Mark Gilroy links behavioural economics to learning.
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In recent years the study of behavioural economics has become a popular lens to view human behaviour, with best-selling books on the topic a mainstay of most retailers. Behavioural science has journeyed from the academic world into the wider arena. As a consultant and coach, I’ve become intrigued by how behavioural economics might be applied to the arena of learning and development.
What is behavioural economics?
Behavioural economics is a branch of psychology. Specifically – the analysis of the decision-making behind an economic outcome. For example: in an ice-cream shop, what are the factors that would lead to one person choosing one flavour over another? The study of behavioural economics seeks to uncover the scientific evidence behind our approach to making seemingly unconscious decisions.
One of the underlying findings in behavioural economics is that we act in ways that are far less-rational than we may think. Even though we have the ability to rationalise our decision-making, and (on paper) should always act in a way that indicates stable preferences which maximise payoffs, the evidence would indicate otherwise.
Nudge theory and mental accounting
US Academic Richard Thaler won the Nobel prize in economics for his pioneering work into psychological assumptions and analyses of economic decision-making. Nudge theory was coined by Thaler to explain how small interventions can encourage individuals to make different, potentially irrational decisions.
Nudges can, however, be considered to be (at best) directive or (at worst) manipulative, especially when they play out to the detriment of individuals.
For instance, when in a restaurant you’ll often see one item which is much more expensive than anything else on the menu. The restaurant doesn’t expect you to buy that dish – they expect you to buy the second most expensive. When you compare the relative prices, the second most expensive item can seem like a bargain.
Nudges can, however, be considered to be (at best) directive or (at worst) manipulative, especially when they play out to the detriment of individuals. Thaler also coined the concept of mental accounting – the idea that people think of value in relative rather than absolute terms.
Think of the following decision-making problems:
Would you prefer:
A) A certain win of £250 vs
B) A 25% chance to win £1000 and a 75% chance to win nothing?
C) A certain loss of £750 vs
D) A 75% chance to lose £1000 and a 25% chance to lose nothing.
Amos Tversky and Daniel Kahneman’s work (1979) showed that responses to these scenarios are different if the choice is framed as a gain or loss. When faced with the first decision, most people will opt for the less-risky A, while for the second problem, most people choose the far-riskier D. This happens, Tversky and Kaheman propose, because losses are felt more significantly than gains.
Sunk cost fallacy
This principle holds that individuals continue a behaviour as a result of previously invested resources (time, money or effort) (Arkes & Blumer, 1985). This fallacy can also be viewed as a bias shaped by an ongoing commitment.
If the costs outweigh the benefits, the extra costs incurred are held in a different ‘mental account’ than the one associated with the original transaction. An example of this might be ordering too much food and then over-eating just ‘to get my money’s worth’.
Equally, if someone has bought a £30 concert ticket and then drives for hours through a blizzard to get to the show the need to attend is greater felt due to having made the initial investment.
A study by Daniel Mochon (2012) was dubbed ‘the Ikea Effect’. Mochon and his coauthors did a series of experiments and either gave them a pre-assembled LEGO car, or LEGO bricks with instructions to build the car. They then asked the participants – how much would you pay to keep your car?
The findings: their subjects were willing to pay twice as much for the model if they had just finished building it, compared to the ones who were given a pre-assembled car.
This piece will be concluded in December.
About the author
Mark Gilroy is managing director of TMS Development International Ltd