Behavioural Economics; 7 Principles

 

I spent a very interesting three days a week or two back with some big names in the Industry such as Rory Sutherland and Dave Trott at the Institute of Practitioners in Advertising "Red hot or red herring" event.

Initially I thought this was a training course, but very quickly realised it was itself a mini-social experiment, mixing the best of British Planners and some very brave Clients. The rules of engagement were simple;

"Ignore how you traditionally plan, take a new frame of reference (seven principles of Behavioural Economics) and see what comes out!"

So what are these magical principles, and more importantly, what do they mean?!

1- Loss Aversion. People will work harder to avoid losing something than they will do to gain it. This is because they have a tendency to ascribe a disproportionately higher value to an item they already have in their possession, compared to one they're being offered, even with reference to what they may have originally paid for it.

2 - The Power of Now. Consumers engage less with future events than they do with current events.

3 - Scarcity Value. When we perceive something to be scarce it has a greater value in our eyes. Conversely when we perceive it to be plentiful it's perceived value falls. When valuing things, circumstantial factors tend to crowd out factors that point towards absolute value.

4 - Goal Dilution. When multiple goals are pursued, they are less effectively achieved than goals pursued individually.

5 - Chunking. Parts are easier than wholes. The way a task is presented affects people's willingness to take it on and complete it.

6 - Price Perception. In theory, price should be  a consequence  of the value people attach to something. We should be willing to pay what we think something is worth. In practice, this casuality runs backwards. The price that is demanded for something makes us value it.

7 - Choice Architecture. Choosing is relative to what you can have, not absolutely about what you want.

 

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