COVER STORY
Brand Building And Innovating
In An Irrational World
By Andrew Riungu
F
or the past two years or so, I have
been fascinated with Behavioral
Economics as a framework to
demystifying and better understanding
human behavior. This is not to say that
I stumbled upon BE, as it is commonly
known, two years ago. My first interactions
with BE was probably about six years ago,
but back then it was still relatively new
and the chief evangelists were those in
academia.
For those of you who may not be familiar
with the term, Behavioral Economics is
part of the social sciences and seeks to
understand how people make decisions.
If you would like an academic description
of Behavioral Economics, we would refer
to it as systematic irrational behavior
associated with decision-making.
Why irrational and not rational systematic
behavior? Well, this is the essence of BE
which seeks to improve on traditional
economics or economic theory.
Humans on the other hand, do
not think like econs, especial-
ly for frequent purchases. For
brands that intend to sell to
the same customer time-and-
time again, transactional util-
ity is the default setting for
your customers. It is impera-
tive for such brands to ensure
that they are driving positive
transactional utility on as
many occasions as possible.
50 MAL28/19 ISSUE
Behavioral Economics is part
of the social sciences and seeks
to understand how people
make decisions. If you would
like an academic description
of Behavioral Economics, we
would refer to it as systematic
irrational behavior associated
with decision-making.
Traditional economics, founded on
the premise that all human beings are
rational and make rational choices about
everything, is used to create optimization
models to mitigate against the occasional
error in judgement that humans make.
These errors are what we call biases and
heuristics - heuristics is just a fancy term
for a mental shortcut or a rule of thumb.
Founding fathers of BE like Daniel
Kahneman & Amos Tversky successfully
dispelled this notion that humans are
fully rational by showcasing that in fact,
a significant majority of our decisions
are based on irrationality. For more
information on how Kahneman dispelled
this notion, I suggest reading Daniel
Kahneman’s bestseller book, Thinking
Fast & Slow.
Allow me to share a brief synopsis of what
Kahneman (with help from Tversky) talks
about in his book. Our decision making
process is dictated by two systems; system
1 and system 2. System 1 is fast and
intuitive, derived from the reptilian part
of the brain that deals primarily with
instinct. System 2 on the other hand is
slow and laborious, using more of logic
rather than instinct. In short, system 1 is
irrational and system 2 is rational.
Humans get by based on irrational
behavior that is punctuated with a
series of biases (both conscious and
unconscious) and rules of thumb, to allow
If humans feel the price paid for a certain
product, service or experience is exces-
sive or a rip off, they experience negative
transactional utility. This negative trans-
actional utility, more often than not, puts
the customer on a path to “seek justice”
by informing people of how they were
robbed.
us to save brain energy to focus on tasks
that will require more brain power, like
studying for an exam or picking the right
mortgage plan. In short, as humans, we
have not evolved this far based on rational
decisions - irrationality is what got us this
far, and will continue to take us farther.
When it comes to brand building and
innovation, this systematic irrational
behavior needs firm understanding
in order for it to be considered across
all stages of the brand building and
innovation process.
One such important aspect that is crucial
to brand building and innovation is utility
- happiness or satisfaction.
Utility (or happiness) stems from our
irrational behavior... the happiness or
satisfaction we derive from an innovation,
a brands product or service, does not
originate from a rational point of view, but
from an irrational point of view.
There are two broad types of utility
that consumers can derive from a new
innovation or an existing brands offering;
Acquisition utility: This is the happiness/
satisfaction one gets from perceived
benefit of the product, service or
experience after acquiring the service,
product or experience.
For example: you decide to buy a watch
that you feel will speak to your sense of
style and make you feel good… heck it
could even help uplift your mood every
time you look at it. Less focus is placed on
the cost - the benefit outweighs the cost.
Transactional utility: This is the happiness/
satisfaction one gets from the terms of the
transaction, regardless of the perceived
benefit.
For example: when buying a drink , you will
expect the price to be “fair” but you make
variations to your acceptable price based
on where you are purchasing the drink
from. If you are at a high-end restaurant,
you will reluctantly accept a higher cost
because of the venue where the transaction
is taking place. Your reluctance to pay the
“exorbitant” price will leave a bad taste
in your mouth and this will in turn lead
to you having a negative transactional
utility for that restaurant. This negative
transactional utility will even be higher
if the same “exorbitant” cost is charged
at your local grocery store. You will only
experience positive transactional utility if
the terms of the transaction are “fair”.
To put it bluntly, if the price is within
the realms of the reference price of the
product, service or experience in question,
you are likely to experience positive
transactional utility.
Traditional economics and economic
theory advocates that all humans
experience/pursue acquisition utility.
Economists
do
not
experience
transactional utility because to them, the
terms of the transaction are a Supposedly
Irrelevant Factor (SIF).
This notion is based on the thinking that
humans think rationally and are able to
overlook “irrelevant” details like price if
they have a job that needs to be done by
a particular product or service. To an econ,
if the perceived benefit is not a strong
enough driving force, then you should not
be considering the product or service. This
does not mean that econs are immune to
bargains… bargains are welcome but
merely seen as an added bonus in their
pursuit for acquisition utility.
Humans on the other hand, do not
think like econs, especially for frequent