Lone Gunman

The recent reces­sion saw sales of con­doms, guns and bur­glar alarms soar. This is because, when fear enters our mind in terms of los­ing our job or of not being able to pay bills, we focus on two of our most basic dri­ves: fear and sex.

The key to sell­ing and build­ing a brand dur­ing finan­cial crises, there­fore, is sim­ple: man­age fear. Under­stand how it works and how it affects pur­chas­ing behav­iour. This advice on brand-building dur­ing a reces­sion comes from Mar­tin Lind­strom, ex-advertising agency exec­u­tive, author of Buy­ol­ogy, and one of TIME’s 100 Most Influ­en­tial Peo­ple in the World, 2009.

First, there’s always good news in bad times. A stan­dard approach in this sit­u­a­tion is to address con­sumers’ prob­lems. And peo­ple always have prob­lems. The fact is we rarely know what we want, but we have no trou­ble point­ing out our dif­fi­cul­ties. For exam­ple, no one knew they wanted an airbag, but every­one agreed they wanted safer cars.

It’s there­fore impor­tant to ask your­self what sort of prob­lems are con­sumers fac­ing dur­ing this eco­nomic reces­sion? There are many. […] Con­vert prob­lems into assets for your brand.

Sec­ond, add a prac­ti­cal dimen­sion to an irra­tional deci­sion. No mat­ter how much money you may have in the bank, or how secure your employ­ment may be, it’s now fash­ion­able to save your money and buy every­thing at a dis­count. What can a brand owner do? Par­tic­u­larly in light of the fact that a dis­counted brand typ­i­cally takes seven years to recover!

The answer is sim­ple. Add a prac­ti­cal dimen­sion to the equation. […]

Third, you have to sys­tem­at­i­cally remove fear. Hyundai did it. And a stream of new banks are doing it. Both have suc­ceeded in iden­ti­fy­ing why con­sumers are reluc­tant to spend. Once this is under­stood, then you can har­ness it and build a bet­ter prod­uct by address­ing the fear and find­ing a way to elim­i­nate it. Your sales may be down. But do you know why? Peo­ple are cer­tainly buy­ing less, and expla­na­tions like, “Well, there’s a reces­sion going on out there,” are not help­ful. What’s impor­tant is to under­stand the fun­da­men­tal role of fear, and then turn it around to strengthen your brand. Some of the world’s most endur­ing gro­cery brands were built on the back of the Great Depres­sion. Each one turned the threat into an opportunity.

Kris­t­ian Segerstrale–owner of online games com­pany Play­fish (acquired by Elec­tronic Arts for $400m in Novem­ber 2009)–discusses why online game envi­ron­ments are excit­ing places for eco­nom­ics research (and specif­i­cally: “how social fac­tors influ­ence eco­nomic deci­sion making”):

When econ­o­mists try to model behav­ior in the real world, they’re always deal­ing with imper­fect infor­ma­tion. “The data is always lim­ited, and once you get hold of it there are tons of rea­sons to mis­trust it,” Segerstrale says. In vir­tual worlds, on the other hand, “the data set is per­fect. You know every data point with absolute cer­tainty. In social net­works you even know who the peo­ple are. You can slice and dice by gen­der, by age, by anything.”

Instead of deal­ing only with his­tor­i­cal data, in vir­tual worlds “you have the power to exper­i­ment in real time,” Segerstrale says. What hap­pens to demand if you add a 5 per­cent tax to a prod­uct? What if you apply a 5 per­cent tax to one half of a group and a 7 per­cent tax to the other half? “You can con­duct any exper­i­ment you want,” he says. “You might dis­cover that women over 35 have a higher tol­er­ance to a tax than males aged 15 to 20—stuff that’s just not pos­si­ble to dis­cover in the real world.”

Of course, there’s a fairly obvi­ous caveat:

One pos­si­ble flaw in this eco­nomic model is that the kind of peo­ple who spend hours online tak­ing care of imag­i­nary pets may not be rep­re­sen­ta­tive of the rest of the pop­u­la­tion. The data might be “per­fect” and “com­plete,” but the world from which it’s gath­ered is any­thing but that.

In a series of novel fram­ing experiments, researchers have shown that our self-identified polit­i­cal lean­ings cor­re­late with how we per­ceive finan­cial losses.

Hun­dreds of online par­tic­i­pants chose between var­i­ous flights, com­put­ers and so on. In each case they could plump for a cheaper option or a more expen­sive, greener option, the lat­ter includ­ing either a ‘tax’ to help reduce car­bon emis­sions, or an ‘off­set’ to do the same – depend­ing on how the choice was framed. Whether the expen­sive option was framed as a tax or off­set made no dif­fer­ence to Demo­c­rat (left-wing) par­tic­i­pants. By con­trast, Repub­li­cans (right-wing) and Inde­pen­dents were much less likely to choose the more expen­sive option when it was labelled as a tax.

Large bonuses and salaries are in place to attract prime tal­ent and as an incen­tive to improve per­for­mance, goes con­ven­tional wis­dom and the bankers’ rhetoric. However recent research by Dan Ariely (author of Pre­dictably Irra­tional) and col­leagues sug­gests that while large pay will attract the best tal­ent, large performance-based bonuses may hin­der supe­rior per­for­mance.

Inter­est­ingly big bonuses suc­ceeded in increas­ing per­for­mance only when the tasks under­taken were mechan­i­cal in nature (e.g. tap­ping a key as fast as pos­si­ble) but not when they were cog­ni­tive. When tasks were con­ducted in pub­lic (pub­lic scrutiny as a task moti­va­tor), per­for­mance did increase.

Like money, social pres­sure moti­vates peo­ple, espe­cially when the tasks require only effort and not skill or think­ing. But at some point, too much of it over­whelms the moti­vat­ing influence.

If our tests mimic the real world, then mas­sive bonuses clearly don’t work. They may not only cost employ­ers more but also dis­cour­age exec­u­tives from work­ing to the best of their abil­i­ties. The finan­cial cri­sis, per­haps, didn’t hap­pen in spite of the bonuses, but because of them.

Much has been writ­ten on the (ir)rationality of pur­chas­ing lot­tery tick­ets (Eliezer Yudkowsky’s view­point is par­tic­u­larly fine), but lit­tle has been said on appli­ca­tions of these biases that could improve the finances of all of those who buy a ticket.

Now behav­ioural econ­o­mists are attempt­ing to boost the his­tor­i­cally poor house­hold sav­ings rate by using our lottery-like opti­mism as an incen­tive to save:

Psy­chol­o­gists have long known that peo­ple tend to over­es­ti­mate the odds of rare events. Apply­ing that behav­ioral insight, finance pro­fes­sor Peter Tufano of Har­vard Busi­ness School has devised a clever pro­gram called “Save to Win.” Launched ear­lier this year for mem­bers of eight credit unions in Michi­gan, it is a cross between a cer­tifi­cate of deposit and a raf­fle ticket. Mem­bers who put $25 or more into a Save to Win one-year CD* are entered into a monthly “sav­ings raf­fle” for prizes up to $400, plus one annual draw­ing for a $100,000 jackpot. […]

In 25 weeks, the pro­gram has attracted about $3.1 mil­lion in new deposits, often from peo­ple who have never been able to set money aside.

via Techdirt

* CD = Cer­tifi­cate of Deposit (sim­i­lar to a sav­ings account).