A few months ago, my local grocery rearranged their store layout. Of course, that’s not an unprecedented move, but it did take a handful of trips for me to adjust to the new setup. Have you ever given thought to why stores are arranged the way they are? Why some foods are placed on top or bottom shelves instead of the easy-to-reach middle or eye-level shelves? Why chocolate bars and chewing gum are placed right by the checkout? If you’ve ever heard about or studied the discipline of behavioral economics, you may already know the answer.
Economics, simply defined, is the study of decision-making in a world of scarcity. A world where resources—such as time, money, or social connectivity—are limited and sacrifices must be made. The beings portrayed in traditional economics (“Econs”) are rational, respond predictably to incentives, and always make choices that logically lead to their desired outcomes.
Behavioral economics is a subset of the field which acknowledges that real human beings rarely behave like Econs. We are emotional, respond unpredictably at times, and often make illogical choices—even when we know the consequences are undesirable. Behavioral economics applies principles of human psychology to understand some of the “why” behind our decision-making processes.
You can find a fuller list of key behavioral economic principles here, but I’d like to share briefly a few of my favorites.
- The IKEA Effect: Humans tend to value things more highly when we have invested labor into that thing. A jigsaw puzzle or Lego set that we’ve spent hours putting together is worth more than an already completed one on a store shelf. The IKEA Effect is also a bias that leads us to think our way of approaching a task or project is superior to someone else’s approach (without any clear evidence supporting that claim).
- Priming: Humans who are exposed to concepts or words that trigger an emotional response (positive or negative) will carry those associations into unrelated activities. One interesting example is anchoring, where merely seeing or thinking about a number (e.g. your birth year, or the most expensive item on a menu) influences how you value products at other prices.
- Social Proof: Humans are more likely to purchase or participate in something when we see that others already have. This is one of the reasons that word-of-mouth promotion, customer testimonials, and online review sites are so effective. Humans rely on social proof to help reduce uncertainty in decision-making situations.
- Status Quo Bias (or, Inertia): When faced with a decision of continuing the same path or changing course, humans tend to prefer the existing option (“the devil you know beats the devil you don’t,” perhaps). In the absence of data, I expect that when FJM added two new health plan options this year, many of us opted to continue with the same coverage from last year. A contributing factor to this phenomenon is the sunk cost fallacy, wherein humans will consider previously-invested time, money, and other resources into the decision to continue on an otherwise undesirable or suboptimal path.
So, what is the point of knowing all this? What’s the takeaway? Well, these principles are at work behind-the-scenes in your brain, whether you like it or not. Understanding them can help us make better decisions for ourselves but can also help us invite others to make better decisions. In a well-known book of the same title, Richard Thaler and Cass Sunstein of the University of Chicago argue that behavioral economic principles can be used to “Nudge” individuals toward choices that will make them better off.
In marketing, we aim to use these insights to reach, understand, educate, and entice prospective and current customers, all while ensuring they retain the power to make decisions for themselves. After all, we must remember that “with great power comes great responsibility.”