Neuromarketing

The wildly popular television game show, Deal or No Deal, is a televised neuroeconomics experiment (or would be if you could scan the brains of the participants as they played): each week, contestants choose to accept a fixed amount of money, or keep playing with the possibility of a still-higher payoff. In each round of the game, the payoff for stopping is based on the prize amounts remaining to be uncovered. I don’t watch the show, but on the few occasions that I’ve seen it I’ve noticed the different responses of the contestants (and their family members, who are often on camera as well). Some contestants amaze me by turning down a guaranteed six-figure payout to keep playing for a chance at a million dollars. Others bail out early to take the guaranteed cash. Family members are often at odds with the player, either exhorting the player to keep going if he’s wavering, or hollering at him to take the money and run if he’s turning down a big payout. Perhaps inspired by the game show, researchers at the University of Pittsburgh have conducted an experiment that sheds light on the different ways people view rewards, risk, and time. Subjects were offered an immediate reward that might range from a mere ten cents to $105, or the alternative of a sure $100 payout that might be made in week or in up to five years.

Not only do people differ in their preferences for immediate over delayed rewards of larger value, say the researchers in the Journal of Neuroscience, but these individual traits are mirrored by the level of activity in the ventral striatum, a key part of the brain’s circuitry involved in mediating behavioral responses and physiological states associated with reward and pleasure. Research volunteers classified as more impulsive decision makers, who tend to seek rewards in the here and now, had significantly more activity in the ventral striatum.

As reported by the University of Pittsburgh Medical Center in Deal or No Deal? Need for Immediate Rewards Linked to More Active Brain Region, differences in “delay discounting” could be related to serious issues like addiction; individuals who choose immediate gratification in a neuroeconomics experiment may at greater risk for addiction.

“The ventral striatum appears to be a nexus where we balance acting impulsively to achieve instant gratification and making prudent choices that may delay rewards. Understanding what drives individual differences in ventral striatal sensitivity could aid efforts to treat people who have difficulty controlling impulsive behavior, by adjusting the circuitry,” explained lead author, Ahmad R. Hariri, Ph.D., assistant professor of psychiatry and director of the Developmental Imaging Genetics Program at the University of Pittsburgh School of Medicine and Western Psychiatric Institute and Clinic.

Additional research will be directed at establishing that link. One issue I have with the current research is that the future payout may have been too low to predict an irrational choice. While I’m perfectly capable of understanding that the present value of a certain $100 payout in an average, say, of 2.5 years is likely to be higher than an immediate payout of some amount between a dime and $105, I’d probably take my chances on the immediate payout. So much for B-school. But why would I take the cheaper but immediate deal? I think in my case it has less to do with immediate gratification and more with mental overheard. Will I even remember in five years that someone owes me a hundred bucks? Will they find me? Will they be around to pay it out? For me, the computation would change completely if the future option was to hand me a savings bond that would mature on the future date. There’s still a bit of mental overheard involved - I’d have to put it someplace where it wouldn’t get lost, and I’d have to remember to cash it in - but a lot less than if I didn’t have it in my possession. I think if you repeated the same experiment for much higher stakes - say, a million dollars to be paid out in a week to five years, vs. $1,000 to $1,050,000 to be paid immediately, almost every subject would take the delayed but certain payout. I doubt if Pitt’s research budget will let them perform this test, but I’ll be happy to volunteer as a subject should they get funded.

Selling to the ventral striatum? There’s a neuromarketing lesson in this research as well: people are hardwired to respond in different ways to the same offer. Many types of product and service offers have these same elements as variables: immediate access to a product, shorter or longer payment terms, down payment or no money down, etc. Many product offers exploit the appeal of instant gratification with later financial consequences - think of those consumer electronics, furniture, and appliance offers that lead with, “No money down, and no payments until next year!”

The Pitt research and other studies show that beyond whatever practical financial considerations exist, different people’s brains will respond in different ways to an offer. From a practical standpoint, a “no money down” offer will appeal to buyers who don’t have enough money to buy a product outright or even make a down payment. But, it might well appeal to a consumer who has the ability to make a down payment but whose brain weighs the immediate use of the product against payments months in the future and finds the deal attractive. Conversely, some consumers with less need for instant gratification and more of an emphasis on future costs may find these deals unattractive, as they assume that financing costs will be hidden in the product’s price. So, to the extent possible, marketers should try to appeal to different purchaser brains. The auto industry is quite good at this with some of their offers - ads often give the buyer a choice between zero percent financing for the whole purchase, immediate cash back, and perhaps an attractive lease rate. Those ads create a sense of immediacy (the deals always have an expiration date), and have options to appeal to a variety of practical financial situations as well as a variety of less-rational analysis of the payment trade-offs.

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Most of us attempt to treat each other fairly, and react negatively if we feel we are treated unfairly. We may even react negatively if we see someone else being treated in an unfair manner. Research shows that this sense of fairness isn’t something we learn in school or from our parents (though undoubtedly those environmental factors shape our perception of what constitutes fair behavior) - other primates also have a developed sense of fairness. Sharon Begley of the Wall Street Journal reports in Animals Seem to Have An Inherent Sense Of Fairness and Justice:

The concept of equity — and fury when it is violated — lies deep in the human psyche. But scientists have long wondered whether it is a product of learning or something innate, from deep in our evolutionary past. That question has taken on added importance as behavioral economists probe why people sometimes make “irrational” decisions, such as rejecting a payoff that would leave them quantitatively better off if a rival unfairly benefits.

Sammy’s reaction, righting the inequity, hints at something even more intriguing: Animals other than humans are not only sensitive to unfairness, but are driven to rectify it. Philosophers have long argued that this ability underlies much of our human morality.

The search for the roots of our sense of equity began, as science often does, with casual observations. Primatologist Frans de Waal of the Yerkes National Primate Research Center, Atlanta, once saw a female chimp, Puist, help her male friend, Luit, chase off a rival. The rival took it out on Puist. Although Puist reached out her hand to Luit in a plea for backup, Luit “did not lift a finger to protect her,” recalls Prof. de Waal in a recent paper. You could imagine the “that’s not fair!” module in her mind turning on. Once the rival left, Puist “turned on Luit, barking furiously. She chased him across the enclosure and pummeled him.”

From a neuromarketing and neuroeconomics point of view, Begley makes a key point in her article:

A sense of fairness underlies irrational choices by humans, too. Economists assume that economic decisions are rational, but in many cases people prefer to gain less in order to punish someone who is behaving unfairly. If a partner proposes a $7/$3 split of $10 offered in an experiment, many people reject it outright, gaining nothing rather than accepting the inequity. “People are willing to give up their own potential gain to block someone else from unfairly getting more than themselves,” says Ms. Brosnan, who points to resistance to globalization and free trade as current examples.

Fairness and Political Ads. We’ve finally completed the months of political advertising leading up to the 2006 election, and at least half of the advertisements I viewed attempted to exploit the viewer’s perception of fair behavior. A common theme for many candidates was to suggest that their opponent had profited from legislation they had sponsored (incumbent candidates), had prospered personally while employees had suffered (candidates who owned or managed businesses), etc. Experiments like the Ultimatum Game show that humans have an expectation of fair behavior that may even overrule rational decision-making. These ads were clearly designed to exploit that expectation and tarnish the image of the targeted candidate. Some of the ads were positive ones (all too few, it seemed!), and even these focused on fairness issues like cooperation, helping constituents in need, etc., rather than on, for example, a planned legislative agenda. Campaign managers may not have known about the monkeys at Yerkes Primate Center, but they certainly knew which buttons to push to get the attention of voters.

Fairness Dissonance. We can be thankful that business marketing is much more genteel than political marketing. Most companies aren’t foolish enough to deliberately make business or marketing decisions that they think will be seen as “unfair” by their customers. Still, perception is everything in marketing, and customers may view an offer the company thought was generous as less than fair. One example of what I call “fairness dissonance” are product rebates that must be mailed in by the consumer to get the prominently advertised price. Many of these offers have been plagued by a variety of issues, including complex terms that require including receipts, forms, labels, etc.; short expiration dates that a busy purchaser might miss; and lengthy delays in mailing the rebate even when a customer jumps through all of the required hoops. The time and effort needed to submit these rebates may be the start of a feeling of unfair treatment by the consumer. Any additional aggravation - confusion as to which bar code must be cut off and mailed, a missing proof of purchase, slow payment, etc., will aggravate that feeling. And any major problem, such as a refusal to pay for a nit-picking reason, will create a major sense of unfair treatment that will likely shape the customer’s feelings about both the retailer and manufacturer.

Manufacturers and resellers like rebate offers for a variety of reasons. They get to advertise a low price, noting in fine print, “after mail-in rebates.” The net amount disbursed is always less than the sum of possible rebates because some consumers don’t bother to mail them in, others forget and miss the deadline, and still others try to collect but somehow fail to meet the requirements. Being able to advertise a $200 discount at a net cost of $100 (just an example, I have no inside data on the percentage of rebates that get redeemed) is a very appealing marketing strategy from a business standpoint, but these companies may be unaware of the the fairness dissonance created by onerous rebate terms.

We’ve seen a movement by some businesses to capitalize on this resentment of mail-in rebates. Staples, the office supply chain, offers a simple rebate redemption method that needs only the number from the receipt; it can be entered online with no need to cut up the packaging, mail original receipts, find an envelope and stamp, etc. I recently saw an ad from Wal-Mart which took an even more direct approach to consumer resentment of complex rebates: their ad noted that the advertised prices were what you actually paid in the store. (What a concept!)

So, when you are choosing business and marketing strategies, remember that fair play isn’t just an abstract idea - a sense of fairness is hard-wired into our brains. Strategies, even good ones, that could be perceived as unfair are risky indeed.

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Neuromarketing and Pricing. Why do people sometimes set prices that are too high, and then stubbornly stick with them despite evidence from the marketplace that the price is indeed wrong? Neuroeconomics research tells us that financial decisions are often evaluated in a way that lets our emotions overrule rational financial analysis, and setting prices turns out to be one more area in which this is true. Kirstin Downey of the Washington Post wrote For Sale, By the Owner’s Ego to show how home sellers have difficulty selling their house when there’s a disconnect between market pricing and the owner’s perception of value.

Little of this research has been applied directly to real estate, but neuroeconomists say the principles would logically apply to housing, too. For example, much work has been done on the concept of “loss aversion,” which shows that people tend to deny reality when something they own, such as stock, declines in value. They will keep holding that stock, confident the price will rise again if they wait long enough. They do the same with their homes, maintaining the asking price even at a level that makes no sense, economists said. Similarly, home sellers become attached to the prices their neighbors received at the top of the market rather than current prices, and they become reluctant to sell unless they get that higher price.

“It’s classic loss aversion,” said Christopher J. Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School in New York. “You could do it, but you don’t want to. You don’t want to realize the loss. It leads to housing markets that don’t function very well. You’ve got a lot of houses on the market and they aren’t selling.” Mayer said that people allow their wishful thinking to overcome realistic perceptions because they don’t want to view themselves as having made a mistake…

David Laibson, who teaches psychology and economics at Harvard University, said a common error people make is believing that homes can’t drop in value below what they paid for them, and, in particular, that they can’t fall below their mortgage amounts. “There seems to be a psychological resistance to taking losses on the sale of a house,” Laibson said. “People think they’ll make money on it. . . . That logic worked for a long time, and now anyone who bet on that logic is being burned.”

Emotional Pricing in Business. Pricing is a key element of the marketing mix for any product or service, and businesses aren’t always as coldly rational as one would expect. Often it IS quite rational, of course. One firm I worked with made machinery parts that were subject to high wear and were viewed as consumables by their customer. Any new product that offered a longer life was priced in direct proportion to that advantage. A product that lasted twice as long was priced twice as high as the base product. Customers didn’t cut their part expense, but they experienced less frequent downtime and saved money on labor. This was a rational and effective pricing strategy that served that firm well.

Another firm I worked with also sold industrial products, in this case a commodity metal product used as a raw material by manufacturing firms. That’s about as unglamorous a market as one can imagine, and the pricing was typical for that sort of commodity: suppliers charged the same delivered price for the product, and competed mainly on service and availability. One executive, though, was armed with data showing that the firm’s products were of marginally higher quality than some of the competitor’s products. In addition, the firm was an industry leader, with more sophisticated technical support and a much higher research and development budget than any competitor. Customers should be willing to pay a tiny premium, he reasoned, considering the additional benefits they received by dealing with the firm. Overruling line executives who cautioned that customers would not pay more, the exec pushed through a small increase. Customers did, in fact, bolt to the competition, and the price boost was quickly rolled back.

This pricing decision was easily as emotional as that made by a homeowner who won’t drop his selling price to market levels. In this case, the executive placed a higher value on aspects of the company that he felt strongly about (better manufacturing technology, higher R&D spending, etc.) than the market did. That’s not much different than a homeowner who cites a list of features (custom woodwork, imported tile floors, etc.) to justify a higher value while buyers are largely oblivious to them.

Business pricing decisions are usually rational, simply because they are often hammered out by groups of managers who use market data to come up with price points. Still, it’s all too easy for business leaders to “fall in love” with their product and assign a higher value to it than justified. It’s also possible for a manager to adopt a risk averse attitude and assign too LOW of a value to an innovative product. Setting a high price point could greatly increase profits, but might also result in low sales - a lower price point might be less profitable, but would produce satisfactory revenues and reduce the risk of failure. And neuroeconomics research tells us that avoiding risk, sometimes to the point of forgoing probable benefits, is highly typical behavior.

There’s no easy way to keep emotions out of pricing, but recognizing that potential for less than rational decision making is a good start.

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Neuroeconomics finished a respectable runner-up in the 2006 Word of the Year contest run by staffers at Webster’s New World College Dictionary. Crackberry, a term that reflects the addicitive nature of PDA-based messaging and e-mail, is used to refer to both the PDAs and their users. The press release listed two other runner-up words: netroots (a grassroots movement on the Internet that is employed in political and business marketing) and carbon footprint (the effect one’s daily activities — like washing clothes or driving to work — have on the environment). They describe neuroeconomics as, “an emerging field studying the emotions activated in financial decisions.”

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I’m still catching up on the reading I missed during my extended trip (and posting hiatus) a few weeks ago, and one of the more interesting things I’ve run across is an article in the UK’s Times Online, Why say no to free money? It’s neuro-economics, stupid. The article describes an unusual variation on the “Ultimatum Game”, an experiment in which the subject and another individual (who remains anonymous) share an amount of money (say, $20). The other individual determines the amount he will share (e.g., he will keep $14 and give the subject $6), and the subject can accept that share, or reject it; if he rejects it, neither individual receives any money. Logically, any non-zero share of the money is better than nothing, and the subject would be acting rationally to accept even a low share. In fact, experimenters have found that the lower the share goes, the more likely the subject is to consider the split “unfair” and reject the offer. In this example, research would predict that at offers below $5, four out of five subjects would reject the offer, gaining no money but preventing the other person from profiting “unfairly”.

The novel approach to the Ultimatum Game was tested by researchers Ernst Fehr and Daria Knoch of the University of Zurich, who “used a technique called transcranial magnetic stimulation to tire out and thus temporarily suppress a part of the brain called the dorsolateral prefrontal cortex (DLPFC). Functional magnetic resonance imaging scans show that this is particularly active when people play the ultimatum game.” The study showed that when the DLPFC was taken out of the process by the magnetic stimulation procedure, the subjects began to behave in a fashion that one might consider either selfish or rational: they accepted the low offers, even though they were still able to perceive them as unfair.

The study provides a key neuroeconomics insight:

The results tend to support a very different theory of human behaviour from that favoured by classical economists. Our decisions seem not to be determined mainly by reason, but by a continuous battle between two sides of our psyches that are rooted in different mental circuits. One of these is rational, controlled by the cortex — the cauliflower-like outer section of the brain where reasoning takes place, which is uniquely developed in humans. The other, however, is emotional, governed by the limbic system — the deeper-lying brain structures such as the amygdala that are much closer in character to the brains of other mammals.

In past posts about neuroeconomics, we’ve discussed the balancing act the brain performs when making decisions - it seems to weigh the potentials of different alternatives in arriving at a decision. The new study provides clear evidence of this by showing that one can alter that balancing process artificially.

It’s intriguing to think that we could transform people into rational decision-makers so easily, though having a population of insensitive selfish individuals walking around doesn’t sound like a particularly appealing alternative to normal human irrationality. And while transcranial magnetic stimulation isn’t going to catch on as a commercial procedure, the insights provided by this experiment are indeed significant. If nothing else, it’s a reminder that under normal conditions, emotions often overrule rational choices. George Loewenstein, Professor of Economics and Psychology at Carnegie Mellon University, makes the point succinctly:

The new science of neuroeconomics is lending support to a very ancient view of human behaviour. That is the idea that there is a conflict and interaction between passion, and reason and self-interest.

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One of the most successful sectors in the travel industry has been cruising. Megalines like Carnival and others are building ever-bigger ships to handle the increased traffic and offer more amenities. There’s no doubt that a good part of the success of the cruise industry is due to offering a product that people want: a low-stress way to visit multiple locations (no packing, unpacking, hotel check-ins, etc.) at a price that is often a better value than land-based hotels and restaurants. One additional key to the success of the cruise business may lie in neuroeconomics.

A few days ago, we talked about how extended warranties have turned into a huge industry in Warranties, Neuromarketing, and Neuroeconomics, despite the fact that the cost of the additional protection often exceeds the expected benefit by a wide margin. The continued success in the extended warranty business may be attributable in part to the way the brain processes risk analysis - a certain outcome of lower value may be chosen over a higher value but variable outcome due to processing the choice in the amygdala rather than the prefrontal cortex (see Why Negative Ads Work: Framing, Emotions, and Irrational Decisions and other posts for more on emotional decision making.) While we are in no way suggesting that selling cruises in any way resembles pushing dubious warranty extensions at the point of sale in an electronics store, there is a bit of similarity in one area: risk avoidance.

Cruises are certainly a low-risk way to visit a series of destinations. First, the availability and cost of lodging is never in doubt - there’s no last minute scramble for a wildly overpriced hotel room, or discovering that the restaurant recommended by the concierge is a budget-buster. When cruising, lodging and meals are paid for up front. In addition, the food is always “free” - the cruiser can select another dessert, hunt for a midnight snack, scarf up a slice of pizza by the pool… all at no additional cost. In addition, the quality of the food is predictable; while perception of cruise food quality may depend one’s gastronomic experience and inclinations, there’s little doubt that the food will be edible and will be replaced quickly if there’s any problem. No risk, no worry.

When they take passengers to unfamiliar ports, cruise ships may minimize perceived risk in other ways - they offer a high level of personal security, and serve as a haven if the particular destination is unpleasant, the weather is problematic, etc. Traveling by ship minimizes the risks of trying to cope in an unfamiliar place where an unfamiliar language is spoken, where merchants may or may not be entirely honest, where the police and legal system may not be bastions of incorruptibility, and so on. Again, the floating world of the cruise ship minimizes perceived risk.

There are a few important cautions in this analysis. First, the important factor is perceived risk. For instance, a few individuals are now fearful of air travel because of terrorists; the fact that air travel remains far safer than auto travel doesn’t diminish the perception of risk for those individuals. Similarly, the fact that a port destination is filled with friendly, honest people who tend to have reasonable English skills may not diminish the concern of some travelers that they would be unable to communicate and would probably be taken advantage of if they were on their own.

Second, not everyone tries to minimize all risks. Cruise vacations may not appeal to some travelers specifically because they provide so much insulation from the local environment. These vacationers may prefer the uncertainty of environments where they can travel on their own, with no fixed schedule to constrain them. Could they have a problem finding a hotel room somewhere? Perhaps… but the odds of success are good, and the downside isn’t perceived to be that serious.

With these caveats, from a neuromarketing standpoint we see continued smooth sailing for the cruise industry. As the world seems to get riskier, the potential for exploiting the emotional aspect of risk minimization will increase.

The cruise lines even do a bit of neuromarketing on the ships. On my last cruise, passengers were offered unlimited soft drinks (bar service is one of the few extra expenses on a cruise) for a payment that worked out to about $4 per day. At a per-drink cost of about $1.50, the offer makes sense for the passenger if he averages three or more sodas per day. I was ready to sign up, but after doing a quick calculation I concluded that due to the nature of the cruise I’d be unlikely to “win” on the deal. It was a port-intensive trip, meaning early-morning departures and late returns - I’m not a Coke-for-breakfast person, and it seemed unlikely that (unless I really worked at justifying the expense!) I’d consume that many soft drinks. Even so, the pull of this “no worry, no extra cost” approach was strong - in the end, I suppose, my prefrontal cortex overruled my amygdala. I purchased a few soft drinks when I wanted to, and spent a tiny fraction of what I would have spent on the “all you can drink” deal. I did see many, many passenger take advantage of the offer - some probably were heavy soft drink consumers who knew they’d benefit over the course of the cruise. Some, perhaps, were the same people who buy the $20 extended warranty for the $80 cordless phone.

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There’s a neuromarketing lesson in extended warranties. If you have purchased any kind of electronic product in the last few years, you were almost certainly offered an opportunity to extend the product’s warranty. Despite the fact that these are rarely great deals, many people purchase them. Often, the cost of the warranty is a significant percentage of the price of the product itself. Most of the electronic products one finds today have a couple of characteristics - they tend to be reliable, and, when they do fail, they are more or less unrepairable. (A few high-ticket items, like computers, large screen televisions, etc., may not fall into the disposable category.) So why would someone buy a cordless phone for $60 and spend another $20 to extend its warranty for a few years? The answer may lie in neuroeconomics.

An article in the Washington Post, Unwarranted: In Most Cases, Extended Product Service Plans Don’t Benefit Consumers, goes into some detail on the unattractive nature of most extended warranties. They note that these products tend to be primarily profit-boosters for the retail channel, but that consumers snap them up anyway. One explanation for this apparently irrational behavior surfaces in the article:

The instinct to protect what we have and forgo the obvious benefits of another course is one long studied by behavioral economists. Kevin McCabe, an economist and director of the Center for the Study of Neuroeconomics at George Mason University, said that even without knowing from experience that a product will break, many people insure it anyway.

“I suspect that this behavior is in part due to our sensitivity to uncertainty in general,” he said.

Past discussion here and elsewhere has shown that people will often avoid risk even if the riskier approach is more “profitable” - the brain seems to process the risk information in an emotional rather than a calculating, rational manner. The popularity of extended warranties on throwaway products seems to confirm this - these warranties are a real-world experiment, many orders of magnitude larger than the typical fMRI study. It’s encouraging that the small-scale brain scan studies are consistent with observed behavior of large groups in the real world.

(It’s worth noting that the success of extended warranties isn’t due solely to risk averse behavior - these offers also fall into the general category of post-purchase accessories that enable retailers to boost margins. By offering the primary product at an attractive price, the retailer can get the consumer to decide to purchase it. Then, by offering high-margin accessories at the point when the consumer isn’t inclined to keep shopping at other outlets, the retailer can boost the margin of the total purchase. I’m a veteran of the computer direct marketing business, and for years it was common to see printers selling a few dollars over cost, with much of the margin on the sale coming from the required printer cable. Shipping and handling charges are often similar margin boosters.)

So how should marketers use this knowledge of irrational risk avoidance by consumers? Well, one way would be to keep pushing extended warranties at the point of sale, and pricing them as aggressively as possible. Personally, I don’t like that approach - a firm that sells something of dubious value to consumers may find that practice to be one step in the direction of greater loss of integrity. Rather, savvy marketers should identify where consumers see risk in their product or service, and work to craft a total product package that addresses these risks better than the competition.

Lexus and Risk Minimization. One great example of risk minimization was Lexus in its early days. While it crafted a premium image for itself, and developed a product of high quality, Lexus also addressed those areas of potential risk anticipated by its buyers. Lexus offered a strong warranty like other auto makers, but went further by offering free loaner vehicles and even, in some cases, picking up the vehicle at the owner’s home or office and delivering the loaner. This approach eliminated unpleasant thoughts in the buyer’s mind about having to drive to the dealer, perhaps at an inconvenient time, wait in line to be “written up”, etc. Lexus successfully established itself as a true premium brand, in part due to their high level of service.

In some ways, the Lexus loaner/pickup/delivery offer is similar to the extended warranty issue. The reality is that with these vehicles, the need for service isn’t frequent; the true consumer benefits of the program aren’t huge (barring some unusual service needs). But, the complete warranty and service offering by Lexus in its early years eliminated virtually all service-related risk in the minds of its buyers, and the long-term results speak for themselves.

So, identify the aspects of your product or service that might be perceived as risky by potential customers, and address them in a forthright way - like Lexus, you may end up with high margins, high growth, and long-term success.

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How can neuroscience inform marketing? One example comes from the increasingly hot field of neuroeconomics: a practice called asymmetric paternalism. In New Yorker writer John Cassidy’s superb neuroeconomics article, Mind Games: What neuroscience tells us about money and the brain, the practice is described as “a new political philosophy based on the idea of saving people from the vagaries of their limbic regions.” The specific example of asymmetric paternalism provided in the story is redesigning corporate retirement plan enrollment procedures based on brain scan-based studies of how individuals react to risk.

The article describes work by neuroscientists at Harvard and Princeton:

they used an MRI machine to scan a group of student volunteers who were asked to choose between receiving a fifteen-dollar Amazon.com gift voucher today and receiving a twenty-dollar Amazon.com gift voucher in two weeks or a month.

The scans showed that both gift options triggered activity in the lateral prefrontal cortex, but that the immediate option also caused disproportionate activity in the limbic areas. Moreover, the greater the activity in the limbic areas the more likely the students were to choose the voucher that was immediately available and less valuable.

Building on these findings, the researchers suggested that to get people to save, you need a “pre-commitment” device. Enrolling in a 401K retirement plan in which the employer matches employee contributions should be a no-brainer (sorry!) for eligible employees, since they are basically getting free money with little or no risk; despite this, firms often find that many employees do not enroll. A pre-commitment device in this case would be automatic enrollment with the ability to opt out. And, indeed, when this approach is taken enrollments are significantly higher.

A skeptic might say, “Big deal… when won’t an opt-out approach work better than one where the individual has to opt in?” Nevertheless, by exposing the ways people evaluate choices, sometimes in an irrational but ultimately predictable nature, neuroscience can help us develop better approaches to offering these choices. The article notes that warning labels on cigarettes are a form of asymmetric paternalism; neuroscientists suggest steps like warning labels on lottery tickets and mandatory “cooling off” periods after major purchases to avoid bad decisions driven by emotions.

What does this have to do with marketing? Quite a lot. Forget the unappealing and vaguely Orwellian name, asymmetric paternalism. Think, instead, about efficient and effective marketing. A financial services vendor has to deal with similar issues to those of the company offering a 401k plan, and can benefit from understanding how customers think about risk, and about present value vs. future value.

A broader spectrum of firms offer “deals” that involve risk and/or time. I haven’t seen any neuromarketing studies on the topic, but I’ve always found “scratch off” discount coupons interesting. “Save 20%, 30%, or even 50% on your purchase - when you check out, just scratch here to reveal your discount!” These sales are common enough that one presumes they do work better than a standard discount, at least in some situations. Rational cynic that I am, I always assume that my coupon (and just about everyone else’s) has the lowest value on it, but I’m sure there’s part of my limbic region whispering, “Hey, it COULD be 50%!” In a similar vein, we often see stores award gift certificates with a purchase - these certificates can be used only a week or two later. This has some benefits for the store, as it greatly increases the probability of a return visit, and there’s no doubt that some percentage of the certificates will never be used at all.

The research mentioned above, though, shows that consumers DO find a major difference between immediate money and future money (even when the future is only a few weeks away) and make seemingly irrational decisions in favor of the immediate reward. A store offering time-restricted gift certificates to get customers to shop right away might find that a smaller but immediate reward gets more customers into the store.

Neuroeconomics is still in its early stages, but marketers need to pay attention to this research. The types of decison making studied by neuroeconomists are often the same ones of interest to marketers. Some of it may be considered neuromarketing, some is common sense, and some is old-fashioned test marketing… but one can’t ignore the area.

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The nearly simultaneous release of a neuromarketing article, Brain Sells, in TIME Europe, and a neuroeconomics article, Mind Games, in the New Yorker, has generated a considerable amount of blog activity. (See our commentary, TIME Europe Bullish on Neuromarketing and Mind Games: New Yorker on Neuroeconomics.) Much of this activity has been from bloggers other than the “usual suspects” who write often on these topics. The chart to the left shows Technorati’s measure of posting activity for the combined fields; that’s a static snapshot at the time of this post - you can also see a constantly updating chart of posting on Neuromarketing in Blogs.

In general, perhaps because of its thorough coverage of the topic, not to mention US distribution, John Cassidy’s New Yorker article seems to have generate more attention. The Bellows blog thought that Cassidy’s enthusiasm for explaining decision making with neuroscience went a bit too far, commenting, “Life is incredibly complex, and to doubt our decision making capabilities based on our performance in financial markets seems a little…unimaginative.” Two Newtons notes simply that Cassidy’s article is being posted on by “90% of the blogs in the universe” - I guess we’ll have to watch the live Technorati chart to judge that claim. Greg Mankiw’s Blog comments on fellow Harvard prof David Laibson, “But maybe Laibson is right that we need to redefine ‘microfoundations’ as starting at the neuron and building up from there.” Victoria Pynchon of the Settle it Now blog calls neuroeconomics “heady stuff” (and then disclaims any punning intention!).

On the neuromarketing front, the Yuticha blog bullishly posts, “Neuro Marketing comes of age,” citing the TIME article as one indicator of the maturation of the field.

It will be interesting to see whether this burst of neuro-interest continues…

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The recent article, Brain Sells, in the Europe edition of TIME, comments that neuromarketing is “essentially a subgenre of another emerging discipline, neuroeconomics. ” When I scanned that line the first time, I saw a fair amount of truth in that. After all, neuroeconomics covers the general field of the neuroscience of decision-making, while neuromarketing is focused on a rather specific set of behaviors by consumers and business decision-makers.

A little while later, though, I was reading an interesting article on the neuroscience of attention, i.e., what “paying attention” means from a brain activity standpoint. In daily life, people are presented with lots of inputs - people talking to them, broadcast media, things happening around them, etc. , and only a small portion of that is actively processed by the brain. (We’ll cover some of this work in another post.) Clearly, attention is a key part of the marketer’s task; if the message is lost in the cacophony of background noise, the decision-making process will never come into play at all.

So, the neuroscience of attention would clearly be of interest to the neuromarketer, but wouldn’t appear to fall under the discipline of neuroeconomics at all. There are probably other examples like this, too. This leads me to conclude that neuromarketing is less a subset of neuroeconomics than a sibling discipline with a lot of overlap in some areas.

But, enough semantic hair-splitting. I thought Grose’s TIME article did a good job of presenting a brief, balanced view of how brain science may be applied to marketing, and I’m more than willing to let this picky point slide.

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