Behavioural Economics: The study of cognitive, social and emotional influences on economic decision-making. In other words, the hidden influences that shape behaviour.

 

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A

Actor-Observer Bias (Fundamental Attribution Error): tendency to attribute own successes to character and the successes of others to the situation, while own failures are blamed on the situation and those of others, their character. e.g. If someone cuts me off in traffic, they're a jerk. If I cut into traffic it's because I am a good driver who is being smart.

Adaption: tendency for the impact to wear off the more something is experienced. Like when you put clothes on - at first you are aware, then you forget. In business, people readily and quickly adapt to annual pay increases.

Affect Heuristic: how we feel determines our beliefs. If I feel good around someone I will think they are a good person. 

Ambiguity: We tend to avoid options where incomplete information makes the choice feel risky. People dislike ambiguous calls-to-action on a website for instance. "Grab your copy" doesn't help them understand whether they need to pay.

Anchoring: We base decisions on information that has been previously introduced even if it's irrelevant. If a customer sees a low price first, for example, they will find subsequent prices more painful. 

Attentional Bias: We tend to focus on only one or two choices even when there are several possible outcomes. Much like horses that wear blinkers, we can become very narrow in our consideration set.

Authority: tendency to defer to someone who seems to be in authority. In a crisis, people tend to look for anyone in uniform even though they may not be best placed to make decisions. In business, sales staff can use authority with customers to persuade, customer service staff can use on calls to calm, and managers can use to set a direction for the team to follow.

Availability Bias: information that easily comes to mind tends to be over-weighted in its importance. A familiar brand, for example, may be chosen by default when a customer doesn't know much about the product category.

Availability Cascade: a simple idea gains popularity because of how simple it is, then seems even more simple because of how popular it is. "Fake news" seems to have fallen into this category.

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B

Backfire Bias: we reject evidence that contradicts our point of view even if we know it's true. In this case, we dig in and become even more committed to our point of view. You see this a lot in politics!

Bias Blind Spots: we fail to see our own cognitive biases. Sure, other people might be irrational, but I'm not! Yes, you are.

Biases: Systematic 'errors' in decision-making. In effect, the mental short-cuts we make mean we are not always acting rationally, and these paths become so ingrained we end up with a fixed bias.  See also Heuristics.

Bounded Rationality: our rationality has limits. In other words, sometimes we make the sensible decision according to the economic theory of rationality, but most of the time we make good enough, 'irrational', decisions. This is central to how we see ourselves and our customers. We assume too often people will act rationally when that is usually not the case.

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C

Centre Stage Effect (a.k.a Goldilocks Effect): tendency to prefer the middle option. Not too hot, not too cold! That means you need to present your highest margin option in the middle. 

Certainty (Zero risk) Bias: we are influenced more by smaller changes in probability that provide certainty than larger changes that do not. ie 99% to 100% is better than 50% to 60%. People particularly like certainty when the outcome is going to be positive. As soon as it is negative, they are more likely to roll the dice. 

Choice Architecture: structuring choices so optimal decisions can be made. That means how many options and in what sequence.

Choice Bracketing: tendency to focus on the impact of individual choices rather than the consequences of many choices taken together. So people might focus on buying in one product category, and then another without acknowledging they have blown their budget.

Choice Overload: more choices can result in less choosing we we get overwhelmed. See also Paradox of Choice.

Choice Supportive Bias: we think positively about a choice once made even if it has flaws. For example, a manager may back a candidate they've selected even though their performance is below expectation.

Clustering illusion: we tend to identify patterns where none are present. People see patterns in the stock market when it is mostly random.

Cognitive Dissonance: the tension we feel when our actions and beliefs are not consistent. Dissonance can lead to people (consciously or otherwise) to change the story e.g. Lance Armstrong continued to believe he was an honest and worthy person even though he cheated. How? By telling himself that he was simply rebalancing the ledger after his cancer treatment, and launching the Live Strong Foundation. In business, it can also lead people to buy things to alleviate tension between who they are and what they do e.g. I'll take out a gym membership even through I don't do.

Commitment Devices: tools to lock us in to our intended behaviour. As enforced savings, superannuation is a commitment device.

Completion Bias (a.k.a. Endowed Progress): we are driven to complete tasks once we have started. In business that means giving your customer a sense of momentum rather than starting from scratch e.g. pre-populated forms and reminding them of steps already undertaken. 

Confirmation Bias: we tend to seek information that confirms rather than contradicts our view. A customer will believe statistics that support their intended purchase  (e.g. red wine in good for you) but ignore those that don't (e.g. red wine is bad for you).

Conjunction Fallacy: we tend to believe the probability of two specific events happening is greater than a more general one. For example, it's more likely for an introverted middle-aged man who likes to read and owns two cats to be an accountant who is single than just an accountant.

Conservatism Bias: reliance on prior evidence rather than new information e.g. the prevailing view for many years was that the world was flat.

Contra Free Loading: tendency to pay for things we value and work for reasons other than money. This runs counter to economic theory which suggests people would never volunteer, for example, because we all want to maximise our economic outcomes.

Curse of Knowledge: the more informed of us don't get why others cannot understand. This is a trap for anyone who reads a lot about behavioural economics, for example, and can't convince others of its value!

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D

Decoupling: tendency to separate the cost from the benefit over time. For customers, that means they'll typically forget the cost of the couch they sit on every night. 

Decision Quicksand: The tendency to seek additional information when an easy decision becomes unexpectedly difficult. That means a customer who thought they knew what they wanted, but got confused when speaking with your staff or visiting your site, may request more and more information while getting further and further away from a decision. Frustrating for you both! 

Decoy Effect: we can be persuaded to change our preferences between two choices when a third option is presented.  If a customer is vacillating between red and white wine, for example, they are more likely to go with red if they are offered either a 2016 Shiraz or 2019 Shiraz because the decision shifts from which wine to which vintage of red wine.

Default Bias (a.k.a. Status Quo Bias): tendency to want things to stay the same, selecting the default option where available. People tend to say in the superannuation fund they were first defaulted into, for example.

Denominator Neglect: we focus on the number of times something has happened rather than the overall number of opportunities for it to happen. So 2 recent plane crashes will stick in the mind more than the percentage that represents of all flights in that period. For customers, reading 3 bad reviews means more than knowing that is across 10,000 transactions. 

Depletion Effect: the more decisions we make in a day the more our capacity to make new ones is reduced. We are like batteries, and decision-making drains our brain power. See also Ego Depletion.

Diagnosis Bias: we jump to an initial assessment from which it is difficult to change. You might think the problem with your website is a lack of videos when it may actually be the language on your call-to-action buttons.

Disfluency: when information is difficult to process it interrupts processing fluency and increases perceived effort. White text on a black background, for example, can inhibit a website visitor's fluency. See also Processing Fluency. 

Disposition Effect: our tendency to sell shares whose price has increased, while keeping assets that have dropped in value to avoid being reminded of 'failure'. Likewise, people tend to put off pulling the pin on a project (or business) to avoid having to come to terms with the loss. Customers might keep paying gym or diet memberships so they don't have to admit defeat!

Distinction Bias: we value two options differently when looking at them together rather than separately. If I meet twins I will see each of them differently than if I meet one on their own. A customer might value a tie less highly than if they see it in combination with a shirt.

Diversification Bias: we overestimate the amount of variety we'll actually need in the future. If you've ever packed for a holiday this will be familiar! A customer might be attracted to more functions on a device than they'll ever actually use.

Drop in the Bucket Effect: tendency to not act if the impact of a personal contribution is not easily discerned. In other words, if I feel my donation won't end poverty, I won't bother. In business this can mean staff don't act if they feel no one values their contribution.

Dual Process Theory: Conceptualisation of how we process information using two thinking systems; fact-based, deliberate and logical System 2, and emotion-based, impulsive, and intuitive System 1. Imagine you setting your alarm for the morning - that's your System 2. Now imagine hitting the snooze - that's System 1! Your customers and colleagues will be using System 1 most of the time...as will you.

Duration Neglect: When the duration doesn't factor into the valuation. For customers, they will be more attracted to $10 a month for 2 years than $20 a month for one, for example.

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E

Effort vs Reward: my conceptualisation of the two elements of behavioural influence; resources expended compared with the payoff. For behaviour to happen, R must exceed E.

Ego Depletion: tendency to make easy (default or impulsive) decisions once System 2 (our brain's police officer) has been exhausted. This is why supermarkets place lollies at the registers! See also Depletion Effect.

Empathy Gap: our inability to understand people in a different emotional state to us. If you are well rested you might not understad why your sleep-deprived colleague is struggling to decide. See also Hot-Cold empathy gap.

Endowed Progress (a.k.a. Completion Bias): we are driven to complete tasks once we have started. Give your customers a sense of momentum so they are less inclined to walk away. Related blog.

Endowment Effect (Ikea Effect): we value things to which we have contributed more and demand much more to give them up than others are willing to pay. If you've ever tried to sell your house or car, chances are you will have valued it higher than others, at least initially, because, well, it's yours and you know how great it is!

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F

Focussing Illusion: whatever we are thinking about at that moment seems more important than at any other time. We often can't imagine the project that is consuming us ever not being so important. And yet, give it a week, a month...

Framing: tendency to draw different conclusions depending on how information is presented. In short, how you say something is as important as what you say. 97% fat-free is more enticing than 3% fat, for instance. Related blog.

Free: we act with disproportionate force when something is free and it can be enough to persuade us to change our behaviour. Why? There's no downside. That means customers might take something that is free that they wouldn't if they had to pay. The challenge, however, is they may not value it as highly. Why? There's no skin in the game. Related blog.

Frequency Illusion: something you've just learned appears to be everywhere. Suddenly you see people doing irrational things everywhere, for example!

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G

Goldilocks Effect (a.k.a. Centre Stage Effect): tendency to prefer the middle option. Not too hot, not too cold! That means you need to present your highest margin option in the middle. Related blog.

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H

Halo Effect: we carry judgments about one characteristic over to another. A staff member who is good at presenting, for example, is good at all parts of their job. For customers, a good (or bad) interaction with you will shape their perception of your business.

Hard-Easy Bias: we tend to be over confident on easy problems and not confident enough for those that are hard.

Hedonic Framing: two separate gains are more valuable than one large gain of equal value, whereas two separate losses are more painful than a single loss of equal value. So giving your customers or staff two smaller bonuses will be more highly regarded than a once-off, whereas raising prices twice a year is worse than once.

Herding (Bandwagon Effect): tendency to base actions and beliefs on what others are doing or believing. If everyone else seems to be going vegan, I will too. See also Social Norms.

Heuristics (Rules of Thumb): governing cultural, social or personal 'rules' we live our lives by. These mental short-cuts save mental energy but may be sub optimal. Eg Price=quality; private label brands are cheaper

Hindsight Bias: we trick ourselves into believing we "knew it all along" rather than admit error. Watch any post election review and you'll hear people who claim they predicted the result...but must have kept it to themselves!

Hot-Cold Empathy Gap: our tendency to believe we will always make a decision based on how we feel right now. I won't be able to imagine myself getting cranky and binging on chocolate next week when I feel calm at the moment. 

Hyperbolic Discounting: a 'bird in the hand is worth two in the bush'. We tend to value a gain we receive now more than a larger gain available in the future i.e. give me $100 today rather than $110 in a year's time. See also Short-term Bias.

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I

Illusion of Control: we overestimate our ability to control events. You might think turning up to a sporting event will change the odds your team will win, for example. 

Illusion of Validity: we tend to believe our predictions are valid despite contradictory evidence e.g. we believe we are great at spotting talented recruits despite them not living up to expectation.

Impact Bias (Affective Forecasting Error): we overestimate how happy or sad we will feel in the future about a gain or loss. In truth, lottery winners and victims of trauma often revert to their pre-event level of contentedness. It means customers might overestimate how great the new car/device/relationship will make them feel, but also overestimate how rotten life will feel if they lose out on something they want.

Information Avoidance: "head in the sand" avoidance of information that would result in a negative outcome. Unfortunately business and political leaders often don't want the bad news.

Inter Group Bias: we view people in our own group differently than someone in another group. This can lead to discrimination and bullying if not carefully managed.

Inter-temporal Choice (a.k.a. Short term or Present Bias): we tend to focus on the immediate result of a decision over what the future may be. Give me ice-cream now and I promise I'll eat salad for the rest of the week. It means you need to give your customers a benefit in the immediate term - waiting for a future payoff is not enough.

Irrational Escalation: investing more in something based on the past even if we know its bad, throwing 'good money after bad'. For example, pouring money into a new product even after a competitor has launched a superior alternative.

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J

Judgment Heuristic: the methods we use to simplify our decision-making and assessments of probability. We make judgments, often on the basis of intuition or limited information.

Just World Hypothesis: our desire to believe that a higher power, karma, forces of justice or stability guide situations. We might think karma will deliver customers to our door.

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L

Loss Aversion: we prefer to avoid losses because they are 1.5-2.5 times as painful as gains are pleasurable. Think of the difference between a first and second serve in tennis - the second is slower and more conservative because we'd rather not lose the point than win it win an ace. Customers will be more worried about what they lose by doing business with you (time, money, reputation, energy) than gain. 

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M

Mary Poppins Principle: my description of Temptation Bundling, where you improve the likelihood of action by bundling a "want to do" with a "should do" i.e. spoon full of sugar helps the medicine go down. 

Mental Accounting: tendency to think of the world in terms of specific accounts where value in one account is different to other. I might refuse to buy an avocado for $5 when it's usually $2.99 but then happily blow $5 on a box of muesli bars because that is in a different mental bucket. Knowing which mental accounts your customers can access is important to get the sale.

Mood Heuristic: our mood affects ratings and judgments. A happy customer will rate you differently than one that is feeling sad, regardless of service quality.

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N

Narrative Fallacy: the way we have constructed our story of the past leads to imperfect decisions in the future. If I see myself as someone who is independent I may find it difficult to ask for help when I need it, for example. Likewise, if I believe a company has always performed above market, I may think they will continue to.

Negativity Bias: we place more emphasis on negative experiences than positive. A bad meal is more remarkable than a good one.

Not Invented Here Bias: tendency to dismiss the ideas of others. You may see this in workplaces where people are very interested in their own ideas but less so when it comes to those of their colleagues.

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O

Observer-Expectancy Effect: our expectations influence how we perceive an outcome. If I expect a product to be hard to use then that's what I will probably find.

Omission Bias: we tend to judge harmful actions as worse than equally harmful inactions. Someone who lies is worse than someone who neglects to tell the truth.

Outcome Bias: we judge a decision on the outcome rather than the quality of the decision, ignoring the role luck plays. If an entrepreneur hits the big time, we believe it's because of their genius rather than being in the right place at the right time. We tend not to hear about equally smart people who were simply unlucky.

Over Optimism: tendency to think the world is better than it is, leaving us unprepared for danger and vulnerable to disappointment. We ignore the rate of small business failures, for example, believing the statistics don't apply to us.

Over Confidence: we are too confident in our abilities which causes risk taking in every day lives. We might drive too fast or drink too much believing we are invincible.

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P

Paradox of Choice: we like the freedom to choose but can get overwhelmed by it. Customers will therefore be attracted to shops with a bigger range but then struggle to make a decision. Same goes for empty car parks - it can take longer to park! See also Choice Overload.

Peak/end Rule: when recalling an event, we make a judgment on the basis of the two most significant moments - the peak (highest intensity) and end. That means you should focus on these two parts of the customer experience. 

Pessimism: tendency to overweigh negative consequences. Some people are glass half-empty types who overestimate how badly things may go (great if you are selling them insurance).

Placebo Effect: self-fulfilling prophecy where own beliefs cause something to happen. People may believe a tablet helps them feel better when in fact it has no active ingredients, for example.

Planning Fallacy: tendency to underestimate the length of time something will take, overestimate benefits and underestimate costs. This is the cause of most project mis-management.

Possibility Effect: tendency to overweight the importance of highly unlikely events. People who are risk-averse are often good at raising such possibilities and it can be difficult to dissuade with statistics.

Pre Decisional Distortion: tendency to 'imprint' on the brand initially favoured due to a specific attribute and then sequentially judge other brands relative to that lead brand e.g. Brand A is known for it's great customer service, so may be preferred to Brand B who isn't, but which offers better functionality.

Priming: our acts are often influenced by sub-conscious cues. Think of a day spa - they prime us to relax by having soft furnishings, gentle music and lovely fragrances. 

Procedural Fairness: we tend to accept an outcome if we believe the process has been fair. A customer will be less likely to get angry if they believe the process has been impartial and transparent. 

Processing Fluency: the ease with which information is understood can impact behaviour.  White text on a black background can impair online fluency for your customer, for example, and make them think working with you is harder than it really is. See also Disfluency.

Prospect Theory: seminal theory in behavioural economics which posits we make judgments relative to reference points and losses are more influential than gains. In other words, we use comparison to determine how good we think something is.

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R

Recency: we weight the latest information more heavily than older information. What plays on our mind tends to shape our reaction.  When it comes to structuring information for customers or stakeholders, that means ending on a high so that's what they'll remember. A customer who is given a chocolate as they leave a hotel will remember that hotel fondly.

Reciprocity: social pressure to return a favour in kind. When someone offers you their hand to shake, you reciprocate because it would otherwise be a social affront. 

Regression to the Mean: tendency for aggregate behaviour to be drawn close to the average. When people were told they used less power than their neighbours, for example, they used more and regressed to the average. 

Relativity: everything is judged relative to something else and we prefer to use obvious rather than difficult points of comparison. There's a reason we say "I want to compare apples with apples".

Remembering vs Experiencing self: we are persuaded by not only the experience but our memory of it. We tend to think what we did and how we remember it are the same when they are different. A customer might swear something happened because that's how they remember it, not necessarily how they experienced it.

Representativeness (Belief Bias): we assume things with some similarities are more similar than they really are. Often we think people who look like us or share a similar educational background will think like us when they may not.

Restraint Bias: we overestimate our ability to show restraint in the face of temptation. That means we can easily undermine our goals by placing ourselves in the wrong environment, thinking it won't be a problem. Going to the pub and expecting not to drink or buying chocolate and keeping it in the pantry are just two examples. Instead we need to anticipate weak restraint and plan accordingly.

Revenge: we will act to punish another due to perceived wrongdoing. Examples may include tailgating a driver who cut us off in traffic, refusing to support a rival's promotion or a customer bad mouthing a business who didn't give them what they wanted.

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S

Salience: we focus on easily recognisable or memorable features of a person or concept. That stands out gets our attention. When writing an email or letter, that means making the most important points stand out e.g. call out boxes. When presenting to a group, interesting visuals or props can help.

Scarcity: tendency to value something more if it is rare. Our fear of missing out means things in limited supply (quantity or time) become attractive. In Australia, infant milk formula has become very scarce and coveted as a result.

Seer Sucker Illusion: we rely too heavily on expert advice, avoiding responsibility. Instead of making a considered decision, we often defer to the views of charismatic politicians, pundits or business leaders.

Selective Perception: we allow our expectations to influence how we perceive the world. If I expect everyone to be mean to me then I will likely perceive the world as an unfriendly place.

Self-Enhancing Transmission Bias: we share our successes more than our failures, creating a false perception of reality and an inability to accurately assess situations. These days, it's social media culture where people curate an artificially positive narrative of their lives.

Self-Herding: tendency to follow decisions we have taken before. If I chose this brand last time, then I will this time too.

Short-Term Bias (a.k.a. Present Bias, Inter-Temporal Bias): Preference for immediate gratification and to defer bad news till later. Give me ice-cream now and I promise I'll eat salad for the rest of the week. It means you need to give your customers a benefit in the immediate term - waiting for a future payoff is not enough. See also Hyperbolic Discounting.

Social Norms: tendency to follow what others do, the 'normal; behaviour in a situation. When in doubt, I'll buy from the 'best sellers' list, for example, because other people have trusted that product or brand. See also Herding.

Status Quo Bias (a.k.a. Default Bias): tendency to want things to stay the same, selecting the default option where available. People tend to say in the superannuation fund they were first defaulted into, for example. Related blog.

Stereotyping: we expect a group of people to have certain qualities without having any real information about the individuals. "All vegans are hippies", for example.

Sunk Cost Fallacy: tendency to maintain possession of a position or item because of the resources already put in rather than give it up. People are more likely to invest in a project that has no hope of succeeding if it has already started than if it has not yet commenced, for instance. This is a big problem in managerial decision-making. For customers, it means they may be loath to discard their old widget even though you can offer them a better one.

Survivorship Bias: our focus is on examples of things that have survived. In health, we focus on the rates of recovery and in business, the rates of success rather than failure.

System 1: fast, intuitive, automatic, habitual, instinctive thinking. Vast capacity 11,000,000 bits of information can be processed per second. It is "one" because it came first - it is an older, more primitive thinking process. When driving somewhere familiar, System 1 is steering.

System 2: slow, rational, logical and fact driven thinking. Limited capacity, only 40-50 bits of information can be processed per second. When driving somewhere unfamiliar, System 2 is steering.

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T

Temptation Bundling (a.k.a. Mary Poppins Principle): improving the likelihood of action by bundling a "want to do" with a "should do" e.g. I can only watch my favourite TV show (want to do) while at the gym (should do). 

Tragedy of Commons: we overuse common resources because it is not in our individual interest to conserve them. In a workplace or hotel, for example, people might not care about how much water and power they use compared to when they are at home and responsible for their usage.

Transaction Utility: we are predisposed to pay more for something that we visualise in an expensive setting. If I imagine myself wearing a dress to an expensive dinner I may pay more than if it was for use at home.

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U

Uniqueness: we prefer to think we are unique, and will react against forces that compromise our sense of individuality. This is the danger in telling people they are being influenced by other people (social norms) - you will experience reactance and the individual is likely to go in the opposite direction. Remember, we are not unique in thinking we are! 

Unit Bias: the belief that there is a universally agreed optimal unit size. This impacts how much we consume of something because people tend to finish their portion regardless of size. It means I might have one glass of wine at home, but that glass is the equivalent of three standard drinks. I count one not three. 

Up/Down Congruence: matching value representations to the head (up) and heart (down). In other words, analytical messages are better at the top of a page (head), and emotional ones below (heart). 

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V

Visual Depiction Effect: tendency to be persuaded by images oriented for use. A spoon on the right hand side of a tub of yogurt in an advertisement is more compelling than on the left because it is easier for the customer (who is more likely to be right-handed) to imagine eating. 

Vividness: tendency to respond to something that stands-out. When writing an email or letter, that means making the most important points stand out. In presentations, a vivid story can help your audience become engaged.