Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
Preface
The idea is not new. In fact, it is rather old. Probably
because it makes perfect sense: to really understand the
mental processes underlying economic behavior both
psychologists and economists are needed. What is relatively
special, however, is that at Tilburg University, psychologists
and economists had the wisdom to actually do something
with this idea and make it an academic reality. Tilburg
University has always been a place where psychologists and
economists are in close contact with each other and where
they actually collaborate on empirical research projects.
Recently, this collaboration has been formalized in a multidisciplinary research institute. ‘Tiber’ has become the name
of both a meandering river in Italy and the Tilburg Institute
for Behavioral Economics Research in the Netherlands.
Tiber brings together economists, psychologists, and
marketing researchers to cooperate intensively in furthering
our understanding of the psychology of economic behavior.
Tiber aims to contribute to the development of new insights
into the psychological determinants of economic behavior
by combining the best practices from economics and social
psychology. Economists have formulated strong and
mathematically precise models for describing, explaining,
and predicting economic behavior. However, the
psychological basis of these models is not always wellresearched. Insights from psychological theory may help
to improve these models and to better understand how
individuals will behave when they make economic choices
and decisions. Thus, Tiber hopes not only to contribute
to the building of new theories of human economic
behavior, but also to contribute to the development of
new methodologies to study this behavior. This issue
of Tilburg Research hopefully gives an idea of how we,
Tiberians, do this.
Please enjoy.
Diederik A. Stapel
Director of Tiber
4
16
23
26
FEATURES
10
Tilburg Research
Tilburg Research is a newsletter for special-interest groups about research at Tilburg University,
located in the southern Netherlands. Tilburg
University specialises in the Social Sciences and
the Humanities.
(page 26), Gerard Til/Hollandse Hoogte (page
31), Tim Dirven (page 36). Tiber members
inside: Ton Toemen, Ben Bergmans.
Translation Paul Jones (The Word Co.)
Layout and graphic design Beelenkamp
Ontwerpers, Tilburg
Printer Drukkerij Groels, Tilburg
23
‘The economic assumption of the selfish
individual has become second best’
Interview with Ernst Fehr
26
How does the mind work?
The value of basic psychology by Jean Vroomen
30
‘Reason is not much different from
postponed emotions’
Interview with Nico Frijda
Colophon
Publisher Office of Public and External Affairs,
Tilburg University
Authors Marion de Boo, Irene Herbers,
Rik Oerlemans, Jan Potters, Corine Schouten,
Marga van Zundert
Editor Irene Herbers, Diederik Stapel
Photographs Tim Smith (cover), Xavier Cervera
(page 4), ANP/EPA (page 11), Ilja Vreman (page
12), George Georgiou (page 16), Qilai Shen
(page 23), Tom Haller (page 25), Jez Coulson
‘Psychologists can influence society
only by influencing economists’
Interview with Daniel Kahneman
36
Big shiny things
What brands should be like - according to
Giep Franzen
Columns
9
21
39
Barry Schwartz on choice distress
Alain de Botton on status anxiety
Fred van Raaij on ‘Fire and Water’
ON TIBER
4
16
19
20
Understanding the psychology of
economic behavior
Can consumers handle more choice?
A fruitful cooperation
Juggling with our rational and
emotional self
Tiber researchers
Throughout this issue
Tilburg Research - 2008, volume 5, number 3
Tiber director Diederik Stapel:
Understanding the psychology
of economic behavior
Why are more computers bought on a sunny day? How do we prevent
young women wanting to become as slim as those portrayed in
advertisements? What are the psychological motives underlying the
buying behavior of consumers? And why don’t people grasp an
opportunity if they’ve previously missed out on a bigger one? These
are the sorts of questions addressed by research carried out at the
Tilburg Institute for Behavioral Economics Research (Tiber).
Tilburg Research - 2008, volume 5, number 3
Tiber was established in 2000 to
a PhD student, Stapel investigates
merge the fields of economics, marthe concept of cognitive consistency
keting, and psychology. The research- as a motive for human behavior.
ers investigate the psychological
“Why do people do what they do?
processes that underlie individual
Not simply to make themselves feel
choices and economic decisions.
good, but also because of a need for
“Preferably via relevant, carefully con- structure and predictability. This
ducted, and moreover, provocative,
need for consistency appears to be
exciting research”, says the research
a very important motive. People
director, Professor Diederik Stapel.
don’t like to be surprised. In fact,
“Those are the criteria on which we
our experiments have shown that
evaluate all of our projects. An internice things are not always initially
disciplinary approach offers, furappreciated if they were not expected.
thermore, much added value.” Tiber
For instance, consumers prefer to
has three strands: Marketing (e.g.,
buy herbal tea in the knowledge that
market research, consumer behavit’s made using a ‘traditional recipe’
ior, advertising); Economics (e.g.,
and are less taken by claims that the
solidarity, social preferences, social
product is ‘totally new’. Consumers
dilemmas); and Social Psychology
are certainly open for improved and
(e.g., decision-making). Each element innovative products but not if they
has its own co-director who is also
hadn’t expected them. This is an
a professor. Diederik Stapel himself
important conclusion for marketers.
studied psychology and communication science. In each case, he was
The Tilburg tradition
awarded ‘cum laude’, which is the
Tiber is rooted in the Tilburg tradimost prestigious graduate accolade.
tion. “Our university originates from
Stapel is now a professor in consumer an economics school as is evidenced
science at Tilburg University and
by the fact that the economics
works as an editor for various top
department resides in the highest
journals in his area of expertise. He’s building on the campus”, says Stapel
full of enthusiasm. “We’re a virtual
somewhat tongue-in-cheek. Other
institution but our specialisms really
disciplines like law, social and behavinteract and we work on research
ioral sciences are also very imporprojects together. We’re open to each
tant for economic problems and
other’s ideas. Besides our full-time
issues. Tilburg was one of the first
staff, PhD students and post-docuniversities in the world where you
toral researchers (who are paid by
could study economical psychology.
Tiber), other top researchers seek
The group of Economic Psychology
fellowships within the Tiber network
at Tilburg remains unique in
because they are interested in the
The Netherlands. Stapel: “In the
past, economists were not always
work we do and in the informal and
cooperative atmosphere of our group. enthusiastic about the possibility of
psychology entering their domain.
Together with Marret Noordewier,
They were satisfied with their own
models of the market to explain
homo economicus. Economists like
to portray people straightforwardly
as beings for whom rationality is
central and where maximizing utility
is a key concern. We pick up every
penny that’s thrown on the floor.
Everything revolves around money
or better, utility. Maximizing utility
is our core motive according to classic economists. But philosophers
and psychologists continue to argue
that the economic view on human
behavior is somewhat incomplete.
People want to maximize utility in
the most efficient way, yes, but that is
not only or always what drives their
behavior. People, for example, have
emotions. We are often irrational and
do not always process all the available information concerning supply
and demand. But as psychologists
continue to penetrate the domain of
economics and improve their understanding of the jargon that goes with
it, then slowly psychology’s insights
may be absorbed.”
Nowadays, for example, both
psychologists and economists, point
to the importance of understanding
issues like solidarity, social preferences and social dilemmas, the urge
to do something good and meaningful for society, and the benefits and
advantages of doubt (sometimes
people prefer uncertainty and ignorance over certainty and perfect
knowledge). These are just a few
illustrations of factors that could be
added to the well-understood selfinterest expressed by economical
motives. One important milestone
Tilburg Research - 2008, volume 5, number 3
in the bridging of economics and
psychology, was the Nobel Prize
of economics awarded in 2002 to
the cognitive psychologist Daniel
Kahneman from the Princeton
University concerning his research on
and modeling of the role of context
effects and psychological processes,
such as emotions, in economic decision-making. “The role of contexts
and emotions in decision-making is
now an important research area and
that is reflected in economic models”, says Stapel. “This reappraisal of
economics also permeated into the
field of psychology. Economists have
taught psychologists that they need
to be both more ‘ambitious,’ analytical, precise, and formal on their
theorizing for their research to have
a real impact on society.”
Compelling models
A big difference between psychology
and economics concerns the degree
to which formal models are used to
describe and predict a large array
of phenomena. According to Stapel,
economists like to develop one large,
theoretical and incisive model with a
clear, somewhat normative portrayal
of human behavior. Psychologists,
on the other hand, work with many
small mini-theories, each of which
only apply to a very specific subdivision of reality. “Psychologists focus
more on exceptions than on rules.
And according to many economists,
psychologists testing arrangements
and computer tasks in which people
have to react to artificial stimuli or
imagine certain scenarios are of
little practical, real-life relevance.
‘Economists are sometimes over-optimistic.
Psychologists, on the
other hand, are often
too careful.’
Tilburg Research - 2008, volume 5, number 3
so little influence on policy issues
and the social debate. “At a ministry
level, for instance, hardly any psychologists are employed – we simply
work in the background in our laboratories. But policy makers certainly
need sound advice from us. Consider
the pension debate. You could
address this by applying economic/
mathematical models, but the policy
makers don’t think they need such
advice. They also want insight into
human motives: How long do people
want to remain working?; Under
what conditions do they want to enter
retirement?; What perceptions of risk
are involved? and How can you predict future behavior?”
In the next few years, Tiber wants to
conduct more field research. Such a
project has recently been launched
on the topic of “green marketing”.
In this project, researchers compare
consumer behavior in branches of a
supermarket chain which has either
been refurbished or not with new,
barely noticeable (but certainly influential) ‘green cues’.
Participants in psychology
experiments are typically required
to press buttons in the laboratory
under controlled conditions in order
to see, for instance, how they choose
between red and blue balls. In
contrast, marketing researchers, for
example, want to know when people
choose between a jar of peanut butter
with either a red or a blue lid. And
economists seek general rules and
are consequently sometimes overoptimistic about the universality of
human behavior. Psychologists, on
the other hand, are often too careful
in their approach; they always see
exceptions everywhere and seldom
come to a decisive and succinct
conclusions. It is too often: under
some circumstances, for some of the
people, some time… Tiber offers a
Different cultures
fantastic opportunity to arrive at more Stapel emphasizes that, in pracprecise, decisive, and relevant contice, working with researchers
clusions since economics offers us a
from different disciplines is not as
robust model and a strong theoretical straightforward as you may think.
perspective of human behavior and
“The remaining specialists, with
psychology offers us rich and precise
their own idiosyncrasies and their
methodologies to study the workings
own cultures, are easy to detect.
of the human mind.
Economists like to have definitive
rules. If I, as a psychologist, think
Social debate
deeply about the question of how
Stapel finds it unfortunate that psymood influences consumer behavior,
chologists - as opposed to economists I first want to know what’s going on
and sociologists, for example - have
in your head, what memory process-
Jan Potters (Economics), Diederik Stapel (Director of Tiber), Rik Pieters (Marketing) and Marcel Zeelenberg (Social Psychology).
es are being activated, and how such
moods materialize. What exactly is
a mood actually, and what does it do
precisely when it comes to the way
we look at reality? Economists are
much more practical. For instance,
they examine the effect of sunny/
rainy weather on product purchases
which leads to a good, testable, and
usable, model.” These different
approaches make the collaboration
really interesting. “You become compelled to look at your own academic
discipline in a different way”, says
Stapel. “In Tiber, we do research, for
example, that investigates the relationship between religion and creativity that has produced some very
surprising conclusions.”
Independence, reputation,
and excellence
Tiber is an institution financed
chiefly by University and other
government funds. Tiber receives
few funding from elsewhere.
Fundamental research is our
primary concern. To date, commercial companies or institutions do not contribute financially.
“Independence, reputation, and
excellence are very important for
Tiber. We hope to add a reputation
of excellence to the university”, says
Stapel. “We’re not in it to get as many
commercial assignments as possible.
We like to do research for companies
such as Super de Boer, Philips, or
Shell as long as we can allocate a
considerable part of the budget to
basic research. This provides us with
scientific ‘added value’ and delivers
fundamental knowledge about the
psychology of economic behavior.”
The results are preferably published
in top journals like Psychological
Science, Psychological Review, Journal
of Marketing Research, American
Economic Review and the Quarterly
Journal of Economics. Stapel:
“Everyone who’s interested in laying
bare the universal laws of human
decision making and social, economic behavior is welcome. We’re not
going to solve a specific or temporary
problem for company X or company
Y if that doesn’t augment our
fundamental understanding.
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
Column
Too much choice, too little satisfaction
By Barry Schwartz
I had an epiphany while buying jeans a few years ago.
Jeans buying for me had always been ‘waist size, inseam,
and out the door in two minutes.’ But when I went into the
store, I encountered more than a dozen different varieties
of style and fit. There were no ‘regular’ jeans any more.
Suddenly, a two-minute operation had turned into an
hour-long project. What’s more, though I ended up with
a pair of jeans that fit me better than any I had ever worn
before, I felt worse about them. What happened to me is
that all the options I was given raised my expectations
about just how well jeans were supposed to fit.
My new jeans fit very well, but they weren’t perfect, and
I now expected perfect. The result was disappointment.
All this choice enabled me to do better, but feel worse.
“Everyone who’s interested in laying bare the universal laws of human decision making and social, economic behavior is welcome at Tiber”,
says research director Diederik Stapel.
Tiber was not set up to answer
practical questions from the likes of
Unilevers of this world, but rather,
what we do is sound research in
cooperation with external partners.”
A sample of motives
Tiber has good contacts with various
government institutions including
ministries, local and regional
authorities and semi-commercial
parties (e.g., pension fund organizations, advertising agencies, and
marketing research companies).
The idea that Tiber research should
not only be rigid, precise, and
provocative, but also ‘relevant’ and
‘practical’ is evidenced by the many
newspaper and radio interviews,
and TV appearances that are given
by Tiber researchers. In next few
years, Tiber wants to address the
question of the extent to which
economic models should be
supplemented with additional
factors in order to better predict
human behavior. Up until now
roughly, each researcher from the
institute has their own pet theory.
Consider, for instance, the role of
emotions in decision-making, the
role of social preferences, the
importance of eye movements in
evaluating advertisements, or the
effect of financial versus social
sanctions. “But what are the ten
most important determinants?”, says
Stapel. “How can we develop theories
that go beyond researchers’ individual preferences or perspectives? “What
is it all about, really? This is what we
want to find out.”
I began to look around for evidence that it wasn’t just
me. And there was plenty to be found, most of which is
brought together in my book, The Paradox of Choice: Why
More Is Less. Here are two examples: As options increase
among varieties of gourmet jam or chocolate, shoppers
are less likely to buy any of them. Twenty-five options
attract more attention – but less buying – than five.
As employers increase the number of investment options
provided to employees in retirement plans, the
employees become less likely to participate in any of
them, even though this often means passing up an
employer match of several thousand dollars per year.
In addition, several colleagues and I have found that the
problem of choice overload is especially acute for people
whose aim is to get the ‘best’ (we call them ‘maximizers’)
rather than ‘good enough’ (we call them ‘satisficers’).
The only way to find the best is to examine all the
possibilities, which in the cornucopia of modern, affluent
societies is just impossible. Maximizers, we find, when
faced with extraordinary consumer choice, are less likely
to buy, and are less satisfied and more regretful when they
do buy, than satisficers. Maximizers have extremely high
expectations about the results of their decisions, and they
are often disappointed. More importantly, maximizers are
in general less happy, less optimistic, less satisfied with
their lives, and more depressed than satisficers.
The orthodoxies of rational choice theory and of
economics tell us that there can never be too much
choice. Those who don’t care can ignore options, while
those who do care can find just what they’re looking for.
These same orthodoxies tell us that the development of
ever higher standards for satisfaction are signs of
material progress. The results I have just described
provide a strong indication that whereas these orthodoxies
may be logically true, they are psychologically false. There
can be too much of a good thing: too many options and
too high standards, with the result that people feel worse
even when they do better.
Barry Schwartz is the Dorwin Cartwright Professor of Social
Theory and Social Action in the Psychology Department at
Swarthmore College, Swarthmore, Pennsylvania, where he has
taught for more than thirty years. The arguments in this
article are detailed in The Paradox of Choice: Why More Is
Less. Schwartz is also the author of The Battle for Human
Nature, and The Costs of Living, along with several other
books and many articles in professional journals and
periodicals.
10
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
Nobel Prize laureate Daniel Kahneman:
the then editor and he remembered
that he took it because he ‘liked the
math’. I was really disappointed.
I thought that was absolute nonsense;
there were some very important ideas
in the article but he just liked the
math.”
‘Psychologists can influence
society only by influencing
economists’
That taps into the many difficulties
in the discourse between economists
and psychologists.
Kahneman: “The fact that Amos
was trained in decision theory and
mathematics was extremely important because we could write in a way
that economists could respect. It’s
like knowing the language. But ultimately, that was not the reason for
the impact of our theory on economics. The reason was that the economist Richard Thaler could come and
work for us on a grant from the Sloan
Foundation to promote psychology
in economics. In a very serious way,
Thaler, Tversky and I working together was the beginning of behavioral
economics. After Prospect Theory,
it had become respectable for economists to look at the work of psychologists – that also helped a lot.”
A penthouse in Manhattan, New York. Marcel Zeelenberg,
Professor of Social and Economic psychology at TIBER, meets
psychologist and Nobel prize laureate Daniel Kahneman, one
of the founders of behavioral economics. They talk about the
past, present and future of the psychology of economics.
Zeelenberg: Could you tell us how
you entered the field of behavioral
decision research?
Kahneman: “I’d thought a lot about
my own judgment of other people
and was also very interested in intuitions about statistics, which I had
been teaching. Then there was that
wonderful accident when I invited
Amos Tversky to speak in my graduate seminar on the applications of
psychology to real-world problems in
1969. He spoke about the research
of his former mentor, Ward Edwards,
on people’s judgments about probabilities involving gambles and red
and white poker chips, and I really
didn’t like it. We had a good argument in front of the class which
brought together our different
approaches. He was trained as a decision theorist and I was mainly into
perception. It turned out to be the
key to our collaboration. At lunch, we
exchanged personal accounts of our
own recurrent errors of judgment,
and decided to study the statistical
intuition of experts. After that, we
were just very lucky that we complemented each other. For 12, 13 years
we just had a wonderful time working together very closely.”
Do you consider this to be your
best work?
Kahneman: “Yes, clearly. It was my
best work; it was Amos’s best work.
It was a bit wilder than the work
that Amos did by himself and it was
a lot crisper and more definitive
and authoritative than the work I
do by myself. We had a better mind
jointly than each of us separately.
The reason that our collaboration
started to wind down in the 1980’s
was primarily geographic. But we
remained friends and never stopped
interacting.
I know you put a lot of effort into
getting Prospect Theory right.
Why were you so precise?
Kahneman: “On our Science paper
on heuristics and biases in human
judgment, we worked for almost a
year. It’s 5,000 words and we did
nothing else. We argued about everything. Prospect Theory took several
years. We’re both perfectionists and
we liked each other’s company, so
that meant we had infinite patience.
Amos used to say: ‘let’s get it right’.
Of course, we were also ambitious.
But we did not aim to influence economics. Econometrica happened to
be the best journal for this theory. So
we went for it. But they accepted the
article for the wrong reason, which I
think is funny. A few years ago, I met
11
“We create stories. That is what Amos and I did”, says Daniel Kahneman. “They’re stories
that make you think. What hasn’t happened yet, but is about to happen, is the development
of a joint language.”
What do you think is important in the
field of behavioral economics at the
moment?
Kahneman: “The work of John List
at the University of Chicago. He has
shown that the endowment effort
changes with the amount of experience in training. Actually, I think
behavioral economics is the only
hope for having psychology gain
influence on policy. It is perhaps different in Europe, but in the United
States, the gatekeepers who con-
12
Tilburg Research - 2008, volume 5, number 3
trol academic input into policy are
economists and lawyers. You can’t do
anything except through economists
and lawyers. The only way we can
influence society is by influencing
economists.”
And how do you see the future
of behavioral economics? Is it neuroeconomics?
Kahneman: “I’m a big fan of neuroeconomics – ignorant, but a big fan.
Tilburg Research - 2008, volume 5, number 3
Actually, I think that the economists
who are doing neuro-economics
have become psychologists. They
have to be because they are studying the working of the brains. But I
think psychologists will continue to
provide economists with ideas. We
create stories. That is what Amos and
I did. They’re stories that make you
think. What hasn’t happened yet, but
is about to happen, is the development of a joint language.”
About Daniel Kahneman
Daniel Kahneman (1934, Tel Aviv)
is an Israeli-American Psychologist
and Nobel laureate, notable for his
work on behavioral economics and
hedonic psychology. One of his
childhood experiences encouraged
him to become a psychologist:
“It must have been late 1941 or
early 1942. Jews were required to
wear the Star of David and to obey
a 6 p.m. curfew. I had gone to play
with a Christian friend and had
stayed too late. I turned my brown
sweater inside out to walk the few
blocks home. As I was walking down
an empty street, I saw a German soldier approaching. He was wearing the
black uniform that I had been told to
fear more than others – the one worn
by specially recruited SS soldiers. As
I came closer to him, trying to walk
fast, I noticed that he was looking at
me intently. Then he beckoned me
over, picked me up, and hugged me.
I was terrified that he would notice
the star inside my sweater. He was
speaking to me with great emotion,
in German. When he put me down,
he opened his wallet, showed me a
picture of a boy, and gave me some
money. I went home more certain
than ever that my mother was right:
people were endlessly complicated
and interesting.” (Kahneman, 2003)
Kahneman’s early work focused on
visual perception and attention.
With Amos Tversky, he published
articles in the field of judgment
and decision-making, one of which
was Judgment under uncertainty
(Science, 1974). It turned out to be
an empirical psychological article
that economists could take seriously. Kahneman and Tversky’s collaboration culminated in the publication
of their Prospect Theory in 1979 in
Econometrica. After 1983, when the
two no longer worked at the same
university, the intensive collaboration
began to wind down.
Kahneman was awarded the Nobel
Prize in Economics in 2002 for his
work on Prospect Theory. It is generally believed that Tversky would have
as well, had he been alive. He died in
1996. Kahneman claims that he never
took a single course in economics:
what he knows of the subject was
(like Tversky) learnt from collaborators Richard Thaler and Jack Knetsch.
Kahneman is currently a senior
scholar and an emeritus faculty
member at Princeton University’s
Woodrow Wilson School. He is also a
fellow at Hebrew University. In 2007,
he was presented with the American
Psychological Association’s Award for
Outstanding Lifetime Contributions
to Psychology.
What are the goals for your remaining
academic career?
Kahneman: “I’ll be doing things
that interest me as long as I can.
I won't be giving talks after this
year, because I’ve spoken enough.
But what gets me excited is the new
priming work, like the work by John
Bargh. I think it’s revolutionary and
it blows my mind. And the Dutch
work on priming is really beautiful.
Just to be a consumer of that is
enormously exciting.
I also have access to very interesting
quantitative and qualitative data on
well-being. I was looking at them
this morning: when people are poor,
you can predict their well-being from
the circumstances; but when people
are rich, you cannot because money
is a buffer, it protects you. So when
you’re in trouble, it’s good to be rich.
Another very exciting progress is the
structure of happiness in different
countries. For instance, in which
countries is it important to be rich?
In Holland, I think it is not.”
Marcel Zeelenberg is Professor of
Economic and Social Psychology at
Tilburg University. He co-founded
Tiber and is its co-director. His
research focuses on the role of
emotions in decision making. What
fascinates Zeelenberg most of all is
how people can make reasonably good decisions with only a
minimum amount of information.
Zeelenberg: “Every day, we make
hundreds, if not thousands, of decisions. Yet, many of these involve
a lot of uncertainty. What will the
economy do? Do I really know what
I want to do this afternoon? If I take
a holiday in Asia, would I still be
able to enjoy a holiday in my home
country? The decisions made on
13
the basis of this kind of information
actually shape our lives.” According
to Zeelenberg, Kahne-man and his
collegues have succeeded in providing invaluable insight into how
people form judgements and make
choices. They have created the field
of psychological decision making
and behavioural economics as well
as the opportunity for psychologists to talk with economists and
business administration experts.
“Kahneman's work is simple”, says
Zeelenberg, “yet very elegant, precise and robust. That is probably
why his work has been so influential. The phenomena Kahneman
described turned out to be relevant
to many everyday decisions.”
What is Prospect Theory?
Prospect Theory is about choice
under uncertainty. It was proposed
by Kahneman and Tversky in 1979 as
an alternative to the more traditional
expected utility theory (EUT). Prospect
Theory distinguishes two phases in
the decision-making process: the editing phase, a preliminary analysis of
the offered prospects, and an evaluation phase. In the evaluation phase,
the outcomes of the prospects are
transformed by a value function and
the probabilities are transformed by a
weighting function. The value of each
outcome is multiplied by a decision
weight. Next, the prospect with the
highest value is chosen. In the value
function, changes in wealth (gains
and losses with respect to a reference
point) are the carriers of value instead
of final wealth. The value function is
concave for gains, convex for losses,
and is steeper for losses than for gains
(reflecting loss aversion). In 1992,
Tversky and Kahneman published an
updated version, named Cumulative
Prospect Theory. The theory incorporates some new developments
concerning how people weigh probabilities.
14
Tilburg Research - 2008, volume 5, number 2
Tilburg Research - 2008, volume 5, number 2
15
THE researchers of TIBER
Product decisions:
the benefits of distraction
Copycatting and consumer behavior:
Even a subtle copy can
endanger a premium brand
Name: Femke van Horen (PhD student)
Education: Social Psychology, Marketing, University of Amsterdam, Tilburg University
Tiber research: Copycatting
“
Supermarket shelves display many private labels which
deliberately look like premium products. My research
focuses on the effectiveness of this ‘lookalike’ strategy,
also known as ‘copycatting’, and explores the factors
affecting how the consumer evaluates and buys copycats
(consumer evaluation and choice rate of copycats).
Current literature states that copycats with a high degree
of similarity can jeopardize the premium product because
the copycat free-rides on the premium product’s positive
associations. The rationale being that visual similarity
raises the value placed on the look-a-like making it more
likely to be purchased. However, my research shows
that this is not necessarily the case. The extent to which
similarity is perceived by consumers is critically
dependent on characteristics of the shopping situation.
In the laboratory, I investigated how the presence or
absence of a premium brand influences the consumers
evaluation of a copycat. My research suggests that the
evaluation of the highly similar, blatant copycat is more
likely to be rejected when the premium product is present.
In fact, contrary to common belief, moderately similar
copycats fair more favorably than highly similar copycats
when in the presence of the premium brand. This is
because the presence of the premium brand instigates
direct comparison between the copycat and the premium
brand and that tends to prompt a negative evaluation of
the more blatant copycat. The greater the similarity, the
stronger the invitation to compare and the more the
differences between the two brands are noticed.
Consequently, blatant copycats are rejected, whereas
subtle copycats still seem able to benefit from the
positive associations attached to the premium brand.
Another important factor in the evaluation of copycats
versus premium brands appears to be the role which
consumers adopt. When people act purely as consumers,
they consider whether or not to buy the copycat product.
However, when people adopt the role of a judge, they
critically evaluate the copycat in terms of its acceptability.
Therefore, when making judgments, people are more
likely to compare the copycat with the premium product,
resulting in a negative evaluation when the copycat is
highly similar. However, when people consider whether
or not the copycat is worth buying, no direct comparisons
are made and so the highly similar copycat is evaluated
positively.
My research into copycatting speaks to the legal and the
copycatting literature by showing that subtle imitations
can be as damaging, or perhaps even more damaging,
than blatant imitations. Furthermore, it demonstrates
that in addition to the degree of similarity, other
characteristics of the shopping situation, such as the
physical arrangements in the supermarket and the
consumers’ frame of mind, also influence the
effectiveness of a look-a-like strategy.
”
Name: Davy Lerouge (Assistant Professor)
Education: Applied Economics, University of Leuven
Tiber Research: The effect of distraction on product evaluations
“
Suppose you are choosing among several houses for
sale. Such a choice typically involves large amounts of
information with each alternative having its specific pros
and cons on various dimensions. For instance, you could
have difficulties deciding between the following: (a) a
centrally located, modern, but small house without a
garden; and (b) a larger, but older house with a nice garden
in a less attractive location. Advice that consumers often
receive from others when making such complex decisions
is “let the information rest for a while” or “sleep on it”.
But, is such common advice really helpful?
The idea that temporary distraction might be beneficial
when making product decisions is intriguing given that
decision theory typically advises us to think hard about
complex product decisions. For instance, many
consumers conscientiously write down the various pros
and cons of each product alternative in order to find the
best option. Yet, recent evidence suggests that thinking
deliberatively about complex product decisions does not
necessarily result in the best choice. Instead, it is
argued that distracting attention away from the product
information is a better decision for complex decisions.
Although this advice may seem provocative at first, many
people are familiar with the experience that sometimes
the solution to a decision pops up all of a sudden when
we are not consciously thinking about it any more
(e.g., when taking a shower, cycling etc.).
My research demonstrates that it is the manner in which
consumers process the available product information that
determines whether distraction will be beneficial or not.
More specifically, I argue that distraction will only help
consumers who tend to perceive products as coherent
entities, whereas it will not help consumers who typically
focus on the specific features of products. Participants in
my studies were exposed to attribute information of four
product alternatives. One alternative was made rather
attractive and another one rather unattractive. After
product information was presented, some participants
were distracted for a short period whereas others were
not. Together, the results show that for consumers with
a (situational or chronic) motivation to perceive products
as coherent entities, the mental representations of the
attractive alternative become more dominated by
positive aspects; in contrast, the representations of the
unattractive alternative become more negative after
distraction. Importantly, distraction did not result in
better differentiation between attractive and unattractive
product alternatives for consumers who tend to focus on
individual (negative and positive) product features.
This research is a good example of Tiber research
because it applies and extends basic psychological
knowledge about how people (unconsciously) process
information in order to get insights into how and
when distraction is beneficial for making consumer
decisions.
”
16
Tilburg Research - 2008, volume 5, number 3
Can consumers handle
more choice?
More choice and more liberal markets. Many economists believe
that this is the best way to make consumers better off. More choice
enables consumers to find the goods and services that best fit their
preferences; competition renders them affordable. The benefits of
this policy depend critically, however, on the ability of consumers
to make good decisions. According to Tiber professors Jan Potters
(Economics) and Rik Pieters (Marketing), this may well be the
Achilles' Heel.
Tilburg Research - 2008, volume 5, number 3
In several domains, consumers
behave in a way that seems rather
myopic. This does not mean that they
are stupid. Certain choices are just
very complex. For example, what is
the best saving, investment or
insurance product when planning for
retirement? This is a decision that
involves many uncertainties. What
will the interest rate do? How will the
stock market evolve? How will my
income change? Will I be healthy?
Will I have grandchildren? Few
people have the knowledge and the
ability to make such decisions
optimally. Asking a financial adviser
might be an alternative, but as recent
scandals indicate, there is little
guarantee that these experts put the
consumer's interest first. Moreover,
choosing an expert, or picking the
best advice, is almost as difficult a
problem. Research indicates that
the more complex the decision, the
more likely it is that people resort to
relatively simple decision rules. They
take the cheapest option, chose the
same one as their neighbor, or take
the advice of the best looking expert.
Others may avoid making a decision at all. They stick to the status
quo or the default option and spend
their time on more enjoyable consumer activities, like buying a new
iPod. There is evidence for this with
respect to financial products (e.g.,
mortgages, pensions, and health
insurance), but also for choices
which are difficult for other reasons,
such as choosing to be an organ
donor or not.
Will-power and self-control
It is not only when decisions are
‘A policy of liberalization
does not always bring
as many benefits
to consumers as one
might hope.’
complicated that consumers seem to
have trouble making the right choice.
Every smoker knows that it would be
better to quit. Office workers realize
that it would be wise to visit the
fitness club more often. Students
know that it is better to start studying well before an exam. Still, many
find it hard to follow up on the good
advice of their inner self. Willpower
and self-control come in limited supply. As a result, we drink too much,
eat too much fatty food, watch too
much television, and exercise too
little. Some people are rather naïve
about this. They are convinced that
they will improve their lives tomorrow (but just not today). Others realize that they will fall prey to the same
temptations over and over again, and
they try to take precautionary
measures. They purchase expensive
running shoes, buy cigarettes in
small quantities, set deadlines for
themselves, and leave their credit
card at home when visiting the
casino (or the shopping mall). Even
with the aid of such commitment
devices, however, consumers often
make choices which are not in their
best interest.
Labels and frames
There are several other reasons why
people sometimes exhibit behavior
that is hard to reconcile with the
17
economists' image of the rational
consumer. One of them is the effect
of labels and frames. For example,
consumers spend income differently
depending on whether it is labeled as
‘child benefit’ or ‘vacation allowance’.
Even though such labels would seem
irrelevant, they seem to matter for
consumers. Also emotions, like anxiety and regret, may interfere with
a purely rational deliberation. For
instance, consumers are more likely
to play the postal code lottery than
the state lottery. Not because the
chances of winning are better, but
because they anticipate the regret of
not participating if it transpires that
they could have won. In such cases,
it is of little help if consumers are
provided with more information or
more choice. One could even argue
that choice and information overload
cause some of the problems in the
first place. This is why a policy of
liberalization does not always bring
as many benefits to consumers as
one might hope.
Towards a better understanding
Tiber is committed to the study of
consumer behavior in all its aspects.
What are the main drivers of consumer choice for different types
of goods and services? When are
consumers more or less likely to
make good decisions? How do firms
respond to the potential weaknesses
of consumers? Is there a role for the
government, and if so, what are the
best policies? In addressing these
issues, Tiber researchers employ a
range of empirical methods including experiments, field studies,
18
Tilburg Research - 2008, volume 5, number 3
surveys, and process methods (e.g.,
eye-tracking and brain imaging).
What makes Tiber unique is that it
combines the insights, the models,
and the methods from econom-
Tilburg Research - 2008, volume 5, number 3
ics, marketing, and psychology. Its
researchers are dedicated to step outside the comfort zone of their own
discipline. Whereas economists take
consumer rationality very seriously,
psychologists pay attention to market
forces. This unification of the social
sciences will lead to a better understanding of consumer behavior and
to more effective advice.
Myopic consumer behavior
Four fictive cases: Jan Potters and Rik Pieters describe the general behavioral patterns they exemplify.
64 times, at an average cost of 15 Euro per visit. It would
have saved him 448 Euro had he decided to pay per visit.
Case 1
Annie saves 5% of her monthly income and she is considering how to invest this. At 65 she wants to have a decent
supplement to her pension. She knows that investing in
stocks offers a much better average rate of return than
she can get on saving deposits. She has noticed, though,
that stock prices vary a lot over time and there are some
years in which the return is even negative. Annie hates the
possibility that her investments might actually decrease in
value! Therefore, she decides to invest all her money in a
saving deposit.
General insight: Consumers tend to overestimate their willingness to do costly or unpleasant activities in the future,
while underestimating their willingness to do gainful or
pleasurable acts.
General insight: People tend to be influenced more by
short term fluctuations than by long term outcomes.
When planning for their long term future (e.g., retirement
or mortgage), people are deterred by short run price fluctuations of stocks; instead, they prefer safer investments,
despite the long term benefits of investing in stock.
Case 2
Bjorn wants to start exercising in a fitness club and
decides to buy a membership card with free access (60
Euro per month) instead of paying per visit (8 Euro). He
expects that he will go at least two times a week so the
monthly pass is surely cheaper. After a month, he has only
visited five times, but realizes it takes time to adjust to a
new routine. Bjorn decides not to cancel his membership,
which is then automatically renewed. In the second and
third month, he exercises twelve times in total, but he is
sure this will increase over the coming months as he will
be less busy at work. After 16 months, Bjorn decides to
cancel his membership. He has visited the gym a total of
Case 3
scenario 1. Chris makes a hotel booking for a conference
meeting and is asked whether he wants a 40 Euro access
pass to the gym and sauna. The pass is valid for a week.
Since, he is only staying for two nights, he decides not to
purchase the pass.
scenario 2 . Colin makes a hotel booking for a conference
meeting and is asked whether he wants a 40 Euro access
pass to the gym and sauna. The pass is valid for two days.
Since he is staying for two nights, he is happy to purchase
the pass.
General insight: Consumers want to avoid the idea that
they are wasting money. This can override an evaluation
based on net value or utility. The same holds for costs and
expenses that have incurred in the past. Consumers find it
difficult to let bygones be bygones.
Case 4
Dana is asked how much she is willing to pay for insurance that covers all medical expenses. Her answer: 800
Euro. Diane is asked how much she is willing to pay for
insurance that covers all medical expenses in case of an
accident. Her answer: 900 Euro.
General insight: Occasions and events that come to mind
easily and vividly tend to be overrated.
19
A fruitful cooperation
Jan Potters is Professor
of Economics at Tilburg
University and Co-Director
of Tiber, as well as Academic
Director of the CentERLab
for experimental economics.
Potters talks about the
cooperation between
economists and psychologists
at Tiber.
“I am an econometrician by
training, but I have always
had a real interest in political
processes. It was while
studying for my PhD that
I came into contact with experimental economics which
investigates actual human behavior under controlled
conditions, just as in psychology. In one of our first
experiments, we tested how people lobby. Participants
sent messages, which the recipient either believed or
did not, and from which they might or might not gain
some benefit. That exposed all kinds of psychological
mechanisms that are now being taken more and more
seriously in economics.
One of our main research interests is social dilemmas.
The classic example is pollution. If we all blindly follow our
self-interest, the aggregate result is worse for everyone.
But there are also some interesting social dilemmas
associated with market forces. Companies want to outwit
the competition with keen prices and a clever marketing
strategy. But if everyone does that, as in a supermarket
price war, then prices fall across the board and the only
winner is the consumer. Because of that, every market
is characterized by a permanent tension between
competition and cooperation. Perhaps CEO’s are making
secret deals on the golf course. Most economists have too
much faith in the power of the free market. Tiber is
studying the strategies companies pursue to avoid the
competitive pressure in a free market.
Another example. To enter many markets, firms first
have to invest heavily. New telecommunications
businesses have to buy an expensive license. In Tilburg,
fairground operators pay the local authority E 50,000 for
a site. A gas-station owner has to purchase selling rights.
Economists find it difficult to accept the idea that such
entry fees push up prices in such markets. But our
economic experiments show that this effect is very
strong. We found an explanation for that in the theory
advanced by the psychologists Kahneman and Tversky.
Economists love simple theories that are widely applicable
and can be demonstrated using simple, formal models.
Thus, psychological insights are much more likely to make
headway in the realm of economics if they can be modeled
effectively. Economists can barely communicate with most
psychologists, but Tilburg is an exception. The scientific
outlook of our psychologists is much closer to that of
economics. They are quite precise in the way they form
their theories, and their perceptions are broad in scope.
Moreover, there is a strong group of social psychologists
here. That makes our cooperation in Tiber particularly
fruitful.”
‘Economists can barely communicate
with most psychologists, but Tilburg
is an exception.’
20
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
Juggling with our rational
and emotional self
21
Column
Status Anxiety
By Alain de Botton
Rik Pieters studied Economic
Psychology at Tilburg before
obtaining his PhD from Leiden
for research into environmental awareness. He is now
Professor of Marketing at Tilburg
University, and Co-Director of
Tiber. Pieters talks about the
complex effects of advertising.
“Advertising has fascinated me
for years. I probably was about
fourteen when I started to read
The Psychology of Advertising in
bed every night. One common
misconception is that advertising
is mainly intended to sell bad products by telling a good
story. But what do manufacturers gain from that? If your
cheese tastes horrible, you won’t sell it a second time.
Advertising is about telling people things to make them
enthusiastic about products the seller actually believes in.
What exactly consumers do with that information, and the
way it influences their decisions, is a complicated story.
For a long time, scientists regarded consumers as a sort of
rational computers that had a complete understanding of
the market and who optimized their choices accordingly.
But that image turned out to be faulted. For a while after
that, consumers were seen as very fickle and impulsive.
But that’s not really the case either. One intriguing question is why people often have trouble achieving their short
and long-term objectives. For example, we don’t want to
put on too much weight. So the trend towards smaller portions – single servings of ice cream, individually packaged
cookies – would seem to be good news. But nothing could
be further from the truth. With one of those family packs
full of small bags of potato chips in the cupboard, there
is actually less to stop you opening one. After a week, the
pack is empty, and you’ve put on a kilo.
One of our students used an elegant experiment to test
this hypothesis about snacking behavior. To begin with,
she found an excuse to persuade half of her participants
to weigh themselves in front of a mirror, and measure
their waistlines. Then, everyone was told that they would
be assessing a series of six TV commercials. To make the
experiment as realistic as possible, the researcher said
that the ads would be shown during an episode of the
series Friends. And, to make it totally realistic, they could
eat potato chips while they were watching. They were given
either a bowl of potato chips or a supply of small bags.
Surprisingly enough, those who had not been reminded
of their weight beforehand hardly touched the potato
chips, either loose or in bags. Those who had weighed
themselves and were given a bowl (the contents of which
were carefully weighed before and after the experiment)
ate much more, but those who had been reminded of their
weight and were then given the ‘sensible’ mini-bags ended
up eating the most.”
‘Why do people have trouble achieving
their short and long-term objectives?
That’s an intriguing question.’
Status anxiety is a worry about our standing in the world
– whether we’re going up or down, whether we’re winners
or losers. We care about our status for a simple reason:
because most people tend to be nice to us according to
the amount of it we have. If they hear we’ve been promoted, there’ll be a little more energy in their smile. If we’re
sacked, they’ll pretend not to have seen us. Ultimately, we
worry about having no status because we’re not good at
remaining confident about ourselves if other people don’t
seem to like or respect us very much. Our ‘ego’ or selfconception could be pictured as a leaking balloon, forever
requiring external love to remain inflated and vulnerable
to the smallest pinpricks of neglect. We rely on signs of
respect from the world to feel acceptable to ourselves.
While it would be unusual to be status-anxious in a
famine, history shows that as soon as societies go any way
beyond basic subsistence, status anxieties quickly kick in.
In the modern world, status anxiety starts when we compare our achievements with those of other people we consider to be our equals. We might worry about our status
when we come across an enthusiastic newspaper profile
of an acquaintance (it can destroy the morning), when a
close friend reveals a piece of what they naively – or plain
sadistically – call ‘good’ news (they have been promoted,
they are getting married, they have reached the bestseller
list) or when we are asked what we ‘do’ at a party by
someone with a firm handshake who has recently floated
their own start-up company.
Status anxiety is certainly worse than ever, because the
possibilities for achievement (sexual, financial,
professional) seem to be greater than ever. There are so
many more things we expect if we’re not to judge ourselves ‘losers’. We are constantly surrounded by stories of
people who have made it. For most of history, an opposite
assumption held sway: low expectations were viewed as
both normal and wise. Only a very few ever aspired to
wealth and fulfillment. The majority knew well enough that
they were condemned to exploitation and resignation.
Of course, it remains highly unlikely that we will today ever
reach the pinnacle of society. It is perhaps as unlikely now
that we could rival the success of Bill Gates as that, in the
seventeenth century, we could have become as powerful as Louis XIV. Unfortunately, though, it no longer feels
unlikely – depending on the magazines one reads, it can in
fact seem absurd that one hasn’t already managed to have
it all.
Could Bill Gates suffer from status anxiety? Of course
he does – because he compares himself to his own peer
group. We all do this, and that’s why we end up feeling
we lack things even though we’re so much better off than
people ever were in the past. It’s not that we’re especially
ungrateful, it’s just that we don’t judge ourselves in
relation to people far away. We cannot be cheered for long
by how prosperous we are in historical or geographical
terms. We will only take ourselves to be fortunate when
we have as much as, or more than, the people we grow up
with, work alongside, have as friends, and identify with in
the public realm. That’s why the best way to feel successful
is to choose friends who are just that little bit less successful than you…
Are there solutions? Think about death. It’s the best way
to stop worrying so much about what others make of you.
To discover whose friendship you should really care about,
ask yourself who – among your acquaintances – would
make it to your hospital bedside. If need be, look at a
skeleton: what others think about you will soon start to
lose its intimidating power. But most of all, and perhaps
most seriously, the solution to such issues lies in thought
22
Tilburg Research - 2008, volume 5, number 3
– and here economic thinking may be as powerful as the
philosophical. Economics in the classical mode left behind
questions of feeling and happiness, a situation which is
now changing. The great hope is that we will in the coming
years see the development of a more emotionally focused
hedonistic philosophy.
Tilburg Research - 2008, volume 5, number 3
Alain de Botton (1967) is a writer and television producer
who lives in London. In 1997, he made his international
breakthrough with the book ‘How Proust can change your
life’. With this book and other bestsellers on literature, love,
travel, status and architecture, he succeeded in making
difficult philosophical themes accessible to a wider public.
See also: www.alaindebotton.com
Experimental economist Ernst Fehr:
Fokke and Sukke are the stars of a famous Dutch comic strip,
created by Jean-Marc van Tol, John Reid, and Bastiaan Geleijnse.
The one-panel comic usually features humor of a politically
incorrect nature but always comments on aspects of social life in
a near-brilliant manner. While the creators have pointed out that
“Fokke” and “Sukke” are ordinary West-Frisian language names,
the names of the comic strip’s protagonists, a duck wearing a
small sailor’s cap and a small bird wearing a backward baseball
cap, are often misunderstood.
‘The economic assumption
of the selfish individual has
become second best’
Ernst Fehr, a renowned Austrian experimental economist, was
one of the first to introduce non-selfish motives into economic
models. In the early 1990s, he pulverized the rational, selfish
“Homo economicus” by showing that people are willing to
punish shirking coworkers, even at personal cost to themselves.
“Economists accused me of opening Pandora's Box.”
23
24
Tilburg Research - 2008, volume 5, number 3
People do not act and decide solely
on rational grounds, or on the basis
of self-interest. This may be an
obvious fact in daily life, but the
standard model in economics
assumes 100 percent rationality in
human beings. Using a variety of
games, experimental economist
Ernst Fehr has provided hard data
showing that fairness, altruism, and
reciprocity really do exist – and that
these so called “social preferences”
really matter to fundamental
economic issues like unemployment or contract efficiency. His
research met with a lot of skepticism
in the early 1990s, but today, he is
a renowned professor and director of the Institute for Empirical
Economics at the University of
Zurich, Switzerland. Fehr’s work is
not only followed closely by
economists, but also by psychologists, and even by evolutionary
biologists, who see it as providing
building blocks for the evolution of
human cooperation and sociality.
Tiber postdoc Rob Nelissen talks
with him.
How did an economist become so
interested in psychology?
“In the late 1980s, I was studying
unemployment, a topic at the very
heart of market economics. The
prevailing theory stated that, by
inventing different types of contracts,
it is always possible to eliminate joblessness. Involuntary unemployment,
for example, could be overcome by
charging people an upfront fee for a
job. The idea of asking unemployed
people to pay for work immediately
struck me as completely absurd.
Everybody knows that that would
make them angry. So I introduced a
fairness motive to the theory. Now,
one could no longer invent a clever
contract that solved involuntary
unemployment. I wrote a theoretical
paper about it, but nobody wanted to
publish it at the time.”
You repeatedly stress the importance
of non-selfish motives in understanding how financial incentives work.
What can be learned from your work?
“The most important lesson is
that non-selfish motives play a
tremendous role in the effectiveness
of financial incentives. I'll give an
example. Economists usually
consider reputation incentives as
pecuniary. And, indeed, they do have
a pecuniary component. If I work
very diligently today, I establish a
good reputation, I will be promoted
soon, and this may increase my
future salary. However, I don't think
that this is the whole story. We care
about our reputation per se. The
power of reputation as a driver of
efforts is much stronger because of
the existence of social preferences
such as fairness or pride. “Moreover
– and this may sound complex – nonselfish motives can constitute incentives in themselves. We witness this
in finitely repeated games; that is,
games that are only played for a few
rounds. In all but the final period,
participants cooperate with the game
leader, the principal. But some players defect completely in that last
period because this will maximize
their gain. They are the selfish types.
Tilburg Research - 2008, volume 5, number 3
But, in the earlier rounds, everybody
– fair or selfish – behaves in a similar
way. The fair types because they are
fair guys, the others because they
want to look fair. Here, the existence
of fair types creates the opportunity
for reputation as an effort-enhancing
tool. If everybody were selfish, and
everybody knew this, no one would
acquire a reputation for providing
the greatest effort.”
‘I am not convinced
that preferences
change quickly’
What are the practical implications
of this?
“We can use it to explain labor
market segmentation, for example.
Very recently, we ran economic
experiments – games – in which
participants can acquire a
reputation. The principal could
observe the behavior of all
participants in previous periods,
even if they were not working for
that particular principal then.
What we observed is quite
interesting. Some workers are very
keen to acquire a good reputation,
but there are also people that don't
care. Those with a good reputation
were paid high wages by the
principals, and were rarely
controlled. Their principal trusted
them. But those participants who
didn't care and didn’t work hard
received low wages and were highly
controlled. And that is exactly what
labor market segregation is.”
“When I’m designing an experiment, I always keep my most skeptical colleagues in mind”,
says experimental economist Ernst Fehr.
Can we use this knowledge of
incentives to change work ethos?
“That would be norm internalization: changing preferences.
Economists don't like changes of
preferences, since every economic
model is based on an assumption
that they remain stable. It becomes
far more complicated if you believe
that changes in behavior can also
be caused by changes in preferences.
Even though I'm open to the
possibility, I am not convinced that
preferences change quickly. For
economists, the concept would open
a Pandora's Box. Actually, we were
accused of the same thing when we
introduced non-selfish motives. But it
wasn't true: we had the tools to
measure preferences properly.
And with that, the whole economic
assumption of the selfish individual
became second best. When you can
measure something precisely, you do
not have to, and should not, rely on
assumptions.”
Why do many economists still hang
on to the standard model?
“There is a good reason. Rationality
and self-interest keep economic
models simple at the individual level.
Complexity at that level makes it
difficult to model interactions at
the institutional level. Mathematically, we face a trade-off between
efficiency and complexity. I hope
we can manage to change that
habit by showing that neglecting
social motives has serious effects.
Ultimately, it’s really important to
convince the unconvinced. Whenever
I'm designing an experiment,
I always keep my most skeptical
colleagues in mind.”
25
Can psychologists also learn from
experimental economists? To put
it provocatively, psychologists
realized decades ago that people
are not selfish.
“Psychologists have also long known
about the ‘bad apple’ effect: the
notion that one bad apple spoils the
bunch. In more scientific terms, a
minority of selfish types can make
a majority of altruistic types defect
from cooperation. But it took
economists to provide the theoretical
structure behind this phenomenon
by using the public goods game.
They mathematically demonstrated and described the equilibrium behind the bad apple effect.
Economists provide a much more
precise characterization of social
preferences and are able to work
out the implications for social
interactions at both a theoretical
and an empirical level. So I do think
that psychologists can learn a lot
from economists, but they tend to
have a natural reticence towards
formal models.”
What do you think about Tiber,
the new institute for behavioral
economics in Tilburg?
“It is a very good idea to let
economists and psychologists
interact on a daily basis because
they have non-overlapping
knowledge. It will lead to crossfertilization, to learning new things.
And isn’t that just what we scientists
like? So it isn’t just a good idea in
terms of scientific output – you could
also call it a pleasure machine.”
26
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
How does the mind work?
The value of basic psychology
These days, economists carry out brain scans to
investigate how people make decisions. To do so,
they rely on paradigms that were first developed
within the field of cognitive psychology as a means
to discover how the brain works. “Psychological
knowledge increasingly permeates into the
applied sciences”, says Jean Vroomen, professor
of Experimental Psychology at Tilburg University.
“You only have to look around to see
that people are not rational decisionmakers”, argues Jean Vroomen.
“A Skoda offers a lot of value for a low
price, but I don’t see many people
driving them. And all salespeople
know that they must take advantage of gut feelings to sell their
products. The Bounty advert is the
classic example.” Is the psychologist
from Tilburg a little frustrated that
economists have only recently started
to take an interest in psychology?
Vroomen: “A well-established finding
from the cognitive psychology
literature is that people are unable
to think about more than three or
four factors at a time. But many
choices are much more complicated.
However badly economists would
like it to be true, the brain cannot
make decisions on a purely rational
basis. But economists only began to
examine the role of emotions after
the Nobel prize for economics was
awarded to a psychologist in 2002.
Still, I genuinely applaud this
interest. And, with our current
technology, there remains much
more to be discovered that will
further help the field of economics.”
The role of the brain scan
One technique from neuropsychology that economists have
enthusiastically embraced is called
functional MRI. MRI stands
for Magnetic Resonance Imaging
although it is better known as
simply a ‘brain scan’. With an MRI,
a researcher can take a photo of
the brain in a few seconds and see
which parts are active when people
carry out tasks, view certain images,
or think about something. What
does such a photo reveal exactly?
Vroomen: “In fact, it only means
that an area of one cubic millimetre
uses more oxygen – and is therefore
active. But even though we don’t
exactly know what’s happening in
the ten thousand brain cells in this
area, cognitive psychologists have,
nevertheless, precisely identified
where ‘attention’, ‘memory’, ‘hearing’
and ‘motion’ are located, thanks to
MRI. Economists are now using that
knowledge to gain further insight
into thinking processes”. For
example, neuroeconomists offered
people in the scanner 500 or 50,000
euro for their car. So, what happens
is that with a bad offer, the same area
of the brain is activated as is the case
with pain impulses. A good offer, on
the contrary, shows activity in a cell
cluster that is associated with happiness. Vroomen: “A scan is an actual
reflection of what happens in the
brain. In this way, you can discover
links. Which areas are activated and
in what order? Does the same thing
happen in children? And what about
apes, shop-a-holics, and people with
brain damage? Each result yields
another research question.
Gut feeling and ratio
Functional MRI also demonstrates
that emotions play an important
role in decision-making. If you show
someone in a scanner an interesting
product, then one can measure
activity in the amygdala. The
amygdala are two almond shaped
areas deep in the brain that have
been proven to be associated with
our emotions. Vroomen: “The
amygdala are linked with what we
call ‘gut-feeling’, a quick/automatic
instinctive judgement. You either
like something or not; you either
endorse an idea or not”. The ratio
seems to be located mainly in the
front of the brain (i.e., the part of the
brain behind the forehead). If someone is offered the choice of receiving
‘Study the brain if you
want to learn how people
make choices. This is
where it happens – not
in your big toe’
1000 euro now or 2000 euro in two
years, then after a few seconds there
is much activity in this frontal area
of the brain. Vroomen: “This area
plays an important role in conscious
decision-making in the long run as
it does with complex emotions such
as honesty and guilt. In other words,
situations where you re-think certain
aspects of the situation. In humans,
this frontal cortex has much more
evolved than in animals.
‘Knock-out’ without damage
The frontal cortex, though, remains
the least understood area in the brain
and additional experimentation is
needed to increase our insights into
how it functions and what it does.
Transcranial Magnetic Stimulation
(TMS), another technique from
neuropsychology, is a timely method
that can help in this respect. During
a brain scan, a certain area of the
brain can be effectively ‘shut down’
using a directed magnetic pulse.
Vroomen: “The magnetic pulse
causes an electrical current resulting in a cluster of brain cells that
are temporarily disabled (i.e., ‘knockout’) – of course, without permanent
damage to the person. In this way,
you can examine what happens, or
what the differences are, if a specific
part of the brain does not work. Does
someone choose differently, for
example, when you disengage the
27
anxiety centre of the brain, or does
one become a shop-aholic if frontal
cortex is shut down?
Practical benefits of
collaboration
Another example of the ‘infiltration’
of fundamental psychology research
into economic research is eye movement registration. In the 1970s,
cognitive psychologists wanted to
know how we read words and developed a device that precisely registers
how the eyes move over a page.
Nowadays, this technique is used by
companies to analyze the effectiveness of advertisements. Are the ads
in the right place? What do people
read first? Does the logo stand out?
Vroomen: “As a psychologist,
I often get questions about the
practical value of my work. But
astronomers investigating the ‘Big
bang’, or History of art students,
are rarely bothered by such questions. Psychology must be useful.
But, we can’t always expect that to
be the case. Much of my research
is concerned with the question of
how the brain combines sounds and
images. Is that of any practical value?
Perhaps. Or better to say ‘possibly’.
But when and how..?”
Economic models are based on the
idea that humans behave rational.
For example, a car should be sold
more quickly if it’s relatively cheap.
But in practice, it appears that this
is not necessarily the case. People
may, for example, distrust the offer.
Psychology can help us to explain
such behaviour. And, if you want
to understand how people make
choices, then it is important to study
the brain, because this is where it
happens – not in your big toe.”
28
Tilburg Research - 2008, volume 5, number 3
29
Tilburg Research - 2008, volume 5, number 3
THE researchers of TIBER
“
Tales of the unexpected:
People love consistency
Status: Its determinants
and consequences
Name: Marret Noordewier (PhD student)
Education: Social Psychology, University of Groningen
Tiber research: Consistency and expectancies
Name: Rob Nelissen (Tiber postdoc)
Education: Biology, Social Psychology, Utrecht University, Maastricht University
Tiber research: The causes and consequences of status-oriented behavior
Personality, taste, price, performance, appearance...
People have a lot of expectancies about all kinds of future
circumstances or events. But what happens when reality
is different to that expected? My research is about how
people respond to the unexpected: how do people feel and
how do they judge things that they didn’t anticipate?
We all have a strong need to understand, structure, and
predict reality. Expectancies are an important tool to
achieve this goal. Because people dislike inconsistencies,
it is unpleasant when reality does not match our
expectations. On the other hand, people like positive
outcomes: they like friendly people, success, sunny
weather, and pleasant tastes. But how would one feel
when reality turns out to be both inconsistent with our
predictions (i.e., unpleasant), but positive (i.e., pleasant)?
Thus, the question is, how you feel when you expect
someone to be unkind (negative) who then turns out to
be really nice (unex-pected but positive)?
My research shows that the way people respond to the
unexpected depends on their focus. People may either
focus on consistency or on outcomes. We demonstrated
that people love consistency and that the need for
consistency is basic and primary. Thus, people first focus
on the consistency and later on the outcome of events.
In particular, they first like consistent outcomes more
than inconsistent ones (even when these consistent
outcomes are negative), and only later focus on the
positivity of those outcomes. Not until people are able
and willing to do so, can they abandon the safe comfort
of their expectancies and focus on reality as it really is.
Then, they can say, “Okay, although this is not what
I expected, I like it.” An important question is, therefore,
when are people able and willing to abandon their focus
on their expectancies? The first answer is that some
people value consistency more than others. Some people
are organized and plan ahead, whereas others are more
chaotic. The second answer is that some situations are
more consistency-inviting than others. For example,
people who work under time pressure or cognitive load
are more likely to stick with their first impressions, their
expectancies, and their stereotypes compared to when
they are not under such stressful conditions.
Our intention is that my research will be able to be
applied to all situations where people have expectancies. So far, I have focused mainly on person-perception,
product price, visual stimuli, and performance. Recently,
we also started to focus on innovation and change and
we also examine whether our ideas can be generalized to
general surprise effects. What we typically do in is
create an expectancy and subsequently present a reality
that either confirms this expectancy or not. In addition,
we measure or manipulate the value people assign to
consistency; for example, we measure individual
differences or use different situations to induce a high/
low need for consistency. Subsequently, we ask questions
about how people feel, how they judge the outcome and
– in the case of products – what they would choose.
”
“
What do the person who spends a lot of money on
brand clothes and the one who spends it on donations
to charity have in common? They may both be driven
by concerns about status. Simply put, status is one’s
position relative to others on a trait that is held desirable
by most, like wealth or physical attractiveness. Luxury
expenditures and charity donations improve one’s status
because they signal desirable traits, such as wealth and
good character (respectively).
General perspectives on human behavior (e.g., economic
theory) have trouble accounting for the type of behavior
described above because they assume that people only
act in their self-interest. Spending money on useless
products or on other people is wasteful from this point
of view. It is therefore necessary to abandon these
perspectives to explain the causes and consequences of
status, which is what my research is about.
Behavior may improve status precisely because it is
wasteful and incurs costs in terms of time, energy,
money, or even physical risk. The cost associated with
the act guarantees its reliability as a signal of some
unobservable, yet desirable trait. The more time and
effort I spend on doing things for others, the more
likely it is that I am actually a nice and caring person.
Do people indeed seek to improve their reputation when
they help others? In order to find out, I also study the
psychological mechanisms that motivate people to strive
for more status. Feelings of pride play an important role
in this. Still, I have found that in order to feel proud about
the things we do, we require information about how well
we have done compared to others, and about the social
relevance of our accomplishment. This links pride firmly
to striving for status. It is not only important to study the
causes of status-oriented behavior, but also to identify the
consequences of status differences in social life. Why is
having status so important to people? Possessing high
status has all sorts of benefits. Being known as friendly
makes me attractive as a friend, colleague, or partner.
Other signs of status have other benefits. Wearing
designer clothes enhances status, too, which has
implications in negotiations inasmuch as people who
dress in this way achieve better results. They get more
money even though they are already perceived as
wealthier! Striving for status is an ineradicable element
of human nature, and one we share with most animals.
The recent financial crisis in the US was caused by the
irresponsible investment of borrowed money, which may
well have been brought about by a desire to keep up with
neighbors, friends, and colleagues. It has been argued
that concern with status has incited a ‘luxury fever’ that
has grasped Western society. At the same time, it appears
that even people in impoverished countries prefer to
spend their money on luxury goods, rather than on food
and shelter. My research on the determinants and
consequences of status is at the heart of the Tiber
philosophy, because it combines insights from
evolutionary theory, economics, and psychology to arrive
at a better understanding of seemingly erratic acts.
”
30
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
31
‘Reason is not much different
from postponed emotions’
“I count myself lucky that for all of my life, I’ve earned my money
doing what I like doing”, says Nico Frijda. The Dutch psychologist,
after more than sixty years of studying emotions, is still fascinated
by them. Although he retired in 1992, his work still keeps him busy
everyday. Pure hobby.
Frijda has published widely, particularly in the area of facial
expressions, social interaction, and emotions. The Emotions (1986),
arguably his most important piece of work, has been regarded
worldwide as a major contribution to the field. At the end of 2007,
the distinguished professor received the highest accolade of his
work by being awarded an honorary doctorate from the University
of Padua. Five questions to a passionate expert.
How did you become so fascinated by
emotions? The rumour goes that
having fallen in love was the reason
for your interest. Is that correct?
“When I was 19- years old, I fell in
love. The girl – besides my being very
much in love with her – surprised
me because she used to tremble
with emotion all the time. I found it
strange that I could see that from the
outside since emotions are things you
feel from the inside. The continually
changing facial expressions and
emotions of my first girlfriend
inspired my PhD research which
was entitled ‘Understanding Facial
Expressions’. Love was one reason,
but there were more.
Emotions give people a lot of trouble.
They influence our lives in a way that
sometimes requires us to control
them. I really wanted to know how
that worked. Moreover – and this
was undoubtedly part of my secret
agenda – I thought that you might
be able to make them harmless with
this knowledge. Everything you
understand allows you more control.
At least, that’s what I had hoped.
Emotions: what are your main
contributions to this topic?
“There are three. The first is the concept of appraisal. That is, the idea that
emotions do not primarily emerge
from certain events as such, but
rather through the interpretation of
these events. I was, however, not the
first or the only one with this insight.
At the end of the 70s/beginning of
the 80s, two American researchers
and I – independently of each other
– came up with this idea. Later, we
helped one another in working things
out. The second insight is my theory
concerning ‘action readiness’. Around
1980, the dominant view was that
emotions were no more than states of
physiological arousal. Thus,
physiological mechanisms were
assumed to cause emotional feelings.
I thought that was ridiculous because
when I’m in love, I don’t only feel
stomach cramps. I further reasoned
that emotions are, in fact, passions.
And that means you’re not only
subject to them, but that they also
initiate action, or for that matter,
inaction. For that reason, I introduced
the graceless term ‘action readiness’.
What is anger, for example?
It is the experience of the urge to hit
someone, to insult them, to somehow
hurt him or her or otherwise cause
discomfort, in order to – and that is
the core of the thought – make him
or her stop doing what they are doing.
‘I thought that was
ridiculous because when
I’m in love, I don’t only
feel stomach cramps’.
Sadness, on the other hand, renders
one passive: nothing can be done to
undo the loss. Emotions are therefore
about tendencies to act and about
inclinations to change something in
the immediate environment, or by
contrast, to keep them as they are.
Which action corresponds to which
emotion differs from one individual
to the other, and depends on the circumstances. And finally, contribution
number three refers to the notion of
‘control precedence’. A strong
emotion controls or dictates one’s
desires, behaviors, and thoughts.
32
Tilburg Research - 2008, volume 5, number 3
Nico Frijda
One has, at that moment, absolutely
no idea what damage this might
inflict on ourselves or others. These
are, in my view, meaningful and
insightful thoughts. I consider them
to be my most important contributions to emotion theory.
Frijda thinks that, thereafter, no real
spectacular insights in emotions have
appeared. And it is unfortunate that
his insights are still not used enough,
as is the fact that they never became a
central topic of study. Why is that?
Particularly, I think, because of the
cognitive orientation in psychology.
Within the more contemporary areas
of cognitive psychology, researchers
prefer to use representations as the
core concept in explaining perception
and behavior, rather than dynamic
elements such as: motivation,
striving, and persisting in a given
behavior (even if it does not yield
desired outcomes). That is, ‘control
precedence’. Anyone who wants to
understand love, greed or addiction
must consider these processes.
Anyway, psychology as a whole has
difficulties in understanding what
drives people and animals, or what
puts them into motion when we go
beyond satisfying our basic needs
(e.g., such as hunger, thirst, or
loneliness). Why are people
sometimes so intensely curious?
And how does something like sexual
desire or craving work? Or religious
or political fanaticism? How can
something be so strong as to put
everything else aside? How do
intense emotions – again control
precedence – engage all our
psychological functions, such as
attention, thinking, imagination,
fantasy, perception, memory,
prediction? All this is central to
understanding emotions, but it is
often neglected in research. That is
unfortunate, since emotions arise
through events that are perceived to
imply promise or threat to one's
concerns, the things that move us,
such as needs and desires.
What is the relationship between
emotions and economics? Describe
this relationship.
When I once asked an economist
what precisely causes a crash on the
stock market, he said: “That’s for you
psychologists to say.” And, of course,
he was right. A market crash revolves
around uncertainty, fear, and loss
of confidence. The psychology of
emotions is very relevant to
economics. Indeed, emotional
factors are frequently involved in
economic decisions. Think, for
example, of novelty, the role of brand
names, product confidence and
preferences, including product confi-
Tilburg Research - 2008, volume 5, number 3
dence and preference shown by
other people. Emotional factors like
these imply that economic behavior
sharply deviates from the classic
decision-making models that many
economic theories endorse. People
are not always rational beings
striving to maximize their economic
gain. They usually stop the choice
process as soon as they come across
an alternative that best satisfies them
(satisficing model, Herbert Simon).
But the role of psychology in
economics goes much further.
Indeed, a core element of my
perspective is that emotions emanate
from events that are relevant to one’s
concerns: they either help or hinder
those concerns. Economics is largely
defined by supply and demand, but
demand derives from someone’s
concerns, and notably from his or her
needs and desires. Economic demand
results from emotions that people
expect after the demand has been satisfied. Why do people buy a car? For
the convenience and the fact that it
saves time? But why is saving time so
important? Because of convenience
(again) and economic gains. And
why do people always seek gains? So
the cycle continues. The rationality
of economic decisions stems from
its correspondence with anticipated
emotions. Reason is not much different from anticipated or postponed
emotion. It is not much different, in
particular, from emotions that are
due to satisfying concerns that one
strongly shares. If other people have
emotions due to concerns that one
does not strongly share, there is
nothing rational in their emotions.
But that is not everything. Every
event has different consequences for
different concerns. A marriage
satisfies the desire for intimacy and
sex, but conflicts with the need for
independence. The net emotion,
therefore, depends on what
people think about, and thus on their
appraisal. And that raises problems
for economic considerations: how
far do people pursue their appraisal?
That can vary, and can make huge
differences in the estimated
economic outcome – whether it
appears good or bad. Time gain and
economic profit are worth pursuing
on account of other concerns that
result from other emotions. That is
one. But the car also produces carbon
dioxide that is relevant to our
concerns for our health and that of
our children. That may (or may not)
enter our calculations of net profit
and, thus, net emotions. Take
another example. Take the telephone
computer voice that says: “There
are still 40 people before you.” That
indeed does save a firm the cost of
39 telephone operators, but also
entails a loss of what has been called
"social capital", such as interpersonal
trust and loyalty. What is considered
net profit thus depends on one's own
concerns.
And this leads on to something
important. Reason is postponed
emotion, and is therefore liable to
the laws of emotions. One of them
is George Ainslie’s time-discounting
principle: future emotional states are
perceived as considerably less intense
compared to those being experienced
in the present. In popular parlance:
‘I’ll cross that bridge when I come to
it’. This thought must have crossed
the American mortgage lenders'
minds in the last few years…”
Apart from his key works, ‘The
Emotions (1986)’ and ‘The Laws of
Emotion (2006)’, Frijda also wrote a
book in Dutch entitled ‘Psychology
makes sense’. How does the emotion
psychologist look at the current world?
With the pessimism that it deserves.
Psychologists have invested much
energy, for example, in understanding and preventing human violence,
but that hasn’t made a difference.
Psychologists, and other scientists
interested in human thought
processes, have, in various ways, tried
to reduce prejudice and unrealistic
thoughts. That has only strengthened
fundamentalism rather than
33
weakened it. I could go on. All this
psychology doesn’t make any
difference because the power of the
psychology of violence is negligible
compared to the power of violence
itself …
Despite that, you wrote a book
about the usefulness of psychology,
didn’t you?
“I don’t think that psychology can do
much to change the world. But it does
contribute to individual happiness
and well being. Psychology seeks to
give an account of who we are. That,
by the way, brings me back to your
very first question. That is why I find
the psychology of emotions so nice,
and I do remain fascinated by the
subject. Because it seeks to elucidate
who we are and who I am. Psychology
makes sense. A little bit.
‘Why are people sometimes so intensely curious?
And how does something like sexual desire or
craving work? Or religious or political fanaticism?
How do intense emotions engage all our
psychological functions? All this is central to
understanding emotions, but it is often neglected
in research.’
34
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
35
THE researchers of TIBER
“
Market Bubbles
and Crashes
The Dutch are oversensitive
to economic losses
Name: Charles Noussair (Professor)
Education: Economics, Psychology, Social Sciences, University of Pennsylvania, California
Institute of Technology
Tiber research: Experimental study of asset market bubbles and crashes
Name: Gijs van de Kuilen (Tiber postdoc)
Education: Economics, University of Amsterdam, University of Otago
Tiber research: Individual decision-making under risk and uncertainty
Asset markets at times experience spectacular price
fluctuations. One pattern that seems to occur repeatedly
is a bubble, a sustained period of apparently unreasonably
high and increasing prices, followed by a market crash,
in which prices rapidly decrease by a large amount. For
example, the Shanghai stock exchange, after posting a
gain of 467% between May 2005 and October 2007, lost
half of the amount gained by April 2008. More generally,
in markets for stocks, real estate, and other assets,
bubble and crash price patterns occur and appear to
indicate mispricing relative to fundamental values, and
thus raise doubts about whether markets are efficient.
However, with data from “real world” markets such as
these, researchers cannot distinguish between two
explanations of these price patterns. The first possibility
is that market prices are tracking fundamentals, which
are in turn exhibiting increases and rapid falls.
The second possibility is that markets are becoming
decoupled from fundamental values when they form
bubbles and subsequently crash.
We use English methods such that prices can be
compared to fundamental values, which can be made
observable and controlled. The basic approach is the
following. Each member of a group of traders is endowed
with units of a dividend-bearing asset and some money
to make trades, as well as the ability to participate in a
market in which the asset can be traded.
The asset is designed in a manner so that it has an
unambiguous fundamental value, which can be
compared to the prices at which the asset trades.
Experimental research shows that when traders are
inexperienced, prices in such markets exhibit a tendency
to depart from fundamental values. Indeed, the typical
price pattern observed is a bubble and crash, reminiscent
of those observed in real world markets. As traders gain
more experience in similar markets, bubbles become
smaller and crashes less common. Eventually, prices
come to track fundamental values. Thus, the overall
pattern suggests that bubbles and crashes are
consequences of the presence of a large number of
inexperienced participants, and depend on individual
trading behavior that diminishes with experience.
The research I have recently conducted, building on
the structure described above, has yielded a number of
results about the behavior of experimental asset markets,
as well as insights about real world financial markets.
Allowing individuals to make short sales results in lower
prices, and introducing futures contracting on the asset
induces pricing at close to fundamental values, and thus
improves market efficiency. These benefits provide an
explanation for why these types of contracts tend to
co-exist with trading of financial assets. My experiments
show that asset markets track fundamentals better at
times when the fundamentals are peaking than when
they are experiencing a low point, and adjust better to
inflation than to deflation, providing a possible explanation for why some studies find that real world stock prices
track fundamentals while others find the opposite.
”
“
Every day, consumers take numerous decisions with
an uncertain outcome. I am trying to understand the
psychological factors behind that process. To attain this
understanding, I do experiments. Only rarely do people
know in advance what the consequences of their choice
will be. Of course, that matters more for some decisions
than for others: some decisions are complex, others are
relatively easy. The decision-making model that is often
used in economics is called ‘expected utility theory’, and
it assumes that people derive a certain amount of utility from the different outcomes of choice alternatives.
Someone who has to choose between two options with
uncertain outcomes will simply select the option that
yields the highest expected utility. This purely rational
consideration is thought to explain someone’s attitude
towards risk.
In practice, however, we see that individuals do not
always make choices on purely rational grounds. Take the
way people behave at a casino, for instance. Gamblers are
not averse to risk. Quite the opposite, in fact: they are risk
seeking. The classic decision-making model, based on
the maximization of expected utility, is unable to explain
this kind of behavior – all the more so because many
of those who flirt with risk at the casino often carefully
avoid risk when taking out an insurance policy.
In response to this kind of irrational behavior, many
alternative decision-making models have been developed,
often based on findings from psychology. Some of these
models assume that individual choice behavior deviates from the predictions of the classical expected utility
model because people are overly sensitive to tiny possibilities and certainties. Take a lottery, for instance, where
the probability of winning a cash prize is minute; despite
this, huge numbers of people still buy a ticket every
month. Or the many unnecessary insurance policies
taken out by consumers. They indicate an oversensitivity
to certainty. These two examples illustrate that people
often fail to discriminate sufficiently between different
levels of likelihood.
Another aspect of my research is response to losses.
Consumers appear to evaluate the outcomes of their
choices relative to a reference point, and are overly sensitive to outcomes below this reference point i.e., they are
overly sensitive to losses. My research has shown that
the average Dutch person weights a particular loss about
one-and-a-half times as heavy as a commensurable gain.
Hence, the average Dutch person is indeed oversensitive
to economic losses.
To sum up, then, I am looking at human decision-making under conditions of uncertainty. What are the underlying psychological factors? With that knowledge, we
hope to be better able to predict how economic choices
are made in the future.
”
36
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
If there is any trade where
economics, psychology, and
marketing come together, it is the
advertising business. The skill of
persuading people to buy your stuff,
and to trust in your promise – time
and again – is one of the most
important driving forces of the world
economy. And it is a costly one, too.
That is why it is so staggering to
watch brands that fail to succeed, and
at the same time so fascinating to
observe others that remain successful for decades. What is the reason
behind this? Are we able to pinpoint
why things went right, and why other
things went wrong? Is there a scientific brand theory that reveals the
secret? Well, yes. And no.
Big shiny things
What brands should be like – according to Giep Franzen
If you have the good fortune to spend time in a less polluted part of the
world, the starry sky on a moonless night can be a fascinating treat. There
they are: your friends the stars. The big, shiny, solid heavenly bodies seem
close, even if they are billions of kilometres away. Their presence is serene,
never changing and comforting. That is what great brands look like, according to professor Giep Franzen.
In front of the impressive stage of the nocturnal firmament, satellites,
shooting stars, planes, and other objects flash by like disturbing mosquitoes.
That is what minor brands look like. Quite a difference, if you think about it.
Franzen explains why branding has everything to do with astronomy –
and nothing to do with astrology.
The consistency rule
With a career lasting 54 years,
and counting, Giep Franzen is a
true veteran in advertising. His
knowledge of the trade is not only
wide and profound, it is also very
up to date. “I keep collecting things,”
he says. “That is only obvious for a
very young science like commercial
communication. I have a continuing curiosity about brands. Their
successes and failures are amazing
research material. One thing is very
clear to me: there is a certain lack of
consistency in both the companies
and the mentality of today. First
of all, people stop reading after
they have completed their studies. Their careers come to prevail
over the freshness of their knowledge. At SWOCC [the Foundation
for Fundamental Research on
Commercial Communications at the
University of Amsterdam], we
publish piles of brochures on new
and very important topics. Thin
but interesting booklets. We have a
hard time distributing them though,
because people think they are hard
to comprehend. Would you consult
a surgeon who had stopped reading in 1990 because his specialist
literature was too complex? Secondly,
the careers of marketing people are
inconsistent, too. If the team that carries the values of a company changes
entirely every three years, how can
you possibly expect that firm to
operate a consistent branding policy?”
Overly self-conscious
In this climate of inconsistency,
companies have a tendency to
become somewhat overly self-conscious. Six years ago, Volkswagen,
the unpretentious brand of the
people, introduced its Phaeton, a
top-end luxury limousine capable
of competing with the BMW 740
and the Mercedes C-Class. The car’s
development cost Volkswagen 900
million euros. But nobody bought
it. “It’s obvious why,” says Franzen.
“Who wants to spend 100,000 to
185,000 euros on a supercar with
a Volkswagen logo on the grille?
Second-hand Phaetons with very
low mileages are for sale today in
Germany for less than 14,000 euros.
US sales stalled in 2005. This failure is an exception for a brand like
Volkswagen. They are well known for
their consistent branding policy and
low advertising cost per car sold. But
nonetheless, it remains a failure, a
big one.”
37
A brand belongs to
the public
Today, large companies seem to have
their own religion, which urges the
people involved to become believers
in the success of the next project
– whatever projects that may be.
Their vision is inward-looking and
they seem to underestimate the complexity of their assignments. “The
science is pretty basic,” Franzen
comments. “For example, the introduction of a new product under an
existing brand name has an 80-90
percent chance of failure. That is a
fact proven by SWOCC. Big businesses such as Unilever, Sara Lee, and
Procter & Gamble probably account
for the 10 percent that do it by the
book. The rest should keep their
money in their pockets. But somehow, they don’t seem aware of the
fundamental principles of branding.”
One of those fundamental principles
is that you should keep your hands
off a brand as much as possible, even
if it is your own. A brand belongs
Tiber Co-Director Rik Pieters
about Giep Franzen:
“He is the David Ogilvy of the
science of advertising. He is a
born advertiser, gifted entrepreneur, strategic thinker, self-made
academic, and true gentleman.
He is the only one who can weld
theory and practice into a solid
union. Incessantly striving to discover new truths about the
effectiveness of commercial communication.”
38
Tilburg Research - 2008, volume 5, number 3
Tilburg Research - 2008, volume 5, number 3
39
Column
to the public. At least, that is how
the consumer sees it. And that is
only logical: if we are confronted
with hundreds of brand messages
every day, they become part of our
daily routine and identity. We want
them to remain untouched, because
human beings are conservative
animals. So anything you do should
be done with great care and consideration for your customers. Brands
that add something – whatever that
something is – to people’s identity
are particularly prone to damage.
Companies like Nike, Apple and
– again – car manufacturers should
be vary careful, because the slightest
deviation can turn strong believers
into disappointed deserters.
Determination and
consistency
Franzen calls BMW the most
admired car brand in the world.
“Literally everything they do is
based on the same strong yet basic
assumption: sheer driving
pleasure. Building engines has
always been the strongest quality
of the Bayerische Motoren Werke.
Mind you, it was only in 1960
that BMW started to produce cars
and positioned itself alongside
Mercedes with this very strong
psychological assumption:
If a businessman has made something
of his life in Germany and has to show
his neighbour he is something, he can
only drive a Mercedes. If, however, he
has made something of his life, but feels
not the slightest need to show off, then
he can buy himself a BMW. Over the
years, this way of positioning the
brand, and its drive for perfection in
technology, has established BMW
as one of the best carmakers around
the globe. Both determination and
consistency can turn your brand into
an icon.”
The success of the BMW brand is described
in the book 'Driven', by David Kiley; compulsory reading, according to Giep Franzen.
Past, present and future
Marketing and advertising have nothing to do with predicting the future.
“The objective reality of things is a
fact,” says Franzen. “You must be
willing to find out what that means.
If you are working on new projects,
you need experience to rely on; just
trying and praying won’t do. Lately,
I have been slightly worried about
the position of marketing people;
they are being thrown off companies’
management boards because they
cannot account for their contribution
to the financial results. Their work
is not visible in the profit or the loss
of a company. Corporate brands that
appear in the stock exchange suffer
the most: every three months they
have to report to the stockholders.
If you let the present rule your
decisions, you won’t be able to pursue
a consistent policy. A good branding
policy is always based on the past,
the present and the future.”
Branding is just hard work
David Ogilvy, who has often been
called ‘The Father of Advertising’,
was never driven by his ego or his
dreams, he was just incredibly
curious. “All the time,” says Franzen,
“he was busy collecting the facts
about his profession. His book,
On Advertising, can be seen as the
first branding theory. Now there are
hundreds of them. So there is no lack
of research material. I urge anyone
with ambitions in the business to
study it thoroughly. After all,
branding is hard work. Visionary
talent is rare. Freddy Heineken was
a special and amusing exception to
that rule: I sat next to him at a lot of
presentations by people from FHV
BBDO, Heineken’s publicity agency.
During every session, those poor
boys and girls stuttered and acted
clumsily with the overhead sheets.
But Freddy totally ignored them; he
just sat there smiling and cracking
dirty jokes at me. Heineken’s
decisions were rarely influenced by
anyone but Heineken himself.
He was a natural. But everyone else
must learn.”
Fire and Water
By Fred van Raaij
Economics as a science developed in a period when
psychology was still in its infancy and was not yet
recognized as an independent empirical discipline. Early
micro-economists could thus not yet use the input of
empirical psychology and therefore developed their own
behavioral foundation. Hedonic Utility Theory, developed
by Jeremy Bentham (1789), was their inspiration. In this
theory, pleasure and pain are the central concepts. People
seek pleasure and avoid pain. Their preference for
alternatives and their behavior are assumed to be
explained by a ‘pleasure-pain calculus’, a kind of pleasurepain trade-off. The psychologist William James criticized
this in 1890 as being a too simple explanation and predictive basis of behavior. However, he could not prevent
(micro) economics disengaging itself from psychology and
thus from a psychological behavioral foundation.
The foundation of (micro) economics centers on a system
of utility maximization which assumes that people have
complete information about alternative options and are
aware of their stable preferences. This means that
economics is essentially a normative, rather than a
descriptive, science. Descriptive science starts from a
portrayal of how economic actors (e.g., consumers,
investors, and entrepreneurs) behave and make economic
decisions in real and/or experimental situations.
The Nobel laureate, psychologist Herbert Simon (1978),
introduced the concept of ‘satisficing’ and showed that,
in many cases, people cannot maximize their utility as
economic theory assumes. People are typically satisfied
with a choice outcome that meets most (if not all) of their
criteria. But with regard to ‘satisficing’ economists could,
nevertheless, still argue that people are not rational; and,
that economic theory offers the solution and the
correction for the irrationality.
But our understanding of psychology has since developed
and is now better equipped to provide a behavioral
foundation for micro-economics. Economic psychologists
and behavioral economists use experimental and survey
techniques (based on psychological and sociological
models and theories) to investigate the behavior of
consumers, investors, entrepreneurs, and tax payers.
However, economists still seem to learn more from
psychologists than psychologists learn from economists.
The transfer of knowledge in the latter case still has to
gather momentum.
The Nobel laureate Daniel Kahneman (2002) and Amos
Tversky (both psychologists) developed Prospect Theory
and showed that human deviations from economic theory
are systematic. Such departures should, therefore, no
longer be considered as purely human shortcomings.
People react to gains and losses from a reference point.
And people take more risk to avoid a loss than to reach
a gain. This instigated the acceptance of behavioral
economics to economics more generally. However,
many economics textbooks still are lacking a behavioral
introduction.
Tiber will thus be functioning within a changed economics
environment. Tiber will be a part of micro-economic
science using psychological findings and experiments.
Tiber will be a part of macroeconomics where the
confidence and expectations of consumers, investors and
entrepreneurs became a critical factor for success. And
Tiber will be a part of behavioral accounting, behavioral
finance, and other new developments in economics.
Economics and psychology are no longer “fire and water”
(as the late Amos Tversky once lamented), but rather
provide mutual support and learning.
Fred van Raaij is Professor of Economic Psychology at
Tilburg University.