How Reality Affects Rationality

Rationality, predictability and utility maximization are indispensible factors that guide the framework of standard economics. These factors contribute towards our understanding of economic flux in an idealistic world, and are hence considered important while defining the basic laws of economics. In reality, however, decisions made by humans may be influenced by psychological and emotional factors which lie beyond the scope of standard assumptions in economics. The concept of behavioural economics plays an instrumental role to complement this void in standard economics. It tries to amalgamate psychology and economics to understand the reasons behind irrational decisions made by humans which hinder predictability and thwart utility maximization.

 

How does behavioural economics work?

The notion of idealistic, calculated and risk neutral behaviour goes for a toss, when people make decisions with ‘bounded rationality’. The idea implies that there exist limits up until which rationality in decision making is exhibited, beyond which, cognitive factors may disproportionately drive the decision making process. For example, when shopping for a particular product in a mall, customers may not have sufficient time and resources to compare every single product available in the required category. In such a situation, lower pricing, larger quantity, better brand perception, or merely greater product visibility on shelf, may be the factors on which the buying decision is based.

‘Prospect theory’ adds another layer to this idea, by considering the unequal value that humans associate with perceived gains and losses. The theory demonstrates that in a decision making situation, people tend to be risk or loss averse and prefer certainty of returns. For example, in a probability game, if one option offers a certain pay-out of $100, while another option offers a 75% chance of winning $150 and a 25% chance of winning nothing, then individuals tend to select the first option, even though it has a lesser statistical expected value as compared to the other option. This happens because the certainty of $100 pay-out is highly valued and individuals try to avert the risk of perceived loss at 25% chance.

Similarly, choices can be impacted by comparison of obtained gains to certain reference points that individuals have in their mind, such as, the possible gains from other choices or gains obtained by other individuals. Moreover, behaviour associated with social preferences like fairness, reciprocity, equity, etc. may further influence a customer’s choices. For example, a company may run a campaign wherein for each product sold, a certain sum of money would be donated for a social cause, and customers may find such a campaign appealing enough for their decision making process to be influenced.

 

How is behavioural economics leveraged for marketing?

When marketing different product or service offerings, businesses often utilize the above mentioned factors to drive customers towards purchases. Some of the methods adopted are as follows:

 

        The Nudge Factor :

This method involves manipulation of the environment surrounding the decision making process, such that it prompts or ‘nudges’ the customer towards predictably making one choice over other. For example in retail outlets, impulse buying is nudged onto the customers when they are on their way to checkout or billing counter, by placing chocolates or other sweets right next to the counter. Here, customers tend to be not as critical towards considering their buying decision as they were during the in-store shopping, and a tempting, attractive, sugary treat easily sways them into making a purchase. The online shopping or e-commerce version of this method is the display of ‘frequently bought together’ items or other complementary items while customers are on their way towards the check out.

 

      • Framing of Choices : 

Choice architecture can also be tweaked in ways that can persuade customers to make certain purchases. The Decoy effect is a well-known example of this and is most popularly demonstrated with the help of popcorns sold at movie theatres. While buying popcorn, if only two sizes of popcorn buckets are available, namely a ‘Small’ size for ₹ 49 and a ‘Large’ size for ₹ 99, then the ‘Large’ bucket appears relatively expensive and does not sell as much. However, if a third, decoy item is introduced as a ‘Medium’ size option with a price of ₹ 89, then the ‘Large’ option begins to appear as the best choice, and this may increase its sale. Customers can thus be persuaded towards one particular choice by introducing a disproportionately priced decoy item. Following illustration depicts the same.

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      • Default Bias :

When choosing from several options, customers are more likely to maintain the status quo and go with the default option, if provided. This happens as people tend to feel more relaxed and secure about not having to deal with evaluating all the options or actively deviating from the status quo and attracting potential risks. For example, customers using a web service often
subscribe for receiving emails and marketing messaging as it is set as the default, pre-ticked option, which they rarely take the trouble to change. Similarly, subscription plans set as default option under ‘our recommendation’ or ‘most popular’ tags, add credibility to the already risk averse option and may obtain a higher subscription rate.

 

       Priming Effect:

This effect involves influencing decisions of customers by subconsciously directing their behaviour. This can be done by setting up subtle visual, auditory or olfactory clues in the environment, such as, use of certain scents or suggestive music, use of a ‘premium’ or ‘bestseller’ tag on products, etc. Advertising plays an important role in conveying this effect as priming can also be used for creating positive association between a desired attribute and your brand. Such associations, if developed using sensory stimuli, can be used to trigger a desire for buying from the brand upon sensory stimulation. For example, the tagline ‘Red Bull Gives You Wings’ may help establish an association between the Red Bull brand and the feeling of being energized and customers may more often choose to buy Red Bull, whenever they feel fatigue or weariness. Red Bull drives this idea by hosting, sponsoring or advertising in adventure sports and events, an illustration of which has been shown below.

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It is thus evident that several marketing techniques have been developed to account for the behavioural aspects in economics which can introduce substantial changes in business offerings. Marketers are always on the lookout for new opportunities to influence customer behaviour in a favourable way and implementation of behavioural economics can certainly prove to be a useful tool in this endeavour.

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Have you ever wondered why shopkeepers use mannequins to display their apparel collection, why there is always an attractive channel – showing a football match or a serial or any song – playing on televisions in an electronics shop? Have you ever felt like having those similar cool looking shoes you saw a person wearing or having those white color earbuds your friend uses? Well, thanks to the industries which are investing a tremendous amount of money and other resources in studying consumer behavior.

Consumer behavior is the study of the processes and factors a consumer considers before and after buying the goods. The study helps marketers to understand the needs and wants of the consumer, what are the products needed in the market place, and how to best present them to attract the buyer. It helps them know that what do the customers buy, why do consumers buy, how frequently do customers purchase and many other things.

So, here we will talk about one of the most critical elements – Mirror neurons – which generally helps marketers to influence our buying behavior.

What are Mirror Neurons?

Mirror neurons are the neurons that become active when an action is performed and when that same action is observed.

Have you ever wondered why, when your favorite team scores a goal, you pump your hands in the air? Or why tears roll up in your eyes when you watch your favorite hero crying in a movie? Or that feeling of energy and dance that floods through when you watch your favorite dancer dancing in the film? You can give all the credits to mirror neurons. When we watch someone do something, whether it’s scoring a goal or our favorite actor dancing, our brain reacts as if we are performing these tasks by ourselves.

Mirror neurons also explain why we feel happy when we see someone happy or sad when we see someone sad. Our mirror neurons get activated when we see someone in pain, and we feel the pain as if it is ours.

Yawn. Do you feel like yawning now, or are you actually yawning, or are you getting that initial feel of tiredness?  I am, not because I am tired, but because I have simply typed the word yawn. Mirror neurons not only become activated when we see someone performing those actions, but they also get activated when we read about someone performing that action.

 

How do Mirror Neurons affect our behavior?

Let’s take a real-life experience of mine. Once I was passing the front window of the United Colors of Benetton (UCB) showroom. I observed a mannequin wearing a slim fit jean, an attractive t-shirt, and a perfectly fitting black leather jacket. He was looking great, confident, relaxed, and appealing. There subconsciously, even though I had put some extra kgs, I thought even I could look like that if I bought that outfit. I could be him. At least my brain was telling me that, even though I was not aware of that at the moment. Next thing I remember, I entered the showroom with my debit card and purchased those jeans, t-shirt, and jacket. I felt like, along with those clothes, I have bought that image and attitude too.

You will wonder that not only ours but others’ behavior with us also affects our purchasing behavior and influences our purchase decisions. According to a study conducted by two researchers of the University of California and the University of Michigan, exposure to brief images of smiling or sad faces affected the amount test subjects were willing to pay for a product. Participants who saw happy faces were willing to pay twice for a product as compared to those who saw angry faces. It means that managers who teach their retail serving employees to smile while attending a customer are on the right track.

However, the effect of mirror neurons is not limited to offline shopping. For the last few years, we have observed a tremendous increase in the number of unboxing videos shared by social media influencers. Lately, many companies have also joined the league. But how do these influence us as consumers? Let’s consider an example of a video showing a person unboxing one’s brand new iPhone 11. So, when a fan watches this video, it seems that she watching someone else unboxing their brand-new phone gives her as much pleasure as opening that new iPhone herself. In fact, there are multiple video-sharing websites that serve this kind of vicarious pleasure. Chad Stoller, executive director of Emerging Platforms at the ad agency Organic, explains, “It’s the culmination of lust. There are a lot of people who aspire, who want to have something they may not be able to afford, and they can’t buy it yet. They are looking for some way to satiate their appetite.” Or maybe it’s just mirror neurons at work.

 

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This is probably the most difficult question which an employer as well as an employee faces…Initiative seems to be easy to say but difficult to work upon..When it comes to initiative we always wait for someone to do that..We wont do it..We would expect others to do it..The best we could do is to respond or react..

An employer expects that an employee would take an initiative with regards to new ideas and implement while an employee that he needs to be motivated ( mostly in financial terms ) which would make him take more initiative. Both the terms are relative & would always be correct based on the situation which you are in..At every stage of our life right from school to college to corporate , we should be taking initiative and create a change but we always wait..

We have become Masters in Waiting…Waiting for the right job..Waiting for the right girl..Waiting for the right opportunity..Waiting for the market to improve..this waiting game has made us more lethargic..We wait for things to happen..We never know what is the right time..We dont know when it would come..

Lets make a difference by taking initiatives & doing actual execution.

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