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There’s a phenomena on the cusp between behavioral economics and psychology known as cognitive biases which are essentially scientifically documented tricks that our minds play on us.

As all of us in the world of digital marketing are in the business of persuasion, understanding these often irrational tendencies can help us do a better job.

Some are glaringly oblivious when you’re alerted to them, other are far more subtle in the way they influence decision making. 

I recently delivered a talk at A4U Expo London exploring a few of these ‘mind tricks’ but I want to explain them further and in more depth.

Anchoring

Anchoring  is one of the cognitive biases which we all recognize when we hear about it. This is where a numerical ‘anchor’ can have a significant influence on future decision making.

The most famous example of anchoring was based on how a randomly assigned social security number can have an influence on decision making.

I’ll paraphrase and Anglicise the experiment slightly for simplicity. If I collect a hundred people and ask them two questions, first what’s the last two digits of your mobile phone number and how many brown M&Ms are there in a jar, the two are correlated.

This makes no sense, the last two digits of your phone number are essentially random, yet people with higher digits in the phone number will generally predict higher than those with low digits. Now this isn’t because people who happen to have high phone numbers have a propensity to overestimate the volume of confectionary, it’s because the question about the phone number provided an anchor to the second question.

You can find out more about the original experiment carried out by Dan Ariely here.

Another good experiment around the anchoring carried out by Amos Tversky and Daniel Kahneman. They asked a group to guess the percentage of African nations which are members of the United Nations, people who were first asked "Was it more or less than 10%?" guessed lower values (25% on average) than those who had been asked if it was more or less than 65% (45% on average).

These are brilliant examples of an anchor exerting an influence; it’s why in a negotiation of price you should never bid first.

The most obvious example of this in daily life is connected with two of my favourite hobbies, drinking and eating out. I’m a red wine man and when I’m going out for a meal I, like most people, never buy the cheapest bottle of wine.

Normally I plump for the second cheapest bottle of wine. In doing this I think I’m being clever, however, most restaurateurs know this, so they bump the price of the wine with the cheapest wholesale up to the second cheapest on their wine list. An example of where a business has understood a cognitive bias and taken advantage.

What implications does anchoring have for us in the digital industry? First up it might challenge the logic of sorting e-commerce categories purely by which are the best sellers.

For example, if I browse to the laptop category the first five results might be £750, £500, £750, £750 & £750. In this circumstance the £500 laptop seems a bargain and £750 over priced.

If there results were slightly different £1000, £750, £500, £750 & £750 the laptop for a grand might not sell but the £750 priced laptops suddenly seem a lot better value.

I’ve seen this approach used by Software as a Service (SaaS) businesses. They add a super premium membership level, and they know very few of their customers will ever purchase at this level but its mere existence helps move people from basic levels of membership to middle levels.

Anchoring also has implications for the order you might want people to add items to a basket. A £30 case for an iPad doesn’t feel quite so expensive as it would if you bought it in isolation when you’ve already got a £350 iPad in your basket.

Loss aversion

People don’t like losing things they already possess, so much so they will often make irrational decisions to avoid this loss. Someone who loses £100 will lose more satisfaction than another person will gain from a £100 windfall.

There’s an oft repeated rule of thumb about Loss Aversion which states that the satisfaction lost from a £50 loss is equal to the satisfaction gained from a £100 increase.

Again, the two academics to look out for on loss aversion are Amos Tversky  and Daniel Kahneman.

So if you are promoting a product or service based on a subscription or retainer, you may have more success retaining potential customers by concentrating on what they will lose by discontinuing the relationship rather than talking about what they gain.

Now if you’ve got a background in direct marketing, I can be fairly certain there are two words floating round in your head: free trial. Loss Aversion is the science that proves why free trials work.

Now many companies will already be deploying some kind of free trial or freemium model but Loss Aversion is another reason to continue with this approach. It also focuses the mind on doing whatever you can do to get the first small purchase or buy-in. Then you can concentrate on the repeat business or up sell opportunity.

It also has implications of how you word your email or PPC advertising. Maybe you should be talking about missing out on special offers more than gaining from special offers.

Or rather than just talking about your products benefits and features, could you talk a little bit more about what they would miss out if they went with a competitor or didn’t make a purchase at all?

Choice Supportive Bias

Closely related to loss aversion is the idea of Choice Supportive Bias, or as I prefer to think of it, ‘post-decision rationalisation’. This is the tendency to attribute a positive perspective to an option one has selected. We think the decision we’ve made in the past are better than they often are.

Henkel and Mather tested choice supportive biases by giving participants a number of hypothetical decisions like deciding between two used cars. After making these decisions they left and were asked to return in a week.

When they returned, the experimenters reminded them which option they had chosen for each choice and again gave them a list of the features of the two cars, but this time some new positive and negative features were mixed in with the old features, such as facts about the cars that weren’t included in the previous test.

Next, participants were asked to indicate whether each option was new, had been associated with the option they chose, or had been associated with the option they rejected. Participants favoured whichever option they had made in the past.

Interestingly, they also found if the first decision had been made at random this positive biases didn’t occur.

So even if people weren’t initially entirely convinced you were the best choice, over time they will eventually convince themselves they made the right decision, which is a bit like the people who maintained the GameCube was better than the PS2.

If we understand that people tend to think they’ve made good decisions even if they haven’t. This can be a trigger to get testimonials but also reinforces the importance of someone making an early decision in your favour.

If you convince someone you’re the cheapest supplier the first time they buy with you, they will continue to believe that without checking every time they make a purchase.

As we discussed with Loss Aversion, that first purchase or decision in your favour is even more important once you understand Cognitive Biases. We’re creatures of habit even if we don’t always realise it.

Hyperbolic Discounting

The next cognitive bias on our list, hyperbolic discounting, concerns itself with how we deal with time and incentives and how that decision it’s always entirely rational.

In a series of experiments psychologists found that if given a choice between £50 today and £100 in a year’s time most people tended to favour the instant gratification.

The fact people prefer an instant reward that is guaranteed over a larger reward in a risky and uncertain future isn’t particularly surprising, but I’m not sure we always consider this fully when promoting products or services.

We should realise that the sooner the incentive is delivered the smaller (relatively) it needs to be. I actually think it’s this understanding that’s driven a small number of banks to start incentivising people to switch with relatively small monthly ‘gift’ payments. These are low compared to the annual interest that could be achieved elsewhere, but that reward is more instant and constant, which appeals to our tendency towards hyperbolic discounts.

So, we found a time gap of a year is enough for us to accept half the reward of the delay, would this work in the future? Rather than asking about now vs. a year the researchers asked five years time vs. six years time. The time gap was the same, the difference in incentives was the same but the results weren’t the same.

In this case people tended to favour the larger, longer away rewarded. We think about the distant future very different to the immediate future. We don’t think of six years being much further in the future than five.

We tend to prefer instant rewards over deferred gratification until we start to move into the future when the size of the incentive often becomes more significant than its timing.

This understanding should influence your incentive structure for customers. What can you deliver immediately to take advantage of our lack of patience, even if the value of the reward is less than you would have given in the future? What can you do to understand that our ability to appreciate time in the future is far from rational?

False Consensus

which I’ve written about at length for A4U on how it can influence affiliate marketers. It’s the tendency for us to assume that everyone thinks like us even when we try to put ourselves in other people’s shoes.

The best demonstration of false consensus in action was carried out in 1977 by Ross, Greene & House in 1977. They carried out a study excellently described on Spring.org.uk.

The experiment asked a group of students to walk around their campus carrying a big sandwich board decorated with the slogan “Eat at Joe’s”. No reason was given for why they should wear the walking billboard other than they would learn something interesting about themselves, but they were told that they were under no obligation to carry out the task. Of course some people said yes and others no.

They were then asked whether they thought the other participants would make the same decision as them. Of the people who agreed to wear the sandwich board, 62% thought others would also agree. Of those who refused, only 33% thought others would agree to wear the sandwich board.

We think others are more likely to agree with us than they actually are which you should consider next time you’re putting together a marketing campaign. You think it’s perfect, you think other people will think the same, but how much of that certainty is based on False Consensus?

Want to know more about Cognitive Biases?

These are just a few of dozens of tricks our minds play on us, if you’re in the business of marketing products you should invest time understanding them. There’s a great list of them on Wikipedia and I cannot recommend Dan Ariely’s Predictably Irrational enough.

Kelvin Newman

Published 19 October, 2011 by Kelvin Newman

Kelvin Newman is SiteVisibility's Creative Director and is the editor of the UK's most listened to Marketing Podcast. He also spends his time at conferences, tweeting too much and working on top secret research and development projects. He's also on Google+

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Comments (6)

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Stephen Thair

Stephen Thair, Director at Seriti Consulting

Re your point on negotiating I can't find my copy of Ariely's book but I recall that his conclusion was opposite to the one you cite above - "it’s why in a negotiation of price you should never bid first."

In fact, anchoring means you SHOULD get your bid in first... and bid high (as the seller) or bid low (as the buyer)

You've then set the anchor around which the negotiation circles.

If you let the other person set the anchor then "irrationally" they are tied to that price and it can be very difficult to get them to budge.

about 5 years ago

Andrew Nicholson

Andrew Nicholson, Founder at The Guku

You beat me to it Stephen. Apart from that, good summary of some interesting points.

If this takes your fancy, you might also want to try Freakonomics (Stephen D Levitt), Herd (Mark Earls), Nudge (Cass R Sunstein)and the sequel to Predictably Irrational, The Upside of Irrationality. All of which cover behavioural ecomonomics and its role in marketing.

about 5 years ago

Kris Littlewood

Kris Littlewood, Digital Marketing Assistant at English Lakes

The point Stephen mentions above is one I got a little confused about when reading about I always thought you should get your bid in first because of anchoring.

Apart from that point your post was very interesting and I think I might just try and grab a copy of the book you suggested.

about 5 years ago

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Nikki Rae

Kelvin,

This is a great article! Made me think why I spend so much on Groupon vouchers!!
Nikki Rae

about 5 years ago

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Kelvin Newman

Good spot there chaps, I've probably taken a slightly different conclusion there. I spose I'm saying don't set a high anchor and you're saying set a low anchor.

But glad you found it interesting. Especially as it seems you guys are as big fans of Behavioural Economics as me. I've read all three of those books and the sequel Andrew, Love all of them, though not as big a fan of nudge as most people are though.

about 5 years ago

Andrew Lloyd Gordon

Andrew Lloyd Gordon, Digital Marketing Expert, Speaker and Trainer at New Terrain Limited

A fantastic article Kelvin.

There's a growing body of research that better describes human behaviour. And it's material we, as marketers, should become familiar with.

However, how do you deal with the criticism that this material is often based upon research conducted with US college students. Students who are often paid to take part in a psychology/behavioural economics experiment i.e. are the findings as applicable to the real world as we'd like?

about 5 years ago

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