Why marketing won at leapfrog

Marketing left finance and economics in the dust. Marketers have recognised and have been using principles of psychology in branches like advertising for over a century. In the late 1800’s Harlow Gale was a pioneering psychologist studying the process of persuasion. His conclusion was that a subjects’ attitude towards an advertisement depended on cognitive processing as well as an affective component (the feelings the message evoked). Walking into the office of an economics professor in the 1950’s claiming that psychology was critical to models of financial preferences may have yielded the same reception as someone from the flat earth society.

People get basically three things when they buy any product or service, financial or otherwise;

 The first is called “utility” and is what the fields of economics and finance have been fixated with since the 18th-century when Swiss mathematician Daniel Bernoulli proposed this concept as an indication of usefulness or benefit from consuming any good or service. Utility is a handy concept here because it can neatly be used to explain and predict preferences. Obviously we choose the portfolio or investment that gives the most usefulness for us or "utility" and so if we give people a choice they always choose the one with the biggest number. Even in what is termed "modern" portfolio theory in the 1950’s, the economics professors we referred to earlier are still talking about maximising utility by choosing investments with high expected returns or low risk as the clear rational choice. This would be a great way of describing how people make financial choices when they present in a super simple fashion. You have one year to invest and there are 2 banks offering one-year deposits. Blue Bank offers you 6% and Red Bank offers you 7%. Easy choice assuming of course that both banks are equally financially stable. But what about choosing between 1500 unit trust funds?

The second benefit is an “expressive” one. This gives someone an opportunity to express something about themselves by making a purchase. Many South Africans buy a Land Rover without any intention of cruising the Namaqua trail. The expressive benefits of ruggedness, social standing in some cases or perhaps the option to indulge one’s exploratory urges are clearly worth the additional fuel and maintenance charges.

The third and final are emotional benefits. A great illustration of this is the famous John Caples ad from the 1920’s. The ad shows the protagonist centre stage at a party getting ready to take his seat at the piano. The guests are depicted around him turning to each and whispering. Some are chuckling. Can he play? The lengthy copy is a testimonial from guests that details how surprised and amazed they were at our protagonists’ piano prowess – they had no idea he was so good and of course now John is the life of the party earning the admiration of friends and acquaintances alike. The advert was selling piano lessons. Not by price, who is giving them or lesson time but by how the customer is going to feel when they surprise and amaze friends and family. Genius.

Marketers have managed to extract value from products and services by adding expressive and emotional benefits that consumes are happy to pay for. Meir Statman’s paper on the second generation of behavioural finance reminds us that L’Oreal’s tagline, “Because I’m worth it,” celebrates their lofty prices as an investment in the purchasers’ self-worth. The more one spends the more “worth it” one is.

Why did marketing leapfrog finance? Likely because it needed to. Try selling a Bentley appealing to utility alone – it gets you from A to B but in price multiples of 10 compared to something else offering exactly the same economic utility. Nobel-winning economist, George Stigler, defined advertising as the “provision of information about the availability and quality of a commodity.” In a world of utility alone this may be true – but this is not the world we live in.  

 Nobel laureate, Richard Thaler, in a famous interview with Barry Ritholtz reflected on how economics and finance got it so wrong. So wrong that the field of behavioural economics and finance were created to consider in part expressive and emotional benefits in our financial decisions. For example, your investments can also say something about you. Investing in a socially responsible firm sharing your values is something that people are prepared to sacrifice, if need be, higher investment returns for. Thaler explains that the mathematisation of economics was to create more predictability in financial and economic models because behaviour is easy to predict in a rational world by simply writing “max” and “solve” in these models. It turns out we are far more complicated than that.

Necessity is usually the mother of invention. Marketing leapfrogged finance and economics because it was necessary to understand the customer much sooner. Until recently it has been sufficient to build investments that offer the greatest return or lowest levels of risk possible. This is no longer sufficient in a complex and emotive investment world where reaching financial goals is not easy. Understanding investor decisions in the face of fear and greed in a profession where financial therapy and coaching is fast becoming the core value proposition in financial services necessitates a deep understanding of what makes investors tick.