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Behavioral economics & incentives
20 January 2022     1183

Behavioral economics & incentives

Behavioral economics is becoming more and more popular. It is kinda a crossover between psychology and economics; it tries to explain how behavior is former by different (external or internal) factors.

As we have explained in our other blog post the main principles of behavioral economics are based on the conception of rationality employed by economists. It is usually referring to bounded rationality in contemporary academic literature.

Which means that humans have to explain their behavior through a lens of self-interest. Specifically, if any reason is good enough for them they choose it. If you want to explore more of this thought Freakonomics by Steven D. Levitt and Stephen J. Dubner is a good start.





In order to delve further into this topic and understand better how a person deliberates before making economic decision we should, first apprehend which processes precede the decision-making.


Judgements and Beliefs

What is necessary for an individual to make a decision? It is imperative that they believe or judge a certain course of action appropriate, good enough. It is important to note that whichever choice is good enough should be the best of all possible choices in the persons estimation.

This does not mean that the estimation is in any way necessarily accurate or that the persons beliefs, on the whole, are in fact well-reasoned.

Nevertheless, we can infer that the main goal of our organization should be to change the beliefs and judgements of its consumers. Or otherwise to influence them in the right manner.

How is this to be done? Humans, usually, need experiences to come up with new beliefs. For example, if we want a person out there to form a belief regarding our website being fast, then we have to make sure it does actually load fast and the navigation is smooth.

Therefore, if a person roams through your website and is somewhat attentive, they will form the corresponding belief.






Things are a bit different when they already have pre-existing opinions. Let us follow the website example, again. If the user has gone on your website 10 times and 9 times out of those 10 it was slow, its gonna take some time and many more experiences in order for them to change their beliefs.

For that reason, in business, as well as life in general, it is better to anticipate risk and take precautionary steps rather then rely on damage control.


Defaulting

Defaulting is a process during which a person settles on a less complex option in order to avoid contemplation.

As in, people choose to form beliefs which are easier to form overall. Your followers and non-followers alike should not have to spend much time and energy trying to understand how to picture your brand. Typically it is incredibly rare for a person to give much thought to one brand or another.





So try to express the identity of your organization in a clear, concise and easy-going manner. The user do not want to do much thinking. Even though you might want them to. Try to meet them on their terms and engage them in a way that keeps their short attention span focused.

Naturally, the impression they get about you will not always be positive. If you own a charity you should not be surprised when immoral people do not like you very much.


The conclusion

We have offered you general principles that you can extrapolate on yourself in order to make day-to-day business decisions more effective.

Ika

Ika