Behavioural economics is, in essense, the analysis of decision making and the application of behavioural sciences to economic forces (e.g. consumer behaviour). It has grown in popularity in recent years with Richard Thaler being awarded the Nobel Memorial Prize in Economic Sciences for his work within the field.

The major difference between behavioural economics and traditional economic theories is the realisation that people do not always make rational choices. Since the behavioural sciences focus on the study of observable human behaviour, this has allowed for the identification of numerous cognitive ‘biases’, which subsequently allow a broader understand of why people choose one thing over another.

The knowledge and understanding of these cognitive biases allow an organisation to structure their sales and marketing funnels to nudge individuals towards more favourable choices and behaviours.

The entire scope of these cognitive biases are too great to cover in this article, so below are some examples of cognitive biases and how they apply to economic decisions.


Nudge Theory

Nudge theory focuses on small changes to how a choice is presented to an individual, which in turn ‘nudges’ the individual into making a specific choice (ideally a choice that is more beneficial to them).

For example, in cafeteria lines, you are more likely to choose items closer to the front and in plain view, that items that are further down a line or within your peripheral vision. If those items are rearranged so that healthier options are front and center, then you are more likely to sell more healthier items.

In addition, people are less likely to change from the default settings or options. If the default for organ donation or contribution to a pension plan is yes, although people are able to opt out if they want, people are more likely to stick with the default yes. However, if the default is no, and people had to opt in, then they are more likely to stick with the default no, than opt in.

A key component of nudge theory is that people can freely choose the less desirable option, but we are factoring in known cognitive biases into the architecture of a decision, so people are more likely to pick one over another and benefit from the more convenient choice.


Price Anchoring

Consider two different ways of presenting the same price for a product.

Option 1 – Most people go with our $20/month plan. However, we believe that our $50/month plan is better for your needs. What do you think you’d prefer to go with?

Option 2 – If you were to get these things individually, it’ll typically cost you around $1,400. However, you can get all these things for $50/month. How does this sound?

People are more likely to go for the smaller figure. In option 1, thats the cheaper $20/month plan. In option 2, its the $50/month plan.

Don’t start off with the lowest offer. Still have it available, but don’t start off with that.


Herd Behaviour

This is a simple theory, but a very important one. People typically follow the general consenus and mimic what other people do.

If everyone is going to one restaurant over the other, the general consensus must be that the busier restaurant is better than the other. It’s the ‘wisdom of the crowd’ concept.

This is why testimonials work so well. If no one is buying a product, it can’t be very good. If lots of people are buying and they are liking the product, it is a lot more appealing to individuals.


Loss Aversion

This describes the theory that people don’t like to lose something they already own, or feel ownership of.

This is why car dealerships give you a ‘Weekend Test Drive’. You drive the car around all weekend. You learn all of the great things about it. And then it comes to Monday, when you have to give it back up. Or … you can buy the car and keep it? Do you really want to give up that heated steering wheel and those heated seats when it’s -5C outside? I thought not.


Information Overload

This is a fairly commonly used term, but many organisations still forget this and overload their prospective clients with masses of information or too many options.

Keep things simple and options limited. If you want to allow for custom orders, thats fine. But let the customer come to you with what they want, to let them know all the things they can customise. It’ll scare them away.


There are hundred of cognitive biases just like this. It’s impractical to go over all of them, but if you would like to learn some more, look up the recommended reading below.

Alternatively, if you would like to work with someone who can give you a comprehensive analysis of your website, offer and marketing materials, click the ‘Work With Me’ tab to book a free 15 minute consultation to discuss if I can help better optimise your sales funnel for human decision making.


Recommended Further Reading

Behavioral Economics, by Sendhil Mullainathan and Richard H. Thaler


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