Traditional economic theory, also called rational economic theory, posits that people make decisions by examining all the available evidence and making the most logical decision. But as the craze for Beanie Babies and the continued success of the KFC Double Down have shown, consumers frequently make choices that are not in their best interest. Consumer behavior is complex and often irrational, but there are layers to this complexity that we can unwrap to understand better.
As Dan Ariely, the James P. Duke Professor of Psychology and Behavioral Economics at Duke University, explains in his bestseller Predictably Irrational, “We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires—with how we view ourselves—than with reality.”
Why might this be? Well, as we’ve explored before, most of our mental processes happen at a subconscious level. Daniel Kahneman, a Nobel-Prize-winning economist and author of Thinking, Fast and Slow, explains that thinking happens in two processes, which he calls System 1 and System 2.
System 1 is automatic, quick, and requires little or no effort. Things you can do with System 1 include driving on an empty road, adding 2 + 2, and detecting that one object is farther away than another. System 2 is what we use for arduous thinking that requires concentration and calculation. We use System 2 to fill out a tax form, concentrate on one voice in a loud room, or monitor our behavior in social situations.
“Systems 1 and 2 are both active whenever we are awake,” explains Kahneman. “System 1 runs automatically and System 2 is normally in a comfortable low-effort mode, in which only a fraction of its capacity is engaged. System 1 continuously generates suggestions for System 2: impressions, intuitions, intentions, and feelings. If endorsed by System 2, impressions and intuitions turn into beliefs, and impulses turn into voluntary actions. When all goes smoothly, which is most of the time, System 2 adopts the suggestions of System 1 with little or no modification.”
What does this tell us about consumers? Traditional economic theory would propose that shoppers make a list of what they need, find those items in a store, and purchase nothing else. Kahneman’s theory would propose that shoppers detect attractive items with System 1, which then suggests them to System 2. System 2 selects the items, and thus impulse purchases are made.
Our own analyses of consumer behavior lend more weight to the second theory. We found through some research that we did with POPAI in 2013 that consumers make most of their purchase decisions in-store; in fact, we found that the majority of purchases in non-grocery retailers are unplanned. We were also able to quantify that during the last 20 percent of the shopping trip, unplanned purchases sharply decline. We can only infer this is due to the realization that it is almost time to go and they need to make sure they purchase the items for which they actually came into the store (in other words, that System 2 takes over and focuses the mind on the task at hand).
Another area where shoppers seem to be irrational is in their pathways through a store. We found during the same study with POPAI that if a shopper comes into a store without a clear destination category, shoppers take inconsistent paths throughout the store, with the only hotspot, so to speak, being directly at checkout.
What does this mean for retailers? You should assume that, while customers certainly make plenty of decisions that are in their self-interest, most decisions are driven by subconscious, emotional forces.
As Colin Shaw, CEO of Beyond Philosophy, explains, “A Customer Experience is an interaction between and organization and a customer as perceived through a Customer’s conscious and subconscious mind. It is a blend of an organizations rational performance, the senses stimulated and emotions evoked and intuitively measured against Customer expectations across all moments of contact.”
He urges companies to pay more attention to the often-neglected area of customer emotions. “There are many things we do that are irrational. We all know that we are irrational beings. What we need now is more action to address irrationality in Customer Experience design to include how it makes our Customers feel.”
To learn more about consumer irrationality and how your business should address it, get in touch with us.