Why you should be using behavioural economics in your business…

“Understanding your consumer in any industry is vital; especially when they’re irrational.”

The ‘perfectly rational’ individual wakes up in the morning in complete darkness…

He gets dressed for work but never turns the light on because he knows exactly where all of his clothes are. He rationalises to turn the light on would be irrational. Spending an extra penny on lighting would take away an unjustifiable figure from his concise and dotted budget.

He drinks a cold coffee for the same reason. Boiling a kettle is one of the least energy efficient appliances in the home. The caffeine is just as strong as if the drink was slightly cooler than 100 degrees. He thinks the potency of caffeine is not related to the temperature of the drink, so why boil the kettle?

After he is dressed he heads to work. He does not need to travel to work because he sleeps at his desk. If you asked him why he would say that to own or rent is irrational; “when it is possible to sleep at work why waste the paycheck on a house and commute?”

Does this sound like someone you know? Human beings are not one hundred percent rational. We are emotional beings.

As science fiction author Robert A. Heinlein once said: “man is not a rational animal; he is a rationalising animal.” In other words, we always try and explain our behaviour without knowing why we do it.

In the 1970s, Daniel Kahneman and Amos Tversky highlighted just how irrational human beings can be. These two academics helped develop the idea of “cognitive biases,” showing that humans systematically make choices that defy clear logic. A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment.

An example of this deviation occurs every morning for some people. How many of us are guilty of skipping breakfast. Is breakfast not the most important meal of the day? Not eating in the mornings knocks our capacity to function throughout the day. Breakfast kick-starts the metabolism, helping you burn calories and helping us perform efficiently throughout the day. So why do we do it? Because we don’t have time in the mornings or we are too rushed or… and so on. Little things get in the way and we end up making poorer choices because of it.

These seemingly insignificant irrationalities can have a big impact on our perceptions of our customers. Understanding the customer is crucial in any industry; especially when they’re irrational. Knowing the exact problem your customers are trying to solve, and what shortcuts they might take to solve it is what is demanded by today’s consumers.

Take any everyday consumer product such as washing up liquid or toiletries, consumers generally have a preference for a small number of ‘trusted brands’. Knowing what makes a brand ‘trusted’ and why someone would pick one trusted brand over another is crucial insight in today’s competitive world however irrational the thought processes are.

Behavioural economics is a research field that uses psychology to understand more accurately how people make economic decisions. The insights provided by academics can be used by businesses to work with people’s irrationalities rather than against them.

One of the ideas within behavioural economics is framing. In a nutshell, framing is the difference between painting something in a positive or a negative light. This taps into our biological desire for immediate gratification or loss aversion (depending on if the frame is positive or negative) making us more likely to shift our decisions a particular way.

At the heart of behavioural economics lie nudges. These small hints, tweaks or changes are used to ‘nudge’ very specific behaviours in order to create larger lasting changes over time. This can be as simple as putting fruit before a chocolate sundae on a lunch menu or having to enter your pin rather than tap your card.

Putting fruit higher on a lunch menu means the reader has to actively reject the healthy option before they can accept an unhealthy one as their eyes scroll down. Entering your pin rather than using contactless creates friction. That friction that creates a half a second pause can be enough to make you think, “do I really need this?”

In theory, the wealth and range of products available means people should be able to have their exact needs met more so than ever before. In practise, people become overwhelmed and resort to rules of thumb; some businesses don’t understand that people don’t have the time the energy or the desire to seek out the best option.

While having a fleet of behavioural scientists might be a bit excessive for your company, taking a behavioural approach to your products and services could be the difference between a happy customer and one that is misunderstood.