My life not quite in Behavioural Economics
Over the years I have become increasingly convinced that behavioural economics influence all aspects of life. This is perhaps a little surprising given that I have never formally studied it, and it’s not a hot topic with those close to me. But so many of us are repeatedly observing core principles in effect, even if the terminology doesn’t leap to mind.
Almost every book I read tells me there is nothing more important to decision-making. But then again, perhaps this just reveals my confirmation bias, as my current reading list is dominated by psychology behemoths Thaler, Sunstein, Kahneman and Tversky. That’s right, I can’t help but think about tendencies like confirmation bias now.
I remember casually reading ‘The Small Big’ which talks about small changes that make a big difference and my interest in persuasion science was ignited. In particular, an example about how people love to procrastinate, immediately had relevance and potential application in my working life. It turns out that people are FAR more likely to use account credit that expires in two weeks, rather than in two months, even if they would favour the latter, given the choice.
People don’t like to miss out on a freebie, and if they know they have a short time to claim an offer, it will encourage them to take swift action. But give them months to claim and they will put off today what they can do tomorrow. The credit soon gets forgotten, and is never used.
This isn’t helping the customer, or the business. To labour an obvious point, if your business relies on utilisation then you want people to use their credit. The customer may purchase more than the credit value, or if they don’t, they will hopefully still enjoy the product or service and want to use it again - and next time they will pay for it. You might even have gained a brand ambassador who will recommend you to friends.
I was hooked. Around the same time I watched Moneyball for the first time, and my obsession with marginal gains was well on its way. Michael Lewis had authored the book that inspired the film, and he would go on to write about Kahneman and Tversky in 2016.
Looking back, I witnessed odd human behaviour in my youth that I didn’t have any behavioural economic context for at the time. As a journeyman poker professional, I witnessed how so many people failed to grasp probabilities and made emotional decisions based on recent but unrelated events.
Naive players would bemoan how unlucky they were for failing to hit a flush draw after the flop. As it’s not your money, you don’t really need to know what that means, but the crux of the matter is that for many this common scenario feels like a 50–50 shot, but the true probability of them ‘hitting’ is closer to 35%. In other words they should only win about a third of the time.
You then take that (incorrect) sense of injustice, based on a flawed understanding of probability, and wait for emotions to take over. The Gambler’s fallacy lies in wait to fool even smart, otherwise shrewd adults. This is the non-credible belief that strange runs of random fortune are somehow bound to even out quickly.
The classic example is found on the roulette table where misguided punters contend that a ball that has landed on red four times in a row is ‘overdue’ to hit black. Of course, a belief that red has momentum is equally crazy. The ball and wheel have no knowledge of, or interest, in recent trends.
In poker, a feeling that you’re ‘running hot’ will often lead to poor decision-making. If you’re feeling on a roll, it still isn’t advisable to get your chips in behind and wait for lady luck to do her bidding. More typically, players think they are ‘card dead’ and owed some better fortune. You will frequently watch the self-pitying go on tilt as a consequence. Behavioural economics shows that actually we are all prone to such irrationalities though.
A side hustle has seen me write football tips and make predictions by identifying value in the market. But you’ll never convince some people that a good 2/1 shot simply means that the event should happen more often than the 1 in 3 times implied by the odds. They expect, and wrongly anticipate, a positive outcome every time.
And then there’s the peculiar trend that bookies price up draws as the least likely outcome between two evenly matched sides. Why? Because people don’t like backing draws - they want to cheer on one of the teams because it’s more fun. The crucial understanding is that oddsmakers draw up prices based on the human behaviour pattern, rather than on what they actually expect to happen. Consequently, the dull, atypical selection of a draw will often provide the best value.
Behavioural economics can be a tricky world to officially enter, especially if you’re not a trained psychologist. But I believe many people, from many walks of life, still have much to offer in terms of insight — but perhaps that is my cognitive dissonance. A career in marketing, customer experience and sales reveals so many opportunities to improve choice architecture, or better understand the decision-making process, using behavioural insights.
Should I give up my efforts to formally use behavioural economics in my career? Perhaps this is just a sunk cost in my personal development. After all, you don’t need permission to adopt the principles. A business can be shown the merits and significance of defaults and social proof, without knowing or having the time to care much about the science behind it.
I remember my work ‘Secret Santa’ getting much more popular as soon as all employees were automatically enrolled. Those who weren’t keen were told they would need to ‘opt out.’ Higher rates of participation were assured instantly. Before that, everyone had been asked to ‘opt in’ to be involved. Back then, with a positive action required, apathy, forgetfulness and laziness had to be overcome - not just office grinches!
Senior decision-makers don’t necessarily need to stop and ask why default options affect engagement, although it’s advisable. Just show them the data and they’ll be sold. One day it’s ‘Secret Santa’, the next it’s volunteering commitments. When 100 employees don’t opt-out of those, there is significant social impact. That’s the magic of behavioural insights - one tweak can make a world of difference.
