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Behavioural Economics
The study of psychology as it relates to the economic decision making processes of individuals and institutions. The two most important questions in this field are:

Are economists' assumptions of utility or profit maximization good approximations of

real people's behavior?

Do individuals maximize subjective expected utility?

Behavioral economics explores why people sometimes make irrational decisions, and why and how their behavior does not follow the predictions of economic models.

Behavioural Models Economic model emphasizes that every human being is a rational being and will take only
rational decisions based on their utility.

Learning Model is based on the theory that every individual has both internal and external
drives and needs to satisfy them. For example, a person feels hungry and goes towards food because he has learnt over time that food satisfies that need of hunger.

Psychological Model is based on the Freudian theory of Id (Instincts and drives), Ego, and
Super ego.

Sociological Model is based on the rationale that man is a social being and his thoughts and
thereby, his behavior is affected by the people and environment around him.

Factors Influencing Customer Behaviour

Insights from Behavioural Economics

Traditional economics is based on the assumption that people act in a completely rational manner. It is assumed that people have access to all information and they make rational decisions based on this information. However, it is lately being observed that consumers act in contrast to rationality and therefore, it is necessary to study consumer behavior and how the behavior affects their purchase of a good\service. We have discussed below some of the insights from behavioural economics which could be useful for firms in the financial services sector.

Loss Aversion
People dislike losing something twice as much as they like gaining it. People are more sensitive to losses compared to gains of a similar magnitude. This can be seen in the figure below. In the figure, the individual is at the reference point. The individual requires a smaller amount of gain compared to a larger amount of loss for him to shift from his current position.
Application: People fail to sell stocks which have fallen although there is a chance of a further fall in prices, but immediately sell a stock whose price has risen, although there is a good chance of a further rise.

The disposition effect and the endowment effect are a corollary to the theory of loss aversion.

Disposition Effect It is the tendency of investors to continue holding assets that have dropped in value and to sell assets that have increased in value.

Endowment Effect
It is the tendency of individuals to place a higher price or value on an object if they own it than if they do not. We generally demand more money to part with an object that we already own than what even we would have actually paid. (Example: while a student was willing to sell his pen at Rs.5, a majority of his classmates were willing to pay only amounts less than Rs.3)

Status Quo Bias

The term was given by Samuelson and Zeckhauser. It refers to the tendency of people to stick with current choices and patterns of behaviour. Example: A University added some new options to its employment-based Healthcare plan. The faculty who joined after the introduction of these options took advantage of the options. However, faculty previously employed utilised the new options much lesser. Applications: Marketing managers could use opt outs to sell insurance where the insured person has to intentionally opt to stop paying the premiums. The National Employment Savings Trust (NEST) plans to introduce automatic enrolment into personal pension plans in the US. Firms could offer a free subscription for a fixed period for a particular service, which automatically turns into a full payment contract unless the customer actively cancels the subscription.

Default Option
It is an extension of the status-quo bias which refers to the tendency of people to choose the default option provided as people do not like to make special efforts to make their own decisions.

Application: Annual car insurance policies are automatically renewed year after year unless there is a correspondence from the client to the contrary.

Framing Effects
The choice of alternatives also depends on the way the choice is presented, or framed. People have a preference for positive frames rather than negative frames, an effect which follows on from loss aversion. For example, 82% of cancer patients preferred surgery over radio therapy when surgery was described as having a 90% survival rate. On the other hand, only 56% preferred surgery over radio therapy when it was described as having a 10% mortality rate. Although both groups of cancer patients were given the same information, it can be seen that there was strong bias towards the positive frame. Application: Choice Architecture: since consumer choice is highly dependent on how the choices are presented, or framed, and that the same information can elicit a different response depending on the way it is framed, marketers must be aware of the questions they ask while conducting market surveys. Mutual Fund companies present past performance statistics to attract new customers and the new customers base their choice of funds based on such statistics.

Anchoring Effect
Anchoring effect is a type of framing effect where the evaluation of options is affected by an original starting value which already exists (or anchor). Application: If potential investors are given 3 alternative funds labeled conservative, moderate and aggressive from which they have to choose one for their investment. The investors are told that the percentage invested in risky assets is 0%, 40% and 80% respectively in one portfolio and 40%, 70% and 100% respectively in another portfolio. Since people have a tendency to choose the middle option when forced to select one fund, investors will end up with a different risk exposure depending on how the choice is framed.

Hyperbolic Discounting and Procrastination

The decision maker makes value comparisons between immediate and delayed consequences and the decision is influenced by his time preference. The longer the delay, the larger the IDR the investor assumes for the future outcome. IDR also declines with the size of the outcome. Simply put, people have a tendency to prefer short-term gratification over longer term returns. Effects of hyperbolic discounting may be exaggerated by our tendency to procrastinate. Application: The Pension Commission in the USA had this to say about the tendency of people in this aspect- when they said that an investor would be willing to forgo some current expenditure now for the prospect of enjoying a more comfortable retirement in 20 years, however that same individual would be less willing to sacrifice current consumption in the short term and is therefore likely to defer starting to save for a pension until next year.

Mental Accounting

Mental accounting occurs when sums of money are treated and valued differently depending on where they came from and/or where they are kept. (Fungible). Application: There was a particular store where people came to buy a lamp for 50. The customers were suggested to travel to a different branch 5 minutes to buy the same lamp at the other location for a special sale price of25, thereby saving 25. There were other people coming to the store to buy a dinner table set for 1500. They were also suggested to travel to a location 5 minutes away to purchase the same dinner table for a special price of 1475.In both cases, the customers stood to gain 25 for 5 minutes of time. However, in the former case, the 25 is compared to 50, whereas in the latter case, it is compared to 1500. 25 should have been equally valued regardless of the source. A study revealed that the taxi drivers in New York work shorter hours on good days and longer hours on bad days. This contradicts traditional economic theory, which says that they should work longer hours on good days so as to maximize their monthly income. The explanation is that these drivers have a separate mental account for each day and set daily earning targets. Each day, they stop working once their target is met, which happens quicker on good days and vice versa.

Availability Effect and Salience.

People judge the likelihood of an outcome occurring by how easily the outcome can be brought to mind or imagined. People overestimate the likelihood of outcomes that are particularly memorable, highly emotional or have happened recently. Example: More insurance related to natural disasters in the aftermath of an earthquake. It was also observed that people invest too much money in the stock market when in boom and too little when it has been on the decline.

People have a natural tendency to be overconfident and a lot of research has been done to prove this psychological bias. Peoples confidence greatly surpasses the accuracy of their choices. Example: People rated their own accuracy in prediction of market stocks at 68% while the actual accuracy was only 47%. Consumers opt to forgo the opportunity to insure themselves against unforeseen circumstances. Investors choose actively managed funds rather than passive index trackers

Trust has an important influence on behavior. The more an individual trusts another individual or organization, the less it is necessary to check information and impose controls. As a result, trust acts as a lubricant which greatly helps to reduce the cost of transacting. Example: Voluntary and community organizations may be better placed to deliver financial services

Marketing Strategies employed by some companies in the Financial Services Industry

Banco Azteca operates in Mexico, Panama, Guatemala, Honduras, Peru and Brazil and is already among the largest banks in Mexico in terms of coverage. In 2001, Grupo Elektra, a retail group with years of experience providing in-store credit, saw the need for a financial services unit especially for the lower income group who were largely unbanked in the country. In August of that year it applied for a license to open Banco Azteca and fill this gap. The clarity and experience of the management helped them address the needs of their target segment and this clearly showed in their marketing strategies Firstly the management understood the psychological needs to feel secure and welcomed and thefore for this they used wide banner ads in their already existing retail outlets emphasizing on the safety aspect at the same time giving a warm welcoming message. Next given the target population was largely in the suburbs or interior areas they deployed agents on motorbikes who reached out to the customers at their location where they felt at home. Due to all this Banco Azteca was within a few years able to mop up savings of around $120bn from this segment and become one of the largest banks in their coverage.

Market Analysis: they clearly analysed the size and the trends in the Mexican market and were thus able to narrow down on the segment and target the population that was unbanked.

Internal Analysis: They utilized their agents (resources) to reach out the customers on bikes and also leveraged on their store name. Competitor Analysis: They looked into the existing players in the field and saw the gap in the lower section and thus were able to differentiate their product.


Sun Trust Bank is an American bank headquartered at Atlanta. SunTrust operates 1,659 bank branches and 2,899 ATMs across Southern states, including Alabama, Arkansas, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia, and Washington, D.C

The bank was greatly hit during the recession and a lot of efforts were put into reinventing themselves by the top management. The Bank redefined the ideas it stood for and decided to reach out to the customers and regain their trust through their marketing. They timed their message to match shifting consumer attitudes to create a perfect opportunity for the brand. Sun Trust went in for an incredible amount of consumer research, such as 1,000 client surveys a night, co-creation sessions with clients, brand trackers, etc. During the recession, the insights they heard from people were that they wanted to get back to living a life grounded in principles, priorities, and values versus stuff. They wanted to get real with what really mattered, having a solid life, getting back to basics, being frugal, focusing on savings, and living within their means. Sun Trust captured this consumer shift really well with their campaign, Live Solid. Bank Solid. It was right for the times.

Post-recession, they started to hear shifts from their clients, they wanted to move forward. They wanted to start making financial decisions again and move out of the holding patterns they were in during the recession. They were ready to start taking steps, and they were asking for a banking partner that could help them. Sun Trust asked clients what this would feel like. They said things like: I want to feel that I can actually shine, succeed, and be my best. This was inspiration for Sun Trusts client-purpose Lighting the way to financial well-being and their next How can we help you shine today? campaigns which became very famous.

The results were great and customer began coming back which showed in statistics like the Household acquisition rate going up by 20 percent.

3. Skipton Financial Services:

The management at SFS felt that the financial advisory market was weighed down by poor customer service and decided to do something about this. In 2009 SFS launched Monitored Informed Investing (MII), an investment proposition that was aimed at client service as the heart of every step. The overall aim of MII is to deliver clients above-average returns over the medium to longer term. It also makes promises on customer services, which include monitoring of funds, regular communications of performance, fund switch offers and ISA transfers.

One of the key promises is to keep clients informed on their individual fund performance. They receive comprehensive, personalized quarterly and annual reports providing updates.

Another promise is that if an MII Core Fund recommended by SFS delivers below-average returns for a certain length of time, SFS will rebate the ongoing charges for as long as poor performance continues or clients are offered a fund switch. The product was developed through extensive market research, speaking to existing SFS clients and the organizations financial advisers, who have a clear view of what their clients want. Competitors were also closely examined to find out what they do well and what they lack, so SFS could discover how the proposition could become a market leader. Between the launch of MII in 2009 and the end of 2011, the scheme vastly exceeded targets, attracting more than 21,000 clients and 1.23bn of investment. More than 90% of clients rate the service as very good or excellent and 93% would recommend SFS to other people

Principles of Marketing by Philip Kotler, Gary Armstrong, Prafulla Y. Agnihotri, Ehsan ul Haque. Behavioural Economics and the Financial Services Consumer: A Review by Swee
Hoon Chuah, James Devlin.

www.cmo.cmo.com www.marketingmagazine.co.uk http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions.html