The Behavioral Economics of Product Management
An introduction to building products using behavior insights
"What people say, what people do, and what people say they do are entirely different things." (Margaret Mead, Anthropologist)
I've never found a more accurate description of human behavior. And, of course, we all do it consciously or unconsciously.
This observation has been in my mind for the last eight months, not only because it is foundational for my Ph.D. thesis but because it got me thinking that there's never been a better time to understand the economics of human behavior and apply that to actual product management.
…but first, let's start with the basics.
Behavioral Economics
The Basics
Economists have traditionally believed in something called the rational choice theory. In summary, the theory assumes humans have solid and stable preferences and engage in rational behavior. As a result, our choices are logical, unbiased, and not susceptible to influence.
We perform a cost-benefit analysis whenever we pick up something off the shelves or make a decision. But, unfortunately, that is obviously not the case.
Enter the Prospect Theory
In the late 70s, Daniel Kahneman and Amos Tversky published Prospect Theory: An Analysis of Decision under Risk. This theory demonstrates that when given the possibility of risk and uncertainty, people don't make rational choices and are loss averse. As a researcher, I found their experiment fascinating, and I highly recommend that folks reading this look into it.
To step out of academia for a second, Kahneman and Tversky showed that humans don't make rational choices, especially when faced with certain situations or influenced by outside environments.
Their research was and still is revolutionary because it created the foundations for decades of research into behavioral science and the psychology of consumers.
Daniel Kahneman went even further with his research which resulted in Thinking, Fast and Slow, where he argues that humans think through two systems: System A (fast and intuitive) and System B (slow and reflective).
Using this framework, we can define Behavioral Economics simply as:
From Prospect Theory to Choice Architecture
Richard Thaler and Cass Sunstein promoted Choice Architecture in their book: Nudge: Improving Decisions about Health, Wealth, and Happiness. The term refers to the practice of influencing choice by presenting and organising the context in which people make decisions.
What I like about this particular chapter where they talk about Choice Architecture is the way it's written and that it starts with a famous Steve Jobs quote:
Design is not just what it looks like and feels like. Design is how it works.
There are some viral examples of choice architecture in there, but more frequently mentioned examples are:
How food is displayed in cafeterias, where offering healthy food at the beginning of the line or eye level can contribute to healthier choices
Or how a poorly designed classroom door can prevent students from skipping class (that was actually in one of Richard's Thaler classes!!)
A simple takeaway from choice architecture is that if you want to encourage users to do something, you have to make it extremely easy. Back to Steve's point about design.
Designing Product(s) for Behavior
When I first met my thesis supervisor, she gave me a straightforward task: take a pen and paper and define product management to me. Then, please explain me why I should care.
I immediately panicked like I was in front of a board of execs trying to explain why working on a new initiative was a good idea or not. My mind went into overdrive, even though I have been in Product for a while and had to explain this often enough.
I then remembered an excellent article by Marty Cagan where he defines a product in a mathematical equation:
There is no coincidence that the first component is the CUSTOMER because what is foundational for building a product is understanding your customer or user - their demographics, decisions, wants, needs, and pain points, in one word: BEHAVIOR.
My supervisor was (and hopefully, if she reads this, still is) happy. And I had at least a plan for what I would research. I was happy. Life as a Product Manager and Researcher was good.
However, as time went by and I read and then read some more, I realised there needs to be more academic research on behavioral economics in tech. There is still a big gap which I hope I can contribute to with some research.
Academia aside, if you work as part of Product Engineering Teams, you should hear things like understanding the behavior, so we can change it or design for behavior change. Everything is about a user's behavior.
As Product Managers, we should be highly motivated to:
obsess over user behavior SO we can be explicit about what we want to change.
Although user behavior is contextual, there are foundational goals that a product should achieve:
solve a real problem
make things easier for the user
reduce the cognitive load or repetitive tasks
change behaviors in a positive way
My underlying point is that as Product Managers we can architect users' choices, together with teams. We are in a very fortunate position to be able to do that.
However, as Richard Thaler famously signs his copies of Nudge , if you want to nudge, nudge for good.
More on that to come as I plan to dive deep into public policy, healthcare, and technology innovation, through the lens of Behavioral Science.
References are Resources
Prospect Theory: An Analysis of Decision under Risk (published in 1979) by Daniel Kahneman and Amos Tversky
Nudge: Improving Decisions about Health, Wealth, and Happiness (The Final Edition) by Richard H. Thaler and Cass Sunstein
When writing this I have:
used user to describe a consumer
used the US version of behavior and not the UK version of behaviour (personal choice)
used referencing from my Literature Review
not used any academical system of referencing