Sometime in the middle of March this year, the time I’ve wasted spent on Twitter became worth something. A single tweet from @danariely, Professor of Behavioural Economics at Duke University, justified the hours and days of scrolling through self-promoting blog links (guilty), questionable #hashtags, and angry Beliebers. On offer was a six week course in Behavioural Economics through Coursera, an amazing new start-up company that provides free online courses in association with some of the best Universities in the world.

@danariely blog pic

I’ve been interested in people’s behaviours for a long time, but not really known the official name for it before, or even that it was a unique field of study. When I found out, it was obviously disappointing that I wouldn’t be the first person in the world to write a ground-breaking thesis on the topic. However, following a similar situation earlier in my life with the Umbrella idea (see ‘How to solve a problem like Innovation‘), I accepted the truth manfully and got on with lots of reading…

In short, Behavioural Economics is the study of why people do what they do, shunning the traditional economic model that is based on people making rational decisions, and instead hypothesising that people are largely irrational – predictably irrational. I find it an incredibly interesting topic, with lots of examples that we can see in everyday life and apply in our everyday work. In an attempt to share what I think I’ve learnt, I’m going to give a brief run through of some of the most salient points – many of which could (and probably will) be a blog in themselves. However, in doing this I’ll probably do the work and findings of Behavioural Economists a great disservice – so please follow the link at the end to find the books that will tell you the full story…

7PfQR

Choice Architecture is the keystone of people’s behaviours, or in other words, the way we construct our decisions. We suffer from an illusion that we’re all consciously in control of all of the decisions we make, but in reality, our decision are unconsciously affected by hundreds of factors which we may be totally unaware of. ‘Defaults’ is a great example of this. Put simply, we like choosing the default option, because it’s easy, and saves us having to think and make a choice. As the decision we have to make becomes more complex, these ‘default’ choices become more influential. For example, Holland and Belgium have two very different approaches to encouraging organ donation, with markedly different success rates. In Holland, a huge amount of money has been spent on advertising, TV campaigns, and workplace visits to encourage people to become organ donors, with limited success. In Belgium, they were far more successful, simply changing the form so that you have to tick a box to ‘opt-out’ rather than ‘opt-in’ to become a donor…

Organ Donation

The ‘Decoy effect’ impacts our decision making too. Essentially, having a slightly less good version of something makes the slightly better version look more appealing. The Economist knowingly or unknowningly played on this when offering subscription options to potential customers. As you can see the below, the addition of a middle option makes the expensive option more attractive, despite it being worthless itself. Also, this conclusion does prove what has long be suspected – that taking a similar looking, but slightly less attractive friend on a night out with you will make you appear more attractive…

Economist

A big part of Behavioural Economics focuses on ‘Labour and Motivation‘, particularly the importance of ‘Meaning’ in people’s work. In one experiment, participants were paid to build Bionicle Lego figures. In the first group, their completed figures were placed on the table in front of the builder as they kept building others. However, in the other group, the figures were dismantled and the pieces used to build figures again (called the ‘Sisyphus condition‘). Those who didn’t see their work dismantled in front of their eyes built far more, showing that doing a task without a sense of progress or meaning is the ultimate de-motivator. We’ll all be familiar with the ‘Ikea effect‘ too, whereby people give undue value to things they’ve built themselves, including ideas they have, proving that labour really does lead to love.

Labour

When it comes to dishonesty, the evidence shows that everyone lies a little bit, regardless of cost, benefit, or risk – the ‘Fudge Factor‘. I’m not making that up. People struggle with self-control too, giving undue focus to their present situation, which is why so many people on diets (long term goal) end up having that chocolate bar (short term, present need). It’s also why people buy a new TV rather than save for Retirement.

Fudge Factor

Human emotion is always a fascinating subject, and the world of Behavioural Economics has some useful thoughts to share too. Firstly, our risk-assessment of a situation depends on how salient the memory is, and how great the emotional response it triggers – hence why people respond to the thought of plane crashes and shark attacks in the way that they do, despite the highly improbable likelihood of either event happening. Something else we also see time and again is the ‘Identifiable victim effect‘, where the response to news of an individual’s tragic circumstances (both in the media and financially) outweighs that given to an event involving millions of people. ‘The death of one man is a tragedy; the death of millions is a statistic’, as the quote goes.

Identifiable victim 2

Finally, the ‘psychology of money’ looks at how we react to money on a daily basis, asking questions such as why we find it easier to spend on a Credit Card than in cash, prefer to pre-pay for all-inclusive holidays, and splurge gift vouchers when we receive them. The answer? Because the ‘pain of paying’ is reduced as we move further from tangible cash. Think about it – would you be more likely to take a box of pens from the office, or a £5 note you found in the stock cupboard? Would you gamble as much on the Roulette wheel if you were laying down a £20 note as opposed to a small Purple chip? People that pay for gym sessions on a pay-as-you-go basis tend to spend less than those who pre-pay – but are generally more unhappy, as they have to pay more often.

We have an odd relationship with ‘Free’ too. If you had the choice of two sweets, one for 50p and one for 75p, you’d weigh up the quality benefits and make a choice. But if one was free, and one was 25p…? This is where the App stores have caused themselves a problem by offering free apps – 69p? I’m not paying that… So if you’ve always wondered what the best way to split the bill at a restaurant is, the answer is for each person to take it in turns to pay for the whole thing. It means everyone makes less ‘payments’, reducing the pain of paying, and for everyone not paying, a lovely feeling of getting something for free…

Free

The introduction of money can also move a relationship from Social to Market norms. A famous example is of the children’s nursery that started fining parents for picking their children up late. What happened? Parents turned up even later, perceiving that they were now ‘paying’ for the extra time, and so therefore felt less guilty about being late. And why do furniture companies offer you a 30-day money back guarantee? Because of the ‘Endowment effect’ – losses are perceived as more powerful than gains, meaning that once we have something in our possession, it hurts more to give it back than it felt good to get it in the first place.

money-back-guarantee-banner

So there we have it, a brief(ish) rundown of the world of Behavioural Economics.  Visit http://danariely.com/the-books to buy the books which will tell you the full story – buy all three, use your Credit Card, and you may get Free shipping, which will be nice.

Ariely books

johnJsills

I really hope you enjoyed this article. If you did, I’d love you to subscribe to my blog at johnjsills.com/subscribe to get new thoughts sent to you on an infrequent basis, and find me on twitter @johnJsills.

Posted by johnJsills

One Comment

  1. Nice summary! It’s always irked me how traditional economic models assumed we’re all a rational bunch, it doesn’t exactly take a genius to work out that is so far from the truth!

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s