What do optical illusions have to do with business decisions?
I am sure most of you have come across some of the popular, well-known optical illusions in your life: in kids books (a long ago) or while scrolling on Facebook (not so long ago). There is, for example, the Checker shadow illusion where we just can’t see the two check-board squares to have the same colours — although actually they have.
Or, moving toward a visual and audio illusion, the McGurk-effect demonstrates that we take visual cues for interpreting what we hear. The illusion occurs when what we hear and what we see clashes. Again, learning about this phenomenon doesn’t seem to effect our susceptibility to the illusion.
As a kid, I loved watching these and figuring out how they tricked my mind. Even today, I find them engaging, probably because I learnt it is not only our eye that can be tricked with such illusions, but also our decision-making. But can business decisions also fall pray to such illusions?
It’s about the context
When our brain sees the checkboard image above or listen to the video, although we shortly recognise the reality, at first sight it tricks us into believing something else. Even after we learnt what the trick is, often it is hard not to see it.
What might come as a surprise is that it does not work only with optical illusions, but with decision making situations as well.
Let me challenge you with the following dilemma:
You are about to buy a new, nice organic leather belt for €9.99, preferably fitting in colour to your favourite , light-roasted specialty coffee beans. While in the store, you learn that the exact same belt costs only €2.99, in another shop 10 mins down the road.
Would you take the hassle and go over for it?
Most probably you would (though, importantly, not everyone and not always!).
Now let’s see a different dilemma:
You want to buy a new, state-of-the-art flatscreen TV because you are angry that the battle scene in Game of Thrones was too dark on your laptop. You pick a nice TV for €548.99 and you almost buy it when you are told that the exact same TV is available for €541.99 in another electronic store, just a 10-min walk away.
Would you take the hassle and go over for it?
Although you could save €7 in both cases, most people would rather swallow the loss in the second case. Even when you know that it is not rational from an economic point of view, you might still see these differences in the decision understandable and appealing. A €7 discount from a
€10 belt? “That’s a bargain!“ But getting €7 off a TV costing €549…? “Nah, life is short and my time is expensive.”
There is a phenomenon, similar to the optical illusions above, going on in the background in this case: it is called the framing effect, and you can see it everywhere in your daily life. It suggests that the way you frame the options of a decision affects the decision. In this case, the decision whether to save €7 depends on how you frame that decisions: whether it is €7 off €10 or €7 off €549. It’s the same cost (10-min walk) and same benefit (saving €7), but most people just can’t see the two as the same.
Framing effect belongs to the group of so called cognitive biases — an area of study often in the focus of psychology.
Cognitive biases are systematic patterns of deviation from norm or rationality in judgement.
And believe me, there are loads of them.
It’s when you end up binge-watching a series. When you buy the medium size popcorn and soda in the cinema. When we are afraid of airplane disasters but not from getting into a car. When you get a taster in the shop and so feel compelled to buy something. Or when something unexpected happen and you still have the feeling “I knew it!”.
What behaviour your company wants to influence?
But why is this interesting for us, excited economists, consultants, service designers, customer experience experts, product managers, innovation managers?
Ultimately, every company is in the business of changing human behaviour. Be it a one-off action or a recurring habit, a decision made once or a challenge faced repeatedly, companies are interested in learning why people make a decision and how they can influence it.
The specific behaviours can vary and be abundant — for example:
- …for banks, it is about getting people to put money into a savings account or steering people toward digital channels instead of visiting branches.
- …insurance companies want to tackle the risk aversion of their customers and gently push them toward risk-based products.
- …the beauty industry these days increasingly wants its customers to make an informed decision, striking the neat balance between providing just enough information for that while not overloading them with insurmountable amount of information (hi there, financial industry!).
- …a smart home startup needs to overcome people’s fear of new things and make e.g. the very first steps of acquiring and installing a device easy, convenient and effortless.
- …a health care provider wants its doctors to get the annoying paperwork of e.g. approving a claim or writing a referral done quicker, thereby providing an overall better customer experience.
- …a retail company might want to acquire new customers into its loyalty program by getting existing members to invite them.
You could say that almost all of these could fall within the realm of service design and traditional business management techniques — and you are right!
Why do you always buy the medium-sized popcorn?
But do you remember the optical illusions and the example of the leather belt and flat TV from above? They suggest that despite the model of rational decision makers that economics often use to describe us, there is another, more intuitive decision making process in work as well which cannot always be directly gauged.
Daniel Kahnemann, the winner of the 2002 Nobel prize in Economics popularised a dual model of decision making. He suggests that our brain formulates thought through two ways: System 1 and System 2.
System 1 is intuitive, unconscious, automatic, fast and effortless — you employ it when I ask you what’s 2x2 or when you are doing your daily commute to work.
System 2, however, is logical, conscious, effortful, slow and controlled — it’s 23x43 or driving in a new country.
In a world full of choices from abundance of options and complex short-term and long-term costs and benefits, our intuitive thinking often helps — and often hinders — us to make the right decision as quickly as possible. That’s where the cognitive biases come into play: many of them are rule of thumbs that simplify our daily decisions. For example, to assess the likelihood of an event, we unconsciously make a measurement according to how easy it is to recall an example for such an event (that is, based on how available that information is in our mind, hence called Availability bias) which is much easier than reviewing all the evidence out there.
When we consider the challenges listed above that companies face (such as the risk aversion of insurance customers), it is often System 2 — our logical and conscious self — we are designing for, whereas System 1 —our intuitive and unconscious self — is there, too, driving many of our decisions. And there are numerous examples in our everyday life when this System 1 decision making works almost completely under the radar.
You often binge-watch a series not because you seriously want to, but because autoplay is the default option on Netflix and we just go with the flow.
You often buy the medium sized popcorn and soda in the cinema not because that’s exactly the amount you want to consume but because “medium” suggests a general norm about how much others consume and you don’t see any reason for going for the extremes (the small or the large sizes).
Behavioural economics can enhance any product or service
If you are a company, you are into the business of changing behaviour. But that behaviour is rarely the result of a careful, elaborate, 1-hour long planning session in our mind. People are busy, and often, well, lazy. Instead, it’s often intuitive and — although not 100%, but— influenced by our biases and by the context and environment in which the decision to be made.
This is why corporations around the world are starting to incorporate the findings of the field of behavioural economics or even setting up their own behavioural science teams.
- Google uses behavioural economics in various ways, e.g. to better convey the value of paid app subscriptions.
- Walmart has its own Head of Product and Behavioural Sciences and believes that it is the future of innovation.
- Barclays established a Behavioural Finance team already in 2006.
- Maritz, a leading expert in sales, marketing, customer and employee experience, merged CX with behavioural science by appointing a Chief Behavioural Officer and starting their own dedicated website, PeopleScience.
- Uber’s Applied Behavioural Science Lab has even spurred some controversy by combining data and behavioural science.
Starting from the 1950s, scientists dived into the mix of economics and psychology, striving to better understand human rationality and irrationality with the aim to improve the decisions we make. Behavioural economics is about using psychological insights to study (economic) decision making. While the use of these insights have already appeared in the past few decades in strategic decision making, marketing or product development, its use and visibility really became widespread in two major waves:
- With the publication of the book Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale University Press, 2008), by the economist Richard Thaler and law professor Cass Sunstein, that increased the public sector’s focus on applying this science to improve policies, and
- When Richard Thaler received the Nobel prize in Economics in 2017 for his work and contribution in the field of behavioural economics.
Companies didn’t get on the behavioural science bandwagon out of an urge to hail any trend that comes across (as it sometimes seems to be the case with e.g. blockchain — sorry folks!):
According to Gartner, “companies that apply the principles of behavioral economics outperform their peers by 85% in sales growth and more than 25% in gross margin.”
Using behavioural economics, we can recognise those situations in which decisions made either by consumers or employees might go in an unwanted way because the chess-board squares seem to have different colours.
So what are the most typical biases and how businesses can apply or prepare for these? Why one coffee stamp card might be finished quicker than another or why allowing your bank account holders to name their savings account might help reach their savings goals quicker?
Next time.
If you enjoyed this article, read my next one as well about coffee shops, hiking and how we perceive progress in a task.
