Behavioral Economics and the Service Organization

Abstract

This note summarizes some important learnings from the study of behavioral economics of which service organizations should be aware in order to enhance customers' emotional experiences and help direct their decision making—in an ethical manner. Excerpt UVA-OM-1548 Dec. 20, 2017 Behavioral Economics and the Service Organization Imagine you are searching online for an island beach vacation for your family this winter. You notice an ad for an all-inclusive resort with a 65% off special. You click the link and the pictures of smiling people running barefoot on the beach and the site's background reggae music transport your senses. You call and the incredibly friendly sales agent asks for your name and teases you with the current weather and the ocean temperatures, but then informs you that the special deal is not available during the dates you are interested in. Not to worry, she says, because there are several other choices that week, including another great package running at 25% off, though that one doesn't include complimentary breakfast. She mentions that this is the most popular package for guests in your situation. It still is 25% off, you figure. Near the end of the call, you are considering your choices. The agent searches a bit more and realizes she can offer you the free breakfast after all. You are overjoyed and decide to book the 25% off deal! Count another win for behavioral economics (BE), which uses psychological testing to determine typical biases people have that can drive their decision making. In the perfect world of classical economic theory, we would not alter our decisions based on the framing of options, the choices of others, or the order of the service experience. We would weigh the costs and benefits rationally and choose the optimal value. But we don't—at least, not all the time. Our emotions often guide us in ways we can't even articulate, or we make snap decisions based on rules of thumb—cognitive shortcuts called heuristics. This note summarizes some of the important learnings from the study of BE of which service organizations should be aware in order to enhance customers' emotional experiences and help direct their decision making—in an ethical manner. The Beginnings of Behavioral Economics . . .