• by Gord Hotchkiss , Featured Contributor, March 25, 2010

Right out of the gate, let's assume that we all agree consumer behavior is in the throes of its biggest shift in history. And the cause is generally attributed to the Internet.  

While I don't disagree with this assessment, I believe there may be some misattribution when it comes to cause and effect. Did the Internet cause our consumer behavior to change? Or did it enable it to change? The distinction may seem like mere semantics, but there's a fundamental difference here.

 "Cause" implies that an outside force, namely the Internet, pushed us in a new direction that was different from the one we would have pursued had this new force not come along. "Enable" is a different beast, the opening of a previously locked door that allows us to pursue a new path of our own volition. I believe the latter to be true. I believe we weren't pushed anywhere. We went there of our own free will. 

Free Will? Or Hardwired Human Behavior?

But, even in my last statement, language again gets us in a sticky place. "Will" assumes it was a conscious and willful decision. I'm not sure this is the case. I suspect there were subconscious, hardwired behaviors that had a natural affinity for the new opportunities presented by the online marketplace.

For most of our recorded history, we have assumed that rational consideration and conscious will forms the basis of human thought. If we did seem programmed automatically to respond to certain cues, this was as a result of being conditioned by our environment, the classic Skinner black-box approach. But when we were on top of our game, we were carefully considering pros and cons, making consciously deliberated decisions. These were the forces that drove our society and our behaviors. This theory formed the basis of economics (Adam Smith's Invisible hand), Cartesian logic, and most market research.

But in the last few decades, this view of rationality riding triumphant over human foibles has been brought into question. In particular, there were three concepts put forward by four academics that caused us to question what drove our behaviors. These folks uncovered deeper, subconscious routines and influences that lay buried beneath the strata of rational thought. And it's these subconscious behaviors that I believe found the new online opportunities so enticing. Let's spend a little time today looking at these four thinkers and the new paradigms they asked us to consider.

Amos Tversky and Daniel Kahneman - Prospect Theory

Adam Smith's Invisible hand, driven by the wisdom of the market, has been presumed to be the ultimate economic governing factor. The assumption was that each of us, individually making rational economic decisions, would ultimately decide winners and losers and capitalism would stay alive and well.

But Tversky and Kahneman, in their paper on Prospect Theory, showed that the invisible hand might not always be guided by a decisive and logical mind. We all have significant hardwired cognitive biases that often cause us to make illogical economic choices. For example, if I offered you $1,000, with no questions asked, or a chance to win $2,500 based on a coin toss, you'd probably take the sure bet, even though mathematically, the odds for net gain are better with the coin toss.

Prospect Theory shot some holes in the previous theory of Expected Utility, a model where we carefully weighed the pros and cons of a potential purchase based on a return on investment model. Emotional framing and risk avoidance played a much bigger role than we suspected, handicapping our logic and often guiding us down non-rational paths. Tversky and Kahneman single-handedly found the new discipline of Behavioral Economics and changed our thinking in the process.

Herbert Simon - Bounded Rationality

Simon's concept of Bounded Rationality superseded Kahneman and Tversky's theory, but it dovetailed with it very nicely. Even if we are rationally engaged in a decision, Simon argued, we couldn't possibly optimize it, especially in complex scenarios. There were simply too many factors to consider. So, we took "gut feeling" short cuts, which Simon called "satisficing," a combination of satisfy and suffice. We short-listed our consideration set by using beliefs and instincts.

To make the satisficing short list is the goal of any brand campaign. At some point, logical weighing of pros and cons has to give way to calls based primarily on instinct.  And, as Kahneman and Tversky showed, those instinctive calls may well be based on irrational emotional biases.

George Akerlof - information Asymmetry

 The last piece, and the one that really drove the online consumer revolution, is George Akerlof's Information Asymmetry theory. Traditionally, there has been an imbalance of information between buyers and sellers, to the seller's advantage. The seller always knew more about what they were selling than the buyer did. This made purchasing inherently risky.  

With an absence of information, consumers created strong beliefs about brands as a way to guide their future buying decisions. Brand loyalty, whether rational or not, filled the void left by a lack of information. Manufacturers and retailers carefully controlled what information did enter the marketplace, pushing the positives and carefully suppressing the negatives.

 These three concepts, intertwined, defined the psychological make-up of the market prior to the introduction of the Internet. In my next column, I'll explore what happened when these behavioral powder kegs were exposed to the fanned flames of the digital marketplace.