Marketing Is the Original Behavioral Economics

Yves here. Funny, it isn’t often that I see someone, better yet an academic, twit economists for acting as if they’ve invented the wheel. Not only has marketing been around long enough to show that people are readily manipulated, so too is propaganda (dating at least to the start of the 20th century, see Alex Carey’s Taking the Risk Out of Democracy), diplomacy, and psychology.

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

I often see writers equating “nudging” with behavioral economics.  It’s as if nudging is the essence of behavioral economics.  As much as I respect the nudging concept and its contributions, behavioral marketing calls for a larger scheme than nudging.  That scheme is social marketing.

Let’s start with the meaning of behavioral economics.  Before “behavioral” appeared, economists operated with one model of human behavior.  Whether the person was a consumer or producer, that person was rational and a maximizer.  That person had full knowledge of alternatives, would assign weights to the features of the alternatives, and would choose the alternative that would maximize the person’s goal, which was satisfaction in the case of consumers and profits in the case of producers.

Traditional economists never used the word “nudge” in their theory.  It only came up when two University of Chicago professors, Richard H. Thaler and Cass R. Sunstein decided to challenge the idea that all economic decision makers behaved according to the “rational maximizer” principle.   They recognized that people are infinitely different and complex.  They make many decisions by habit, or impulse, or irrational thinking.

Thaler and Sunstein were not the first to notice this.  The field of marketing has been classifying and explaining the great variety of human behavior for more than 100 years. Marketers drew on the disciplines of psychology, sociology, anthropology and social psychology to describe the great varieties of human behavior.  Marketers were fascinated with examples of “irrational” behavior.  Why do many people continue their smoking habit when they know that it will shorten their life?  Why do poor families have so many children that will keep them and their children poor?  Why is it that a CEO decides to acquire a competitor even when he knows that more than half of all mergers fail.

The core idea that humans don’t behave like rational economic agents was introduced several decades ago by Daniel Kahneman, Amos Tversky, and others.[ii]  People move between hot and cold states of emotions.  In a hot state, persons are emotionally aroused (more irrational) and in a cold state persons are more calm or neutral (rational).  All this states that human behavior is likely to be a mix of irrational and rational episodes.  When you find a totally rational maximizer, he or she is likely to be an odd bird.

Professor Dan Ariely from Duke published Predictably Irrational: The Hidden Forces that Shape Our Decisions in 2008. What a brilliant title that irrational decisions can be predicted!  Ariely carries out dozens of experiments on irrational behavior to find out their patterns.

The irony is that two University of Chicago professors challenged the rational maximizer assumption in the very university that did outstanding work in propagating the image of the rational maximizer.  In the process, they not only introduced the concept of nudging but also the concept of behavioral economics as having a strong relationship.

Nudging itself became an interesting concept. Thaler and Sunstein postulated that an economist needs to map out the “architecture of choice” that might face a decision maker.  One much cited example addresses the need to influence high school students to eat a healthier lunch.  The nudge would be for the dining room to change the sequence of these foods so that the healthier foods are at the beginning so that students’ plates are full by the time they get to the deserts.

Consider another example.  A business is located on the second floor of a two-story building.  Upon entering the building each morning, employees could take the elevator or walk up the staircase.   Their manager prefers that they take the staircase because it would be exercise and contribute more to their well-being.  He doesn’t insist on this but uses a “nudge.”  He put a photo in front of the staircase showing a healthy, happy person.  From that point on, more employees used the staircase.  His nudge influenced their choice behavior.

A final example.  A company is trying to raise $20 from each employee for their Christmas party.  The company could announce that $20 will be deducted from each salary in November unless an employee objects and “opts out.”  Alternatively, the company could leave it to individual employees to “opt in” if they want to contribute $20.  In this example, the company is highly likely to raise more money for the Christmas party by an “opt out” nudge than an “opt in” nudge.

So persons can use nudges to influence behavior.  However, are individual nudges sufficient to create highly important behavioral changes?  Can we develop a nudge to get teenage girls to stop smoking?  Can we develop nudges to get poor families to have fewer children?

Social marketing provides a more holistic approach to influencing behavioral change.  In the 1970s, three marketing professors at Northwestern University saw an ad saying, “Can you sell brotherhood like you sell soap?”  Can you sell brotherhood, better race relations, daily exercise, better nutrition, and other causes using the tools of marketing? Professor Sidney Levy and I wrote “Broadening the Concept of Marketing,” and also “Demarketing, Yes Demarketing,” where we claimed that marketing can help not only sell more products and services, but also to sell fewer products, such as fewer cigarettes and less smoking.  Marketing could be used to “demarket” something as well as to “market” something.

Professor Gerald Zaltman and I wrote “Social Marketing: An Approach to Planned Social Change.” We showed how population experts could use social marketing to encourage families to have fewer children.  We defined social marketing as using market segmentation, targeting and positioning (STP) and the four Ps of product, price, place, and promotion to influence behavior change for social good.

Social marketing became a college course and drew many business students who wanted to apply their skills to mitigating social problems.  Many social marketing workshops were run at the University of South Florida, producing eventually over 2,000 practitioners working with government agencies, nonprofit organizations, and businesses to create targeted behavioral change.  We could have called this “behavioral economics” because we were always concerned about balancing the demand side and the cost side of these efforts.

Let me describe one of the most successful social marketing cases.

Dr. Mechai Viravaidya, a well-respected Thai physician, had a passion for reducing unplanned pregnancies and reducing the spread of HIV/AIDS in Thailand. His big idea was to popularize condoms, thinking a “little fun” might make condoms more acceptable. His creative promotional strategies supported the “fun” theme:

  • He spoke at a variety of events, proclaiming, “The condom is a great friend. You can do many things with it. You can use different colors on different days—yellow for Monday, pink for Tuesday, and black when you are mourning.”63
  • He organized condom “balloon-blowing” contests with prizes for kids and adults. He also made sure the media would take photos that he hoped would appear on the front page or in the evening news.
  • He influenced tollbooths to hand out condoms with their tickets.
  • He created a Cops and Robbers program in which traffic police were given boxes of condoms to distribute on New Year’s Eve.
  • He had monks bless condoms so that Thais would be assured there would be no ill effects after using them.
  • He added condoms to fashion shows, with runs of condoms in different colors.
  • He opened new restaurants branded “Cabbages and Condoms” with the slogan “Our food is guaranteed not to cause pregnancy”— and a condom, instead of a mint, comes with the bill.

In 2007, the Bill & Melinda Gates Foundation announced that Thailand’s Population and Community Development Association (PDA) had received the 2007 Gates Award for Global Health in recognition of its pioneering work in family planning and HIV/AIDS prevention. The prize honored Dr. Mechai Viravaidya. Over a number of years, the desired number of children in Thai families moved down from seven to two.

Marketers were the original behavioral economists.  They recognized the great variety of motivations and behaviors of individual consumers, producers and decision makers.  They rejected the idea that all human behavior is rational and always aiming to maximize some individual “good.” They recognized a whole set of tools – ads, prices, products, nudges, etc., that could be used by behavioral economists to influence the level, timing and composition of demand. In building campaigns to modify behavior, social marketers consider both the expected performance and the cost of producing a specific level of behavioral change.

Social marketers differ from nudgers in preparing larger scale plans founded on many more tools to achieve behavioral change.  Social marketing is used by the World Bank (WB), World Health Organization (WHO) and Centers of Disease Control (CDC).  Social marketing goes much further than nudging to exemplify the work and contributions of behavioral economics.

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  1. PlutoniumKun

    Most marketing people I’ve met come from psychology background (a subject that of course has had its own issues with epistemology recently). And of course sociology and anthropology and evolutionary biology have had a major impact. Economists have a habit of course of picking and choosing concepts from other specialities, simplifying them and then popularising them, often in a highly dubious manner (think Freakonomics).

    I can recall as a new first year undergrad attending an anthropology class where the lecturer proceeded to humiliate each and every Econ student (including me) for our intellectual arrogance. At the time I was furious, and I didn’t understand why he did it, but with hindsight I can see his point. So many of the basic assumptions of economics are simply ridiculous when seen from the perspective of other specialities (the standard Econ 101 explanation for the invention of money being a particularly well known example).

    The one subject all economists should study, but most don’t, is history. Its noticeable that those economists who have called out our current problems correctly have a firm grounding in economic and human history. Most of the great economists of the past took it as a given that a firm understanding of the past is much more useful than any mathematical model when it comes to understanding current and future problems.

    1. chuck roast

      Clearly the lecturer had a bone to pick. Better he required as penance that each and every Econ student read and report on Primitive, Archaic and Modern Economies; Essays by Karl Polanyi. It was your intention after all to get an education, not a tongue lashing. I can see it from here. After many years one of my few refugees. A Doubleday Anchor Original at $1.45.

    2. LowellHighlander

      “The one subject all economists should study, but most don’t, is history.”

      As someone with a Master’s in Econ, I can’t tell you how much I appreciate your making this statement. This is also a crucial lesson imparted to me by one of my academic mentors in my graduate program, the late Robert E. Prasch. Professor Prasch impressed upon me how much [neo-classical] economists actually despised history. Needless to say, this is not true amongst other economists, notably Classical Economists (such as Michael Hudson and Dean Baker) or Institutional Economists.

      During my graduate program (University of Maine), the History Department was housed in the same building as the Economics Department. When the eminent Economic Historian Stuart Bruchey retired to Orono, Maine, the History Department practially rolled out the red carpet for him. My academic mentors in Economics strongly urged that I take the course he was offering, and so I did. Later, I attended a fellow graduate student’s (Michael McDonald’s) defense of his thesis, which McDonald wrote under Professor Bruchey. It was almost comical to watch these neo-classicals keep their mouths shut because, as Professor Prasch later explained to me, none of them wanted to debate Professor Bruchey.

      1. Irrational

        My favourite course during my economics undergraduate program at Warwick Uni, UK was the “Economic history of the 20th century” with Nick Crafts – much more insightful than “assume all agents have rational expectations in a 2-generation DSGE model”.
        Coming from physics I thought this notion of calculating human behaviour as if they were planets in orbit utterly ridiculous.

        1. ChrisPacific

          Haha, yes. I can still remember reading a primer on neoclassical economics and thinking “OK, so it’s a Hamiltonian level curve, can we get on with it please?” Turns out there was nothing more to get on with – they were absolutely in love with the idea, which they behaved like they’d just invented for the first time, and proceeded to base a whole theory it and pretty much nothing else.

    1. Adam Eran

      Brandolini’s law, also known as the bullshit asymmetry principle, is an internet adage which emphasizes the difficulty of debunking bullshit:[1] “The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it.” (from Wikipedia)

  2. 'The Rev Kev

    In some ways, this could all be simply reduced to one idea by Robert Heinlein when he said-

    ‘Man is not a rational animal; he is a rationalizing animal.’

    You make a decision which seems to be the best idea at the time and is the most rational. And then later you ask yourself – ‘How could I have been so stupid?

    1. jef

      In order to make a rational decision aka exercise your free will, you must have a reasonable understanding/knowledge of the situation. Unfortunately most of the information readily available is inaccurate and then you have marketing/propaganda muddling it up further with untruths/lies.

      Free will is a participation sport but most people are just sitting in their armchairs, metaphorically (and literally) speaking.

      I blame our education system mostly as we are not taught to seek out information and reason out the truth for ourselves. We are given information and told to memorise and accept it as the only truth.

      The only free will most people exercise is to be willfully ignorant.

  3. Fresh Cream

    Poor people have children, many children, as labor, for security in old age, and because some won’t survive. It is not irrational

    1. jef

      Poor people have the least amount of information that would allow them to make sound decisions.

  4. Treadingwaterbutstillkicking

    Alex Carey’s “Taking the Risk Out of Democracy” is an extremely important and under-read book which, IMHO, should be discussed in the same light as Herman & Chomsky’s “Manufacturing Consent”.

    1. flora

      Also, this 2015 Chris Hedges interview of Sheldon Wolin. The ‘nudge theory’ is imo a window dressing implying the central agency of individuals in economics. And indirectly implies that politics is still primary over economics. But, maybe that’s not the case.
      This is the first 20minute segment of the interview, which contains Wolin’s basic ideas. His Inver Tot sounds a lot like neoliberalism, imo.

  5. DJG

    I can tell that the writer is in the U S of A, where it is widely believed that everything was invented in 1992 (and by Americans, no less).

    Epikouros wrote about hierarchies of pleasure some 2500 years ago. The Epicurean philosophy is that one is motivated by pleasure, but one must assess pleasures and not give into pleasures that will pull one down. Some people have remarked that Epicurean philosophy is more optimistic than Buddhism but that is also recognizes that human dissatisfaction comes from wanting things with out end. The Buddhists called in suffering. The Epicureans, being Greeks originally, said to learn self-control.

    And I’d venture that marketing goes way back. Archeologists keep finding amphoras and containers with brand names. I’m sure that there were “ad” campaigns for that great garum made by Titus Livius.

    1. shtove

      As I said to Titus, “Non possum credere butyrum non est!” To which he responded, “Logos supra, frater mihi.”

      1. DJG

        shtove: Aha. Now I know who you are. We worked in the offices of Piso, Cicer, Livy & Themistocles, near the Temple of Isis, just off the Via Lata.

        You came up with the slogan, Hoc age!, for that line of athletic sandals.

  6. shinola

    My dad was a successful insurance agent (aka salesman). By the time I entered college, he was a district manager for a national ins. co. He had a small library of books that could collectively be called “The Art of Salesmanship”. I had read several of them by the time I started as an Econ. major.

    I kept thinking that the “both sides of a transaction are fully informed, rational actors” thing was just setting up the basics and actual human behavior would be addressed as courses advanced. I was wrong.

    I abandoned the Econ. major in my senior year. (This was in the 1970’s)

  7. SJB

    OMG Yes!
    As an economist, I have been asking for years why the profession has not been taking the field of marketing seriously, as it is essentially demand analysis. The answers I have always gotten were either “I don’t know” or “Because there is no theory behind it”, both of which I found pretty ridiculous. Behavioral economics has been seen as some incredible revelation, without recognizing that marketers have developed a huge, and very lucrative field of study and application. It is the snobbery and arrogance of economists that prevents them from seeing what should be blatantly obvious, as usual. We are a sad profession.

    I also strongly agree that economists should study history. I have always liked it myself, and but for the history Ph.D.s driving cabs in the 1970s, would have studied it. Reading much more history since the financial crisis has helped me understand more about our current dilemma than any academic economic paper.

    1. Off The Street

      We know it works in theory, but will it work in practice?

      followed by:

      What brand of laundry detergent do you use?
      Why did you choose to buy that particular model of car?

      Aw, it was just Tastes all along. Who coulda node?

  8. Dick Swenson

    Social propaganda, e.g., economic theories as well as political theories, have been around for much longer than most think. The “Iliad” and “Odyssey” were written to manipulate Greeks, the Bible (whatever parts you believe in) are nothing but propaganda, and most social fiction in the 19th century is propaganda. All these have established “narratives” (i.e. stories) that manipulate us all long after we have been exposed to them.

    1. Adam Eran

      Far more difficult: find the publication, movie, etc. that is *not* propagandizing. Who was it said “Language is the ultimate propaganda”…a fact acknowledged by the Zen koans (What color is the wind?)…

  9. YankeeFrank

    Social and economic incentives must be diligently applied to the great unwashed and totally ignored for the economic masters. Funny how that works.

    1. MaroonBulldog

      It’s all the same psychology as training dogs: I reward mine with treats that I myself would never think of eating.

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