Intellectual Imprints #002 Five reasons why you are acting the way you are
So for my second post in this section I am not going to talk of my learnings from a single book. I am instead going to put together the cumulative impact this set of books has had on me. What the subject matter of these master pieces is, you ask. In two words - Behavioral Economics.
What you will see now is a list of subconscious inclinations or biases that drive the way we think and act. To bring alive the concept I will use topical and relevant examples from day to day life. I will start with five reasons why we behave the way we do and watch this space for five more in the next few days.
The future me is someone else
Quite simply this means what it says. Which in effect means that we create a differentiation in our mind between who we are today and who we will be tomorrow. It is almost like how Marty from the past watches Marty from the future in Back to the Future, as a separate person.
What this does is, it makes us act in a manner that is gratifying today but may have a questionable impact on us tomorrow. The obvious example is eating high calorie food because we love the taste. Or choosing to spend our money over investing it. Even sleeping in late instead of going for a run.
Let's look at how this may be impacting the consumer in the current scenario. The first thing that struck me is the shift to online education by schools due to the lockdown. While I am totally in favour of it - it also means the children have to be very self motivated and have to ensure good time managent so that they don't fall back on work. With no teachers policing them, the students need to see the importance of what they are being taught over relaxing with a game, book or movie. Now since it is their future self that is going to benefit from this education how can parents keep the kids interested?
Inequity drives action
What this means is when we feel someone is being unfair to us we will react to it. Sometimes the impact of the inequity may be insignificant to us but it is the principle that we will stand up for. Typically extra fines levied by banks or credit cards, albeit very small, will make us fight for a waiver. Or the lack of the promised free sample in the cereal box, which may be of no consequence to us, will make us change our brand.
The perfect exaple here is when hordes of tourists had to cancel their summer vacations. The reactions from airlines and hotel chains ranged from a complete waiver of the booking amount to a reminder that your fares were non refundable. Given that this was an act beyond anyones control, certainly brands that opted for the latter reaction were blacklisted in the consumers minds.
Recency bias
The recency bias describes our tendency to outweight more recent information available to us. We see this most lucidly in the stock market as people tend to get out of a falling market and get into a rising market. This happens because when the market is falling the most recent information is a downward trend... now even if you had bought into a stock at a relatively higher value you expect it to crash because of this current occurance.
The covid crisis has seen this very example take shape. Solid stocks which are at their long time lowest are still not able to find buyers because of the recency bias in part. Ofcourse the uncertainty of the future is the other reason for steering clear of the markets. And this will be clear in our next bias.
Now this is a topic that has not ceased to amaze me ever since I was introduced to it. It reveals many of the non conscious processes that drive human decision making. As understanding the consumer and his actions is part of my daily job, this becomes all the more critical to me.
Before I delve deeper into this let me share with you the five titles that have led to this epiphany.
| Title | Authors |
| Thinking Fast and Slow | Daniel Kahneman |
| Nudge | Richard H. Thaler, Cass R. Sunstein |
| Hooked | Nir Eyal |
| Predictably Irrational | Dan Ariely |
| The Busines of Choice | Matthew Willcox |
The future me is someone else
Quite simply this means what it says. Which in effect means that we create a differentiation in our mind between who we are today and who we will be tomorrow. It is almost like how Marty from the past watches Marty from the future in Back to the Future, as a separate person.
What this does is, it makes us act in a manner that is gratifying today but may have a questionable impact on us tomorrow. The obvious example is eating high calorie food because we love the taste. Or choosing to spend our money over investing it. Even sleeping in late instead of going for a run.
Let's look at how this may be impacting the consumer in the current scenario. The first thing that struck me is the shift to online education by schools due to the lockdown. While I am totally in favour of it - it also means the children have to be very self motivated and have to ensure good time managent so that they don't fall back on work. With no teachers policing them, the students need to see the importance of what they are being taught over relaxing with a game, book or movie. Now since it is their future self that is going to benefit from this education how can parents keep the kids interested?
Inequity drives action
What this means is when we feel someone is being unfair to us we will react to it. Sometimes the impact of the inequity may be insignificant to us but it is the principle that we will stand up for. Typically extra fines levied by banks or credit cards, albeit very small, will make us fight for a waiver. Or the lack of the promised free sample in the cereal box, which may be of no consequence to us, will make us change our brand.
The perfect exaple here is when hordes of tourists had to cancel their summer vacations. The reactions from airlines and hotel chains ranged from a complete waiver of the booking amount to a reminder that your fares were non refundable. Given that this was an act beyond anyones control, certainly brands that opted for the latter reaction were blacklisted in the consumers minds.
Recency bias
The recency bias describes our tendency to outweight more recent information available to us. We see this most lucidly in the stock market as people tend to get out of a falling market and get into a rising market. This happens because when the market is falling the most recent information is a downward trend... now even if you had bought into a stock at a relatively higher value you expect it to crash because of this current occurance.
The covid crisis has seen this very example take shape. Solid stocks which are at their long time lowest are still not able to find buyers because of the recency bias in part. Ofcourse the uncertainty of the future is the other reason for steering clear of the markets. And this will be clear in our next bias.
Loss aversion bias
The loss aversion bias suggests that for individuals the pain of losing is psychologically twice as powerful as the pleasure of gaining. Now investing in the current market in all possibility would lead to some gains in the log run. However the thought of losing our hard earned money ensures a vast majority stays away from the stock market all together. The current situation makes even seasoned investors rethink their investment strategy.
Endowment effect
This effect is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it. This happens because of an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value.
You will see this happening everyday as you stay glued to your laptop or mobile while working from home. A 7-day free trial for an app, or a premium subscription free for the first month. What happens at the end of that 7-day or month long period. You suddenly evaluate the price of that item with completely new eyes.
Hope this helped you understand your own actions and those of your consumers... There are five more very interesting learnings that I will soon share...
Till then I would love to hear examples you have come across that show these biases in action.
The loss aversion bias suggests that for individuals the pain of losing is psychologically twice as powerful as the pleasure of gaining. Now investing in the current market in all possibility would lead to some gains in the log run. However the thought of losing our hard earned money ensures a vast majority stays away from the stock market all together. The current situation makes even seasoned investors rethink their investment strategy.
Endowment effect
This effect is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it. This happens because of an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value.
You will see this happening everyday as you stay glued to your laptop or mobile while working from home. A 7-day free trial for an app, or a premium subscription free for the first month. What happens at the end of that 7-day or month long period. You suddenly evaluate the price of that item with completely new eyes.
Hope this helped you understand your own actions and those of your consumers... There are five more very interesting learnings that I will soon share...
Till then I would love to hear examples you have come across that show these biases in action.
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