In the Quest for Rationality

One of my takeaways from my M.B.A was the understanding that decisions are often made rationally or over time tend to be rational in nature. This was built as an assumption into most of the frameworks I learnt in Economics, Finance, Strategy and Marketing. These models were generically in the form “Evaluate the current situation using XYZ parameters; Based on these parameters and assuming things happen rationally, if you do ABC actions, you can expect PQR outcome”.

I have used this assumption of “Rational decision making” many times in my job when I have prepared a business proposal or a new product initiative or while pricing a solution (e.g: If this product delivers ‘4X’ cost savings to the customer, the product should be priced atleast ‘X’). and I haven’t always been successful at it. There are many times I have wondered why some of my potential customers are not able to see the value against what they are paying for. Other case studies of customers using the product and reaping benefits wouldn’t change their decision. We would more or less conclude internally that the customer was not making a rational decision.

Such instances would make us go back to our product MRD and check if we really missed something. There would be discussions on how to optimize the solution to bring the costs down, remove less important feature and come up with a customized proposal and yet get rejected again.

What was the problem here? Was the customer really behaving rationally? Were we just wasting our time with this customer? Was it a communication issue?

I feel it was our definition of Rationality that was the problem. Our notion of rationality is more or less tied in currency terms i.e ‘4X’ cost savings, ‘5X’ revenue increase etc. Basing a decision on these numbers implies “economic rationality”. However this is not the only aspect of Rational thinking.

Imagine this scenario. The cost of Beauty facial kit is around Rs 400 – Rs 800. This kit will last for atleast 4 sittings. You can use the kit at your own convenience. Even the directions are detailed and don’t need much effort to understand. But still, People spend time booking appointments at parlors, spend time on travel & waiting and pay Rs 800 per visit. Where is the “economic rationality” here? The customer in this case, knows about the price difference, but still chooses to take the higher cost route?? And this is where theory breaks down in practice.

Few key observations I have painfully learnt about Rational behavior.

  1. Economic Value is not the only criteria for rational decision making. Emotional and Physical Value also drives decisions.
  2. Rational behavior will not just be depended on “Extra money I get if I buy this”. It will also be dependent on “What complexity am I adding to my life/ company if I buy this”.
  3. Decisions are made by people by attributing importance ratings for the different types of rational thinking. The importance ratings changes from situation to situation. It is difficult to guess if the person is going to think about a decision economically or emotionally or a combination of both!
  4. Building a product / solution that caters to different types of rational behavior might be good. But if your product caters to only one type of rational behavior, be prepared to forego some customer segments.

The more I watch people around me making decisions, the more I learn (and unlearn) about “rationality”.

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