Behavioural economics 101

It is time for the service industry to put in place a checklist to ensure that customers are treated well

Consumer behaviour often appears irrational and counter-intuitive. Small things get blown out of proportion. And sometimes what should have been a flare-up dies down quickly. Behavioural economics is now in a position to give us a new lens for analysing consumer behaviour. If we apply this lens we can decode the “irrationality” and see how it was in fact very “rational”.

It is true that in this day of 24X7 social media, you cannot get away with treating your customers shabbily. And if you stonewall questions you get punished even more. A few weeks ago United Airlines CEO Oscar Munoz learnt the lessons the hard way. There has been a lot of criticism against how the airline treated the passenger David Dao. But when you go behind the story you discover that United might have missed a few critical tricks on how to handle passengers, let alone how to physically carry a person out of an aircraft.

The story is that after the passengers were seated in the aircraft, but while the plane was still at the gate, the Republic Airlines flight [operated by United] crew announced that it needed to remove four passengers to accommodate four staff members, who had to cover an unstaffed flight at another location. Passengers were initially offered $400 in vouchers, a hotel stay and a seat on a plane leaving more than 21 hours later if they voluntarily deplaned. The offer was then raised to $800 since there were no takers for the first offer. With no hands still going up, a manager boarded and selected four seated passengers, albeit randomly, to deplane. Dao, a 69-year-old Asian American doctor, was among the four selected. He insisted that he had patients who needed his attention and refused to leave the aircraft. In the ensuing scuffle, Dao suffered injuries and the entire episode became a viral sensation.

Here are some facts, thanks to Google maps. It takes less than five hours to drive down from Chicago, Illinois to Louisville, Kentucky.

The offer made by the airline ($800) was indeed generous. Yet, why were there no takers for the offer?

Let us now take a detour into behavioural economics and seek some answers. In the book Thinking, Fast and Slow, Nobel Laureate Daniel Kahneman speaks of several “effects” that affect our behaviour. We do not behave rationally very often and behavioural economics experts have labelled this under various “effects”. Some of the more commonly observed effects include endowment effect, loss aversion, framing effect, hyperbolic discounting, hedonic adaptation, goal gradient effect, choice paradox, anchoring bias, inaction inertia effect, reciprocity effect.

For example the choice paradox [Sheena Iyengar’s The Art of Choosing speaks of this experiment eloquently] says consumers tend to get confused if there are too many options available for them. In an experiment consumers were given an option to buy a jam bottle at a discount; in one experiment they tasted from five variants and in another they were offered 20 variants. The consumers in the five variants experiment bought more than those in the 20 variants experiment. Logic would say that more the choice, the more consumers will find something that is to their taste. But choice paradox proved that too much choice tends to confuse consumers.

Let us look at the endowment effect. We tend to ascribe a much higher value to something we have, as against the same thing that is available for sale. In an experiment students who had won a lottery to attend a football game [ticket price of $50] would not give up their tickets for even $1,500, as against students who did not win the game, who were not ready to offer anything more than $150. So if we have something we feel we are “endowed” with the product and are reluctant to give it up.

It is here that United might have made a critical mistake. After reading all the stories that appeared in the media, I was left a little perplexed that the episode even took place. So some more digging revealed a Wiki page with all the micro details and enough citations.

Airlines do overbook flights and this is common in the US. And passengers are offloaded often enough. So where did United go wrong?

I think the mistake made was to wait till the passengers had all taken their seats. They were now captive to the endowment effect. They then refused to give up their seat for a fabulous prize. A Chicago-Louisville round trip often can be had for $250. But the passengers refused an offer of $800.

The airline manager should have made the offer before passengers boarded the flight, at the boarding gate. At that stage passengers only had their boarding cards in hand, may be a digital boarding card on their mobile phones. They did not have a seat in their possession. So giving up a seat could have been achieved for a much lower price. But once the passengers were seated, the endowment effect played spoilsport.

That said, the way an elderly person was physically carried out of the aircraft is unpardonable.

Service industry needs to delve deeper into the many dynamics of behavioural economics; that could save it a lot of time, effort and reputation.

For a start, there is this wonderful Coursera course on behavioural economics offered by Dan Ariely, professor of psychology and behavioural economics at Duke University.

And there are more than 20 books on the topic. It may be worthwhile to take out some key points from behavioural economics gurus, and put in place a set of best practices for the service industry.

The airline industry implemented the Checklist Practice/Manifesto [Atul Gawande’s wonderful book captures the story] and that is reported to have brought down air accidents to a fraction of what it was. Now it is time to put in place a behavioural economics checklist to ensure that customers are treated better. In their own eyes.