How to apply Behavioral Economics to impact the business?

Category: Behavioural Economics, analysis

Hub Day: Behavioural Economics
Brands need to understand the emotions and cognitive biases that come into play when making purchasing decisions.

The world has become a complex place for customers when it comes to choosing from among so many different stimuli and options. It’s under these circumstances that decisions are mostly made automatically, intuitively, quickly and unconsciously.

People are constantly making purchasing decisions, all of which have an impact on the KPIs of any company. That’s why brands need to understand not only the rational and deliberate conscious side of the customer (System 2 of the brain), but also the more instinctive and automatic side of the brain (System 1). Brands need to understand the emotions and cognitive biases that come into play when making purchasing decisions, so that they can optimize customer interactions in line with these emotions and inclinations.

Customer decisions are mainly tied to unconscious and intuitive processes.

Guillermo Paris, Qualitative Researcher in The Cocktail Analysis.

This generates a very significant blind spot when it comes to understanding user decision-making, meaning that those brands that strive to comprehend System 1 will be one step ahead of the competition.

 

Three examples showcasing the most compelling occurrences of Behavioral Economics: Heuristics Nudge and RTC.

HEURISTICS. Bias and mental shortcuts are the two pillars of Behavioral Economics that shape the way we, as people, make decisions and form opinions. It has to do with mental shortcuts, we don’t like difficult questions; we much prefer the easy ones.  

There are more than 200 cognitive biases that influence decision-making. However, there are some biases that are considered to be particularly relevant depending on the field of business. For example, in the area of Pricing, three of the most significant cognitive biases (and their associated heuristics) are:

    1. Anchoring. This is an effect by which initial exposure to a number serves as a point of reference and influences subsequent value judgments. The process tends to occur without realizing it.

    2. Loss aversion. It’s people’s natural tendency to avoid losing something before attempting to benefit from something. Loss aversion is an important concept associated with prospect theory, which is capsulated in the phrase, “losses outweigh benefits.” The belief is that the pain of losing something is mentally twice as painful as the pleasure of benefitting from something.

    3. Decoy effect. This is when people’s preference for one option over another changes as a result of adding a third option (similar, but less appealing).

NUDGE THEORY. Small pushes. Subtle, contextual changes (choice architecture) that have an impact on people’s decision-making processes.

RTC (Randomized Controlled Trial). Experimental procedures are the basis of Behavioral Economics. It’s a scientific method: we have hypotheses and we distort them.

And so how does all of this affect business? How can this knowhow be used in order to make an impact on business KPIs?

 

Three examples of applying Behavioral Economics to business:

·    Communicating negative news. ING case. As a financial entity, it uses the knowhow of Behavioral Economics in order to soften the pain that customers experience when receiving negative news, thereby finding counterintuitive solutions for reducing customer churn rates.

·    Improving the efficacy of a debt collection call center. How using the knowhow of Behavioral Economics streamlines call center procedures and improves its productivity, making a direct impact on the company’s KPIs.  

·    Artificial Intelligence + Behavioral Economics: the Machine Learning model allows us to understand products that customers are more prone to purchase. In light of AI standard output, the Behavioral Economics toolkit allows us to guide and propel the decision-making process.

 

Thus, we conclude that Artificial Intelligence enables us to anticipate our customers’ decisions. Behavioral Economics also helps us to understand them and modify them. And the combination of both disciplines is the “more-to-more” of optimizing the conversion. 

 

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