Four simple ways to improve your business with behavioral economics

There’s a lot going on in our decision making that companies could be using to improve their day-to-day business.

We’re not as consistent, logical or objective as we might hope we are.

Behavioral economics does not assume we behave or make decisions in a rational way. Our decision making is influenced by so called biases and heuristics, as well as by how we form our preferences.

We’re more likely than not to exhibit signs of overconfidence, assign disproportionate value to information that comes easily to mind, discount information that does not support our point of view, or go to great lengths to avoid losses over securing gains.

To put it bluntly, we’re not as consistent, logical or objective as we might hope we are. The characteristics of our decision making expose us to risks such as cost overruns, lost sales, unsuccessful investments and inefficient incentive schemes.

If behavioral biases create risks, knowing them also opens up opportunities. Organizations can apply a variety of near costless methods to correct for bias and shield themselves from the lost opportunities they might be missing due to them.

Here are four ways you can apply behavioral economics to improve your business.

a) Always consider the way you are presenting information

10% fat or 90% meat? How information (or a product) is framed matters. Is there a different way that you can say the same thing emphasizing alternative results? Is it better to focus on the gain of using a product or the loss of not using it? Are you accidentally placing emphasis on the wrong things when communicating about your business?

Always consider the framing of your communication and preferably run some tests to see what works best for each target audience.

b) Minimize uncertainty around your product or service

Minimizing uncertainty should be one of your main goals during the sales process. Uncertainty strengthens our tendency to stick to what we have right now (status quo bias) and also triggers our significant aversion to losses. We’re likely to run into significant uncertainty around complicated products and services, such as financial products, software and IT or telecom -products. This means that in the face of uncertainty, we might consider mitigating potential losses (financial, ego, relative welfare) too much in relation to securing potential benefits.

Seek to reduce uncertainty around the value you provide at every stage of communicating with your client. Make sure your client-facing employees understand this point fully.

c) Limit the amount of choices and options for the client

In the face of a large variety of choices, we tend to become paralyzed and opt for the easy choice of doing nothing. In technically oriented sales processes, options for product setups can be staggering. If we’re building a proposal for a client, we should stick to a few options and think long and hard about how we frame them. In a classic study, researchers varied the amounts of jars of jam in a store to see what effect they have on purchasing behavior. The store with a large amount of jams on display brought in more potential clients. However, the store with only six jars on display had a much better conversion from visitor to shopper.

Look at the options that you present your clients with. Are they creating choice overload and resulting in decision paralysis? Test different versions with varied amounts of choices to look for the best way forward.

d) Utilize social proof

Consider these statements for example: 98% of our clients purchase a second year; 60% of our clients found their first sales lead in a week, and 95% in their first half year subscription. All of these communicate what others have done in a similar situation and help reduce uncertainty around the probable value to your client.

Steer indecision towards a social norm and inform your clients or employees what their peer-group is doing in similar situations. Storytelling and reference cases work well and help reduce uncertainty as well as visualize benefits of using your products or services.

Behavioral economics has a lot to offer both private companies and the public sector. It’s my firm(s) belief that by designing our companies and services to match behavioral characteristics and decision making processes we’ll have happier employees, clients and healthier businesses as a result.