The company has sought to bridge that disconnect between product and intended result with the help of behavioral psychologists, whose research helps break down why people are motivated to make certain decisions.
The company, which has tripled in size since last spring, leans on a two-member scientific advisory board that acts as a supplement to its board of directors. While the latter advises on issues of money and company direction, the former offers guidance on product development and consumer outreach.
“I think we maybe are an exceptional case, but our bottom line is very, very dependent on our ability to achieve this public good, which is to reduce energy consumption,” said president and co-founder Alex Laskey. “So there are a lot of psychologists and economists who share that interest, who are themselves thinking about how to achieve this public good.”
The applications of behavioral psychology and economics in business are varied, though a measure of how widely they are applied is difficult to come by. At least one other promising start-up in the District, HelloWallet, also makes use of the discipline. Its soon-to-be-released software encourages financial responsibility.
The application of psychology and consumer behavior in many ways runs deeper than just advertising, where executives have long sought the right images, words or features to attract buyers. Psychologists played an integral role in both companies’ inception and the software they’ve built.
“This is among the richest fields in the social sciences,” Laskey said. “This is where some of the best economists and psychologists are working, so there is a tremendous amount of new literature that’s being produced. We’re not on top of all of it, but our advisers are. It’s their job to be.”
Brainpower in business
HelloWallet founder and chief executive Matt Fellowes conceived the company after his work as a personal finance expert and research fellow at the Brookings Institution. So in many ways, research is the foundation of the business.
Chief Technology Officer Steve Wendel now works most directly with the team of behavioral economists that the company has recruited as it designs a product to improve financial literacy while motivating people to make better spending decisions.
“In the end, our business is based on giving quality advice that actually helps people meet their goals, so everything we’re doing is toward that [end],” Wendel said. “And the advisory board is helping us give better advice.”
The company’s advisers — it has volunteers as well as a contract with researchers at Rand Corp. — also dig into the product enough to offer seemingly minor suggestions that could help influence users. For example, researchers found people are more motivated to put money in a savings account marked “college fund” if it’s personalized with the name and photo of their college-bound child.
“[We] try to get a better understanding of what makes consumers tick,” said Dartmouth College professor Jonathan Zinman, a behavioral economist who serves as an adviser to HelloWallet. “And basically the model research-wise is to try to come up with innovations that provide a win-win for the consumer. . . and the service provider.”
Opower uses behavioral psychologists to a similar end. After all, the utilities who buy its software aren’t likely to pay for a product if it can’t deliver on its promise to curb energy usage.
Laskey said researchers have found that people are less inclined to turn off the air conditioning or minimize electricity use when simply told that it will save them money or that it will benefit the environment. What motivates them most? Peer pressure.
Opower compares customers’ energy consumption to that of 100 similarly sized homes in their geographic area, going so far as to rate users depending on how more or less efficiently they consume power. The company is now toying with the idea of shrinking the comparison to 45 households because smaller groups have been found to inspire a greater sense of competition.
“The key for us is that it not be the psychology of manipulation but of simply informing people in ways that they found especially attractive and to which they were especially receptive,” said Robert Cialdini, an Arizona State University professor who has authored several books on the psychology of persuasion. He’s been a scientific adviser to Opower since its formation.
“The people we work with are all academics, so they’re very intellectually curious,” Laskey said. “They don’t have an economic interest in our company, so what they’re interested in is testing some of the hypotheses they have in their own independent work.”
Laskey said the lack of financial investment creates a different dynamic between executives and scientists compared to the company’s board of directors, which includes investors from New Enterprise Associates and MHS Capital.
“They are really, really exceptionally good thought partners and in some ways there’s this sort of zone of comfort. We’re not accountable to them financially. We’re only accountable to them intellectually,” Laskey said.
A new discipline
Behavioral psychology and economics are broadly seen as new disciplines in the academic community, said Roland T. Rust, a University of Maryland marketing professor who does not advise any local companies.
“The economics community has sort of caught onto this in the last five to 10 years, relatively recently, because economics has always assumed that everyone is rational and they maximize utility in a very rational way,” Rust said.
In reality, emotions and the actions of peers, among other factors, hold sway over the decisions that people make. The rational conclusion is not always the one people settle upon.
“You have to understand the underlying psychology of people before you can come up with” effective marketing and products, Rust said. “You have to understand, in a deep way, what’s going to connect.”
Cialdini sees the application of behavioral science to business as a natural fit.
“Part of this trend, if you see it moving in that direction, is a recognition on the part of a lot of organizations that evidence-based decision making is the only way to go,” Cialdini said. “The days of relying on hunches and speculation, and even the histories of the CEO and managers, bring only limited success.”
Both Cialdini and Zinman agreed the commercial sector may be able to integrate their findings more quickly than the government. Policymakers often have more factors at play when making a decision, they said.
Research “just gets swallowed up and you never see it again because government is such an enormous, complex system with all kinds of constituencies and interests to be served,” Cialdini said. “But you take a small start-up like Opower that’s in the business of making something happen fast and has a goal that’s prioritized above all others, they can do it.”