My one year journey into behavioral economics

My one year journey into…

BEHAVIORAL

ECONOMICSBy: Matt Stergiou

Everything I thought I knew about how people make

decisions was…

WRONG

What made me see the LIGHT?

I had one slot left in my timetable and decided to try something NEW

be·hav·ior·al ec·o·nom·ics

a method of economic analysis that applies psychological insights into

human behavior to explain economic decision-making.

In other words….

+Humans Economy

News Flash: The human mind isn’t perfectly rational

• People are influenced

Okay… you probably already knew that

ACADEMICS have spent years studying how

IRRATIONAL we are

Here are some of the cognitive biases they found

• Ambiguity effect• Anchoring• Attentional bias• Automation bias• Availability heuristic• Backfire effect• Bandwagon effect• Base rate fallacy

• Belief bias• Bias blind spot• Clustering illusion• Confirmation bias• Conjunction fallacy• Contrast effect• Decoy effect• Distinction bias

• Empathy gap• Endowment effect• Framing effect• Gambler's fallacy• Hindsight bias• Hot-hand fallacy• Hyperbolic discounting• IKEA effect

Just to name a few…

But what you probably didn’t know…

Humans are irrational in a predictable way

If people behave in a predictable way we can NUDGE them to… CHANG

E their behavior

NudgeAny aspect of the choice architecturethat alters people’s behavior in a

predictable way without forbidding anyoptions or significantly changing their economic incentives. (Sunstein and Thaler, 2008)

3

We look for SOCIAL PROOF when we make decisions 1

2

3

LESSONS I LEARNED ABOUT BEHAVIORAL ECONOMICS

We tend to go with the DEFAULT option

We are influenced by how the CHOICE is structured

Let me repeat in case you missed that…

SOCIAL PROOF1

DEFAULT2

CHOICE3

We look for “SOCIAL PROOF” when making a decision

Air Plane Study: when we see someone near us make a purchase, we’re 30% more likely to buy something ourselves

1

This explains why you can’t go to an online retailer without seeing this…

How would you feel if this was your next energy bill?

People like to follow social norms

We (usually) don’t like to stand out

We tend to follow the DEFAULT option 2

Have YOU

ever found yourself saying: “Hey! I don’t remember signing up for these emails” #unsubscribe

The onus is on you to read it and opt-out of future emails

The box was likely pre-checked

Defaults are used to increase organ donation rates (people almost never check the box)

Countries that implemented opt-out policies using defaults saw

significantly higher organ donation rates

Small nudges can make a BIGDIFFERANCE

Alter the environment in which decisions are made so that people are more likely to make choices that lead to good outcomes. (Beshears, Gino, HBR May 2015)

Choice Architecture

3

Can the size of your plate change how much food you consume?

Small

VSBig

One study found that on average people prefer a plate that’s

70% full

Regardless of plate size, on average people will fill it until it reaches 70%

Why would a gas station add Ultra 94 to the set of options?

Most people don’t know the technical difference between the different octane levels of fuel at the gas station

Most people don’t know the difference between the different octane levels of fuel

Why add Ultra 94?

option and avoid extremes (this is known as the compromise effect)

When people don’t know how to value an option they tend to choose the

middle

By adding Ultra 94 to the set of options, the new middle shifts from octane 89 to octane 93 (which equals more $$$)

OLD middle

NEW middle

Behavioral economics is taking the marketing world by storm

Will you be ready to capture this opportunity?

WIiIiiiiii ll you be READY to capture this opportunity?

The journey continues…

Sources• Slide 1: Photo credit: Zak Suhar• Slide 12: Photo credit: Dan Ariely “Predictably Irrational”• Slide 14: Nudge, Sunstein and Thaler 2008 • Slide 20: Gardete, Pedro. (2015) Social Effects in the In-Flight Marketplace: Characterization and

Managerial Implications http://www.gsb.stanford.edu/insights/pedro-m-gardete-fellow-airline-passengers-influence-what-you-buy

• Slide 22: Opower http://www.opower.com/solutions/energy-efficiency• Slide 23: Photo Credit: http://www.forbes.com/sites/joshbersin/2014/02/19/the-myth-of-the-bell-

curve-look-for-the-hyper-performers/• Slide 27-28: Dan Ariely Ted Talk https://www.youtube.com/watch?v=9X68dm92HVI• Slide 29: Photo Credit: Dan Goldstein. http://www.dangoldstein.com/papers/DefaultsScience.pdf• Slide 31: Beshears and Gino. HBR 2015. https://hbr.org/2015/05/leaders-as-decision-architects• Slide 33: Wansink, Brian; van Ittersum, Koert. (2013). Journal of Experimental Psychology.

http://psycnet.apa.org/journals/xap/19/4/320/• Slide 34: Dilip Soman. (2014) https://

www.edx.org/course/behavioural-economics-action-university-torontox-be101x• Slide 36: Compromise Effect. http://en.wikipedia.org/wiki/Context_effect