A growing body of research in behavioral economics indicates we use an irrational approach to decision-making. What exactly is behavioral economics? One of the best definitions comes from British economist Dan Evans: "Put simply, behavioural economics argues that human beings' decision-making is guided by the evolutionary baggage which we bring with us to the present day." Not understanding how we make our decisions can have profound consequences on our behavior.
We need to rethink how we make decisions, and recognize which repeated decision-making processes don't serve us well so we can learn to avoid them. As Albert Camus said, "Life is the sum of all your choices." Gaining insights into irrational motives that affect our personal and work lives is a good place to start.
These seven tips can help you avoid falling into irrational-trap thinking.
1. Understand the pull of partial ownership. A popular book on behavioral economics is Dan Ariely's Predictably Irrational: The Hidden Forces That Shape Our Decisions. Ariely reports on the influence of ownership in our decision-making. It turns out that we begin to feel ownership even before we actually own something. Let's say we have a basic cable TV service and we are offered a free trial version of the upgraded package. Ariely found that with free trial packages, the idea of owning something—even temporarily—makes it difficult to give it up later. This also taps into our aversion to loss. The emotions of ownership make us unconsciously decide that the "loss" of the upgraded package is more painful than spending more money. Understanding the phenomenon of temporary ownership on our psyche can help us approach temptations with greater awareness and caution.
2. Preempt customer revenge. In his subsequent book, The Upside of Irrationality: The Unexpected Benefits of Defying Logic At Work And At Home, Ariely explores the need for people to seek revenge for poor customer service and other annoyances. For example, when a customer rep interrupted an explanation to take a personal phone call, and returned to the person without an apology for the interruption, it significantly increased the odds that the person would write a scathing review online for other potential customers to see. Ariely provides a formula for neutralizing the desire for revenge: "1 annoyance + 1 apology = 0 annoyance." (For more insights on customer revenge, see Ariely's video,"The Case For Revenge.")
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3. Choose carefully between social norms and market norms. Ariely talks about the difference between social norms (which are friendly requests not requiring instant payback) and market norms (which deal with wages, prices, rents, interest and cost-and-benefits.) To illustrate the difference, take a day-care center that decided to fine parents who didn't pick up their children on time. The fine violated a prior social contract between the day-care center and parents that allowed for being late. When a fine was charged, parents viewed the situation in terms of market norms: since they were paying for being late, they frequently opted to be late. When the day-care center then removed the fine, parents continued to pick up their children late—late pick-ups even increased.
What this teaches is that we cannot switch from establishing a warm relationship with a customer one day—treating them as family—and switch to an impersonal relationship the next day, because it suits us better. When a social norm collides with a market norm, the social norm disappears, and will more likely never return. In other words, it is difficult to reestablish a social relationship.
4. Reconsider your first impressions. In Sway: The Irresistible Pull of Irrational Behavior, Ori and Rom Brafman report on experiments involving "value attribution"—one of the hidden psychological forces that cause us to make preemptive judgments. Value attribution is defined as our inclination to attribute qualities to something or someone based on our initial perception of their value rather than on objective data. In an experiment, Joshua Bell, one of the nation's greatest violinists, wore a baseball cap and went to a subway station, where he took out his $3.5 million Stradivarius and played some of the most challenging pieces of music ever played for a violin. Value attribution caused more than a thousand people to view Bell as just another street musician and to stream past him.
First impressions can often narrow our perceptions. It's smart to catch yourself after you have made an assumption about the value of someone or something based on superficial appearances. Much as this is hard to do in the moment, work on cultivating your ability to have a discerning eye—in other words, reconsider hasty evaluations.
5. Know the hidden effects of price discounting. In an experiment, Ariely assembled a group of students and offered them a can of SoBe Adrenaline Rush drink, prior to their taking an IQ test. He told them that the drink has a positive effect on their mental acuity. He charged the students $2.89 for the drink. Students performed slightly better on the test than those who didn't have the drink before the test. He then offered another group of students the same drink for 89 cents and told them that it was heavily discounted. The scores of the students who drank the discounted SoBe dropped significantly.
Here again, we see the power of value attribution: It's so compelling, it causes us to alter our perception of a product or service after it has been discounted off its regular price. We now unconsciously value the product or service less than if we had paid full price for it. Does this mean you should never discount the price of your services? No, but you should carefully consider when it might not be prudent to do so.
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6. Offer fewer options. In North America, we are accustomed to think that when we're given more choices, we're likely to make a better choice. In a now famous study, Sheena Iyengar, author of The Art of Choosing, presented consumers at a supermarket tasting booth with six different jams and a $1 off coupon to encourage them to buy jam. Every few hours, new groups of consumers were offered 24 jam options with the same $1 coupon. It turns out that 30 percent of consumers who had seen the smaller assortment were able to quickly pick a jam from the store isle and continue shopping. The ones who were presented with a large assortment took longer to decide, and only 3 percent ended up buying jam.
While there's no denying that we value having choices, it's also true that choices cause stress and may lead to our inability to choose. In A Better Choosing Experience, Iyengar offers four tips to help businesses with the choosing process:
- Cut the number of options.
- Create confidence with expert or personalized recommendations.
- Categorize your offerings so consumers better understand their options.
- Condition consumers by gradually introducing them to more-complex choices.
7. Beware of those who say, "It will set a precedent." All of us have at some point decided not to adopt a decision because someone said, "We can't do this. It will set a precedent." This is the wrong reason for abandoning a decision. Whether or not it sets a precedent is irrelevant. As Stuart Sutherland, British psychologist and author of Irrationality, says: "The decision should be made on its own merits." Guard against discarding what could be a very good decision because of faulty reasoning. Setting a precedent may be a legitimate reason for not adopting a certain course of action, but don't allow it to sway you before carefully examining the value of the decision.
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Bruna Martinuzzi is the founder of Clarion Enterprises Ltd., and the author of two books: Presenting with Credibility: Practical Tools and Techniques for Effective Presentations and The Leader as a Mensch: Become the Kind of Person Others Want to Follow.