Neuromarketing

   
Erotic images sell better than pictures of office supplies, and a lot better than photos of hairy spiders. Who knew? Actually, that’s a bit of an oversimplification. Stanford researchers led by neuroeconomics prof Brian Knutson have found that positive images, in this case mildly erotic photos of men and women shown to heterosexual men, stimulate the reward center in the brain and induce the viewers to take greater financial risks than subjects who saw neutral (office supplies) or negative (big spider) images. This effect was purely a priming effect, as all of the images were irrelevant to the subsequent decision. The implications of this work could be broad, impacting such diverse areas as gaming and auto sales. (more…)

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Advertising Age’s Mya Frazier has taken neuromarketing to task in Hidden Persuasion or Junk Science? Despite the alarming title, the article itself is reasonably balanced in content if not in tone. Frazier highlights some of the same neuromarketing problems we have identified here - overselling the power of the current technology to predict consumer behavior, drawing sweeping conclusions from tiny sample sizes, and assuming that all consumers have the same motivations. She interviewed quite a few of the major players in the field, and the article is definitely worthwhile for anyone looking for a current, if skeptical, assessment of the state of the art of neuromarketing.

Frazier begins with a profile of M. K. Pradeep and his Berkeley-based company, Neurofocus. Pradeep’s firm uses relatively inexpensive EEG (electroencephalography) and eye-tracking equipment to measure consumer reactions to ads. The equipment is readily portable, and allows quick setup and fast-turnaround testing in different geographic markets. After painting a rather hucksterish portrait of Pradeep, Frazier quotes Stanford neuroeconomics researcher Brian Knutson as comparing EEG techniques to “standing outside a baseball stadium and listening to the crowd to figure out what happened.” She follows up with neuroscientist Joshua Freedman, chief scientist at FKF Applied Research, calling EEG information “worse data than you’d get by just talking to people in focus groups.” Both Knutson and Freedman prefer fMRI (functional magnetc resonance imaging) data, which can show levels of activation in specific brain areas. (Knutson has been a lead researcher in some of the most exciting neuroeconic research to date - see Brain Scans Predict Buying Behavior and other Knutson mentions here.)

Frazier describes FKF’s use of fMRI:

Through his work with FKF, Mr. Freedman said he’s confirmed a consistent reality about human behavior: People tend to lie. “The ads that evoked the strongest emotions and are really firing up their brain, they tend to be relatively dismissive of,” he said. “Ads that are pleasant pabulum, they’ll say they are great, but their brain isn’t lighting up at all. That’s the problem with focus groups: People don’t really bare their soul. They are trying to protect their souls.”

She then proceeds to quote Paul J. Zak, Director of the Center for Neuroeconomics Studies and a professor of economics at Claremont Graduate University as being “highly skeptical of FKF’s methods” and as saying, “the payoff is pretty low for marketers.”

While the tone of the article seems negative, Frazier is certainly correct in pointing out that people selling neuromarketing services can get carried away. To the extent that the article encourages marketers to adopt healthy skepticism when viewing the latest brain-based marketing panacea, she has performed a valuable service. However, we would have liked to see an acknowledgement that neuromarketing and neuroeconomics are still in their infancy, and that there is plenty of reason to be optimistic that more research and better equipment will result in new levels of both understanding and predicting consumer behavior.

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In This is Your Brain on Money, I mentioned that I’d visit some of the other neuromarketing-related topics raised in Jason Zweig’s interesting article in Money, Your money and your brain. One of these is that our brains are programmed for “reward anticipation” but aren’t very good at calculating odds. Big potential rewards produce big responses, even if they are unlikely outcomes:

Brian Knutson [of Stanford University] has found that while your reflexive brain is highly responsive to variations in the amount of reward at stake, it is much less sensitive to changes in the probability of receiving a reward.

If a lottery jackpot was $100 million and the posted odds of winning fell from one in 10 million to one in 100 million, would you be 10 times less likely to buy a ticket? If you’re like most people, you probably would shrug, say “A long shot’s a long shot” and be just as happy buying a ticket as before.

That’s because, as economist George Loewenstein of Carnegie Mellon University explains, the “mental image” of $100 million sets off a burst of anticipation in the reflexive regions of your brain. Only later will the analytical, or reflective, areas calculate that you’re less likely to win than Ozzy Osbourne is to be elected Pope.

This human inclination has implications for marketers who use contests, sweepstakes, or other prize offerings. These findings suggest that it’s the magnitude of the grand prize that is the most important in a giveaway. If you have a budget for total prize money or merchandise, it’s probably better to load it into the top-level prize than to try to spread it among a larger number of prizes that would increase the odds of winning for all contestants.

Want Insurance on That Bet?

Conventional wisdom at the blackjack table is to decline the insurance offered by the dealer, but for marketers insurance might make sense if it allows a bigger prize. An example that comes to mind is the common “million dollar hole-in-one” fundraiser. Golfers (and perhaps some non-golfers) make a donation to enter the contest for a chance at winning a million dollars by shooting a hole-in-one. There are various rules to reduce the probability of the million dollars actually being paid out, notably that the winning shot doesn’t take place in the qualifying round when hundreds of golfers may be whacking multiple balls at the cup; it takes place in a final session, when just one or a few golfers (who placed closest to the hole in the first round) get a shot. The other technique that minimizes the risk to the charity (a good thing, since a lucky shot might turn a fundraiser into a financial disaster) is that they buy insurance. By paying a tiny fixed sum to a firm that offers such coverage (and who ensures the rules of the game limit the probability of a payout), the charity can offer the million-dollar challenge with no fear of catastrophic loss.

The reason those fundraisers attract entrants is the magnitude of the potential payout. The cost of hole in one insurance for a million dollars might be as little as a few hundred dollars depending on the method of payout (multi-year annuity vs. cash) and the number of shots that will qualify (giving one finalist one shot vs. multiple finalists with multiple attempts). From the standpoint of an individual competitor, awarding a few $1,000 prizes to those closest to the hole would have a higher expected payout than the opportunity to qualify for a million dollar shot, but would it generate any excitement? Probably very little. In short, awarding five $1,000 prizes would cost the charity a lot more than hole-in-one insurance for a million dollar prize, and would almost certainly result in fewer entrants and less excitement.

Business contests have different motivation than charity fundraisers, but the same principles apply - a spectacular prize is better, even if the odds are greatly reduced. (One exception may be high-frequency awards, like those in some fast-food restaurant contests; in these, there is a high concentration of winning game pieces with small awards, like free french fries. The promise of an immediate, high probability food reward brings other factors into play that are beyond the scope of this topic.) But, when choosing a top-line prize, think BIG - even if the odds are lower, people will respond better if there are more zeros at the end of the number. Possible approaches could be to concentrate prize money in one prize, to use a playoff system with the possibility that no prize will be awarded (in essence the hole in one strategy), or to participate in a joint promotion with other companies to increase the prize budget. (Note that in most jurisdictions contests are subject to government rules and regulations, so be sure to jump through the appropriate legal hoops in any such promotion.)

For a neuromarketing perspective on another game of chance, see Deal or No Deal.

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The human mind may be well suited to surviving in dangerous forests and plains, but it doesn’t do as well with modern financial decisions. A lengthy and interesting article in Money by Jason Zweig (read it online at CNNMoney.com - Your money and your brain.) highlights some of the areas where our brain’s decision-making processes yield results that are often less than optimal from an economic standpoint. He describes a variety of current neuroeconomics research to make his points, and even was put in an fMRI machine to take part in an experiment run by Brian Knutson of Stanford University. In short, our brains evolved to avoid risk and seek rewards, but don’t do a great job of balancing those in financial decisions. Zweig thinks better understanding of our neurological shortcomings will make us better investors:

Your brain developed to improve our species’ odds of survival. You, like every other human, are wired to crave what looks rewarding and shun what seems risky.

To counteract these impulses, your brain has only a thin veneer of modern, analytical circuits that are often no match for the power of the ancient parts of your mind. And when you win, lose or risk money, you stir up some profound emotions, including hope, surprise, regret and the two we’ll examine here: greed and fear.

Understanding how those feelings - as a matter of biology - affect your decision-making will enable you to see as never before what makes you tick, and how you can improve, as an investor.

One key thread in Zweig’s article is the importance of reward anticipation. Anticipating a reward, which might also be pejoratively termed “greed,” produces higher levels of brain activation than actually getting that reward. Anticipating a big reward is particularly potent. This is why lottery ticket sales boom when the jackpot hits, say, $100 million or more. The thought of the huge prizes triggers the reward anticipation effect, and people flock to buy tickets even though their odds of winning are infinitesimal. Looking at more conventional investments, the potential of a big reward is what causes investors to invest in hot biotech stocks even when the firms have little revenue and uncertain prospects.

Fear is another emotion that doesn’t work well in financial decision-making. Zweig points out that our evolved brains do a poor job overall with fear - we worry more about nuclear reactors than sunlight, and more about rattlesnakes than deer. In fact, sunlight kills far more people every year (via skin cancer) than nuclear reactors, and deer are much more deadly to humans (from auto crashes) than snakes or scary predators. Financially, we worry more about a stock market collapse (unlikely - there’s only a 2% probability of a 33%+ drop in a given year) than inflationary erosion of our portfolio’s value (much more probable).

There’s a lot of information in this article - I highly recommend it. Some of the neuroeconomics points made by Zweig have neuromarketing implications as well, and I’ll highlight one or two in a future post.

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We recently reported on important new neuroeconomics research in Brain Scans Predict Buying Behavior. This study is the first that attempts to correlate fMRI brain scan data with actual purchasing behavior. George Loewenstein of Carnegie Mellon University, Brian Knutson at Stanford, and other researchers presented subjects with cash, put them in an fMRI machine to record their brain activity, and then presented them with different offers of items and prices. Some of the offers were overpriced, and others were good value. The subjects then actually chose to buy items with their money, or keep the money. The researchers compared self-reporting of purchase intentions by the subjects, brain scan data, and actual purchases. (You can read the full paper in Neuron.) We interviewed Loewenstein after publishing that article, and are happy to share a few highlights here.

According to Loewenstein, one significant aspect of the findings is that the brain scans predicted buying behavior almost as well as the self-reported intentions of the subjects. In other words, absent any knowledge of what the subject intended to do, viewing the brain scan was nearly as predictive as asking the subject what he would do. Loewenstein noted that in this experiment, the questions about the intentions of the subject were quite straightforward and would be expected to be good predictors of actual behavior.

From a neuromarketing standpoint, we think this finding is particularly important. While simply asking people questions is a lot less expensive than sticking them in fMRI machines, there are many situations where the individual may not respond with complete candor, either intentionally or unintentionally. The fact that the scans do almost as well as self-reporting in a situation with no emotional loading suggests that they might do better than conventional methods when user self reporting is likely to be less reliable. (Indeed, that’s the point that advocates of fMRI lie detection make, though certainly using scans as legal evidence of truth or falsehood is certainly not imminent.) Lowenstein makes the point that the fMRI data enhances the self-reporting data.

The “negative” activation produced by cost is relative, according to Lowenstein. That is, it isn’t just the dollar amount, it’s the context of the tranasaction. Thus, people can spend hundreds of dollars on accessories when buying a car with little pain, while a vending machine that takes 75 cents and produces nothing is very aggravating. Auto luxury bundles are designed to minimize negative activation because their price tag covers multiple luxury items. The consumer can’t relate a specific dollar amount to a particular item, e.g., $1000 for leather seats, and hence can’t easily evaluate the fairness of the deal or whether the utility of the accessory is worth the price.

Cost isn’t the only variable that causes “pain” - it’s really the perceived fairness or unfairness of the deal that creates the reaction. Other parts of an offer that caused it to appear unfair would presumably cause a similar reaction as a too-high price.

Overall, Lowenstein isn’t interested in using this work for neuromarketing purposes. He points out that for many years credit card companies have prospered while encouraging consumers to spend too much by exploiting the principles he’s now uncovering his research. In essence, for a large number of consumers, the credit card takes the pain (quite literally, from the standpoint of the customer’s brain) out of purchasing. Pulling cash out of one’s wallet causes one to evaluate the purchase more carefully.

We think this makes a lot of sense, and is entirely consistent with real-world behavior. A credit card reduces the pain level by transferring the cost to a future period where it may be paid in small increments. Hence, not only does a credit card enable a consumer to buy something without actually having the money, but it also puts a finger on the scale as one’s brain weighs the pain vs. the benefit of the purchase. This can be a bad combination for individuals lacking financial savvy.

Lowenstein didn’t analyze Super Bowl ads, and he thinks that we aren’t yet at the point where marketers can do meaningful branding studies with fMRI scans. Lowenstein is part of the faculty at CMU’s Social and Decision Sciences Department, an interdisciplinary program that studies a wide range of topics, including the psychology of decision making, innovation and entrepreneurship.

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Only a day ago, in our post Neuro-Hype, we lamented the abundance of brain scan hype and the dearth of research that examines real purchase behavior. As if on cue, Carnegie Mellon University released Researchers Use Brain Scans To Predict When People Will Buy. While we haven’t perused the full study details, which appear in Neuron in Neural Predictors of Purchases, the work seems to be some of the most useful and exciting neuromarketing and neuroeconomics research published to date:

Twenty-six adults participated in the study, in which they were given $20 to spend on a series of products that would be shipped to them. If they made no purchases, they would be able to keep the money. The products and their prices appeared on a computer screen that the participants viewed while lying in an fMRI scanner. The researchers found that when the participants were presented with the products, a subcortal brain region known as the nucleus accumbens that is associated with the anticipation of pleasure was activated. When the subjects were presented with prices that were excessive, two things happened: the brain region known as the insula was activated and a part of the brain associated with balancing gains versus losses - the medial prefrontal cortex - was deactivated.

Furthermore, by studying which regions were activated, the authors were able to successfully predict whether the study participants would decide to purchase each item. Activations of the regions associated with product preference and with weighing gains and losses indicated that a person would decide to purchase a product. In contrast, when the region associated with excessive prices was activated participants chose not to buy a product.

The researchers who authored the paper are Scott Rick and George Loewenstein of the Department of Social and Decisions Sciences at Carnegie Mellon; Brian Knutson and G. Elliott Wimmer of the Department of Psychology at Stanford; and Drazen Prelec at MIT’s Sloan School of Management.

It seems likely that this work will spark some creative thinking. The Market Psychology blog speculates in Excited about a Good Deal that Warren Buffet and other value investors may like stocks when their medial prefrontal cortex is activated. For neuromarketers, this looks like a ground-breaking study that will help establish the basis for fMRI-based evaluation of ads, price points, and other marketing variables. (We think it’s doubtful that Wal-Mart will install brain scanners as suggested by the Life of Learning blog. ) We’ll report further on this work after we study the paper and gather more details.

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