Behavioural Economics and Business
Behavioural economics is a huge field of science that is increasingly getting more attention. Economics and behavioural economics is different in one particular way, whilst both study decision making centered around dollar dollar bills, one assumes that people are rational and the other presumes that people are irrational. Economics assumes that people are controlled and unbiased where as behavioural economics assumes that people are in fact the opposite, they are bias, influenced and irrational. Behavioural economics pairs the theory of economics with the reality of psychology. Why are you likely to buy a Starbucks coffee at £5 but are pretty pissed if the local cafe charges you £4 for one? That can be understood by looking at the behavioural economics.
Decision making and the study of this is not a new thing, a chap called Chester Bernard introduced the term ‘decision making’ into the business world some time mid way through the last century. Of course, as humans we’ve always had to make decisions, so decision making isn’t a new thing but the study of it is fairly new. In our early days (not mine, some folks back in the 1500s) we used the stars to make decisions. I’m not entirely sure how that would work but I quite like the idea of leaving every decisions in life down to what stars you saw in the sky. It would definitely be a time saver, although it might lead to absolute chaos. Since then we have strived to find better ways to make decisions from using numbering and algebra to Aristole’s empirical system. Today we use a number of techniques and tools to make decisions which are in no way irrational or biased. Not way at all.
So why are we so interested in decision making? Who cares if people follow their gut to make decisions, who cares if someone buys a £5 Starbucks because they like the sound of it? Well, I personally care because maybe I’m just super nosy and like to know about why all the time. But I think it goes deeper than that. We make decisions all the time. Every minute of everyday. Our whole life, really, is a series of decisions to get life how we want it to be. It seems unfair that the world, or at least the business world, knows all about how we make decision and here’s us sitting here thinking we are totally in control.
It turns out we might not be in control as much as we think.
We buy a £5 Starbucks because of the perceived value it has. Take a cup of coffee from a local cafe, the mug will be unbranded, the look of the coffee will perhaps be pretty similar to what you can make at home, you probably won’t even be asked what size you want, it will tastes fairly decent, but it still will only be worth approximately £2 definitely not £4 and it’s absolute extortion at £5. Then take an experience like Starbucks. There are a whole range of choices, all sounding pretty cool, there are a range of sizes but not small, medium, large oh no, we’ve got tall, grande, venti. They in themselves sound also, pretty cool. We then get asked what our name is so that it can go on our cup (oh my god our very own cup with our name on it) or so when the barista shouts out our order it feels like she knows our name, very personalised. It comes in an elegant mug with the logo subtle embedded on the side and it definitely looks like you could make this at home. You can even have whipped cream. £5 later you are pretty pleased with the experience and what you’ve got for £5. But the question is why? Well because Starbucks have high-jacked our decision making. Added more steps in the process and more options seems like we’ve got a better deal, serving it in a branded cup rather than a regular one makes it feel like we’ve got something we couldn’t make at home. The barista shouting our name to collect makes it feel personal and that we’ve made a friend in the process — an absolute steal for £5.
Once you start to learn that people are pretty irrational but in a predictable way things start to get pretty interesting.
Originally published at https://www.careerhealth.info on March 12, 2020.