Behavioural Economics ... in a nutshell
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Behavioural economics studies how psychological, social, cognitive, and emotional factors influence economic decisions. As humans, our "primitive" brain can lead to irrational behaviors that favor instant gratification over long-term gain. Understanding these human biases is important for decision-making that achieves long-term sustainability. Some key biases discussed include anchoring bias, loss aversion, bandwagon effect, and instant gratification bias. Overcoming biases requires acting counter-intuitively and recognizing how biases can negatively impact organizations, economies, and the environment.
Behavioural Economics ... in a nutshell
- 1. BEHAVIOURAL ECONOMICS ... IN A NUTSHELL
- 2. WHAT IS BEHAVIOURAL ECONOMICS? Behavioural economics studies the effects of psychological, social, cognitive and emotional factors on the economic decisions of individuals and institutions, and the consequences for market prices, returns and resource allocation. Definition taken from Wikipedia
- 3. WHY IS THAT IMPORTANT? As human beings, our primitive brain in the modern world leads to irrational behaviours and decision-making. Our survival mode of fight & flight encourages us to take the path of instant gratification over long-term gain. This irrationality needs to be a consideration when decisions are made for a better future and for long-term sustainability to be achieved, be that economic, organisational, societal, financial or individual. The next slides set out a number of research concepts that can help you to understand how our human biases affect how we make the decisions we make.
- 4. BEHAVIOURAL ECONOMICS The Anchoring Bias The Bandwagon Effect Behaviour Change through Design The Choice Paradox The Truth about Dishonesty The Drachten Traffic Experiment The Framing Effect The IKEA Effect The Instant Gratification Bias The Isolation Effect Loss Aversion & Status Quo Overcoming Fear & Stress The Risk Aversion Bias Reciprocity
- 5. THE ANCHORING BIAS As human beings, we value the first piece of information seen higher than what follows. An example of a simple practical application: So ... Always prioritise what you want people to remember and value early on in any communication.
- 6. THE BANDWAGON EFFECT As more people come to believe in something, we tend to join the crowd because we prefer to conform and/or derive information from the crowd. Whether a positive or negative activity, most people will follow the momentum of a crowd. One business model which shows the impact of the Bandwagon Effect on innovation and the adoption of technologies in the workplace is Rogers Innovation Adoption Curve. Image source -Wikipedia
- 7. BEHAVIOUR CHANGE THROUGH DESIGN In Belgium and the Netherlands they have put large butterfly nets along the cycle paths to encourage people to throw their litter in the right place rather than littering just anywhere. This design is based on a marketing theory called 'Nudge' which uses people's natural/instinctive behaviours as the starting point of any design. Image source: http://deludoloog.nl/?page_id=83
- 8. THE CHOICE PARADOX Too many choices will lead to indecision and lower sales. Yet choice is important in achieving purpose and encouraging ownership, personal responsibility and, believe it or not, enhancing quality of life and extending life expectancy. An American field experiment was conducted to assess the effects of enhanced personal responsibility and choice on a group of nursing home residents. The outcome showed that residents who were given responsibility and choice over relatively small decisions such as how to personalise their rooms and what to have for dinner, among other choices, had improved well-being and lived on average longer than residents living in a nursing home where all the choices were taking by the staff team.
- 9. THE TRUTH ABOUT DISHONESTY Are you more honest than a banker? Under what circumstances would you lie, or cheat, and what effect does your deception have on society at large? Dan Ariely, one of the world's leading voices on human motivation and behaviour, explores the truth about mass dishonesty by good people and its economic impact. Click to image to watch The Truth about Dishonesty on YouTube.
- 10. THE DRACHTEN TRAFFIC EXPERIMENT In the Netherlands, transport planner Hans Monderman has pioneered a new method which involves removing traffic signs, lights and in some cases, road markings. By doing so, traffic flow was restored and people started to show more courteous behaviour to other road users and take more personal responsibility for the appropriateness of their speed. Noteworthy Conclusion: Less rules, more autonomy with personal responsibility! Image source: www.treehugger.com
- 11. THE FRAMING EFFECT Instigating RISK Avoidance When people are presented with a scenario of gain they tend to avoid risk. Instigating Risk Awareness However when presented with a scenario of loss, they start seeking out more risky, yet more resourceful activities. Innovation requires risk taking. Taking risks requires informed, fact- based decision-making. Source Unknown
- 12. THE IKEA EFFECT People place disproportionate value on things they themselves have created, yet undervalue items created by others. In organisations many departments overvalue the strategies, plans and policies they create and undervalue the strategies, plans and policies others create, which often results in competitive behaviours between departments. Competitive behaviours can really hold back organisational transformation. We have the power to think differently and create different behaviours, but we must acknowledge our own biases first before we can move from competitive to collaborative ways of working!
- 13. THE INSTANT GRATIFICATION BIAS People accept smaller payoffs in the here-and-now over larger pay offs later on. This is particularly relevant in relation to people personal finances, where many people invite loans and credit cards, without planning how to pay them off. This financial bias also exists within organisations and can stop organisations from becoming financially viable. This is also relevant in relation to peoples contributions to future sustainability of the economy and planet, where long-term pay-offs may come too late in peoples own life times and future generation inherit a world less well off. A bit dramatic, but unfortunately these issues are not immune to our instant gratification bias.
- 14. THE ISOLATION EFFECT People value items and/or criteria that stand out higher even though different does not necessarily mean better. This can be observed in many aspects across organisations, not least in recruitment processes. This is however highly contextual and can differ from person to person, depending on the individual filters. For example, an interviewer who values qualifications will favour the person who stands out by having a higher degree of education, while the interviewer who is themselves self-made, will seek out entrepreneurial criteria that stand out in the interviewee. Interviewers therefore have a high responsibility for communicating the right culture and expectations, and ensuring biases do not reduce the diversity any team needs. It is also crucial to recognise that different roles may require different approaches in getting the right person.
- 15. LOSS AVERSION & STATUS QUO Loss aversion People prefer avoiding losses to acquiring gains. Status quo People like things to stay relatively the same.
- 16. OVERCOMING FEAR & STRESS If you want to overcome your fears it is useful to understand your own fight & flight responses to your environment. At times of high pressure, most human beings tend to express fight by trying to take more control, and when the brain becomes too overwhelmed human beings switch off. These are important survival mechanisms that have keep us from burning out. The trick is to act counter-intuitively. Human beings have the ability to reflect and create different outcomes. Fear and stress often lead us to more ill-health. The most resilient people know when to let go of the stresses and worries. It is understanding that less is more in a world where more for less is demanded but not necessarily needed. Relevant article: Train Your Brain to Overcome Fear
- 17. THE RISK AVERSION BIAS BETTER KNOWN AS THE ELLSBERG PARADOX We exhibit strong risk aversion, meaning we have an inherent preference for the known over the unknown. This means that at times of Volatility, Uncertainty, Complexity and Ambiguity (VUCA), people try to create their own safety and stability, guided by the brains fight & flight responses, and become more controlling of their own environments. This leads to high levels of change aversion, clinging on the status quo and other irrational behaviours. As such, organisations who wish to survive VUCA need to work with the few people who thrive on ambiguity & move towards uncertainty. These individuals are often referred to as mavericks, risk takers, rule breakers or disruptors as they challenge the status quo. This often creates increased distrust, tensions and conflict at a time when collaboration is what is needed.
- 18. RECIPROCITY People tend to respond friendly and cooperatively to others who act friendly and cooperative, while people who approach others with frustration will find their approach mirrored back at them. Or in the words of Mahatma Gandhi:
- 19. IF YOU WANT TO LEARN MORE ... Want to learn more about Behavioural Psychology and Economics? Like our Facebook page (www.facebook.com/futurecatalyst) or follow us on Twitter (@futurecatalyst) Struggling to understand & respond to the behaviours & actions that are threaten the sustainability of your organisation? Visit our website www.futurecatalyst.co.uk or Contact Us for a free consultation without obligation 07474 237383