Economic theory makes a fundamental assumption that simply isn’t true. That is, we’re highly rational, utility maximising agents with perfect information- enter behavioural economics.
The love child of social psychology and economics, behavioural economics asks what we actually do when making decisions, rather than what we are expected to do according to economic theory. A relatively new field, behavioural economics is some way off realising its full potential in the commercial sphere, however it has already given some brilliant insights into why consumers do the things they do.
Last week I attended a great talk by Kam Star at Digital Shoreditch that explored how behavioural economics can be exploited in the World Wide Web. Here are 5 of the key concepts and applications that I took away from the afternoon.
1. Social Proof
We are social creatures who like to feel part of something greater than ourselves. Many organisations have already tapped into this herd extinct, perhaps no one more so than Groupon. The fact that ’58 people have already purchased this voucher’ gives us the social proof that pushes us one step closer to making the purchase.
2. Loss Aversion
It’s become a well-documented fact that we experience losses more intensively than we experience gains. This human characteristic can be exploited by tweaking the language we use. For example, ‘enter for your opportunity to win’ may be less effective than ‘enter before you loose the opportunity to win’.
This concept is probably the easiest to implement. By drawing consumers’ attention to a very large number, any consequent number will seem small in comparison. We’ve put this concept to practice with the menu design for our client, Whyte & Brown.
4. Choice Paralysis
When asked, consumers always claim that more choice is better however in reality, too much choice can be paralysing. This is a case of less is more.
5. Decoy Effect
This is the phenomenon I found the most fascinating. By introducing an option that we don’t expect the consumer to choose, we are able to change their behaviour. To give an example, suppose you were given the following three options: ‘cake’ for £1, ‘chocolate’ for £2 or ‘chocolate and coffee’ for £2. My including the second option that nobody chooses, more people are inclined to choose the last option. Why? Because it easy to compare the last two options rather than all three and since our brain is lazy, this is what we do.
Once digested, these concepts make for a powerful toolkit that can be dispensed at every point of contact with your customer. By doing so, organisations can be in a position where the cognitive biases of a consumer work for them rather than against them. We’ve been working to apply these concepts to a B2B context, how could behavioural economics work within your organisation?