Our daily lives are full of planned and random decisions from the beginning of the day to the end of it, and they may crystallize to appear as logical or emotional decisions!
Before we get into the depth of behavioral economics, we should shine a light on economics in general, which is: a term used to refer to a group of human studies related to the nature of human choices based on taking advantage of limited resources. Economic analysis is presented; through the implementation of deductive operations, such as dependence on logical.
But what is the behavioral economics?
- Behavioral economics is one of the branches of modern economics, which is concerned with studying the relationship between psychology and the process of economic and financial decision-making by consumers. This science focuses on studying the psychological, cognitive, emotional and social factors of consumers that affect their preferences for one product at the expense of another.
Large companies have shown much of its attention on studying behavioral economics to understand consumers from the psychological and emotional aspects to influence their purchasing decisions and thus increase the demand for the company’s products/services and increase its profits.
So why not as long as it asks individuals about the reasons for buying products and not others? Although it was not on the planned list, or it was purchases that came at the last minute like some sweets placed in front of the accountant’s box!
When individuals want to buy a product (a computer) for example, the rational decision indicates to them to choose the cheapest to save a larger amount, but the behavior of many members of society leave the options with the lowest price for the same product and choose to pay a larger amount instead of going to the markets and distant stores that were known for their low prices.
Thus, companies founded from these examples that customer needs do not have to be logical, they may often be emotional or related to psychological behavioral factors.
behavioral economics applications:
To reach your business goals and maximize profits by your understanding more precisely about consumers’ behavior and how to influence their purchasing decisions, here are these applications:
- The principle of aversion or fear of loss: by the nature of humanity, the human hates his feeling of loss, so he tries to choose alternatives that give him the impression of profit or victory. For example, when the seller offers and suggests saving electric candles instead of natural (soluble) candles, on the grounds that they remain for more time and give greater safety, so it increases the consumer’s desire to buy it in order to motivate his loss aversion behavior.
- The effect of the temptation price: one of behavioral economics applications that works to change consumers’ preferences between two options when a third option is placed between them that is unequal. For example, when you enter a cinema hall and want to buy popcorn, the prices are as follows: (large 25 SAR – small 12 SAR), you may be inclined to the option that meets your needs, but when you add an unequal option, which is: (large 25 SAR – medium 24 SAR – small 12 SAR), it may push you to buy the large size to get a better deal.
- Using the anchoring effect: where the anchoring effect directs the consumer’s focus on one detail at the beginning to be for him as a reference or criterion for comparisons that are then made to motivate other purchasing decisions regardless of the logicality of those decisions or not! for example, if you own a store, the purchase is enhanced by placed the highest-priced product at the entrance to the store and then arranging the other lowest-priced pieces inside the store. When the customer arrives to them, he builds in his mind that he has obtained an excellent price compared to the level offered at the beginning of the store.
- The principle of not having more choices: the more choices there are for the same product, the lower the probability of buying the product, as the consumer reaches the stage of getting lost and distress due to the inability to choose the right one. We see this clearly when we enter the perfume store and moving between its different scents without specifying a style or method for sorting according to preference or taste, such as: types of scented materials, country of manufacture, brand name, price level..
In the world of business and commerce, companies realize that their understanding and applying of behavioral economics has a great impact in reaching customers and pushing them to procurement process with their conviction of what they have obtained. On the other hand, the desire of store owners to achieve high sales and profits was met by influencing the unconscious mind in the decision-making process.