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Behavioral Economics or Behavioral Health ?

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Jul 28, 2020

In 2002 psychologists Daniel Kahneman and Amos Tversky won a Nobel Price for their work in developing the Prospect Theory in the late 70’s – which is one of the critical components of behavioral economics.  The core of the theory is people are prepared to accept a reduced upside gain to avoid a potentially more significant downside loss.  The greater the perceived risk of loss, the more we are prepared to accept a less than optimal experience or outcome.   The global pandemic is putting this theory to the ultimate test – not necessarily in terms of monetary return, but rather in relation to our personal health and of those close to us.  

Today, many consumers are making decisions about how they live their lives with one eye on reducing potential risk to their health.  How we shop, vacation, socialize, eat and – of course – how we bank – is being affected based on our own personal calculus relating to reducing the risk of contracting or spreading the virus. 

However, in ways Kahneman and Tversky could not have foreseen, the downside risk/upside outcome tradeoffs consumers may have had to live with even a few years ago have been replaced with opportunities to reduce their health risks without necessarily accepting a poor experience.    


Numerous data points in the last few months show consumers have embraced the opportunity to reduce health risk and motivated many consumers to try out and stick with new digital approaches to everyday activities – some of which ultimately may end up being better than the physical alternatives they have been used to.  Even as businesses such as bank branches, restaurants and retail shops have reopened, consumers still seem to be largely choosing to maintain their new digital behaviors.   Why is this?

One answer is likely the comfort and convenience of the new behavior.  Once you get used to buying a range of goods online – getting precisely what you want at a price perceived to be the best available – you are likely to continue to conduct your purchases in that manner.  

Some of this may be based on risk avoidance.   Since gathering in crowds is a critical trigger for transmission and spread of the virus – this behavior may be one many/most consumers will work the hardest to avoid – at least until vaccines have been developed and widely available. 

Some of this may also be based on a reduction in enjoyment.  For example, going out to enjoy a meal today comes with frictions which didn’t previously exist; including masks, social distancing, going out in smaller groups, plexiglass barriers etc.  The experience just may not be the same. 

Even in May after the virus had ravaged countries, businesses and economies, most believed things would – over the course of a few months – begin to normalize.   Safe to say most people today believe health experts who caution it will take at least many months if not a year or more for us to reach this point.   And, Federal Reserve officials have cautioned in multiple speeches and interviews in recent weeks that the U.S. economy faces a deeper downturn and a much slower recovery which means businesses will need to evolve and adapt, exploring new ways to provide the optimal experience consumers will be expecting.   

Impact on Banks

Looking at banks and card issuers, it may be hard to argue customers ever really had an expectation of  “enjoying” an interaction with the bank regardless of whether it was an account opening/onboarding, conducting a transaction in a branch, or resolving an issue through a phone call with customer service.   But, the satisfaction quotient of any digital interaction between customers and the bank or issuer will be driven by reducing Friction for the customer upon engagement thereby increasing the convenience of the transaction while also eliminating any risk to the customer’s health. 

Amazon is an example of a company which has done remarkably well at finding and eliminating friction. From Amazon Prime to free shipping and 1-click ordering, many of its most popular innovations are focused directly on the elimination of things which create friction. The result – for both Amazon and its customers – is a faster, easier and more efficient way of finding, buying and delivering goods.

Account opening, validating a customer’s identity, enrolling in and using online banking and authorizing transactions are just a few of the potential friction points which can prevent a bank’s customer from engaging or lead to frustration.  Banks should take a page from Amazon’s book and think about what they can do to help reduce obstacles for customers across multiple products.  Embracing technology and promoting tailored workflows based on a customer’s past activity or credit history, should remain a critical focus for banks and issuers as COVID continues to dominate the global landscape.

Evolution will require re-tooling and investing in solutions, while optimizing performance is even more critical as financial institutions look for ways to fund and create the friction free experience consumers have now come to expect.

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