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Principles of behavioural economics
- 1. The Foundation! Principles of Behavioural Economics! 12 principles explained! 11 June 2015! 1!
- 2. The Foundation! Anchoring First impressions count! 2! Principles of behaviour economics! First impressions act as important anchors or imprints in our minds, significantly influencing our future decision making ! A group of students were asked to write down the last 2 digits of their social security number in dollars (i.e. $1-$99) before taking part in an auction. The students who had higher ‘anchor’ numbers then bid consistently higher for the items (chocolate, win, computers) than those with lower numbers ! Theory! Example!
- 3. The Foundation! Availability Front of mind! 3! Principles of behaviour economics! We are disproportionately influenced by objects and events that are front of mind; that is, most ‘available’ to us. This might be because we’re frequently exposed to them, or because our exposure to them was particularly recent. Thoughts connected to highly memorable events often influence our probability judgements about them ! In the aftermath of an earthquake, demand for large scale disaster insurance policies rises sharply – but purchases decline from that point on as the vivid memory recedes ! Theory! Example!
- 4. The Foundation! Chunking We find it easier to take on small, defined tasks! 4! Principles of behaviour economics! Bite-sized chunks are much more manageable than giant pieces of information. The way in which tasks are presented affects how motivated we are to undertake and complete them. ! The prospect of completing a large scale task can be overwhelming, hence deterring people from doing it at all. By ‘chunking’ a larger process into more convenient parts, our ability to work on individual elements, and subsequently complete the whole project, increases significantly ! Computer games today, with easy save and load screens before missions, are much easier to complete than older titles which gave three lives to complete the whole thing! Theory! Example!
- 5. The Foundation! Commitment The power of a public pledge ! 5! Principles of behaviour economics! The more public our stance, the more reluctant we are to change it. ! Three groups of students were asked to guess the length of lines drawn on a piece of paper. Group 1 wrote down their estimates and signed their name; group 2 wrote them on a magic writing pad so their estimates were erasable; group 3 were asked to simply remember their estimates. When new information was presented contradicting the estimates, group 1 remained the most committed to their choices, and group 3 were the least committed ! Theory! Example!
- 6. The Foundation! Framing A different perspective on the same thing! 6! Principles of behaviour economics! Our brain doesn’t naturally check to see if rephrasing a question would produce a different answer. ‘Framing’ a question or proposition in a different way often generates a different response. ! Imagine you’re faced with an upcoming operation to fix a dangerous heart condition, which is more reassuring?! ! “Of 100 patients who undergo this operation, 90 are alive for 5 years”! ! “Of a 100 patients who undergo this operation, 10 are dead in 5 years”! Theory! Example!
- 7. The Foundation! Goal dilution We can only focus on one thing at a time ! 7! Principles of behaviour economics! When multiple goals are pursued they are less effectively achieved than goals pursued individually.! ! People prefer activities, tasks and products that serve single, not several goals ! Consider the rise of the mobile apps – people inherently prefer to use a single-function tool to complete a single task! Theory! Example!
- 8. The Foundation! Loss aversion We value more what we have already! 8! Principles of behaviour economics! We tend to put more effort into avoiding the loss of something we already have than trying to gain something new. People find it up to twice as painful to lose something they own compared to how enjoyable it was to acquire in the first place. ! In surveys the statement ‘you will lose £x a year if you don’t insulate your loft has been found to have a significantly greater impact than ‘you will save £x each year if you do insulate your loft”! Theory! Example!
- 9. The Foundation! Overweighting small probabilities It could be you!! 9! Principles of behaviour economics! We often overestimate the possibility of rare events happening, both because of the apparent ‘availability’ of each rare event and because of the ‘possibility effect’, i.e. People consistently have too much faith in their ability to beat the odds ! Despite the probability of winning the lottery being almost 1 in 14 million (and there are statistically greater odds of being struck by lightening) people continually take part in the hope that they might get lucky! Theory! Example!
- 10. The Foundation! The power of now Hyperbolic discounting ! 10! Principles of behaviour economics! We engage less with future events. This often results in us procrastinating about choices that do not offer instant gratification or feedback ! Asked to choose between being given an electric shock now and the same shock tomorrow, most people choose to delay. The earlier shock feels more horrifying than the delayed shock, even though we know it will feel equally bad tomorrow! Theory! Example!
- 11. The Foundation! Reciprocation Give and you shall receive! 11! Principles of behaviour economics! Most people innately expect some sort of reciprocation from those with whom we interact! Bundling a £5 gift cheque in with an insurance survey was twice as effective in driving compliance as the promise of a £50 cheque, which would be mailed after participants had sent back the survey in the post! Theory! Example!
- 12. The Foundation! Status quo bias The power of defaults ! 12! Principles of behaviour economics! People have a tendency to stick with the way things currently are. The more we repeat behaviour traits, the more automatic they become and as time passes these defaults become the key factors driving our behaviour. ! Nearly 90% of people agree that organ donation is a good thing. ! ! Donor registration figures are 12% in Germany, 99% in Australia. ! ! The difference is that Germans must choose to ‘opt out’ whereas Australians must ‘opt in’! Theory! Example!
- 13. The Foundation! Social proofing Follow the herd! 13! Principles of behaviour economics! We instinctively follow the herd, making decisions on the basis of what those around us as are doing. We do this to justify the choices we’ve made, believing that they are validated by the fact that others have made the same decision ! Opower identified that in getting customers to be more environmentally friendly, it was more effective to tell them how much energy their neighbours were using, rather than how much money they would save! Theory! Example!