Behavioural Economics (BE) is a field of study that seeks to understand how humans make decisions through the lens of psychological, behavioural, emotional, and social factors. At it’s heart, Behavioural Science presupposes that people are not the rational decision makers they think they are; instead we rely on instincts, are led by biases and favour the familiar. It is these biases, or mental shortcuts known as ‘heuristics’, that are used to make the vast majority of our decisions.
However, while people might behave irrationally, this irrationality has recognisable patterns that determine behaviour under certain circumstances. For example, have you ever purchased a product or made a decision, such as, chosen a restaurant, based on what other people were doing? This isn’t a coincidence. The ‘Bandwagon Effect’ is a bias that refers to why we adopt a particular behaviour or attitude because many others are doing it. This is just one of the many examples of how ‘heuristics’ impact the daily decisions we make. By understanding better how people respond to different contexts and incentives, we can develop a more nuanced understanding of human behaviour that can ultimately help us to design more effective interventions and interactions.
Many of these patterns are already in use across Health, Environment, Education, Government, Economy and Society to, amongst other things, help inform policy, improve services and change behaviour. For example, using descriptive norms -i.e. describing what other people do, such as “nine out of 10 people in the UK pay their tax on time” -taps into our social norm bias and significantly increases tax payment rates. Researchers estimate that £4.9 million of tax repayment was accelerated during a 23-day sample period due to the use of the messages.
BE Heuristics in the digital context
Behavioural economics focuses on one specific decision and key moment in time. The employment of these behavioural economic heuristics are permeating into the digital environment to help ‘nudge’ users along the purchase funnel. For example, ‘descriptive norms’ are being used to encourage online sales of products and services. ‘Progressive Direct’ a US Motor Insurance provider, are utilising localised information to exert peer influence and encourage users to get a quote from them.
‘Social proof’ has been used for years to provide confidence and trust in products by providing customer testimonials. ‘Default bias’ to encourage a specific product choice; people pick the easiest option to avoid complex decisions and so it signals to people what they are supposed to do. ‘Chunking’ seeks to offer small, well defined tasks as the way in which tasks are presented and broken-down affects how motivated we are to start and finish them. These are just a few of the more common patterns based on BE heuristics that are in use today.
At Global Reviews we help our clients prioritise enterprise-wide decision making, based on digital intelligence and customer centric research. As part of a recent large body of research we conducted for a client to identify global best practice, we identified and grouped a number of BE heuristics into three categories: Functional, Experiential and Emotional.
Functional should form part of the hygiene factors of your site and include heuristics such as ‘Chunking’ and ‘Default bias’.
Experiential, enhance the experience and include heuristics such as ‘Anchoring’ and ‘Goal Gradient’ which can have a fundamental impact on how you are designing onsite experiences.
Emotional heuristics are those that help you connect on an emotional level such as ‘Social proof. While all heuristics, by their nature, are working on an emotional/physiological level, we are looking to understand where they fit within the context of the digital environment.
Our aim was to understand just how, and to what level, these heuristics were being used within today’s digital environment. What we found was that while some are commonplace, BE is an area as yet untapped by much of the digital marketplace.
BE Heuristics in action
There are several examples where BE is being applied by different brands at different stages of the online consumer journey. For example, currently, when it comes to helping consumers get a price/quote, no one is redesigning the functional information gathering process significantly; all brands use some form of ‘manual data input’ capture methodology. ‘Chunking’ has become more commonplace; splitting the form across multiple steps is helping to make the form filling process smoother. The theory behind ‘chunking’ is that small, individual tasks are far less daunting than big ones. The way in which these are broken down affects how motivated we are to start and finish them. Brands that are doing this are the ones we see consistently performing top. It is also the dominant trend amongst newer emerging brands.
Canadian companies such as Sonnet (insurance) and BMO (banking) achieve the highest (task) success, confidence, and satisfaction scores in our onsite acquisition journey studies by ‘chunking’ the form into multiple steps, while also scoring low effort scores through their choice and positioning of inputs.
Other brands are utilising ‘anchoring’. ‘Anchoring’ describes our tendency to depend too heavily on the first piece of information we receive when making a decision. Any subsequent information is weighed up against this first piece, which now serves as an ‘anchor’. Pricing is the most common place where we see this being applied. Presenting a figure/fact upfront can bias consumers judgment and decisions down the line. Being deliberate about the first fact or figure you put in front of users can encourage consumers forward and help influence their decisions.
Most current price result pages are key fallout positions due to the amount of data they present, often in an intimidating format. You can minimise choice by rationalising the product suite and highlighting recommended options. Some brands are doing just this by utilising ‘default bias’ and providing a default plan option, and rationalising it as a choice through labelling it e.g. ‘best value’.
‘Nudging’ consumers forward
These are just some of the common BE heuristics currently being applied to ‘nudge’ consumers and influence the decisions they make. However, there are many more which are not yet being fully utilised within the digital context, for example, the ‘Effort bias’. This works on the theory that people place a greater value on services and products if they can see the amount of effort put into them. Studies have proven that people will value your product or service more if they see just how much effort has gone into creating it. This ‘effort bias’ goes a long way to explaining why we’re happy to pay more for small-batch whisky, or why we enjoy sitting at the chef’s table in a trendy restaurant.
Lemonade surfaces the complexity behind how they work out your price (while letting you know how you score) which may help customers reconcile and justify a price beyond what they otherwise would have considered.
A nudge is any factor that significantly alters the behaviour of humans. To count as a nudge, the intervention must be easy and cheap to avoid. Putting the fruit at eye level while it encourages for it to be picked up or bought counts as a nudge. Banning junk food does not — Richard Thaler, Nudge
Sweat the small stuff
Small changes can have a big impact. Behavioural economics focuses on one specific decision and key moment in time. By developing a better understanding of how people respond to different contexts and incentives, we can develop a more refined understanding of consumer behaviour that in turn, will help us design more effective experiences. Behavioural Economics in the digital context, has huge potential to not only help brands innovate, but to have real impact on the bottom line; conversion and retention rates. Through our benchmarking programs and global best practice repository Global Reviews is helping clients make better decisions when it comes to how consumers make decisions.
In part two of how behavioural economics are changing the way in which we engage with consumers online, we will look at the behavioural science behind buying insurance online and how purchasing decisions are not solely based on price and brand.