I hated Economics in high school. My teacher was a womanizing drunk who sat all the pretty girls in the front row and drew boring graphs on the whiteboard. I remember thinking to myself, “How will this EVER be relevant in my life?”
Then, a course in college changed my perspective forever.
That course was Behavioral Economics, which back then was somewhat of an emerging concept. Where standard economics focuses on supply, demand, and break-even analysis, behavioral economics has roots in psychology and decision-making. Standard economic theory (also known as free market economics) assumes people are rational beings who always act in their own best interest. In a real-world example, people avoid the gym not because they are lazy and distracted, but rather consciously weigh their options and choose not to go.
According to standard economics, this image of Lebron enjoying a Sprite has absolutely no effect on my purchasing behavior.
Behavioral economics, on the other hand, is rooted in irrationality. It assumes people do not act in their own best interest, and that we should design helpful “nudges” to help them make better choices. A behavioral economist understands that some people have a hard time reaching their fitness goals. To help those people look better naked, he offers incentives like free trials for gym memberships and subsidized preventative health care screenings.
Behavioral economics emerged in the 1960’s as part of a larger movement towards cognitive psychology. Rather than giving credence to the top-down observation of external market forces, it suggests we should see the world from a bottom-up perspective, starting with the human brain. These peculiarities of our brain are known to marketers and can be used for manipulation, both good and evil.
I’m good on shoes, Lebron, but thanks for showing me my options. You always have my best interests at heart.
As entrepreneurs, we reject the status quo. We challenge antiquated systems and push new ideas forward. And yet, when I speak with founders, I often hear things like “This is the way it SHOULD be done” or “How could they NOT use my product?” The answer, of course, is that people can and will avoid your product, even if it improves their lives. This can be maddening if you think of people as entirely rational beings.
The best weapon I know for fighting irrationality is behavioral economics, and founders would be wise to wield it. We know that competitive advantages exist in product features, but most of us don’t realize that how we think can also be a competitive advantage. So how does one turn behavioral economics into a competitive advantage?
I DO deserve the best!
Start by understanding people’s irrationalities. Behavioral economists call these cognitive biases. Before starting Tenrocket, I was a professional fundraiser for nonprofits. One cognitive bias I was aware of (and shamelessly utilized) is known as The Identifiable Victim Effect. Here’s how it works. Let’s say I’m trying to raise money to fight malaria, and approach you as a prospective donor.
Did you know there were more than 212 million cases of malaria in 2015 alone? Through our work at The Malaria Foundation, we’ve reduced mortality rates by 29% since 2010. Would you consider making a donation today?
That’s one way to ask. Here’s another.
Here’s a picture of a little girl named Samara from a small village in Madagascar. Samara walks a mile to school each day and dreams of becoming a nurse. Last year on her way to class, she was bitten by a mosquito and contracted malaria. Samara wants to go back to school, but her illness keeps her bedridden. The Malaria Foundation can get Samara the medicine she needs to get better. Would you consider making a donation today?
Both questions benefit the same nonprofit, but the second question consistently raises 20% more money.
Standard economics suggests we should be more affected by the statistic about millions of victims, but we can’t help but empathize and be compelled by Samara. We’re irrational, and that’s ok.
To get started, familiarize yourself with this list of cognitive biases and consider any which may be relevant to your product. Most of the products we know and love today tap into at least one of these. Mailchimp built one of the world’s most human brands using its chimpanzee mascot by leveraging, perhaps unintentionally, a cognitive bias known as anthropomorphism. Snapchat built a $20 billion empire through ephemeral messaging, which is grounded in loss aversion.
For further reading, I recommend picking up at least one of these books:
Chris Turner is a co-founder of Tenrocket, a company building full-stack web and mobile applications for startups in 10 business days. Want to become a Hype Contributor? Email us to get the ball rolling!