What is behavioral economics?

First off, behavioral economics is awesome.

Second, it’s fascinating.

I know the name makes it sound a little boring, so let me tell you more…

Economics is essentially the study of money and how it moves from one place to another.

Economists do a lot of modeling and predictions about what people will do and how they will spend their money.

The problem?

They assume rational beings.

And, as we all know…

Most humans are not rational (that’s the real 99%).

Even though they are not rational, they are predictable.

That is where behavioral economics comes in.

Behavioral economists (and often psychologists) do tests to see how people react and construct rules about that.

The lessons learned help companies and brands be smarter in their marketing and brand efforts.

For example, loss aversion is a well-known concept in behavioral economics.

It explains that people are more likely to take an action to avoid a loss than they are to get a perceived gain.

Let me explain…

You look into your wallet (or online banking) and realize you lost $5. How do you feel?

You are walking down the street and find $5. How do you feel?

Most people will feel the loss more significantly than the gain.

How do people use this in marketing or brand work?

Have you ever heard of someone taking a new car home before the financing came through?

Or seen an infomercial touting a 30-day money back guarantee?

These assume that once a customer has an item in their possession, they will consider it theirs. Giving it back will feel like a loss and be much harder to undertake (and the risk of letting them have it up front is worth it because most people keep the item).

This always makes me think of the seagulls in Finding Nemo…

There are so many concepts in behavioral economics and they all continue to blow my mind.

I can’t wait to share more of them with you and tell you about how to use them to your brand’s advantage.

Do you have an example of a time loss aversion got the better of you? I would love to hear it! Please share in the comments.


P.S. If you are looking for more readings, there is an awesome book by Dan Ariely called Predictably Irrational that explains more about this type of behavior in a way that is easily digested by the public. I highly recommend it.

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