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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