Behavioral Economics? What's That?

Behavioral economics is the study of how and why people make money-related decisions. As a science it is relatively new, although some of its findings have been known intuitively by good salesmen and marketers for many years. Much of what has been learned from recent studies, however, has not yet been applied systematically in the real world of business. Here are some of the things the studies have shown thus far:

Confirmation Bias

We tend to act economically in a way that confirms current belief. When buying the same model of Mecedes, for example, current owners, who presumably already believe in the value of a Mercedes, pay $7,000 more, on average, than new Mercedes customers. I'm sure you can imagine the value of this knowledge to companies that sell high-priced items.

Decision Paralysis

Studies show that, given four samples of jam, for example, people actually spent more than when they had twenty to choose from. You may not want to tell the customer about all 84 colors he can choose from. Limiting options may be a useful sales technique, according to this research finding.

Sunk-Cost Fallacy

This phenomena of behavioral economics persists, even after we're confronted with it's illogical nature. We are more likely to attend an event if we paid for the ticket than if we got it free, even when we have the same information and interest in the event. Since the money is already spent, it has no relevance to the decision, but even seeing this, aren't most of us going to feel a greater loss throwing away a ticket we paid for than one we got for free?

The applications of this fallacy are obvious, if you look. For example, perhaps rather than giving away tickets to those "get rich" seminars, the organisers would get better attendance by putting their "$100" tickets on sale for $3. Just having paid something makes people more likely to attend, with the added bonus of getting some money up front.

Extremeness Aversion

People avoid extremes. Given a choice of televisions costing $300, $500, and $700, for example, not many choose the $700 one. But if you add a $1200 television to their choices, more will then choose the $700 one, because it is no longer the most expensive one.

The last example suggests some obvious applications of this new science of behavioral economics. In fact, if you look closely at the information coming from these studies, you can find a lot to help your sales and marketing efforts. You'll find more results of these studies in Behavioral Economics: Part Two.