Understanding Actual Socio-Economic Behavior as a Source of Competitive Advantage: The Role of Experimental-Behavioral Economics in Innovation

Understanding Actual Socio-Economic Behavior as a Source of Competitive Advantage: The Role of Experimental-Behavioral Economics in Innovation

P. Hernandez (University of Valencia, Spain), V. Martínez-Molés (University of Valencia, Spain) and J. Vila (University of Valencia, Spain)
DOI: 10.4018/978-1-4666-8348-8.ch009
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Abstract

This chapter illustrates the potentiality of the application of experimental-behavioral methods to gain global competitive advantages based in the anticipated measurement of how consumers and citizens would behave when exposed to specific innovation actions to be implemented by an organization. To this end, the chapter presents a brief background of the experimental-behavioral economics approach as an application of the experimental-scientific paradigm to study socio-economic behavior, highlighting its main differential features (use of economic monetary incentives, non-deception, and anonymity). After a discussion of the internal and external validity of this methodology and its ethical implications, the chapter presents specific examples of its application in both industry (framing management and measurement of the added value generated by alternative designs of an innovative product) and government (optimal design of new public programs and policies).
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Don't rely on what people tell you. Rely on what they actually do.

(Ariely, 2008, pp. 341-361)

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Introduction

Innovation is a critical challenge for both advanced and developing economies to increase their global competitiveness. Without innovation, economic activity cannot take advantage of the global technological and managerial developments, and is constrained to the generation and commercialization of standardized products and services applying always the same standard methods and processes. Nations and regions that do not participate in this global innovation race, face an important risk of getting excluded from the global marketplace losing even their local markets, which would shift from local-produced to global- produced and more competitive goods.

In these last years, a conjunction of social, technological and scientific developments has made possible new ways of innovation supported by in a deeper exploration and a more effective management of socio-economic behavior. In this framework, innovation based in such new understanding of the behavior of consumers and citizens arises as a critical source of competitive advantages in the private and public sector. The main features of such a new understanding of consumer behavior could be considered as contradictory at a first glance, but they can be easily interpreted in the framework of the dual models of thought presented by Kahneman (2011). According to this model, citizens and consumers - as human beings - employ two fundamentally different modes of thought, named as System 1 and System 2. Roughly speaking, System 1 is fast, intuitive, associative, metaphorical, automatic, and impressionistic, and it cannot be switched off. Its operations involve no sense of intentional control, but it is the secret author of many of the choices and judgments made by consumers and citizens. System 2 is slow, deliberate and effortful. Its operations require attention. System 2 is slothful, and gets tired easily - a process called ego depletion - accepting what System 1 tells it. As explained by Kahneman (2011), one way to conceptualize these systems is to think of the processes involved in driving a car: the novice needs to rely on controlled processing, requiring focused concentration on a sequence of operations that require mental effort and are easily disrupted by any distractions. In contrast, the well-practiced driver, relying on automatic processes, can carry out the same task efficiently while engaged in other activities such as chatting with a passenger or tuning in to a radio station. Of course, he or she can always switch to more deliberative processing when necessary, such as conditions of extreme weather, heavy traffic or mechanical failure. In terms of decision-making, the description of System 2 bears a close resemblance to the rational, general-purpose processor presupposed by standard economic theory. Although these economic models have provided a strong and unifying foundation for the development of theory about decision-making, several decades of research on these topics have produced a wealth of evidence demonstrating that, in practice, these models considering only System 1 do not provide a satisfactory description of actual human behavior and need to be complemented by considerations regarding System 1. This duality is present in any situation in which human being make decision, specifically in the purchase decision-making that determined consumer behavior.

Key Terms in this Chapter

Bounded Rationality: Rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.

Competitiveness: The ability and performance of a firm, to sell and supply goods and services in a given market, in relation to the ability of other firms or countries.

Behavioral Economics: Study of the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market.

Experimental Economics: Using laboratory methods to study phenomena that are difficult to observe directly in naturally occurring economic contexts, as estimating effect size, test the validity of economic theories, etc.

Nudge: A strategic management of the framing where the information and the potential alternatives are presented in a way to obtain a desired people’s behavior.

Prospect Theory: Is an alternative behavioral economic theory, which states that people make decisions based on the potential value of losses and gains rather than the final outcome.

Willingness to Pay (WTP): Is the maximum amount an individual is willing to sacrifice to procure a good or avoid something undesirable.

System 1 and System 2: The dual models of thought presented by Kahneman, system 1 is fast and intuitive whereas system 2 is slow and deliberate.

Framing: A set of concepts and theoretical perspectives on how individuals, perceive and communicate about reality, it’s an inevitable process of selective influence over the individual’s perception.

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