The idea that the advertising industry might benefit from a greater appreciation of economics is one of the oldest jibes around. Profligate advertising being curbed by economic realism is a script that most of the industry’s critics warm their hands to, especially in tough times, which has undoubtedly helped swell the idea that advertising and economics occupy opposing planets.
However there are signs that all this could be about to change. Dovetailing surprisingly well with the challenges facing modern day “Mad Men,” behavioral economics is a relatively new school of thought at the intersection of economics and psychology that is changing the way that people – and consumers especially – are understood to behave.
First acknowledged by Adam Smith in the eighteenth century, who noted that human psychology is imperfect and negatively impacts on economic decisions, behavioral economics largely disappeared off the radar until the Great Depression. Then, economists such as Irving Fisher and Vilfredo Pareto started thinking about the “human” factor in economic decision-making as a potential explanation for the stock market crash of 1929 and the events that transpired after.
Further impetus was given to the discipline in 1955 when another economist, Herbert Simon, coined the term “bounded rationality” as a way to explain that humans don’t possess infinite decision-making capabilities. But it wasn’t until the early 1980s that anything that might be recognized as a movement started to take shape, influenced by psychologists such as Daniel Kahneman and Amos Tversky. Their paper entitled “Prospect Theory” offered a framework for how people frame economic outcomes as gains and losses and how this framing affects their economic decisions and choices.
Since then a number of leading thinkers and academics have swollen the behavioralist ranks, including Nassim Taleb, author of The Black Swan and Antifraglle, Dr Laurie Santos who runs the Comparative Cognition Laboratory at Yale, Paul Dolan, Professor of Behavioural Science at the London School of Economics and economist Paul Ormerod, who has made a lifetime’s work out of studying non linear patterns of behavior in economics.