Most of us believe that we make decisions based on rational decision-making. What Behavioural Economics tells us is, for the most part, that is simply not true.
Just as we are fooled by optical illusions, our minds are fooled by cognitive illusions. We may think we are making a rational and conscious decisions, however, what is more likely the case is our brain taking a shortcut and using a heuristic or a bias to make that decision. Groundbreaking research by Behavioural Economists Daniel Kahneman, Dan Ariely and others, has proven this time and time again.
Studies have so far identified more than 20 heuristics (short-cuts) and biases we use to make decisions in every facet of our life: from the inconsequential choice of how many loaves of bread we’ll toss in our trolleys when they’re on special… to the more life-impacting decision of choosing a partner!
The question for all marketers: What heuristics and biases are your consumers using?
At DeltaMV, we have developed a suite of behavioural strategy tools to answer this and many more questions.
Interestingly it is when we add Neuroscience into the picture that we often gain an even clearer understanding as to the Behavioural Economic picture that is occurring. The two, working hand in hand, tell us so much more.
Let’s Dive in
Here are a few examples of behavior economics and neuroscience in action.
Emotion – and the Negativity Bias
Emotion is one influence on rational decision making. For example, fear of loss can cause us to make irrational economic decisions. This is demonstrated clearly in stock market crashes. People feel confident while prices are on the rise, but when prices show a sharp downturn, they panic and the ‘flight’ response kicks resulting in massive sell-offs. The way we process emotions may also explain why negative events are given more weight by people than positive events – known as the Negativity bias. The amygdala is a key region in processing emotional significance. Research shows that this region is more reliably activated during negative than positive emotions. It is interesting to note that we have more words in the English language for negative than for positive emotions.
Memory – and the Recency Effect Memory constraints are also an influence on decision making. The Recency Effect refers to the bias of recent events having more influence over our decisions than earlier events. The dorsolateral prefrontal cortex (DLPFC) maintains different choice options in working memory during decision making, but is limited in its capacity. As a result, earlier events are usually discarded and replaced by more recent events, making these most salient.
Reward – and Loss Aversion
Reward-related brain regions may underlie some cognitive biases. For example, behavioural economics has shown that humans do not weigh up benefits and costs as a purely numerical calculation. The ventromedial prefrontal cortex (VMPFC) – a key structure involved in weighing up rewards and benefits against costs –also uses contextual information to make its decision For example, “Is this price fair?” Or, “This is expensive, but it will make me look cool!”
Variability in VMPFC activation and a region in the brainstem known as the ventral striatum may explain Loss Aversion – a key cognitive bias where losses hold more value for a person than gains. Both regions increase in activity during gains, but show a much sharper decline in activity during losses. This neural effect is directly related to behaviour – people who are more loss averse, show sharper neural activity declines. On a more global whole brain level, research shows that our brains prefer to choose courses of action that elicit the least mental effort. This may explain the behavioural economics observation that people prefer to not change from a default option, even if changing to another option is more rewarding.
Dan Ariely - The Placebo Effect
In another thoroughly enlightening and entertaining presentation, MIT Behavioral Economist, Dan Ariely looks at how a person’s expectation of a situation can influence the actual experience of that situation.
Dan Ariely – Visual Illusions
Dan Ariely uses an optical illusion to demonstrate how our minds make predictably repeatable mistakes. Sadly, knowing this information won’t stop you from making the same mistake time and time again.