Behavioral Economics

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Slides Jeff Otto recently used in his discussion w/ mentees of The Product Mentor. The Product Mentor is a program designed to pair Product Mentors and Mentees from around the World, across all industries, from start-up to enterprise, guided by the fundamental goals…Better Decisions. Better Products. Better Product People. Throughout the program, each mentor leads a conversation in an area of their expertise that is live streamed and available to both mentee and the broader product community. http://TheProductMentor.com

Text of Behavioral Economics

Behavioral Economics

Behavioral EconomicsA Story About Chemical Incentives and DecisionsPresented By: Jeff Otto

www.productcollaborative.comThank you for hosting this program Jeremy. Today, were going to talk about one foundational aspect of of behavioral economics the chemicals in our brains and how they affect decisions. Probably not what you expected, but a few of these chemicals are a foundation block of behavioral economics.

1What Is It?

According to our friends at Google, behavioral economics is a method of economic analysis that applies physiological insights into human behavior to explain economic decision-making so what does that mean in simple terms?

First we need to draw a comparison between behavioral economics and conventional economics.2Conventional EconomicsHuman Decision Making Is RationalEh..Not So Much

Hit Me!

Behavioral EconomicsThe core tenant behind conventional economics is that the human decision-making process is based on making choices that result in the most optimal level of benefit for the individual. Essentially, that we are all proficient little economic robots that know what makes us happy and we make choices that maximize that happiness.

So for example.. In a conventional economics world.. A sober, blackjack player in Vegas knows to ask the dealer for another card when he or she is sitting on an 11. the probability of pulling a face card or a 10 is high and this is the rational thing to do to get 21 and win the bet.

But what about the stock market? About 40 years ago is when behavioral economics started getting headlines. Economists started asking hard questions If people are so rational, why do they follow the herd and buy when the market is inflated and sell when the market is depressed?

A best seller A Random Walk Down Wall St, written by Burton Malkiel in 1973 summed it up well. As human beings, When the market is hot, were over-confident that it will continue to go up. We follow the herd during both bull and bear markets, and we have a unbelievably strong psychological bias to avoid losses the combination of these factors causes us to act irrationally and time the market poorly.

3A Little History

Adam SmithHuman behavior is under the influence of the passionsThe Godfather of Behavioral EconomicsBut it turns out the ideas of irrational economic behavior have been around a lot longer. On of the fathers of conventional economics, Adam Smith, has recently been credited for his foundational work in behavioral economics.

Professor Nava Ashraf of Harvard Business School did a deep dive on one of Smiths lesser-known works The Theory of Moral Sentimants and realized how closely the virtues Smith wrote about in this work from 1759 related to the emerging field of behavioral economics.

To quote professor Ashraf: [Smith] believed that much of human behavior was under the influence of the passionsemotions such as fear and anger - and drives such as hunger and sexbut these passions were moderated by an internal voice of reason, which he called an impartial spectator."4Deep In Our Brain, Chemicals Drive Us

(3) Neocortex Brain Our Analytical Mind(2) Limbic Brain Our Emotional Mind(1) Reptilian Brain Our Instinctive MindSo although the ideas have been stewing for quite some time, it is modern psychology and neuroscience that has brought some clarity to what is actually going on in our heads

Deep in our brains, there are chemicals that are quietly pulling the strings and influencing our behavior.

I am not referring to our higher brain, the Neocortex. Im talking about the older regions of the brain, deep down in our brain that control our emotions and our instincts.

5Deep In Our Brain, Chemicals Drive Us

DopamineSerotoninOxytocinCortisolToday, were going to talk about 4 of these chemicals and were going to relate that back to product design and product marketing.

Quick caveat - this is not an exhaustive list, and I am by no means a neuroscientist - there are many more chemicals and complexities in the interactions of these 4 chemicals that I wont be able to cover, so consider this a primer on a handful of chemicals that I feel are relevant to todays social and mobile world.

The 4 chemicals well cover are..

Dopamine AKA Brain CandySerotonin AKA The Power MoleculeOxytocin AKA The Love & Trust MoleculeCortisol AKA The Stress Hormone

6Why Is This Relevant To You?THESE CHEMICALS INFLUENCE DECISIONSWhy Is This Relevant To Product Marketers and Managers?

Understanding these chemicals and how they influence behavior will help all of you product designers and product managers build better user experiences that delight the market, and it will help product marketers determine how to price to increase conversions, the amount your prospects pay for your services, and even the quantity they buy.7

(there is a dark side)But, a quick warning. This is powerful stuff, and praying upon peoples dopamine incentive system can be evil if done for the wrong reasons - dopamine is after-all the same chemical that is released in the brain when a human being ingests nicotine, alcohol or cocaine.

8Get Your Moneys Worth

Oh, one last thing before we dive in.. Youll see this little take-away bag on some of the slides.. This highlights a key learning point in todays talk. Ill also do a recap on all of todays key take-aways at the end of the talk.9DOPAMINE (SIMPLIFIED)

Dopamine - The Brains CandyYOUR BRAIN ON DOPAMINEFirst lets talk about Dopamine. Dopamine motivates persistence in the pursuit of things that meet your needs. It is released when we achieve a task, but more importantly it is released before we have completed a task as an incentive for us to get across the goal line. One of the risks I discussed earlier is that it is highly addictive and habit forming.

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The Feeling of Accomplishment==Practical Example To Triggering Dopamine

So lets explore a practical example of how to trigger dopamine. Here is a great email nurture campaign that Udemy leverages to give you a little shot of dopamine for accomplishing part of a goal. In this case it is a online short course.

The key is that they congratulate you and encourage you to keep going. This generates a feeling of accomplishment which triggers the release of dopamine in your brain. The positive feeling you experience reinforces your desire to finish the course. In fact, you may actually crave finishing the course so that you can get another hit of dopamine.

11Trey Parker and Matt Stones Take On This

YOU DIDNT BUILD A MOBILE GAME, YOU BUILT AN ADDITION MACHINE!!!So lets explore a practical example of how to trigger dopamine. Here is a great email nurture campaign that Udemy leverages to give you a little shot of dopamine for accomplishing part of a goal. In this case it is a online short course.

The key is that they congratulate you and encourage you to keep going. This generates a feeling of accomplishment which triggers the release of dopamine in your brain. The positive feeling you experience reinforces your desire to finish the course. In fact, you may actually crave finishing the course so that you can get another hit of dopamine.

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Serotonin Addiction (Personified)Ok, next up.. Serotonin, or as I like to call it - the Power Molecule

In an amusing book titled Your Too Kind, The History of Flattery author Richard Stengel referenced a study at UCLA by Professor Michael McGuire which show that dominant (or alpha) males had twice the level of Serotonin in their blood as subordinate males. Whats really interesting about the study is that all it took to reduce the level of Serotonin was to isolate the dominant male from his peers. It was the peers subordinate behavior that triggered the release of Serotonin.

In the Netflix's Original Series, House of Cards, Kevin Spacey plays a Machiavellian Social and Political climber: Frank Underwood in the show he is both the alpha male and subordinate depending on his environment. His lust for power is a playbook serotonin addiction.

13Practical Example To Triggering Serotonin

Give PUBLIC Recognition and Status To Your Users, Customers, Employees:So here is a take-away.. badges and rewards for the completion of key tasks or business milestones are a big deal at my company.

The rewards are public , and that is KEY to this working they are visible to the whole company and Ill tell you - it works. A senior product marketer at our firm joked with me recently that as much as she KNEW the psychology behind it, she was still susceptible to it and very proud when she achieved top influencer status. This reward system drives healthy competition amongst sales teams but can also work with your brands top influencers to creates a sense of community status.14

Oxytocin The Love & Trust MoleculeThis is one of my favorite episodes of South Park. Many of you have probably seen it, it is all about the Facebook. In this scene, Stan Marshs dad walks down the hall to his room one morning, to ask him why Facebook says they are no longer friends The irony of a father asking his son why his computer says they are no longer friends.

Books have been written about the psychology of Facebook and were not going to go deep into that today, but one chemical at the core of it is Oxytocin.

Oxytocin is the feeling of togetherness or love, it drives us to generosity. It helps us open-up and be vulnerable, and it allows us to feel belonging. It can induce feelings of optimism, self-esteem, and it builds trust. Amazingly, not only the giver and receiver of kindness get a hit of it, but even witnesses get a hit o