Earlier this week, the Nobel Foundation announced that Professor Richard Thaler of the University of Chicago’s Booth School of Business had won the 2017 Nobel Prize in Economics. Thaler made his bones through his study of behavioral economics, the search to understand how psychological, social, cognitive, and emotional factors affect financial decisions. His newest recognition is a timely reminder this tax-planning season that we can’t appeal to logic and reason alone to sell our services. The more you know about the science that earned Thaler his win, the more effective you’ll be in building your business.
Did you ever take an economics class in college? If so, your professor probably introduced you to an impressive fellow named “Rational Man.” Rational Man looks at all his financial choices through the clear cold lens of reason. He balances pros and cons, weighs factors, and calculates expected values. In the end, he makes the rational choice. Together, acting rationally, we all make up the great “market,” which translates rational choices into solutions for problems involving scarce resources.
Except, of course, that’s nonsense. “Rational Man” doesn’t exist. People don’t act rationally at all. We act emotionally. Our judgment is clouded by bias. (And economists really ought to be studying Rational Woman, because studies show that when it comes to investing, women are less emotional than men.)
The good news is, we can study how those factors affect decision making. As the Nobel Foundation said in announcing Thaler’s prize, he “has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.”
Thaler seems determined to prove himself right with his prize money: he has already announced he intends to spend the million-dollar prize “as irrationally as possible.”
Here at TaxCoach, our marketing approach is built on a solid foundation of quantifying and communicating your value. If you objectively save a client $10,000 in taxes, and you communicate that value to him, you’re appealing to the most calculating part of Rational Man’s logical mind.
But sometimes logic and reason just aren’t enough. Sometimes you need more. So we incorporate insights from behavioral economics into our system. Take pain versus gain, for example. If your prospect isn’t excited about saving a few thousand dollars (gain), take advantage of the “endowment effect” to remind them that they already have those dollars, but their failure to plan is letting that money slide through their fingers (pain). Behavioral economists like Thaler have established that prospects feel the emotional impact of pain twice as hard as the emotional impact of gain.
Thaler has written several popular books on the topic, and he’s definitely worth reading once you’ve knocked out the rest of your extensions. Start with Nudge , which he co-authored with Harvard Law School Professor Cass Sunstein. The book reveals how people really make choices, and outlines how to use “choice architecture” to nudge people to make better decisions. You’ll quickly see ways that you can structure your marketing and presentations to help nudge prospects to hire you!