Behavioral Economics
What Is Behavioral Economics?
When existing Mercedes owners buy another Mercedes, they pay
$7,000 more for the same car as new buyers. Why? Read the explanation
of "Confirmation Bias" below. Recent research shows
we aren't nearly as rational as we think. Behavioral economics
is a relatively new science that studies how and why people make
money-related choices. Here are some of the things the studies
have shown thus far.
Mental Accounting
If you bought tickets to the opera for $100, and you lose
them on the way there, would you buy another set for another
$100 if you had the money? Most people say no when asked this.
Second scenario: You're on your way to the opera, planning to
buy the tickets there, and you lose $100 in the street on the
way. You still have enough money for the tickets, though, so
do you continue with your evening's plan and go to the opera?
Most people answer yes to this scenario.
Scientists in the field of behavioral economics call this
"mental accounting." In the first scenario, you already
spent $100 from the mental category "opera," so it
seems too expensive to spend another $100. In the second scenario,
you lost $100 cash - a separate category. It's easier to buy
the tickets still, even though in both cases the financial situation
is absolutely the same. This kind of "mental accounting"
has its consequences, and you'll see it at work in some of the
other tendencies explained below.
Sunk-Cost Fallacy
We are more likely to attend an event if we pay for the ticket
than if we get it free, even if the information and interest
are the same. Money, once spent, logically has no relevance to
the decision, yet the tendency persists even when pointed out.
Most of us would feel worse throwing away a ticket we paid for,
right?
Applications are obvious, if you look. For example, rather
than giving away tickets to "get rich" seminars, organizers
would get better attendance by selling their "$100"
tickets for $3. Simply paying something makes people more likely
to attend.
Confirmation Bias
People act economically in a way that confirms their current
beliefs. For example, when negotiating to buy the exact same
model of Mercedes, current owners, who presumably believe in
the value of a Mercedes, pay $7,000 more, on average, than new
Mercedes customers. You can imagine the value of this knowledge
to companies that sell high-priced items.
Decision Paralysis
A study showed that customers bought twice as often when given
four samples of jam to taste than when they had twenty to choose
from. It seems that having too many choices leads to an inability
to decide. Offering limited options may be a useful sales technique,
according to this research finding.
Extremeness Aversion
We instinctively avoid extremes, according to the research.
With a choice of televisions costing $300, $500, and $700, for
example, not many buy the $700 one. But add a $1200 television
to the choices, and more will then buy the $700 one, because
it is no longer the most expensive one.
Weber's Law
The law: A change of stimulus is more emotional and motivational,
according to the base: Subjects tested would drive across town
to save $10 on a $20 item, for example, but not to save $10 on
a $500 item. For sales people, this means you probably won't
lose a sale on a thousand-dollar couch over $10, so forget dropping
the price and sell the other benefits.
This information was excerpted from my book "You
Aren't Supposed To Know - A Book Of Secrets." For
more on that, you can visit http://www.TheSecretInformationSite.com.
If you do buy the book, be sure to read the part on "anchoring,"
and "regret aversion." Fascinating stuff. Don't be
surprised if in the near future you hear more about behavioral
economics.
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