Last week I introduced you to the concepts of behavioral economics and challenged you the #1 Irrational Game card.

Today I want to tell you a bit more about this discipline and why it matters for your business and even in your private, day-to-day life.

Why do we do what we do?

A short introduction here: Behavioral economics help us understand why we pursuit certain irrational and coutnerproductive behaviors.
Stop reading if this has never been you: You’ve tried diets, read every article about nutrition and exercise avilable on the internet, replaced any unhealthy food in your fridge with greens and juices. Yet, you hit Mc Donalds as soon as you leave the house. Or you have a bad cough and you know you should quit smoking, but every cigarette is going to be ‘the last one’.

What’s wrong with you? Standard economic theories tell us that those efforts should be enough to change our behavior. You know the consequences but still smoke? You want to feel bad. It’s your choice.
People say they want to do all sorts of things–eat better, start exercising, and they mean it—. But they don’t get to do such things.

And when it comes to money? Let’s take casino gamblers. They’ll keep betting even when they expect to lose.

In theory, man is an intelligent, analytic, selfish and logic-driven being who has perfect self-control over his actions. In real life, this being doesn’t exist.

According to behavioral economics, real-life people make mistakes in their thinking. For example, they are overly optimistic about their sense of control — which is one of the reasons that they overeat, smoke or gamble in the first place.

In 2008, two Yale economics professors launched a website and app, StickK.

To make a long story short, the user selects a goal and pledges an amount of money toward achieving it. Then they choose a referee — a friend, a family member, you name it — and sign a contract. Does the user achieve the goal, he gets the money back; he doesn’t, the money goes to a friend or charity.

Numbers show a dramatic increase in users achieveing their goals with this strategy. Why? It doesn’t prohibit behavior — it allows users to continue their behavior if they want to AND sets up consequences.

It also leverages another common bias in people’s thinking: loss aversion.People are much more averse to losing something they have than they are willing to gain something they don’t have.
Losing 150 € is more painful than gaining 150 € is pleasurable. The fear of losing money is a powerful motivator.

Money And Pain

Pain is a recurring theme in behavioral economics. Not only can it be a powerful trigger in our daily decisions, but it’s also something marketers (and you) should be taking into consideration more often in their business practice. Here’s one of the most widely known BE principles when selling any product or service:

1. Make a product’s cost less painful

In almost every purchasing decision, consumers have the choice to do nothing: they can always save their money for some other day.
One of the triggering factors behind buying vs not buying, according to BE, is the way they value a dollar and how much pain they feel upon spending it.

For example, companies know that allowing consumers to delay payment can dramatically increase their willingness to buy. The logical reason for this is that the time value of money makes future payments less costly than immediate ones.

But, behind the scenes, there is a less rational one.

Payments feel like losses, and losses are deeply unpleasant. But emotions experienced in the present are important. Even small delays in payment can soften the immediate pain you feel when spending your money and trigger your purchasing decision.

PLEASURE OR PAIN?

CHALLENGE #2–23.11.2016 — HOW WELL CAN YOU PREDICT HUMAN NATURE?

Without further ado, here’s today’s challenge.

Category: Pleasure or pain

Situation: Participants were hooked up to fMRI machines that allowed researchers to study their brain activity.
While in the fMRI, the researchers gave participants $20 to spend on different products.
In each trial, the participants saw a picture of a product (such as Godiva chocolates) and could decide whether or not to purchase it.

Question: What did the fMRI reveal about people’s brain activity while making purchasing decisions?

Possible outcomes:
1. Whenever participants thought about spending, the pleasure center of their brain lit up.

2. When participants saw cheap products, the pleasure center of their brain was active.

3. When participants saw expensive products, the pain center of their brain was highly active.

4. fMRI brain activity was less accurate at predicting people’s emotions than participants’ self-reported emotions.

WHAT DO YOU THINK HAPPENED? WHY?

Don’t be shy, give it a shot and let us know what you think!
At the end of the week I’ll post a comment / update and let you know the right answer with an explanation.

Thank you for reading this article.

PS. If you want to learn more about and purchase the Irrational Game, check this out: https://irrationalgame.com