Book Review: Basic Instincts

 Basic Instincts by Pete Lunn is an interesting take on behavioural economics that's gets better as it goes on, with applications to marketing and pricing being the highlights. It is not the best introduction to behavioural economics. It is not the best introduction to the psychology of decision making. But it is useful. (It is also full of incredibly interesting meta economics which I lay out in a seperate post.)

Here are some of the most useful highlights regarding marketing:

• Relationship marketing, where companies intentionally build relationships with consumers, is built on an accurate understanding of both the "perceptions and behaviours of existing and potential consumers". Also part of relationship marketing is the importance of likeability - brands try to be funny or irreverent in an attempt to get consumers to like them.
• The intrinsic desire for familiarity is why people are more likely to choose what they feel they already know. This manifests itself in marketing with firms trying to make their products familiar with consumers. Amongst other things, this explains why household names are used to voice commercials.
• The desire to belong manifests itself in marketing too. For example, car adverts portray ownership as membership of an exclusive club, reinforced by paraphernalia proudly bearing the logo or slogan. To summarise, "it's what your says about you..." 

 
Regarding pricing:

• Firms should beware price hikes as "People think a price should fairly reflect costs of production, not an equilibrium between supply and demand." (p.199)
• Fairness is highly valued by consumers, and woe betide any firm that is perceived to be acting unfairly. For example, in July 2007 Apple released a new iPhone for $599. In September 2007 they reduced the price to $399. This is just a textbook example of price discrimination - making those who were desperate for the iPhone pay more - but it was judged by many to be unfair. After a public backlash Apple offered the original customers $100 back, but the damage to their reputation had been done.
• People care more about the present than the future. Thus the Gillette pricing model is genius: a small upfront cost followed by regular expensive payments. Once you've bought the razor you're unlikely to change, despite the expensive blades which you probably didn't think too much about when you first bought the razor.

And a nugget of wisdom regarding management:

"Human organisation is based on our unique ability to trade favours. Effective organisations create a good climate for such social exchanges. This is the defining characteristic of successful organisations, just as it is of successful human societies." (p.164)
 
But I leave you with some political economy that succinctly details a good reason to doubt free market economics:

"Markets are not deterministic and efficient allocation machines. They behave differently according to levels of trust, common identity, the availability of information, perceptions of fair prices, and uncertainty about value and about the future." (p.268)

Genre: Behavioural Economics
Accessibility: 7/10
Accuracy: 7/10
Readability: 7/10
Usefulness: 9/10
Verdict: A Useful Read