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The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics

Jun 14, 2019

Last week we got to finally have the episode on time discounting, which was very exciting for me because as many of you know, it is my all time favorite concept. As you learned in episode 51, I call it the “I’ll Start Monday Effect” because it is the bias behind all the times we commit ourselves to do something in the future (like starting a new exercise program on Monday) and when we wake up…we feel like a completely different person and hit snooze.

As you have heard me mention on the show many times before, our brains are lazy, and they like to take the path of least resistance to get to what they believe to be a “good enough” answer as quickly as possible. We will get into that in more detail next week, but today I want to talk about how that impacts our interactions with numbers and math. Most people think math is hard and our brains are particularly lazy when it comes to hard stuff, so we often risk being wrong rather than take the time to do the numbers. I dive deep in the fascinating whys and why nots of this phenomena.


Show Notes

  • [04:34] Our brains are lazy, and they like to take the path of least resistance to get to what they believe to be a “good enough” answer as quickly as possible.
  • [05:54] Our brains make lots of assumptions based on the little bit of information they are looking at. This combines with our brain’s natural tendency to believe everything it learns to be TRUE first and ask questions later.
  • [06:27] Because we are particularly lazy when it comes to math, we rely on the source of whatever is thrown our way, and the brain would rather risk being wrong than to take the time to do the numbers in everyday interactions.
  • [07:27] Because of unit bias, you may have assumed the amount you serve yourself matches the intended serving size.
  • [09:00] Calories are the main comparison people make when thinking about cereal. Most people don't take the time to do the actual math involved in the serving size.
  • [09:54] Due to the less is better effect, our preferences change when we evaluate things alone versus comparing them against others (this is relativity in action).
  • [11:16] Great quote from Thinking Fast and Slow, (which was actually a quote from Paul Rozen, an expert in disgust) “a single cockroach will completely wreck the appeal of a bowl of cherries, but a cherry will do nothing at all for a bowl of cockroaches.”
  • [11:48] MONEY AND VALUE Due to the money illusion, we tend to concentrate on the nominal or face value of our money, instead of thinking of it in terms of how much it can get for us.
  • [12:09] Due to the denomination effect we are more likely to spend money in smaller denominations than when it is in bigger ones.
  • [12:53] We still do a lot of mental accounting. This is where we think money in different places or accounts is not all accessible in the same way.
  • [13:33] Why is $1000 not the same everywhere? Consider all the ways this is good and bad.
  • [14:37] Due to the IKEA effect (yes, that is its actual name) people will value things more that they made themselves or partially assembled.
  • [15:13] The endowment effect is where we value things we own more than things we do not.
  • [15:43] For your business, remember that making people feel like they came up with the idea makes them more likely to support it.
  • [16:11] Due to the Zeigarnik effect we will remember the tasks we did not complete – or where we were interrupted – better than the tasks we did complete.
  • [16:43] Due to the disposition effect we humans will tend to sell assets that have accumulated in value and hold onto those that have declined in value.
  • [17:29] Because of our time saving bias, when going at a relatively low speed, we underestimate the amount of time we could save by speeding up or lose by slowing down.
  • [18:14] Perspective can make a huge difference for good and bad.
  • [18:40] Duration neglect. This likely combines with the IKEA effect where we forget the 8 hours it took to put together that simple bookshelf and just see the glorious thing we have created.
  • [20:05] Well-traveled road effect. We underestimate how long it will take us to go on roads or routes we have taken a lot, and overestimate how long it will take to go on less familiar ones.
  • [21:37] GAMES AND PROBABILITIES The hot hand fallacy. ​It's a myth that “hot hands” are going to continue to defy the odds.
  • [22:18] The clustering illusion is where we see phantom patterns and overestimate the importance of small streaks.
  • [22:40] This is a lot like the gambler’s fallacy. This is where we think the past has any impact on the future probability.
  • [23:50] We are biased toward having zero risk if we can. This is much like ambiguity aversion, or uncertainty aversion, people are more likely to prefer the things we know.
  • [25:46] Neglected probability territory is when we are uncertain about the options or outcomes and need to make a decision we completely disregard everything we do know about probabilities.
  • [26:12] Berkson's paradox is where someone will misinterpret statistical experiments when the probabilities are conditional.
  • [27:11] Due to the subadditivity effect, we judge the probability of the whole to be less than the probability of its individual parts.
  • [27:41] Insensitivity to sample size, which is where we don’t properly anticipate the variation that will show up in small samples.
  • [28:04] Weber Fechner Law which is when we find it difficult to compare and see small differences among large samples.
  • [29:38] Melina shares a story from Thinking Fast and Slow.
  • [33:31] Everything we know to be true is not necessarily true. We need to step back, flex, and relax. Try to take an objective look at your business processes.

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