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.