How to become an expert in Behavioural Economics

What does it take to become an expert?

The short answer is a combination of theory backed up by a lot of practice. 10,000 hours to be exact if you believe Malcolm Gladwell. 

Sadly, there don’t seem to be any shortcuts. You’ve got to do the work to earn the badge. 

The hardest part, is getting started on your journey. It can sometimes be so daunting that you’re not really sure where to start. However, as a wise man once said, ‘A journey of a thousand miles begins with a single step.’

With this in mind, we take a look at the fascinating but not exactly sexy sounding subject of Behavioural Economics, with some top resources to set you off in the right direction. 

5 books to read:

1) Nudge: Improving Decisions about Health, Wealth, and Happiness by Cass Sunstein and Richard Thaler

2) Thinking Fast, and Slow by Daniel Kahneman

3) Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely

4) Pre-Suasion: A Revolutionary Way to Influence and Persuade by Robert Cialdini

5) Dollars and Sense: Money Mishaps and How To Avoid Them by Dan Ariely and Jeff Kreisler

5 podcast episodes to listen to:

1) Michael Lewis on how behavioural economics change the world (Intelligence Squared)

 2) Pre-suasion with Robert Cialdini (The Art of Charm)

3) The Psychology of Advertising with Rory Sutherland (Farnam Street)

4) Dollars and Sense with Jeff Kreisler (O Behave)

5) Behavioural Economics with Greg Davies (The Financial Wellbeing Podcast)

5 twitter handles to follow:

@rorysutherland

@danariely

@R_Thaler ‏

@rshotton

@ogilvyconsulting

5 TED talks to watch:

1. Dan Ariely: Are we in control of our decisions?

2. Rory Sutherland: Sweat the small stuff

3. Alex Laskey: How behavioral science can lower your energy bill

4. Sendhil Mullainathan: Solving social problems with a nudge

5. Daniel Kahneman: The riddle of experience vs. memory


Alternatively, you can skip the above and take an online course in Behavioural Economics from the brilliant, charming and witty Rory Sutherland. 

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The Denomination Effect

Human beings behave in funny ways when it comes to spending money.

In a 2009 paper, the professors Priya Raghubir and Joydeep Srivastava revealed a peculiar effect of different denominations on spending behaviour.

In their experiments, students were gifted a dollar in either high (as a $1 dollar bill) or low (as four 25c coins) denominations. The participants were then given the choice to either spend the money on sweets or save it. 

Somewhat surprisingly, 63% of those holding coins opted to spend whilst only 26% of those with paper currency did so.

The study concluded that we are less likely to spend the same amount using larger notes than their equivalent value in smaller denominations.

Why?

Because psychologically speaking, we perceive larger denominations to be less replaceable than smaller ones.

This phenomenon has obvious implications for influencing spending decisions throughout society. For example, the denomination of social security payments to encourage less spending and more saving. 

On a personal level, it seems we’d be wise to carry larger notes on our next shopping trip to discourage impulse purchases!


For more interesting studies like these and to learn about the behavioural science behind them check out our course on Behavioural Economics with the brilliant Rory Sutherland. 

 

 

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The Pratfall Effect

In 1966, the psychologist Elliot Aronson published a paper with an intriguing revelation.

His research had demonstrated that a simple blunder or mistake could, in some cases, improve the attractiveness or likability of someone.

Participants in the study were asked to listen to the recording of a quiz show contestant (played by an actor).

In one group they heard the ‘contestant’ answer 92% of the questions correctly.

Another group heard a separate recording which included the audio from the first recording but this time it also contained audio of the contestant spilling a cup of coffee at the end.

The respondents found the clumsy one more likeable.

Interestingly, what is true for humans is also true for products. This has obvious implications for marketing.

A brand can strengthen their message by admitting their disadvantages.

One of the most famous examples of this is the beer Guinness.

Compared to other beers it takes at least twice as long to pour because it requires a two phase pouring process (see example ad below which is one of our favourites).

Their canny marketing department turned this on its head with the inspired ‘Good things come to those who wait.’

If something seems too good to be true, it normally is. So if you want to make yourself or your brand more likely to be loved, be sure to make sure to show your that you’re not perfect (just be sure to make sure it’s not a humble brag!).

If you want to read up more on the Pratfall Effect a good book to start with is Give & Take by Adam Grant.

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The ‘Peak-End’ Rule

Our memory works in mysterious ways when it comes to recalling experiences.

Have you ever wondered why all Hollywood movies seem to reach a crisis point midway through only to resolve it all with a happy ending?

It seems that filmmakers have intuitively known for a long time what psychology has only recently discovered.

It’s called the ‘peak-end rule’ and it was coined by the Nobel Prize winning Israeli psychologist Daniel Kahneman. He describes it by saying,

“The peak–end rule is a psychological heuristic in which people judge an experience largely based on how they felt at its peak (i.e. its most intense point) and at its end, rather than based on the total sum or average of every moment of the experience.”

In his original experiment to prove his hypothesis, participants were subjected to both of the following experiences:

  1. Their hand submerged in 14℃ ice water for 30 seconds.

  2. Their hand submerged in 14℃ ice water for 30 seconds followed by an additional 30 seconds with the water heated up to 15℃.

When asked which experience they would prefer to repeat, respondents counter-intuitively opted for the second, longer one. That is, exactly the same amount of time in the colder water, only to end a little warmer.

Sounds bizarre right?

And yet when you’re asked to recall a recent holiday you won’t recall the whole trip but just the best or worst part and the very end.

To conclude, keep in mind that experiences are mostly judged by their ‘peaks’ and ‘end’.

If you want whatever it is that you’re creating to be remembered positively, make sure you heed this advice.

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Fordlandia

In the 1920s the Ford Motor Company embarked upon a very ambitious project.

They negotiated with the Brazilian government to by a plot of land in the state of Pará.

The idea seemed like a good one on paper. The region was rich in rubber trees and rubber is a key component of vehicle production. Building a plant there would allow them to take advantage of cheap labour and keep the costs of production low.

The company set about clearing huge swathes of rainforest and built an American style town with houses, a hospital, a school and a number of shops. Henry Ford’s vision was an industrial utopia where locally Brazilian workers would be given a decent wage, provided with meals and free healthcare in exchange for labour on the rubber plantation. Sadly, it was to be a failure that took him the best part of two decades to walk away from.

So what went wrong?

In truth, the problems were innumerable. During the construction phase there were many issues with pests and the tree planting strategy made the problem worse.

The local workers also did not enjoy having a Midwestern American lifestyle imposed upon them. The canteen style company restaurant was not to their liking and they despised the fact that Ford was a teetotaler and had enforced a strict no-alcohol policy in the town. In frustration, they rioted and smashed their time clocks. They were far from content. 

Despite hearing of the multiple issues back in the US, Ford continued to drink his own medicine.

He poured even more money into the crumbling project. To attract workers, he built an 18 hole golf course and even a dance hall. But the problems did not abate. 

Tens of millions of dollars later and with little to show for it, the plant eventually closed down in 1945.

To add insult to injury, the land was sold back to the Brazilian government for a pittance.

Amazingly, Ford himself never visited Fordlandia! 

It’s a brilliant example of ‘sunk cost bias’ (sometimes known as the ‘Concorde Effect’) and, quite frankly, glorious hubris.

For a longer read, check out the excellent Guardian article

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How to save a life

The human brain loves to take shortcuts.

In a given day, it is bombarded with so many options that it would be quickly overwhelmed if it tried to make sense of all of the information.

Therefore, when it is presented with multiple options, it will often take the path of least resistance.

This has a direct impact on our decision making. It makes us more likely to follow a default option or to follow a previously recommended option. This seems a relatively insignificant fact until we realise that it means other people could be designing our behaviour without us realising.

For example, see how a simple form default resulted in Austria having more organ donors than most countries in the world. Often it is the person designing the form that determines how it is filled out, not the person who is filling it in.

Governments appreciate this and can use the knowledge of defaults to motivate citizens to save lives with just the tick of a box.

Countries that have an ‘opt-in’ box for organ donation have far fewer donors than those who have an ‘opt-out’ box.

Next time you’re filling out a form see if you can spot this in action.

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The Scarcity Effect

There are many psychological principles that retailers exploit to get us to part with our money.

One of these is known as ‘The Scarcity Effect.’

It relies on the notion that human beings place a greater value on items that they believe to be in short supply.

Thus, when something has limited availability, people are willing to pay greater amounts for that product or service.

There are a number of ways ‘illusions’ of scarcity are used to increase sales. Examples that you may be familiar with include: one-off special events, special collaborations, clearance sales and holiday specials. ‘Black Friday’ is perhaps the ultimate combination of these tactics which results in this annual retail zombie apocalypse.

Undoubtedly, the master of this strategy though is the diamond industry.

Although around a whopping 135 million carats are mined annually, most of them are stockpiled in order to keep prices and desire for diamonds perennially high. 

Less ‘a girl’s best friend’ and more a retailer’s best friend you could argue. 

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