Leveraging Behavioral Economics for Business
By LISA LOEWEN
Most people are familiar with the idea of behavioral economics as it relates to psychology, sociology and other disciplines dealing with the subject of human actions. However, they may not be so familiar with how experts use behavioral economics for business.
The Barton School of Business Behavioral Economics Laboratory at Wichita State University is committed to help local businesses make better marketing and economic decisions through online experimental studies aimed at understanding decision-making processes.
Dr. Siyu Wang, associate professor in the Department of Economics, heads up the Behavioral Economics Laboratory housed in Woolsey Hall, the new home for the Barton School of Business. Inspired by the groundbreaking work of Nobel laureate Vernon Smith in experimental economics, Wang says the lab’s primary mission is to bridge the gap between academic theories and practical challenges.
“The idea of behavioral economics is not new,” Wang said, “but most businesses in our community may have no idea how it can be used to assist with marketing and policy decisions.”
RESEARCH BASED ON EXPERTISE
Wang says the expertise of researchers at the lab spans a wide range of skills including experimental design, A/B testing, empirical and online data analysis, as well as managerial decision analysis. While many businesses already have access to significant amounts of big data about customer usage and patterns, it can be challenging to answer the ‘why’ question hidden behind the data. Without understanding the ‘why,’ making accurate high-level decisions in the dynamic environment we face every day is difficult.
“We design experiments with control and treatment groups to understand ‘why’ and accurately measure causal relationships that inform actionable strategies. We are extremely precise in our experimental design and analysis because we want to make sure that we gain a clear picture of the decision-making process.”
Wang and her fellow researchers meet with industry leaders and business owners who are interested in using behavioral economics as part of their decision-making process. They listen to their goals and ask questions to help them understand the complex environment a company wants to explore. After thorough research into the industry and market trends, including a detailed literature review, the team will build an experiment designed to gather specific behavioral data.
Once the experiment is designed, they can test it within Wichita State University’s student population in a very controlled environment within the onsite lab, or they can launch it online or in the field to a specified population segment based on demographic and behavioral factors.
“We can also test an organization’s existing client base using their prevailing platform,” Wang said. “We are working with organizations right now to help them determine the best course of action to improve their business. Once we know what they are trying to measure, we design an experiment designed to test options A or B or C. We guide them step-by-step on how to launch those different treatments in a way that will help them look at their data, compare the results and provide accurate policy recommendations.”
ACTIONABLE RESULTS
The statistical power you need in order to conclude that a certain approach works better than another is dependent on a number of factors. Wang says that is why the size of the participant pool is part of the initial research that is conducted prior to implementing the design of an experiment to ensure the results are valid.
“When you sit down with us to talk about what you need from the experiment, we look at everything that will affect your results, including the amount of data you need to collect to get an accurate representation,” Wang said.
The process of designing an experiment, launching it and evaluating the results can be lengthy at times depending on the research problem under consideration. Gathering the client information, historical and industry perspective and conducting a comprehensive literature review is essential to maintain the academic integrity expected from an institution of higher education, but it is also vital to ensure the business receives timely and actionable data.
“As with all research, thoroughness is the key to a quality outcome,” Wang said.
BEHAVIORAL ECONOMICS IN PRACTICE
Behavioral economics is a field that merges insights from psychology and economics to understand how people make economic decisions. This research develops a realistic understanding of human decision-making, on which businesses and policymakers can design effective strategies. Strategies that are aligned with individual behavior and preferences have been impactful in various sectors, including public policy, finance, marketing, and consumer behavior.
Numerous prominent companies have embraced behavioral economics to enhance their decision-making processes:
•Amazon uses behavioral insights to optimize their interfaces, recommendations, and pricing strategies.
•Ride-sharing companies like Uber and Lyft implement behavioral techniques to manage surge pricing and reduce cancellation rates.
•Walmart appointed a behavioral economist as their chief economist to leverage insights for improved strategies.
•Netflix personalizes content recommendations based on viewing history, using behavioral tendencies to engage users.
•Social media platforms like Facebook use behavioral insights to enhance user experiences and optimize ad targeting
RETURN ON INVESTMENT
“The Behavioral Economics Laboratory is committed to solving some of the most pressing issues of companies in innovative and impactful ways,” Wang said.
In return, they ask the businesses who work with the Behavioral Economics Laboratory to share their data so they can publish the results in academic journals and further the research efforts. Businesses can also show their appreciation by sponsoring the lab so that it can expand on its programming and capacity.
A mix of graduate and undergraduate students participate in the research process as paid research assistants. In addition to helping businesses make informed policy decisions, Wang says the Behavioral Economics Laboratory plays a vital role in educating students about decision-making in real world operations.
“Many of these students are interested in applying for Ph.D. programs and become researchers or professors in the future. This kind of training not only has a good return on the effort they invested in, but also helps them pursue the education they need for their future career.” Wang said.
UNLIMITED POSSIBILITIES
Wang says this behavioral approach to decision-making can be used for countless applications. For example, a company may want help determining the best interface to encourage customer interaction. An A/B test could help them decide if customers would prefer certain graphical representation. Other companies use this type of testing to decide what type of sales promotion would be most effective with potential customers.
The Behavioral Economics Laboratory is conducting several projects, including the reduction of safety accidents in metro stations, encouraging electricity conservation, optimizing pricing on freelance websites, developing online education tools, and designing financial health advice apps. Companies that incorporate behavioral economic experiments as a basis for decision making can collaborate with the lab to explore new ideas; or they can also receive help deciding which of their existing ideas will be the most effective.
“When a business asks for our help in designing a test, they could already have an idea of what options they have,” Wang said. “Our process provides them guidance to obtain the causal data and help them make the best decision based on the feedback.”
The Behavioral Economics Laboratory exemplifies a model where academia and real-world businesses converge for mutual advancement. By leveraging behavioral economics, businesses can refine their decision-making, and through collaboration with academic institutions, they foster innovation and practical solutions. Dr. Wang and her team’s commitment to this synergy underscores the transformative potential of behavioral economics in reshaping the business landscape.
Dr. Siyu Wang, associate professor in the Department of Economics, heads up the Behavioral Economics Laboratory housed in Woolsey Hall, the new home for the Barton School of Business. Her research spans diverse areas such as business decision-making, information economics, managerial strategies, public policies, and environmental and energy economics. In her role as an associate professor in the Department of Economics, she not only excels in research and teaching but also serves as the Director of the Masters in Economics and Quantitative Analysis (STEM-designated) program. In addition, Wang serves as a research fellow at the Institute for the Study of Economic Growth, furthering her contribution to the field.
