Behavioral Economics? What's That?

A new science sheds light on some of our most important
decisions.

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.

About the Author

Steve Gillman has been studying every aspect of money for
thirty years. You can find more interesting and useful
information on his website;
http://www.EverythingAboutMoney.info