Why Behavioral Economics Is Really Marketing Science

By Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management at Northwestern University. Originally published at Evonomics

Economists rarely mention marketing. Occasionally an article appears in the American Economic Review on advertising or promotion or warranties. But to most economists, marketing is a sideshow in the economy. It is filled with too many particulars and virtually no theory. A cynical economist would even hold that marketing activity hurts the efficiency of the economy. Promotions distort the true price and lead consumers to buy on brand name, not real value.

Ironically, the discipline of marketing was started by economists! Marketing textbooks first made their appearance in the 1900-1910 period. Their authors were economists who were institutionally oriented rather than theory-oriented. These economists wanted to examine the role that different distribution organizations – wholesalers, jobbers, agents, retailers – played in the economy. They also wanted to describe and analyze the different promotion tools – advertising, sales discounts, guarantees and warrantees—and determine whether they actually shifted demand.

Somehow classically-trained economists didn’t view marketing as an intrinsic economic activity. They couldn’t fit it into either macroeconomic theory or microeconomic theory. They didn’t see a role for mathematics in the discipline. Marketing was seen as much more of a psychological and sociological discipline than an economic discipline.

An irony today. If you picked up a recent copy of the Journal of the Academy of Marketing Science (JAMS), you can easily mistake it for the American Economic Review in terms of the articles’ mathematical sophistication – they are almost unreadable to the lay reader. Although traditional economists are not doing much mathematical analysis of marketing tools and strategies, marketing scientists are producing quite interesting and complex analyses of marketplace economics.

The greatest irony is that traditional economics is now facing a new competitor, namely behavioral economics. Behavioral economics attacks the crucial assumption that consumers engage in maximizing behavior. Aiming to maximize utility or profits is the key to building economic decision models. Otherwise, economists would have to work with another assumption, that consumers are basically “satisficing,” stopping short of spending time to maximize and being happy enough to achieve enough of what they want. But the mathematics aren’t there for this behavior and hence the claim of economics to be a science is also weakened.

Behavioral economists, instead of assuming that consumers and producers are maximizers, have to study how different marketing actors actually behave. This involves collecting empirical data. This will lead to recognizing many instances of non-rational or even irrational behavior. How do we explain people paying so much more for coffee at Starbucks or ice cream from Haagen Dazs? How do we explain some low income people voting for Republican candidates when the empirical evidence shows that poor people have done better during Democratic administrations than Republican administrations?

If economists now have to study and explain how consumers actually make their choices, they need to turn to marketing. For a hundred years, marketers have collected data on what, how and why consumers buy what they buy. The data is there. The only conclusion we can draw is that behavioral economics is, ironically, another word for marketing. Marketers have been the behavioral economists!

What about producers’ decision making? Traditional economics says that producers aim to maximize their profits? But this ignores the role of risks. Every producer can take on higher levels of risk in the pursuit of higher profits. But producers, in practice, have risk aversion. They have different appetites for risk. This undercuts the notion that they only concentrate on profit maximization. When risk is include, we might say that producers aim for a balanced ratio of profit to risk.

When producers face a big risky decision such as buying another company, many market estimates must be made. What will happen to market size and market share? Many different scenarios can take place. Estimating their respective success probabilities is difficult. Many acquisitions in practice are motivated by CEO’s egos that leave them less sensitive to actual risk. Again, the task of behavioral economists is to collect data on how these difficult acquisition decisions are actually made. And part of it is to determine how much marketing estimation and game-theory thinking occurs in the process.

The main conclusion is that economists, both traditional and behavioral, will benefit from paying closer attention to developments in the marketing discipline and marketers looking for more theory will benefit from paying closer attention to both traditional and behavioral economics.

For related discussion, see Philip Kotler, Confronting Democracy: Real Solutions for a Troubled Economic System (AMACOM 2015). Also see the author’s site, www.fixcapitalism.com 

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38 comments

  1. craazyman

    I bet if you put a picture of a topless woman in a bikini bottom next to this post it would get a lot more views!

    That’s common sense marketing. You don’t need advanced utility function math.

    But even though it would certainly get more views, it might not get read more — because the pic would be the center of attention. You’d have to estimate the ratio of views to reads. I’d say it might be 10 to 1. But if you could get 10 times more views, you might get double the reads.

    That would be worth it, since putting a pic of topless woman in a bikini bottom next to this post is, like, totally cost free. If you divide 1 by 0 you get infinity. That’s an infinite jump in productivity and maybe even more of a jump in utility maximization for the people who aren’t reading and just looking. How can you get more than infinity? Well, put the pic up and let’s see!

        1. ambrit

          Or the taggers picture of “Stripper Hillary” painted on the side of a pawn shop in Australia?
          More interesting is the implied idea that economics is a sub set of Bernays Theory. “Once you’ve got them by the short and curlies, their hearts, minds and wallets will follow.”
          On another side of this, what about the women? Didn’t I read somewhere that women control the majority of the money in the West?
          Ladies, some feedback on a good looking man displayed on Section Three of blog sites please. Just a buff dude, with ‘manly’ chest, or full frontal? What would attract and then hold the interest of a woman in the ‘cheesecake’ department? Is there any truth to the assertion that men consider a woman from the viewpoint of reproductive potential and women view a man from the aspect of protection and nurturing of offspring? Too paternalistic?
          Good morning Sunshines.

  2. Robert NYC

    Economics is still a primitive discipline not unlike astronomy in the middle ages. Most of what passes for knowledge in economics is still dogma. Behavioral economics is a BIG step in the right direction but the dismal science still has a long ways to go before its theories and ideas bear any nexus to reality. As it stands now we are waiting for the monetary system to implode and hopefully after that things can take a step back in the right direction.

    As Yves pointed out in Econned, it is a shame they have such a prominent voice in public policy.

    1. craazyman

      I was thinking actually just yesterday that a Navajo shaman in the 13th century looking at the moon would have a whole world of perceptions about life and man and nature, constellating around the vision of the moon.

      This world of perception would be vastly different than that of a 20th century astronomer looking at the moon. In one case it’s a vision that’s embedded in a mythic structure, in the other case, that of the astronomer, well, it’s a vision of a stone reflecting light, embedded in a mathematically oriented mythic structure. Maybe there’s not all that much difference..

      But would the Navajo vision be less accurate? That’s hard to say. I’m not sure it would be less accurate. Or even more primitive.

      Nevertheless, I would not elevate economics to the level of a 13th century Navajo shaman. It’s just an analogy here.

      1. Patrick

        As soon as the Shaman tried to predict something. Like the location of a particular star at some point in the future, his view would be less accurate.

        1. craazyman

          Why would he waste his time worrying about stuff like that? They go where they go — according to their nature and spirit given by the great spider who wove the universe. Only an astronomer would care about something that trivial! :-)

  3. Irrational

    Interesting. It hadn’t occurred to me that marketing had moved on that much.
    When I was at school (admittedly some time ago), marketing was about analysing more or less subliminal symbols in photos and films. It seems marketing has moved on (except in France where car ads seem to have to involve women undressing).

    1. PlutoniumKun

      A few months ago I was driving two female friends of mine across town (Dublin) – both are teachers from Oregon, both with backgrounds in gender studies and related topics, and both very, in parlance, politically correct. We stopped at lights beside a giant billboard showing the then current Air France campaign ‘France is in the Air’ featuring for no apparent reason very jaunty French women giving what can only be described as very come-hither looks.

      My passengers both stared it the poster intently. ‘That’ said one, ‘is kinda objectifying’. The other agreed. They kept staring until the light went red. I counted at least 30 seconds each, staring intently at the billboard. I chose not to say anything.

      It works.

      1. jrs

        It works to get attention, of course if the feelings and affect it engenders are negative (objectification), it’s questionable how much it works on those who feel objectified, only on the “all publicity is good publicity” theory is that a positive I guess.

  4. temporal

    “How do we explain some low income people voting for Republican candidates when the empirical evidence shows that poor people have done better during Democratic administrations than Republican administrations?”

    I’m so old I can remember when that was true.

      1. Stephen Brizie

        Correct me if I’m wrong, but if you compare how the poor were doing under Obama and Clinton administrations relative to their trajectory/well being during the days of their Republican contemporaries they are doing better. That being said Clinton and Obama both did serious damage to the foundations of low/middle income people’s standard of living. Their alliances with the oligarchs led to terrible legislation and legal practices. This metaphor could be a bit off, but I see the two parties at this point as different drivers on the same road. They’re both going to the same terrible destination, the Republicans just have a lead foot.

  5. shinola

    Traditional economics (at least the way it was taught in the ’70s) plays down or ignores asymmetry of information & good ol’ salesmanship (i.e. marketing skills).

    Ever been to a new car dealer or talked to an insurance agent? Does a Cadillac Escalade provide more utility than a Chevy Tahoe? Is a homeowners policy from Allstate somehow “better” than one from American Family? A good sales pitch is designed to discern a potential customer’s preferences, biases & “values” and cater to them.

    My father was a district manager for a national insurance co. He was always on the lookout for someone who could “sell air conditioners to Eskimos” to hire as agents (sales people). By the 3rd semester of Economics, I realized that economic theory had very little to do with what goes on in real life.

    (In a little twist of semantics, the term “producer” in the insurance biz refers to to front line agents, who produce profits; the insurance co. is the “provider”.)

    I doubt that economists will ever rid themselves of physics envy.

    1. Watt4Bob

      I doubt that economists will ever rid themselves of physics envy.

      Blackboard envy.

      How can you get an academic position if you don’t have something that can be explained using a blackboard?

      And can you add a few special symbols while you’re at it?

    2. Nelson Lowhim

      I always thought that decision making was the way to go and it does indeed include things like information asymmetry, emotions, tribal affiliations, etc. The rational decision maker is a relic of the past. That some ideologies need it (and some powerful people need it to justify their spot on the top and can hire people to cheer for them) is something else entirely.

      1. Lyle

        My thought is that the rational decision maker was a figment of economists imagination, in order to allow them to get around physicists envy. We do not yet have Asimov’s Psychohistory so we do not have the set of equations that determine the future and the gurus to meditate on them (As the second foundation was)

        People are also still animals and behave as animals (recall the talk about animal spirts on wall street). Also playing follow the leader (the herd effect)

    3. K Denny

      Has it occurred to you that it might have changed in almost half a century? I teach it at university now having studied it in the 1980s. I can assure you that it has changed. It’s not perfect but it’s certainly better. Asymmetric information is a key feature, Akerlof got a Nobel prize for it.

  6. hemeantwell

    The author would benefit from a reference to Baran & Sweezy’s Monopoly Capital, where they discuss marketing under the rubric of the “sales effort” and, more or less, regard it as a vast terrain of unproductive labor aimed at generating distinctions in products that often are very similar. Instead, the author leaps over the question of real value into the hurly burly of things as they are, which assumes the problem is to measure the value that really must be in there, somewhere, because so many people are working at it. Don Draper smiles.

  7. Skippy

    Why Behavioral Economics Is Really Marketing Science – Well Duh….

    When Homo economicus is your baseline, the data going into the model will always be contorted to fit the base axiom which then the “bricoleur” can triumphantly exclaim Natural Order ™….

    Disheveled Marsupial…. might as well call it Behavioral Narrative Performance Enhancement….

  8. ScratchyChinny

    It is not economics, behavioural or otherwise. It is cognitive, and social psychology. It has simply been vampired by economists since 1979 onwards (Kahneman/Tversky developing Prospect Theory) because economists realised their Homo Economicus was a pile of rats-assicus. And Psychologists, of which I am one, are too silly, or asleep, or unworried about letting econs be the Jason, to their Golden Fleece. Goosfraba, goosfraba.

  9. SeanL

    Interestingly, when economic games are compared across primates, Homo economicus behaves in a way very similar to Pan troglodytes (Common chimpanzee) and Homo sapiens at around 4 years old before social cognition kicks in at > 4 years old.

    (noting that Pan paniscus/Bonobo’s are closer to older Homo sapiens in social cognition).

    So either economists are genetic throwbacks on the Pan troglodytes side or developmentally delayed and stuck with the social cognition of a 4 year old.

  10. I Have Strange Dreams

    It doesn’t matter how many layers of bread one puts on a shit-sandwich; you’re still eating shit. Behavioral economics and the like are just more layers of bread.

    1. swendr

      I ditch the bread for crackers and typically have mine with tea. Crush enough cardamom into it, and you might think you’re munching a kabab.

  11. Chris Sturr

    It may be true that classical/neoclassical economists neglect marketing. But the theorists of monopoly capital from Monthly Review talk about marketing plenty. They call it the “sales effort.”

  12. pe

    economics ignores banks ? Which economics ? New Keynesian ? True. New Monetarist, Post-Keynesian ?
    False. You need to be more specific. Banks have even made their way into the evil DSGE canon.

  13. Sound of the Suburbs

    As demand problems persist, advertising become more important to try and shift all the stuff the system produces.

    By the 1920s, mass production techniques had improved to such an extent that relatively wealthy consumers were required to purchase all the output the system could produce and extensive advertising was required to manufacture demand for the chronic over-supply the Capitalist system could produce.

    Consumers had to be retrained to get them to buy things on impulse rather than their previously traditional, buying of what they needed. They had so much stuff to shift; conservative consumers could no longer be tolerated.

    Easy credit allowed even more consumption and the consumer needed to be trained to not worry about going into debt and just purchase anything they could be persuaded to buy on credit.

    Consumers had to be persuaded to buy new stuff and make room for it by moving older, perfectly functional stuff into storage. Planned obsolescence was needed in product development.

    Advertising is now everywhere and you just can’t get away from it.

    In a system where so much money and effort goes into getting consumers to soak up the chronic over-supply, economists decided the system was supply side constrained and “supply created its own demand”.

    As consumers maxed. out on credit and wealth polarised it became more and more important to capture the little demand that is left through advertising.

  14. Alejandro

    David Ogilvy, considered by many as “a founding father of modern consumer society”, was an adman–“What people don’t buy, has to be sold”. But buying is correlated to purchasing power, which depends on available money or credit, which for most would depend on wages and salaries, which depend on employment, but also on debt-burden. Exceeded debt carrying capacity, has not because it cannot be reconciled with more debt.

    Stuart Chase, an advisor to FDR and attributed with the phrase ” A New Deal”, was an economist but also a semanticist. He once said that sane advertising can change the world, which in the context of the “great depression”, I take it to mean greater participation and distribution of existing resources and wealth as opposed to the mindless accumulation of the “masters of mankind”. In today’s context I would take it to mean legislating, ratifying and codifying universal rights to basic needs of real human beings to participate in and benefit from their efforts with a dignified existence, as opposed to legislating, ratifying, SCOTUS decisioning and codifying the right to mindless accumulation of the “masters of mankind”, veiled behind “corporate personhood”, ISDS, TISA, TPP, TTIP, IP etc..

  15. Ignim Brites

    “Behavioral economics attacks the crucial assumption that consumers engage in maximizing behavior. Aiming to maximize utility or profits is the key to building economic decision models. Otherwise, economists would have to work with another assumption, that consumers are basically “satisficing,” stopping short of spending time to maximize and being happy enough to achieve enough of what they want.” The subjective value theory of Austrian economics allows for both maximizing and satisficing behavior without prejudice. It is not for nothing that it is called catalytics or praxeology, reather than economics, by its adherents.

  16. TheCatSaid

    This article displays so many fallacies of conventional ideas about economics–ideas that we humans use to willingly keep ourselves chained up in prisons of a world that we create that reduces things to “money” and ignores values and the possible role of values in human interactions of all kinds.

    Marketing is nothing more than socially sanctioned manipulation, lying and disempowerment. It is not about truthful sharing of information to support balanced decision-making free of influence. It is quite the opposite. Marketing is about skilful creation and use of delusions, to both deceive and encourage self-deception.

    The fact that so many of this accept without question this activity as a fact and somehow a necessity only shows how successfully we have allowed ourselves to be brainwashed, so that many of us willingly participation in our own ongoing brainwashing–how to do it better, for ends that we think might justify the means.

    I don’t accept that life has to be like that. It’s possible to attempt to live in a way that encourages others and doesn’t keep trying to force others to make the decisions I think they should make, or to make the decisions in a way that would benefit me at others’ expense.

    1. Robert NYC

      Very well said Cat!

      And it has reached a point where it dominates virtually every thing we see and hear, turning our society into an asylum of disinformation, ignorance and delusions.

  17. Itchy

    Went to the drugstore today.

    Same Brand: Lotrimin
    Same product: clotrimazole 1% cream
    Same Amount: 12g
    Packaged for Jock Itch: $12.99; Unit Price: $494.86/lb
    Packaged for “ringworm”: $12.99; Unit Price: $494.86/lb
    Packaged for Athlete’s Foot: $8.99; Unit Price: $342.48/lb

    Difference: 45% mark up based on consumers’ valuation of the relative severity of the condition and the relative importance attached to the afflicted body part.

    I noticed the difference between the jock itch and athlete’s foot version a few years ago, but the “ringworm” scam is a new twist. They put the ringworm and jock itch versions in one section, and the (cheaper) athlete’s foot in another section.

    Get ready to congratulate Bayer on its Nobel Prize, because in 5 years nobody will have athlete’s foot. It will be eradicated. But there will be a ringworm — MUCH more serious condition!!!!!!! — epidemic to fight at 45% higher prices.

  18. Rosario

    I see many of the same problems here as in psychology and even neuroscience to some extent. Just because behavioral or marketing research gets the same result out of everyone it does not imply that a) it is natural or, b) that is “best”. We are all reared in cultures and environments that shape our plastic brains from birth. To imply any behavior is “natural” or “the standard” at present is scientifically invalid. We have never built experiments to actually test for that and likely never could considering the ethical problems with controlling human life from birth (from in utero for thoroughness). Making things “scientific”, no matter the context, is extremely dangerous in a world where people seem to worship science as a panacea for humanity while poorly understanding its proper use. In this setting the “science” merely builds a dogmatic belief system rather than revealing any permanent truth.

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