Introduction to Behavioural Economics

Graymatter | Behavioural Economics
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What on earth is
Behavioural Economics?

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Behavioural Economics (BE) has emerged
from psychological studies exploring the
biases in our decision-making.
What is it?

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Classic Economics
▪ Consumers are entirely rational.
▪ Supply and Demand drive what
people will pay.
Psychology / Behavioural
Economics
▪ Consumers are emotional and
can be persuaded.
▪ Humans are “predictability
irrational” and their decision-
making can be flawed.

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BE in action:
Blue pills have a powerful
placebo effect and a significant
effect on calming people.

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BE in action:
Printing a fly on the urinals at
Schiphol Airport reduced
cleaning costs by more than 20%.

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Apple have employed a variety of BE techniques to embed
“their products and operating systems deeply into our psyches”
iPhones have been shown to improve ratings of people’s attractiveness through a history of “ads in Vogue,
supermodels at product launches and building physical stores as glass temples to the brand”.
• Priming: each new iPhone positioned as “the most revolutionary design & tech advanced seen in years”.
• Framing: the highest cost smartphone is the only one that can do everything you need.
• Social Proof: launch events promoted to create queues outside Apple Stores and then pictures shared
widely.
• Availability bias: both a premium (exclusive) and mass-market product.
vs

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Introduction to our
Two Thinking Systems

System 1
• Subconscious
• Frequent
• Instinctive
• Emotional
System 2
• Conscious
• Infrequent
• Deliberative
• Logical
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The Homer Simpson Brain
System 1
Calorific foods
Gambling
Forgets to take medicine
Drinks too much
Smoking
Acts impulsively
Take drugs
Spend recklessly

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The Spock Brain
System 2
Process endless amounts
of information
Determines the
appropriate behaviour
in a social setting
Never swayed by others’ opinions
Uninfluenced
by emotions
Angry
Curious
Elated Saves for
retirement vs.
spending as
you earn
Enables parking
in a tight space

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Fast brain examples

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Fast brain examples

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Slow brain examples
If a bat and a ball cost $1.10 together, and the bat costs
$1.00 more than the ball, how much does the ball cost?

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Slow brain examples

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Evolution has hardwired us
to think like this

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Why is this important?
Understanding how decisions are
made gives us a better chance of
influencing people’s behaviour.

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Some BE principles
1. Anchoring
2. Availability Bias
3. Chunking
4. Confirmation Bias
5. Endowment Bias
6. Framing
7. Hedonic Adaption
8. Loss aversion
9. Relativity Bias
10.Reciprocity Bias
11.Scarcity
12.Social Proof

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1. Anchoring
The first fact, number, or figure a person
hears will bias their judgements and
decisions down the line.
• A technique used by retailers to promote their
sale events and the likes airlines / package
holiday / hire car companies to nudge
consumers into taking all the little extras –
introduced individually so they appear small
and a tiny proportion of the total cost, but
they soon add up.
• Apple use this to encourage you to opt for the
32GB over the 16GB – “it’s twice as good, but
only 50% more”.

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2. Availability Bias
People tend to focus on what easily
comes to mind (often vivid or recent
events) and give undue weight to
those events.
• People are poor at assessing risk and heavily
over-estimate the incidence of rare
occurrences like shark attacks.
• Heavy smokers are typically aware of the
potential impact on their health, but can be
heard pointing to elderly smokers to justify
their continued habits.
• The same is true of obese Americans – twice
as many deaths each year due to diabetes &
stomach cancer than homicide.
• After domestic plane crashes in the US, train
ticket sales increase.
• The more people hear positive things about a
brand, the greater their purchase intent.

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3. Chunking
Miller’s Law (1956): the
average person can hold 7
pieces of information in their
short-term memory.
Implication: we’re more likely
to remember information or
engage in a task or activity
when it’s broken down into
smaller chunks.
A 21-day course of
medication is more likely to
be completed (by 21%) if split
into 3 one-week bottles.

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4. Confirmation Bias
Confirmation bias is the tendency to
search for, interpret, favour and recall
information in a way that confirms one's
pre-existing beliefs.
• We’re geared to favour information that tells us
we’re correct and shun information to the
contrary - German cars are reliable, Japanese
cameras are the best and Columbian coffee is
the stuff of kings.
• Confirmation Bias means it requires inordinate
efforts to convince lapsed customers and
rejectors of the brand.
• Similarly, it’s best to ignore heavy buyers -
their purchase frequency means they are
routinely exposed to the brand anyway and
pre-disposed to respond to ads, so they’ll
overhear campaigns aimed at other people
anyway.
• By focusing on the lukewarm, spend is
targeted to where it works best.

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5. Endowment Bias
People overvalue what they’re
emotionally invested in.
• In a famous study, 1/2 a class of students was
given a coffee mug. They were then asked
what they’d sell their mug for. The other half
1/2 of the class (those without mugs) were
asked what they would buy one of the mugs
for. The sellers averaged $5.25, while the
buyers were only willing to pay more than
$2.25 - $2.75.
• In the car industry, we see this with trade-ins.
Customers are much more focused on getting
a good price for their current car than a new
one. Used car dealers inflate their prices so
that they have ample room for negotiation.
• It’s also the basis for ‘try before you’ buy
promotions (mail order companies,
subscription services, etc.)

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6. Framing
How a task is framed can have a
significant impact on how
consumers respond.
• Wagamama use long-communal tables to
‘frame’ a different dining experience:
“In the name of kaizen, our ingredients are
cooked fresh, served fresh, every bowl and
plate is served as soon as it is ready”. Seen
through a normal ‘frame’, dishes arriving in an
unexpected order would appear chaotic.
Redemption rate: 19%
Redemption rate: 34%

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7. Hedonic Adaption
The pleasure derived from a shiny
new belonging wears off as you
get used to it.
A perfectly satisfied customer can be nudged
into comparing their current product / model to
a new, superior one. This creates an ‘upgrade
itch’ where none previously existed.
‘Innovation’ provides a rational justification for
early replacement while the real motivation is
an emotional one – the ‘bragging rights’ that
come with it.
In product terms, it’s the reason why games
are continually relaunched after initial success

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8. Loss Aversion
People react to losses more strongly
than gains and try to prevent them
more than they try to make gains.
A tried and tested method in Retail – “Limited
time offer”, “Hurry ends soon”, “Everything must
go!”, abandoned cart emails highlighting no. left
in stock.
Ocado have introduced Flash Sales as you
proceed through checkout – the sale lasts only
as long as you stay on the page.
Emphasising the potential for loss makes a
proposition more motivating - film launch
campaigns which include an ‘ending soon’
phase boost their ticket sales by c36%.

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9. Reciprocity Bias
The subconscious need to give
something back when something is
received (such as a compliment,
favour or gift).
In 1975, 2 American socialists sent 578
Christmas Cards entirely at random. 1 in 5
recipients took the time to find a card, write a
message and send it back to the experimenters.
Spotify provides a free trial for their
premium membership, which can be
cancelled at any time at no cost. They
use very positive language (repeated
use if the word “free”) to ‘nudge’
consumers into action.
Converse offer a royalty-free sample library
for musicians in exchange they’re
encouraged to share their creations using a
campaign hashtag.

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10. Relativity Bias
Consumers have no fixed concept of
what is good value. Instead, they work
out whether a price is fair by
considering what they’ve previously
paid for something similar.
Implication: choices are relative and influenced
by the alternatives available - you can boost the
consumer’s willingness to pay by changing their
comparison set.
• Nespresso charge 47p for a pod of Lungo
and encourage you to compare the price to
the £3 you might have for a flat white.
vs

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11. Scarcity
The less there is, the more you want it.
This bias is the basis on which the luxury goods
sector charges sky high prices.
In 1975, University of Virginia students were
asked to rate the quality of a batch of cookies.
They were asked to take one from a jar
containing either 10 or 2 cookies. The scare
cookies were rated as significantly more tasty.
Participants were, on average, prepared to pay
11% more for them.

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12. Social Proof
The tendency to look to others to guide
our own decision making – sub-
consciously, we care less about
seeking perfection & more about
avoiding catastrophe.
• Apple iPod’s white headphones stood out
against the black & grey of regular
headphones.
• Magners’ Irish Cider stood out at first by
promoting glasses loaded with ice –
requiring the bottle to be left on the bar or
table for twice as long as needed otherwise.
We care less about seeking perfection
and more about avoiding catastrophe.
AirBnB use social proof to build trust and
optimise bookings.

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