Have you ever considered why we purchase limited edition items or take advantage of “50% off” offers even when they aren’t essential? Consumer choices may seem personal, but businesses can use psychological principles to influence them. Behavioural economics is a fascinating field that uses psychology, economics, and decision-making research to explain human buying behaviour.
This article explores the core ideas of behavioural economics and shows how loss aversion, social proof, and emotions influence our choices. You’ll understand these concepts and how marketing teams can use them to influence consumer behaviour.
What is behavioural economics?
Behavioural economics studies how psychological, social, and emotional factors influence economic decisions. Unlike classical economics, behavioural economics posits that people make irrational judgements. In other words, we buy what feels good at the time, not what we need.
Even when you’re trying to save money, think about your last expensive dinner. Consider the instance when you purchased a product that was a best-seller or came highly recommended. Behavioural economics focuses on understanding the biases and mental shortcuts (heuristics) that lead to this behaviour.
Loss Aversion: The Pain of Paying
People hate losing more than they hate winning. Losing $10 is much more painful than winning $10. Our illogical buying habits stem from loss aversion.
A free trial is worth considering. Companies know that you fear losing something after using a product, so they keep you subscribed. Limited-time offers are effective because the fear of “missing out” on a discount or item motivates you to avoid losing money.
Framing: Presentation of Choice
The way options are presented affects the perception of value. The same message, when presented differently, can lead to different judgements. A product labelled “95% fat free” feels healthier than a product labelled “5% fat,” even though they have the same fat content.
Restaurants use framing to promote strategic purchasing. A menu might feature “Chef’s Special” next to the most expensive dish, implicitly encouraging people to buy the item with the highest margin. A well-crafted promotion, such as “two for half price,” is more appealing than “two items for half price,” even if the prices are the same.
Go with the Flow: Social Proof
Social proof, or imitation, is one of the biggest influencers of consumer behaviour. When a product has good reviews, hundreds of positive reviews, or is a “best seller,” we are more likely to buy it.
Take e-commerce sites, for example. How often do you buy a “most popular” or a top-rated product? Marketing uses user reviews, influencer ads, and user-generated content to provide social proof and make products seem safe, trustworthy, and appealing.
Anchoring: The Power of First Impressions
The anchoring effect refers to the tendency for people to make decisions based on the first information they encounter. The anchoring effect setting influences the value of all subsequent options.
Seeing a $2,000 luxury item makes you think a $500 item is a fantastic deal, even if $500 is expensive on its own. The anchoring effect occurs when you place a high-end item next to a mid-range item, making the latter seem cheaper.
The Threat of Missing Out:
People tend to appreciate scarcity. Limited availability makes something more attractive. That’s why “Only Two Left!” and “Limited Edition” create a sense of urgency and prompt customers to make decisions more quickly.
E-commerce flash sales and countdown clocks are classic examples of scarcity marketing. If the supply is not limited, the ticking clock can prompt you to click “buy now” before you miss out.
Emotion and Purchase:
Purchasing is emotional. After an emotional purchase, people use their minds to rationalise it. A fancy handbag can make you feel high-end. Coffee from a local coffee shop can evoke nostalgia and comfort. Marketers capitalise on emotional connections.
Ads that tell a story or evoke emotions are the most successful. Think Coca-Cola’s “Share a Coke” or Nike’s “Just Do It.” In addition to the product itself, they also touch on identification, belonging, and inspiration.
Applying Behavioural Economics to Marketing:
Marketing teams with knowledge of behavioural economics will benefit greatly. Brands can influence consumer choices through loss aversion, framing, social proof, anchoring, and scarcity. Companies use these concepts to persuade consumers with personalised recommendations, emotional stories, and special offers.
Amazon’s product pages feature customer reviews, scarcity signals (“only 1 left”), and anchor pricing. Together, these methods increase consumer confidence in making a purchase.
Ethics of Behavioural Economics:
Behavioural economics can influence decisions, but it can also manipulate them. Marketers should follow these ethical guidelines to maintain openness and honesty. Creating scarcity or exaggerating customer reviews can damage a brand’s reputation.
Ethical marketing uses behavioural insights to improve the consumer experience, not to exploit it. Priorities should be price transparency, honesty in advertising, and communicating product suitability.
Behavioural Economics Can Help Us Understand Ourselves:
Psychological, emotional, and environmental factors influence consumers’ behaviour. Behavioural economics helps marketers create better marketing campaigns and sheds light on human decision-making mechanisms.
Understanding these concepts can make us better consumers. Understanding why a “limited-time offer” creates a sense of urgency or why a favourable review motivates you to buy can give you more control over your purchasing behaviour. Behavioural economics helps organisations and individuals make smarter, more efficient economic decisions.
FAQs:
1. What is behavioural economics?
Behavioural economics studies how psychological and emotional factors influence financial and economic decisions, which often deviate from rationality.
2. Give any example of loss aversion.
Loss aversion occurs when people avoid losses at all costs. Consider retaining a gym membership, which you seldom use, simply because you’ve already made the payment.
3. Why is social proof important for marketing?
Social proof builds trust. Positive reviews, influencer recommendations, and high ratings indicate a product’s credibility and popularity, making it more appealing.
4. How do marketers use scarcity to sell?
Marketers use limited supplies or limited-time offers to encourage consumers to act quickly and avoid missing out.
5. How do consumers avoid behavioural economics?
Beware of scarcity and anchoring effects. Read reviews and compare prices before making impulse purchases.
