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Behavioral Economics Powered by Machine Learning and AI Techniques | Pricing Matters

There is a growing focus among pricing practitioners to use price science to drive pricing decisions. It’s a fabulous trend with many recent innovations in the use of advanced techniques such as machine learning and AI. It is important however to consider behavioral economics because our economic decision making is often shockingly irrational. Naturally, we are not referring to your personal decisions, dear reader, because you are always rational, right?

Consider a recent TED presentation by Dan Ariely, Professor of Psychology and Behavioral Economics at Duke University, Are We In Control of Our Own Decisions? Professor Ariely shows a number of highly engaging examples of irrational decision making that includes an intriguing pricing study.

Incorporating behavioral economics into pricing models can be achieved by the scientific method in a process that consists of (1) domain experts conjecturing a hypothesized strategy, (2) surveys conducted to get market feedback on the hypothesis, (3) price experiments (e.g., A/B testing) executed in a representative market, and (4) learnings used in training data for ML algorithms and AI model definitions. Repeating the process then becomes a positive cycle of learning, anticipating buyer behavior and optimizing strategies.

Another perspective on behavioral economics is provided by Tom Brzezinski in a Vistaar webinar: “The Psychology of Pricing: Is a Penny Just a Penny?” He examines how customers perceive value and pricing. Tom has over 30 years of pricing experience, and he relates that experience to key topics focused on the question—what drives one customer to accept a price increase and another to buy your competition?

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Behavioral Economics Powered by Machine Learning and AI Techniques – Pricing Matters.