What’s wrong with the math and statistics that go into economic and business models? How effective are market questionnaires?
Rory Sutherland insists that, for the most part, the study of economics is completely detached from the realities of human behavior. In his book Alchemy, he provides advice on how economists and business leaders should go about truly understanding what drives consumer choices.
Continue reading to learn why Sutherland believes that significant assumptions in economics and business are faulty.
Faulty Assumptions in Economics
Sutherland contends that economists simplify human interactions so that they’ll fit into mathematical models and then use those models to make logical predictions that don’t account for the underlying messiness of human behavior. Despite the work of scientists such as Daniel Kahneman to debunk traditional economics, Sutherland contends that misguided assumptions in economics still rule the day. Economists and business leaders continue to rely on two long-disproven ideas—that people are consciously aware of their motivations and that they make rational decisions based on achieving their stated desires.
(Shortform note: While Sutherland believes that using statistics to explain human behavior leads to erroneous results, data scientist Cathy O’Neil goes a step further and says that using statistics to make policy decisions is actively dangerous. In Weapons of Math Destruction, she argues that mathematical models reinforce societal prejudice by lumping individuals into large groups and perpetuating systemic inequality. When used for purposes such as issuing credit, screening job applications, or approving mortgages, these faulty economic models have an outsize impact on low-income families and people who fit into other marginalized categories.)
Faulty “rational” assumptions in economics don’t just harm the public; they do a disservice to the businesses that make them. For instance, many industries rely on market research to determine what products and services to offer, but market research rests on the assumption that people know the reasons behind their decisions.
To find the real reasons for consumer behavior, Sutherland argues that businesses need to drill deeper than superficial market questionnaires, sometimes asking questions to which consumers and businesses think they already know the answers. Sutherland argues that unconscious motivations are consumers’ real driving factors, and any logical explanations they give for their choices are rationalizations provided after the fact.
(Shortform note: Sutherland presents the study of unconscious motives as being outside the normal realm of economics, but that isn’t strictly accurate. Consumer research has clearly shown that unconscious behaviors such as copycatting others, judging by stereotype, and making decisions out of habit are all strong determining factors of our actions. For example, consider the irrational act of paying a high price for movie theater popcorn, which many people do on a regular basis. Though some economists argue that theaters charge high snack prices to keep the cost of movie tickets down, people mainly pay their exaggerated prices because eating popcorn at movies is a widely ingrained habit, a fact that theater owners are perfectly aware of.)
Despite the documented power of the unconscious, many economic models are based on the assumption that people make conscious, rational decisions to maximize the chances of achieving what they want. Sutherland writes that nothing could be further from the truth. Many of the choices people make seem completely irrational on the conscious level—it’s only when we understand our unconscious drives that human behavior starts to make sense. Unfortunately for economists, we can’t jot down our unconscious motives on a survey or enter them as data points into a spreadsheet, which is why unconscious factors are largely ignored by decision-makers in business and government.
(Shortform note: Another way of phrasing Sutherland’s argument is that economic models are flawed when they assume that people only consider economic factors when making decisions. In Misbehaving, economist Richard H. Thaler explores this in depth, citing many basic human behaviors that are non-optimal from an economic mindset, such as that people overvalue their current possessions, that they prize cooperation and fairness even when it’s against their economic interest, and that people care more about short-term financial gain than hypothetical long-term rewards. Thaler doesn’t explain these behaviors, but Sutherland cites evolutionary reasons—cooperation and protecting resources pays off in our species’ long-term survival.)
