Monday, November 5, 2007

Advertising Does Your Head In

Not literally, of course. But recent studies of the emotional stimulation of the brain and subsequent decision making are hugely important for marketers and advertisers.

There is a growing body of literature on brain research that straddles pyschology and economics, promising to open up a new chapter in our understanding of advertising. Indeed, a new type of marketing professional - the neuromarketer - is leading the charge.

Some of the most interesting research, to my mind, is that into game theory and decision making. A recent paper on the current state of neuroscience and neuroeconomics refers to the Ultimatum Game (UG):

In the UG, two players must divide a sum of money, with the proposer specifying this division. The responder has the option of accepting or rejecting the offer. If the offer is accepted, the sum is divided as proposed. If it is rejected, neither player receives anything. If people are motivated purely by self-interest, the responder should accept any offer and, knowing this, the proposer will offer the smallest nonzero amount. However, this Nash equilibrium prediction is at odds with observed behavior, and the modal offer is a 50/50 split. Further, low offers of less than 20% of the total amount are rejected about half of the time. Thus, people's choices in the UG do not conform to a model in which decisions are driven by financial self-interest, and neuroscience has begun to offer clues as to the mechanisms underlying these decisions.
In other words: people don't behave the way economists predict - admittedly more of a surprise to economists than to marketers ...

Experiments like the Ultimatum Game give us insights into key marketing issues such as pricing. Markets are based on voluntary exchanges between consenting parties - and both expect to get something of value from the exchange. The Ultimatum Game (and similar experiments) has lessons for marketers when it comes to pricing. For example: sometimes what you think is a great deal for the consumer is to their eyes a bad deal (and you need to go further); on the other hand, sometimes what you offer is a great deal (and maybe you don't need to go as far as you propose).

Or as Warren Buffett once put it (rather more succinctly):

Price is what you pay, value is what you get.


3 comments:

  1. As a marketer I can say 'told you so'. The growing area of neuromarketing is indeed fascinating. If I may be permitted, can I refer your readers to an interview I conducted with one of the authorities in this area, Dan Hill, where he contends that the vast majority of consumer decision making is non-rational. You can hear the link here

    ReplyDelete
  2. As a marketer I can say 'told you so'. The growing area of neuromarketing is indeed fascinating. If I may be permitted, can I refer your readers to an interview I conducted with one of the authorities in this area, Dan Hill, where he contends that the vast majority of consumer decision making is non-rational. You can hear the interview here

    ReplyDelete
  3. Thanks for the link to Dan Hill Alex, I hadn't come across him but what I've just learned of his work is exactly the kind of innovative research that makes the new frontiers in marketing practice and insight so interesting.

    ReplyDelete

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