and personal threat levels are high and immediate. And of course one must have that strategy set available, and the relevant competencies.

        The battle I am fighting is one of ideas, and I maintain a wide range of competencies designed to increase the probability of my individual survival, but not at the cost of anyone else’s, except in extremis.

        Agree that there is a lot of stress in society, and that it is structural to market based capitalism, and that it is unstable and poses existential risk to all (capitalists and others alike) long term; and that needs to become common knowledge.

        We are very complex entities.
        How we respond is very much a function of the context we see (all levels).

        How we make those distinctions generally and recursively available seems to be the greatest challenge.
        The technical challenges of climate change, space travel, universal abundance and indefinite life extension seem trivial by comparison.

        We have much to do, and soon, and there is very real risk, and I am more confident than any time in the past 50 years that we might actually make it. It is going to demand a lot, and it does seem to hold a better than even chance of success.

  • John Cochrane made the same point last year (http://johnhcochrane.blogspot.com/2015/05/homo-economicus-or-homo-paleas.html). It is is included within an excellent discussion of the relationship of behavioral economics to other “types” of economics.