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BEHAVIOURAL ECONOMICS ... IN A NUTSHELL

Behavioural Economics ... in a nutshell

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Page 1: Behavioural Economics ... in a nutshell

BEHAVIOURAL ECONOMICS ... IN A NUTSHELL

Page 2: Behavioural Economics ... in a nutshell

WHAT IS BEHAVIOURAL ECONOMICS?

Behavioural economics studies the effects of

psychological, social, cognitive and emotional factors on

the economic decisions of individuals and institutions, and

the consequences for market prices, returns and resource

allocation.

Definition taken from Wikipedia

Page 3: Behavioural Economics ... in a nutshell

WHY IS THAT IMPORTANT?

As human beings, our ‘primitive’ brain in the modern world leads to irrational

behaviours and decision-making. Our survival mode of fight & flight

encourages us to take the path of instant gratification over long-term gain. This

irrationality needs to be a consideration when decisions are made for a

better future and for long-term sustainability to be achieved, be that economic,

organisational, societal, financial or individual.

The next slides set out a number of research concepts that can help you to

understand how our human biases affect how we make the decisions we make.

Page 4: Behavioural Economics ... in a nutshell

BEHAVIOURAL ECONOMICS

The Anchoring Bias

The Bandwagon Effect

Behaviour Change through Design

The Choice Paradox

The Truth about Dishonesty

The Drachten Traffic Experiment

The Framing Effect

The IKEA Effect

The Instant Gratification Bias

The Isolation Effect

Loss Aversion & Status Quo

Overcoming Fear & Stress

The Risk Aversion Bias

Reciprocity

Page 5: Behavioural Economics ... in a nutshell

THE ANCHORING BIAS

‘As human beings, we value the first piece of information seen higher than what follows.’

An example of a simple practical application:

So ... Always prioritise what you want people to remember

and value early on in any communication.

Page 6: Behavioural Economics ... in a nutshell

THE BANDWAGON EFFECT

‘As more people come to believe in something, we tend to join the crowd because we prefer to conform and/or derive information from the crowd.’

Whether a positive or negative activity,

most people will follow the momentum of

a crowd. One business model which shows

the impact of the Bandwagon Effect on

innovation and the adoption of

technologies in the workplace is Roger’s

Innovation Adoption Curve.

Image source -Wikipedia

Page 7: Behavioural Economics ... in a nutshell

BEHAVIOUR CHANGE THROUGH DESIGN

In Belgium and the Netherlands they have put large butterfly nets

along the cycle paths to encourage people to throw their litter in the right

place rather than littering just anywhere.

This design is based on a marketing

theory called 'Nudge' which uses people's

natural/instinctive behaviours as the

starting point of any design.

Image source: http://deludoloog.nl/?page_id=83

Page 8: Behavioural Economics ... in a nutshell

THE CHOICE PARADOX

‘Too many choices will lead to indecision and lower sales.’

Yet choice is important in achieving purpose and encouraging ownership,

personal responsibility and, believe it or not, enhancing quality of life and

extending life expectancy.

An American field experiment was conducted to assess the effects of

enhanced personal responsibility and choice on a group of nursing home

residents. The outcome showed that residents who were given responsibility and

choice over relatively small decisions such as how to personalise their rooms

and what to have for dinner, among other choices, had improved well-being

and lived on average longer than residents living in a nursing home where all

the choices were taking by the staff team.

Page 9: Behavioural Economics ... in a nutshell

THE TRUTH ABOUT DISHONESTY

Are you more honest than a banker? Under what circumstances would you lie, or

cheat, and what effect does your deception have on society at large? Dan Ariely,

one of the world's leading voices on human motivation and behaviour, explores the

truth about mass dishonesty by ‘good’ people and its economic impact. Click to

image to watch ‘The Truth about Dishonesty’ on YouTube.

Page 10: Behavioural Economics ... in a nutshell

THE DRACHTEN TRAFFIC EXPERIMENT

In the Netherlands, transport planner Hans Monderman has pioneered a new

method which involves removing traffic signs, lights and in some cases, road

markings.

By doing so, traffic flow was restored and

people started to show more courteous

behaviour to other road users and take

more personal responsibility for the

appropriateness of their speed.

Noteworthy Conclusion:

Less rules, more autonomy with personal

responsibility!Image source: www.treehugger.com

Page 11: Behavioural Economics ... in a nutshell

THE FRAMING EFFECT

Instigating RISK Avoidance

When people are presented with a

scenario of gain they tend to avoid

risk.

Instigating Risk Awareness

However when presented with a

scenario of loss, they start seeking out

more risky, yet more resourceful

activities.

‘Innovation requires risk taking. Taking risks requires informed, fact-

based decision-making.’Source Unknown

Page 12: Behavioural Economics ... in a nutshell

THE IKEA EFFECT

‘People place disproportionate value on things they themselves have

created, yet undervalue items created by others.’

In organisations many departments overvalue the strategies, plans

and policies they create and undervalue the strategies, plans and

policies others create, which often results in competitive behaviours

between departments. Competitive behaviours can really hold back

organisational transformation.

We have the power to think differently and create different

behaviours, but we must acknowledge our own biases first before we

can move from competitive to collaborative ways of working!

Page 13: Behavioural Economics ... in a nutshell

THE INSTANT GRATIFICATION BIAS

‘People accept smaller payoffs in the here-and-now over

larger pay offs later on.’

This is particularly relevant in relation to people personal finances, where

many people invite loans and credit cards, without planning how to pay

them off. This financial bias also exists within organisations and can stop

organisations from becoming financially viable.

This is also relevant in relation to people’s contributions to future

sustainability of the economy and planet, where long-term pay-offs may

come too late in people’s own life times and future generation inherit a

world less well off. A bit dramatic, but unfortunately these issues are not

immune to our ‘instant gratification’ bias.

Page 14: Behavioural Economics ... in a nutshell

THE ISOLATION EFFECT

‘People value items and/or criteria that stand out higher even

though different does not necessarily mean better.’

This can be observed in many aspects across organisations, not least in recruitment

processes. This is however highly contextual and can differ from person to person,

depending on the individual filters.

For example, an interviewer who values qualifications will favour the person who stands

out by having a higher degree of education, while the interviewer who is themselves

‘self-made’, will seek out entrepreneurial criteria that stand out in the interviewee.

Interviewers therefore have a high responsibility for communicating the right culture and

expectations, and ensuring biases do not reduce the diversity any team needs. It is also

crucial to recognise that different roles may require different approaches in getting the

right person.

Page 16: Behavioural Economics ... in a nutshell

OVERCOMING FEAR & STRESS

If you want to overcome your fears it is useful to understand your own ‘fight

& flight’ responses to your environment. At times of high pressure, most

human beings tend to express ‘fight’ by trying to take more control, and

when the brain becomes too overwhelmed human beings ‘switch off’. These

are important survival mechanisms that have keep us from ‘burning out’.

The trick is to act ‘counter-intuitively’. Human beings have the ability to

reflect and create different outcomes. Fear and stress often lead us to more

ill-health. The most resilient people know when to ‘let go’ of the stresses

and worries. It is understanding that ‘less is more’ in a world where ‘more for

less’ is demanded but not necessarily needed.

Relevant article: Train Your Brain to Overcome Fear

Page 17: Behavioural Economics ... in a nutshell

THE RISK AVERSION BIAS BETTER KNOWN AS THE ELLSBERG PARADOX

‘We exhibit strong risk aversion, meaning we have an inherent preference for the

known over the unknown.’

This means that at times of Volatility, Uncertainty, Complexity and Ambiguity

(VUCA), people try to create their own safety and stability, guided by the

brain’s fight & flight responses, and become more controlling of their own

environments. This leads to high levels of change aversion, clinging on the status

quo and other irrational behaviours.

As such, organisations who wish to survive VUCA need to work with the few

people who thrive on ambiguity & move towards uncertainty. These individuals

are often referred to as ‘mavericks’, ‘risk takers’, ‘rule breakers’ or ‘disruptors’

as they challenge the status quo. This often creates increased distrust, tensions

and conflict at a time when collaboration is what is needed.

Page 19: Behavioural Economics ... in a nutshell

IF YOU WANT TO LEARN MORE ...

Want to learn more about Behavioural Psychology and Economics? Like our

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(@futurecatalyst)

Struggling to understand & respond to the behaviours & actions that are

threaten the sustainability of your organisation?

Visit our website – www.futurecatalyst.co.uk or

Contact Us for a free consultation without obligation – 07474 237383