Category: Behavioral Economics

What is corruption? Is it taking a bribe? Smuggling millions to a tax haven? Or skipping the line on a public service because the office clerk is your neighbor’s nephew’s kid? “Corruption is what those dirty bankers, politicians, and the referee who conducted the last match my club lost at are guilty of, that’s what it is!” – any of us will enragedly say. “I”- we confidently add – “would never do it”.

But is this really so straightforward? The prevalence of corruption in a given society can be hard to measure, both due to its secretive nature and differences in how it is defined. We rely essentially on what law enforcement records (a biased source if the authorities happen to be corrupt themselves) and on perception surveys, both of the general public and of experts on the matter (which may also be skewed if people have different ideas about what constitutes a corrupt act). But statistical issues aside, the truth is that corruption appears to be a worldwide phenomenon, and a relatively stable one at that. According to Transparency International, the Corruption Perception Index (measured in a 0-100 scale, 100 being the least corrupt), in 2021, was lower than 50 for two thirds of the world. 131 countries “made no significant progress against corruption over the last decade”. Portugal ranked 32^nd least corrupt out of 180 countries, at 62 points.

Corruption Perception Index, 2021

So, it seems we don’t really think of ourselves as corrupt, but we perceive corruption around us. Is it external factors and mechanisms that influence a person’s choice to engage in the kind of behavior that we call corruption? We know what an economist’s point of view would be on the matter: each choice is dependent on incentives and preferences (of the agent making that choice), and on a rational cost-benefit analysis of the situation. And, like with any decision process, Behavioral Economics also has something to add on the subject: the agent’s choice is conditioned by cognitive biases and bounded rationality. This means that people could be guided (or should we say, nudged?) towards a different behavior pattern. Let us now explore these ideas.

Why are we corrupt?

If there’s one thing we should remember when dealing with corruption is that it is harmful, undoubtedly undermining the potential for human and economic development. Corruption can be like a disease, spreading all over and destroying a system from within. Corruption, in fact, corrupts.

Perception of Corruption by Institution, 2017

At its core, an act of corruption is a break of trust. An agent is trusted with some power or task and is expected to act according to the best interest of those who deposited that trust in him/her. We can think of it as a contract being made between society and the agent. The agent is trusted by society as a whole to act in society’s best interest. It is easy to see where the problem starts. Two things, together, provide an incentive for the contract to be breached: a conflict of interest between the agent and society, and asymmetry of information. In other words, there is a risk of corrupt behavior if the agent stands to gain something from breaking the contract and can do it without being caught. 

Given this, the economic reasoning for acts of corruption is simple enough – an agent will rationally assess the costs and benefits of breaking ethical rules and do it if the benefit exceeds the cost. So, a public official who is offered a 5-million-euro bribe will simply perform a cost-benefit analysis (5 million in my pocket vs some time in jail if caught) and decide accordingly.

Following this line of reasoning, anticorruption policies should focus on increasing transparency and accountability, decreasing asymmetry of information (making it harder to act without our actions becoming public knowledge), and better aligning the agent’s and society’s interests, so that not breaking the contract becomes in the agent’s best interest.

In a simple, perfectly rational world, this would be all. For better or for worse, that is hardly the picture the world we live in paints.  

A Behavioral Economics Approach

A person’s actions are hardly ever determined solely based on costs and benefits. Any agent is affected by mental shortcuts, reciprocity, context, fast-thinking and social norms. People rarely go about their lives carefully deliberating every choice. Indeed, many decisions are automatic. For example, a public official may hire his friend’s nephew for his office without necessarily thinking about ethical rules or the public good. Nonetheless, this is a textbook case of nepotism.

Another important mechanism is reciprocity – the “you scratch my back, I’ll scratch yours” mentality. This could be seen either in a large-scale favor exchange between two powerful people or in something as small as a driver bribing a police officer to avoid getting a speeding ticket.

Bribery Payers Index, 2011

But it is not all about automaticity in decision-making and ethical blind spots. Although no one likes to see themselves as the bad guy, even when agents are aware of the dubious nature of their actions they may still choose to engage in corrupt acts. Why?

The moral “weight” of corruption is lighter when the agent feels somehow distanced from the action. Experimental evidence shows that having an intermediary as a third party who arranges the bribe (someone to “do the dirty work”, so to speak) significantly increases the percentage of people willing to offer and accept bribes! Thus, bribery is perceived as a common transaction.

Another problem is our tendency to consider only obvious and immediate results (fast thinking). Corruption presents an obvious, palpable gain, and is often thought of as a “victimless crime”. It is easier to break a rule if no one seems to be worse-off by it. However, according to the United Nations, corruption, bribery, theft, and tax evasion cost at least US$1.26 trillion each year to developing countries, money that essentially could have been implemented in much-needed social and economic policies.

Finally, let us not forget that as human beings we tend to abide by the perceived behavior of the majority. As a matter of fact, we are easily influenced by our peers, with the underlying mentality of “If everyone is doing it, what’s the big deal if I do it too?” being heavily present in many of the choices we make, corruption decisions not excluded.

What can we do about it?

So, does this mean that nothing can be done about corruption, that it should be accepted as a feature of humanity, and that we may as well have to learn to live with it? Far from that! Truth is, by identifying the cognitive biases and mental shortcuts that stir people towards corruption, we are also learning which buttons to push to get them away from it.

A simple way to surpass the ethical blind spot problem in our decision-making is to simply reiterate the ethical principles a person is already trying to live by. An experiment was conducted where the participants were asked to solve a math test, while being given incentives to cheat. However, some were asked to write down the Ten Commandments they remembered beforehand. Those participants cheated much less than the control group, having been reminded beforehand of the existence of a moral code (not even necessarily their own). As it turns out, awareness matters. 

In turn, this opens the door for new anticorruption initiatives. Businessmen could, for example, be asked to sign a document stating their awareness of the organization’s ethical code. Politicians may be required to publicly state all their possible conflicts of interest before taking office. 

5th Pillar, an Indian NGO, created a Zero Rupee note with a pledge against corruption, to be given to officials who ask for a bribe

Moreover, nudges that communicate the ethical standards people have for each other may be helpful, again, as a reminder of the trust society puts in each individual, which may work in itself as an incentive for citizens to live up to that trust.

We know these small nudges are hardly the definitive solution to end corruption once and for all – transparency and accountability measures are still the ones most likely to have a noteworthy impact. However, the nudges we discussed may be just what is needed to curb the small corrupt tendencies in a society in which more sizable schemes are tolerated or even go unnoticed. We may never live in a fully honest world, but awareness of what makes it dishonest is crucial to make sure it never becomes fully, and irreversibly, corrupt.

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Sources: Muramatsu, Roberta; Bianchi, Ana Maria. (2021). “The big picture of corruption: Five lessons from Behavioral Economics”. In Journal of Behavioral Economics for Policy. Vol. 5, Special Issue 3: Roots and Branches, pp. 55-62., Muramatsu, Roberta; Bianchi, Ana Maria. (2021). “Behavioral Economics of Corruption and Its Implications”. In Brazilian Journal of Political Economy. Vol. 41 (1)., Ma, Qingguo; Yan Min. (2018). “Psychological, Behavioral, and Economic Perspectives on Corruption”. In International Journal of Psychology and Psychoanalysis., Statista, Our World in Data, India Times.

Picture this scenario: you’ve been locked in an interrogation room for hours, and the police finally layed out their cards on the table. They know you’re guilty and have your partner in crime in the other room. The police needs a confession, and the one to provide it can walk out freely, leaving the other to serve a long sentence in jail. If you both confess, you both go to jail, but for a shorter time. However, if neither does, both go to prision but receive an even shorter sentence. It is up to you to decide. What do you do? 

If you’ve ever been formally introduced to game theory, you know that its answer is that both of you should run to the officers and tell them the truth. This is the economic prediction as it’s the rational thing to do. But would you do it? Most people’s answer is the economists’ favorite response to (almost) every question: it depends. Who is the other person? How much do you trust them? Is it your friend or your 3rd-floor neighbor? Is it your mother? And how long are those sentences? You may hold your ground facing 6 months, but what if you’re looking at 25 years? Are you even truly guilty? Are you willing to trade away your integrity for a shorter sentence?

The conventional game theory looks at the game elements (what are the actions and the payoffs?) for the answer. Behavioral game theory tries to look at all the other questions.

Game Theory vs Behavioral Game Theory

But let’s back away for a second: what even is game theory, and how exactly is behavioral game theory different?

Well, game theory’s main objective is to predict behavior through a systematic, mathematical approach. No need to close the article, this is only the “scary” version of the definition. Thankfully, we are not in a Microeconomics class, so we can use a much more pleasant definition: game theory analyses games. Of course, by “games”, we do not mean football or basketball (although that would be fun) but are instead referring to any interaction between people (the players), where their behavior (actions) determines what they get out of the game (their payoffs). Any economic, political, or social interaction can be rewritten as a game, and thus seen through the lens of game theory. The interrogation room situation we started with is a classic example. It is frequently used as an introduction to the subject. The idea is that each player will look at their possible strategies (if my partner confesses, I can confess/not confess…) and where those strategies will land them (if we both confess, we go to jail…), deciding then what the optimal course of action will be. It’s like playing chess – if, for example, your opponent moves the bishop to B7, and you take your knight to C4, you’re doomed; if instead you move your queen to D6, checkmate! The optimal course of action: queen to D6. 

Game theory does a wonderful job predicting the outcome of such games, but the jump to real life can be tricky. Notice that the optimal course of action was left undefined. “Optimal” depends on what each person wants out of the game, on their preferences. The usual assumption is that players are self-interested to the extreme and completely rational, caring only about getting the best possible outcome for themselves, regardless of what happens to the other player.

This is exactly where behavioral game theory steps into the picture. It has a practical approach to the games, rather than theoretical. Game theory uses logic and mathematics to find out what a rational and self-interested player would do in a game, and then states what people will choose rationally in such a situation. Behavioral Game Theory takes the opposite path. It asks actual people to play the game and observes their behavior. Such experiments make it possible to see how different preferences affect human behavior (how things like altruism or fairness influence people’s decisions) and how that differs from the theoretical predictions. Why would this matter? Well, these preferences can be incorporated in the models, making them closer to the reality we know, and therefore allowing for better predictions of behavior.

Playing the Game

Ultimate Game

The Ultimatum game is an early example of behavioral game theory’s experiments. In this game, one player is given a certain amount of money (say, 10€) and asked to split it with the other player in whatever way they want. The second player then decides whether to accept the offer or to reject it, in which case neither player gets anything.

Conventional game theory’s prediction is that the first player should offer as little as possible (1 cent out of 10€) and pocket the rest, since the second one would have no reason to reject it – after all, 1 cent is better than nothing, right?

Now, picture yourself playing the game. Do you accept such a low offer? Can you think of anyone who would? Do you think this is the right prediction? If not, congratulations! You are a wonderful forecaster of human behavior. In fact, when this experiment was first conducted, the average offer was equivalent to 3.5 €, and offers below 5€ were more likely to be rejected the further down they went. The experiment has been replicated over the years, with high and low amounts to be split, with consistent results.

The preference uncovered here is known as negative reciprocity – being willing to “pay a price” (give up some amount) to punish unfair or inappropriate behavior in others. Upon seeing what they considered as an unfair split (a much too low offer from the first player), most players decided they would rather gain nothing than allow the other person to, in their eyes, treat them unjustly.

Dictator Game

The dictator game is a slight modification of the Ultimatum game: here, the second player has no power to reject the offer. The first player (the dictator) proposes a split of the initial sum, and that is exactly what each one takes home, even if it means that the second player gets nothing at all. Of course, the theoretical prediction is exactly that – the “dictator” will choose to keep the entire 10€ to themselves and won’t offer anything to the second player.

But when the experiment was conducted this was not what happened at all! In fact, around two thirds of people chose to offer the equivalent of 1€ to 5€, keeping the rest.

Those unlikely nice “dictators” were displaying what is known as an altruistic preference. Someone with altruistic preferences is more content with an outcome if the well-being of others increases. That means they play not only with their own outcomes in mind, but also that of others involved in the game, and prefer situations where other people are also benefitted. This behavior can be found in everyday interactions too: when people donate to charities or help someone in need, they are manifesting altruistic preferences.

Gift Exchange Game

Now, for a break from ultimatums and offers, let’s look at the gift-exchange game. This is simply a game made to mimic the interaction between an employer and an employee. First, the “employer” offers the “employee” some amount of money (a “wage”). Then, the employee must perform a task to earn it. Now, what the task is in particular is not so important (it can be anything at all, as long as it is not completely effortless), what is really at stake is how much effort the “employee” puts into completing it.

Game theory’s prediction here is that being offered any amount at all the “employee” would work as little as possible (self-interested as they are). But do you think that happens? Chances are, you’ve had to do some job in your life, and put some amount of effort into it. Do you always do the least possible required? As it turns out, most people didn’t. They responded to more generous “wages” by working harder. They were, in fact, displaying negative reciprocity’s nicer counterpart: positive reciprocity, the willingness to reward generous actions. People presenting this preference respond positively to actions that benefit them: they go an extra mile when they feel that someone has acted in their best interest.

Notice that neither of these experiments challenge the validity of standard game theory. Its systematic and logic process is still sound – games do have optimal courses of action. Its cornerstone assumptions are the ones that fail: behavioral game theory shows that people in general are not merely self-interested, so what is “optimal” varies according to their preferences.  

Behavioral game theory is a great example of what the branch of behavioral economics can do for the economic science. It is not a replacement of traditional game theory, but a way to expand on and improve it: behavior models can arise from practice, not from theory. After all, there’s no better way to figure out someone’s behavior than to observe it.

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Sources: American Economic Association, BehavioralEconomics.com, Blackwell Handbook of Judgment and Decision Making, Behavioural Economics: Introduction to Behavioral Game Theory and Game Experiments.

Part II: A small nudge for man, a giant leap for mental health

Where do nudges come in?

We’ve talked about how widespread mental health struggles are and how important it is to pay them proper attention. It is particularly necessary to drive people into taking better care of their mental health, as well as end the stigma around mental issues. We will now examine the idea of how behavioral economics can be used for these purposes, namely through nudges.

But what, exactly, is a nudge? According to Thaler and Sunstein, the creators of the concept, “a nudge is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives”. 

Many of those struggling with their mental health do not seek the needed treatment. This may be related with the implications of these issues in decision making, which help-seeking models and interventions often fail to account for.

This is exactly where Behavioral Economics comes in. It can help reduce engagement in behavior patterns that represent risk factors in the development of mental problems and provide the necessary and adequate frameworks for incentivizing help-seeking by individuals affected by them. Nudges can, therefore, be a complementary and cost-effective strategy for suicide and mental health issues prevention, both by tackling risk factors and by effectively encouraging individuals to seek help.

But what would such interventions look like? Well, it is necessary to understand that both the field of behavioral economics and our current generalized concern with mental health issues are still very recent. Therefore, they are still in the earliest stages of development, and studies can be costly and hard to implement, so no widespread intervention has taken place so far. Still, there is no lack of initiatives out there!

Dodging the risks

Ashleigh Woodend, Vera Schölmerich, and Semiha Denktaş, in their article “Nudges to Prevent Behavioral Risk Factors Associated With Major Depressive Disorder”, look at what they call risk factors, behavioral patterns which can increase the odds of developing mental health problems (or worsen existing ones), and propose a series of nudges that could be effective in tackling them. Those negative behaviors include low physical activity, since exercising has a strong positive impact on mental well-being (it releases dopamine and improves self-esteem), inappropriate stress coping mechanisms, as stress can be a powerful trigger of mental health problems, and inadequate maintenance of social ties, as healthy social interaction promotes psychological wellbeing (if the pandemic has taught us anything, is that social isolation and mental health are no friends!).

Nudges play on our cognitive biases. One such bias is our tendency to prioritize immediate reward over gains in the distant future. For example, how many times have you allowed yourself “just five more minutes” of sleep in the morning, even though you knew it would make you late for class? What if we could use this effect to make us want to get up and increase our physical activity? This can be done through a nudge called temptation bundling, combining an unpleasant activity with a pleasant one.

For example, regarding the improvement of physical activity habits, you can try to fuse that unappealing morning run with something you will enjoy, like hanging out with friends or listening to some music. Or, if a trip to the gym seems like a punishment, throw in an episode of your favorite show. These are easy ways to nudge yourself into building an active lifestyle pattern.

Another great way to nudge behavior is by fiddling with the phrasing of the message we are trying to convey. It has been shown that positive framed messages are more effective than negative framed messages in promoting prevention behavior. So, putting up a sign with a phrase like “If you meditate, you reduce your risk of mental health problems” is more likely to get people some quiet time with their own thoughts than one phrase saying “If you don’t meditate, your risk of depression will increase”.

When you go to the beach, do you wear sunscreen? And what if, on your way there, you notice a sign pointing out that without protection, you are likely to get sunburnt within half an hour of direct sunlight? Will you wear it now? Most people will. This is called a salience nudge, where some characteristic of a choice is brought to your immediate attention, “put under the spotlight”, in order to influence that same choice. And this can be done to decrease the risk of mental issues too. By simply highlighting, in the workplace, for example, that a significant number of people have engaged in stress management training, it is possible that more people will try it as well, learning appropriate coping mechanisms to keep their minds as healthy as possible through the difficulties that may come their way.  

You are probably familiar with the feeling of meaning to do something but never actually getting to do it. Sure, you will read that book you’ve been wanting to read, catch up on your microeconomics study before the midterm gets too close, or finally try to chat a bit with your coworkers and get to know them better. Eventually. The thing is, we are not very good at moving away from the status quo, i.e., we tend to stick to the current state of things and struggle to find the drive to make changes in our lives and environment. So, if we want to stimulate social interaction, it is better, for example, to create an environment where that is the default option rather than something towards which people have to make an effort. 

It may be possible, for example, to change the typical workspace from a place with little to no person-to-person engagement into one of sociability, by adopting an open office model. We would be nudging individuals towards building connections by creating an opt-out system of personal interaction instead of an opt-in – a system requiring extra effort to dodge interaction instead of one that requires extra effort to engage in interaction.

So, there are ways to nudge people away from behavior patterns that can be detrimental to mental health. But what can nudges do to help those already in mental distress?

Seeking Help

In these situations, the best to do is to guide someone towards seeking proper help. Instagram, for example, takes preventive measures when users search for a #depression hashtag: a screen pops up redirecting them to help (this will also work with other mental health related searches, like self-harm). A similar thing happens when someone googles depression or suicide. These are small nudges towards the right path, tailored to those who need them the most.

The last mechanism we want to outline is a particularly clever and effective one (as obvious as it may seem): social norms (1). Humans have a strong tendency to follow the norm, tied to a desire for others’ approval. Social norms have been proven to predict behavior patterns. Hence, it is plausible that greater awareness of others recurring to mental health treatment and overall shows of acceptance of those who do it can increase help-seeking behavior. Normalizing the problem can help solve it.

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(1) If you want to know more about this topic check out our article about peer pressure influence click here.

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Authors’ Note:

We are writing this article as more of an exploration of the power of behavior economics in the prevention of mental health issues and in easing the burden of those already struggling with it than as simply an awareness-raiser to the problem. However, awareness for these issues can never be too much, both in society in general and in the academic community, so we lay out some of the signs to watch out for and urge you to reach out to your friends/loved ones if you notice these signs in them, and to seek help if you feel them yourself.

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Sources: Mental Health Foundation, World Population Review, World Health Organization, WebMD, Yale University, PubMed Central, Medium, SAGE Journals, IZA World of Labor, Recovery Ways.

Part I: The silent pandemic

If we start being honest about our pain, our anger, and our shortcomings instead of pretending they don’t exist, then maybe we’ll leave the world a better place than we found it.

– Russell Wilson

Did you know that 12% of the world’s population (a little more than 1 in every 10 people) live with a mental health disorder? And that Portugal is the 2nd European country with the highest prevalence of mental problems? Sadly, there’s no way of knowing by how much the real numbers surpass these (and there is no question that they do, particularly in less developed countries). 

Mental health is as important as physical health. It comprises all dimensions of our well-being besides the physical one, namely the emotional, psychological, and social ones. Remember that our body and mind are more than two sides of the same coin. They’re like cogwheels on a machine, making each other spin. And if one of the wheels isn’t turning, you can’t expect the engine to keep running. Your body is a complex system, and if one element is damaged, the others will inevitably suffer too.

A mental health problem is a health problem. Just like a heart issue can limit your ability to exert physical effort, it affects how you think, feel and act. This way, this can interfere with how you cope with stressful situations, with your relationships, and (most significantly for Behavioural Economics) your choice-making process.

It should be noted that, contrary to general belief, not all mental health problems are situational, i.e., not all stem from traumatic events or abusive pasts. There are many factors that can make someone predisposed to these kinds of issues, including genetics, brain chemistry, or personality. At the end of the day, mental illness does not choose age, gender, or class. No one is immune, but there are some precautions everyone can take. Learn how to deal with the stress in your life. Take time for yourself. Do something you love (like reading the latest NAC article). Your mental health is to be taken good care of.

We should also remember that we are all different, and so are our struggles. Sometimes, the same condition will manifest itself in wildly different ways between individuals. And sometimes, a behaviour that is a cause for concern in one person can be completely a healthy and normal conduct for another.

Two of the most common mental illnesses affecting people are Major Depressive Disorder (colloquially referred to as depression) and Generalized Anxiety Disorder. These mood disorders can be identified by a professional and are treatable. Depression causes feelings of sadness, hopelessness, reduced energy, and sometimes agitation and restlessness. Anxiety causes nervousness, worry, or dread. It should be noted that all these feelings are expected to occur from time to time. However, they are not expected to overwhelm you. When these negative feelings start to show up too often and take their toll on your life, that’s when there could be a cause for concern.

Economic Impact

We know mentally ill people are not at their best (they are ill, after all). Someone struggling with mental issues is, therefore, less productive than otherwise. This affects the labour force – if mental health problems are, at least, as frequent as current data shows (and we’ve already made the argument that they may be even more), then a relatively large share of the working-age population is not producing as much as they could be. Needless to say, this will hurt the economy. Depression and anxiety are estimated to cost the global economy $1 trillion per year in loss of productivity (WHO). Besides, the current solutions for these problems (therapy, drugs, among others) are costly and lengthy to apply, with patients often requiring a follow-up. This understandingly puts a heavy strain on healthcare systems, resources, and individuals.

Depression and Suicide

Depression is particularly prevailing. Around 280 million people worldwide suffer from it (the majority of which are women). Moreover, the large number of cases that goes unreported is mostly due to a general feeling of shame or lack of awareness of mental health conditions. Data usually shows higher numbers of mental diseases in developed countries. This does not, however, necessarily mean that such problems are more common in these countries, but rather that they are more readily diagnosed and reported, as developing nations often do not yet possess the resources required to properly address these illnesses.

The COVID-19 pandemic hasn’t helped: in 2020, the global prevalence of anxiety and depression increased by 25% (WHO). Young people have been particularly affected – they are disproportionally at risk of self-harming and suicidal behaviour. Worst of all, this boom in the prevalence of mental health issues was paired with severe disruption of mental health services. Although this situation had somewhat improved by the end of 2021, many of those who desperately need care are still unable to get it. Professional psychological support is not cheap or particularly easy to access in most healthcare systems, and there is still a lot of catching up to do after the major gap in services that the pandemic represented. And as if the difficulty in obtaining help was not enough, there are still people who don’t bring themselves to ask for help. It is still too common to believe that it is wrong, shameful or pointless to acknowledge our struggles and search for outside support. 

The WHO currently estimates that, by 2030, depression will be the world’s most common disease in the world. If we are not careful, the next pandemic we face may be one of mental illness.

In some cases, depression may even lead to suicide. An individual suffering from depression has a risk of suicide around 20 times higher than one without it. The statistics are beyond troubling, they are outright alarming. Over 700 000 people end their own lives every year. This is the equivalent to one suicide every 40 seconds, making suicide one of the biggest killers in the world, and it is the fourth leading cause of death in 15–29-year-olds. 

How does this affect how you think?

Depression doesn’t just get in the way of being happy. It causes chemical changes to happen in your brain, which can seriously impact your thought process. The condition can interrupt or reduce neurotransmitters (chemical “messengers” in the brain), such as serotonin, dopamine, and norepinephrine. These changes may either be what is causing you to be depressed or be another result of whatever triggered it. 

Depression can impair your attention and memory, altering your ability to absorb new information and make decisions.  

Decision Making

Depressed people tend to have more trouble making decisions, even trivial ones. Try putting yourself in such a person’s shoes. Imagine you’re going out to dinner with friends. You have to choose the restaurant, but which one? And there are so many tables there, where will you sit? And what will you order when the menu goes on for so many pages! All those light decisions can weigh so heavily when anxiety keeps telling you that every choice is the wrong one.

Depression frequently brings along hopelessness. People are unwilling to waste their time on plans that they believe will fail. Besides, they experience considerable anxiety when faced with the need to make a call, even the smallest decisions. This results in high levels of what economists refer to as risk-aversion (reluctancy in taking risks), leading to less information collection, idea production, and option consideration.

Fortunately, studies have shown that using specific techniques such as cognitive behavioural therapy can help depressed people make better decisions, leading to better long-term outcomes. Moreover, problem-solving treatment can train people to improve their problem-solving skills and distorted thinking patterns.

Executive Function

Depression may also impair your executive function, which affects your ability to process information. Executive function is often called the CEO of the brain (you are walking around with your version of a tiny Warren Buffet in your head!) because it is in charge of getting things done. Simple tasks, such as paying bills, cleaning your room, or getting out of the house, can be compromised if that CEO takes an unplanned vacation. Fortunately, the executive function can be improved with educational strategies and behavioural approaches. If you’re experiencing issues with executive function, try breaking large tasks down into smaller chunks, create to-do lists and review them frequently.

As we have seen, depression affects everyone differently, changing habits and the way people live. This translates into changes in behaviour, consumer patterns and decision-making.

There’s a reason why people say depression runs deep. It affects so much more than just your mood. Fortunately, this is a preventable evil – and Behavioural Economics (nudges, particularly) may be a part of the solution.

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Sources: Mental Health Foundation, World Population Review, World Health Organization, WebMD, Yale University, PubMed Central, Medium, SAGE Journals, IZA World of Labor, Recovery Ways.

How many of you bet on Placard, or Bet click, or any other similar gambling website? How many of you have gone to the casino, or want to go and play in the slot machines? All these games generate feelings of excitement, that rush of not knowing what the outcome might be, and if we are going to win or not. But maybe next time you decide to bet on your favourite sport’s team or go to the casino, there are some things you must take into consideration, such as fallacies and biases we sometimes, unconsciously, fall for. With this article, we will explain some of the most common ones, how they work and how they are present in our daily lives.

The Conjunction Fallacy

The difference between plausibility and probability is the source of this fallacy. Normally, we are more inclined to believe in the probability of an occurrence the more detailed it is, when in fact, and according to our statistics and probabilities lessons, it is exactly the contrary: the more exact and detailed an event is, the less likely it is to occur. For example, the probability of a person being a teacher is higher than the probability of a person being a teacher and a woman (even though, when describing a person with these characteristics, it is more plausible if we add more detail and, therefore, can incur in the mistake of thinking that it is more probable).

This is called the conjunction fallacy as it refers that the probability of the conjunction, P(A&B), must be always smaller than the probability of its constituents, P(A) and P(B), as “the extension (or the possibility set) of the conjunction is included in the extension of its constituents.’’

We can relate this fallacy to sports, as there is a lower probability of an event to happen if we add more restrictions. So, for example, let’s assume that:

• Probability of A, P(A), is equal to team A scoring a goal (and the result to be 1-0)
• Probability of B, P(B) to correspond to team B scoring a goal (0-1).

Therefore, the probability of A and B, P(A&B), is equivalent to both team A and team B scoring a goal (and the result to be equal to 1-1). As the probability of the conjunction of A with B, P(A&B), is always lower than the P(A) (or P(B)), then we can assume that the likelihood of a draw is lower than the probability of just one goal.

Applying this to real life, when you bet on Placard, the more you specify the occurrence of an event, the more an outcome, if positive, generates higher rewards, as the probability of occurring is lower. For example, betting on Benfica winning Sporting or Sporting not scoring any goal, if true, generates less money than betting Benfica will win and Sporting will not score any goal.

Hot Hand Fallacy

Another quite common mistake that many people who bet incur in is the Hot Hand Fallacy. As the term suggests, this comes from the bias that people tend to have regarding the likeliness of something that has been successful in the past to continue that way in the future. Because, if for instance, a specific horse keeps winning race after race, it means that next time it will result in the same outcome, right? Well, not necessarily…

In fact, we are only considering a small number of random events, instead of analysing the bigger picture. Although a goalkeeper may be in a “hot streak”, defending every possible goal that comes his way, his average save percentage can be way different. People wrongly assume that a small number of occurrences give the possibility to make safe predictions of what is going to happen. In other words, people infer future outcomes prematurely based on small and recent samples of evidence, disregarding other sources that have been recording performance data for years.

This fallacious reasoning comes from human’s inevitable propensity to formulate patterns and find trends to make sense of the environment that surrounds them. Such usually leads us to have a hard time assessing randomness, viewing events as dependent while they are actually independent of each other.

So, how can we overcome this? Although it is difficult, people should think twice before jumping into conclusions, regardless of how exciting things can be going for them. There’s a need to check and ensure how things usually play out in the long run, to derive better and more rational decisions.

The End-of-Day Effect

Moreover, have you ever noticed that you tend to incur in higher risk when something is about to end, that being either an event or around in the casino, regardless of your previous results being losses or gains?

Once again, let’s use the casino example: you are preparing to leave, and this is going to be your last bet. If your previous results were of gains, then you will tend to incur higher risks, as explained by the hot hand fallacy. On the other hand, if you accumulated losses, then you also tend to incur higher risks, but in this case in an attempt to recover said losses. The end-of-day effect relates to the fact that gamblers are more willing to have higher risks at the end of the session, either to make up for losses or due to the hot hand fallacy. This effect occurs because perceived endings cause participants to be more concerned with gains rather than losses, and this increase in risk-taking in the final round is mediated by a motivational incentive. This motivational stimulus caused by time perception affects the ability to process information in the frontal lobe, interfering with decision making and impulse control.

The Recall Biases

Lastly, the Recall Bias: it can be explained by the tendency to remember and overestimate wins, whilst forgetting about or underestimating losses. Let’s use our old casino example: you have played and lost in the roulette 2 times in a row. However, when you play it a third time, you end up winning. The outcome will be for you to overvalue that win, and forget the other losses, consequently deciding to play one more time, confident that you will win, even though your net effect might still be negative. Another implication of this bias is that losses will not act as an incentive for individuals to stop gambling, since they believe that they will eventually win.

Conclusion

All things considered, any kind of gambling can be addictive and frequently a dangerous behaviour. Examples of individuals getting addicted to gambling, ruining their bank accounts and having negative effects on their own personal lives exist to no end, and the biases and mechanisms presented throughout the article are certainly part of the causes of many of them. Thus, next time you responsibly consider making any bets we recommend you to be mindful and try not to fall into these behavioural traps.

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Sources: The Economics of Sports, The Decision Lab, Frontiers in Psychology, ESPN, American Psychology Association, Springer Link, Forbes, Peel Research Partners, VSin.

Have you ever found yourself overthinking about that party you did not go to or the sunset you missed out, and now that is the only thing you can think about? Or maybe something even smaller than that? I bet so. We all have felt that way at least once in our lives.  

FOMO, a constant in our lives 

This feeling can be described as FOMO – fear of missing out – and not only it is common, but it also plays a big role in our lives. Even in the smallest decisions we take into consideration (most of the time unintentionally) what our peers do or what will they think of us.  And despite being aware to some extent that our actions are affected by others, the question is: do we truly understand how broad/strong this influence can be? 

Imagine the following situation: you are in a room full of strangers, and all of you are being asked the same simple questions. In the first round of questions, you are the last one to answer. All before you give the correct answer and, when your turn comes, give the correct answer as well. However, in another round, at some point those before you all make a very evident mistake, giving the wrong answer. So, what would you do? Give the (correct) answer that you are sure about, or conform to what others said and give the wrong answer as well? 

As obvious as it may seem to answer correctly independently of the other answers, almost 75% of the people did not, despite knowing the right answer, and conformed to the group’s incorrect answer.

Shocking results, right? However, this experience only confirms the considerable influence that others have in our actions, which can be reflected in all aspects of our daily life, from college performance to drug consumption. 

Social Identity Theory 

For starters, in order to understand why people behave in such a way it is necessary to grasp the basics of Social Identity Theory. This concept first appeared in 1979, when Henri Tajfel and John Turner made a breakthrough in social psychology, changing the way we perceive intergroup behaviour.  

Whether we like it or not, our brains tend to categorize society into a variety of groups, going as far as also categorizing ourselves, be it by social class rank or favourite football team. This is a common cognitive process, vital for humans to function as a society. Nevertheless, such train of thought may result in the exaggeration of both the differences between the groups and similarities within the same group. People in a group(the in-groups), by considering their peers similar between each other and acting alike, distinguish themselves from those who belong to other groups (the out-groups) and, consequently, tend to view them in a negative light as to enhance their own self-image. 

Aside from the prejudice and discrimination matters which may arise from this, social identity is crucial in providing pride and self-esteem to an individual. By affiliating oneself with a group, one adopts its identity and will act accordingly to that group’s characteristics in order to preserve their sense of belonging. To illustrate this, we do not need to go far from our own realities. By categorizing ourselves as students, we embrace that identity and start to behave in ways we believe students do (by conforming to the norms of the group). 

Boomerang effect 

Another concept that arises when discussing peer influence is the boomerang effect. This effect occurs when efforts to persuade someone result instead in the opposite outcome.To further understand this concept, we can think of an actual boomerang. If there is some wind, throw it to one direction and it may go to one completely different from what you wanted.  

There are many real-life examples demonstrating this effect, some by which you might have been through already, except you did not know it was, in fact, the boomerang effect.

A simple example is when we are kids, and many times, when told not to do something, we intentionally do the opposite. We can even go as far as thinking of situations when parents forbid teenagers to go out and drink alcoholic beverages, which only result is having them wanting to do so even more. Thus, their efforts only contribute to the outcome being the opposite of what they intend originally. This effect demonstrates that one must be careful on advising close peers, for the effect can be precisely the opposite. 

Is peer influence positive or negative? 

The human vulnerability when it comes to peer influence on decision making can have both negative and positive consequences. As to illustrate this idea, we may consider a reality that is familiar to us all, our academic life: let’s suppose that you belong to a well-behaved group of friends that studies a lot and has good grades. Naturally, your sense of belonging will motivate you to increase your study hours, as to make sure you are still welcome in that group, even if done unconsciously. This is a clear example of how our peers can have a positive influence in our lives. However, the opposite can also be true: if your group of friends decide to lower their academic performance because they shifted their priorities and would rather engage in other activities, you will not enjoy feeling an outsider and will gradually shift your priorities as well, perhaps leading to lower your performance as well, until you match the group’s standards. 

The risks associated with this issue are found mostly in early ages, among which tolerance is lower and the risk of dependency is higher. As so, peers and family have a key role in promoting good behaviours during adolescence, not only serving as role models, but also providing easy access and encouragement in performing good actions. As the Social Learning Theory suggests, teenagers do not need to observe a given action in order to adopt it, they only need to get acceptance from the peer group in order to be able to perform that action. 

An important factor that is proven to impact the extent to which an individual is influenced by its peers is the reciprocity of the relationships in discussion: individuals may only be affected by social groups they feel they belong to and the peers they are particularly attached to may have a stronger impact in their decision-making. Studies show that the negative influence of the peer group is usually more connected to the involvement in risk behaviours, whilst the positive influence is more connected with protective behaviours. Stronger friendships may lead teenagers to an appropriate environment to develop in a healthy way and to achieve good academic results.  

All in all, the need for belonging is something common to all of us, humans, and it is that same need that leads us to categorize people, to conform with groups, and to behave in ways we never thought we would. Nonetheless, peer influence will always be present in our lives, and as mentioned previously, it can have both positive and negative impacts, and we can try to use it in our favour, by surrounding ourselves with the right people.  

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Sources: THALER, Richard; SUNSTEIN, Cass – Nudge. 3ª edição. Lisboa: Leya, 2021,  Simply psychology, Science Direct, Raising Children, National Center for Biotechnology Information, SpringerLink, Behavioural Scientist, Taylor & Francis Online       

Game mechanics that drive people to Action

Behavioral science is openly related to psychology, economics, and marketing. However, not as many individuals make the same relation with game design or software engineering. Where can we set borders? In reality, there is a broad set of tools and frameworks used in behavioral economics that benefit from other sciences. In this article, we aim to address the increasingly important engineering area Game Mechanics, and its applications to the educational sector. 

First of all, why gamify something? Especially in economics, where we already have game theory, cost-benefit analysis, and other theoretical frameworks that facilitate complex reasonings and aid in perfecting the decision-making process, it may seem redundant. Nevertheless, the objective of gamification is substantially different. The main purpose lies in engaging and leading the consumer, and not so much in dictating their action. As a result, more and more real-life problems are being adapted to game situations where the consumer/user is nudged towards a specific path. Essentially, it leverages fun to create motivation, just like in addicting video games. 

In every job that must be done, there is an element of fun. You find the fun, and – SNAP – the job’s a game! – Mary Poppins 

In conventional behavioral economics (if we already arrived there), the focal point of any consultancy project is the experiment. The solution to a problem, being it in marketing, human resources, or any other area, passes through understanding what behavior an organization wants to stimulate in its target group or society. This is precisely why corporations are searching for better solutions through gamification. Certain human psychological actions are difficult to stimulate through “normal” methods and even harder to predict from game theory or related tools that perceive the representative agent as rational. 

Let’s take Duolingo.com for example. If the reader has ever tried to learn a foreign language independently (without any teacher, book, or guide), then probably has encountered this user-friendly website. Duolingo was founded 10 years ago and today is a publicly-traded company valued at USD 161.7 million, with more than 400 employees, 500 million users, and 106 different language courses in 40 different languages¹. But, if the reader has ever tried to learn a foreign language independently, then probably has found it not as captivating or easy as it may seem. How did Duolingo achieve this level of success? Can we restrict its merit to simply better or more disciplined users? 

Well, the internet plays an important part in today’s world of education, but game mechanics might also be a source of success in this case. The difference between learning a language from a regular website and Duolingo lies in how the language is taught. The latter brings about different features that the reader may not encounter often, such as storytelling, goal framing, badges, points, levels, and other virtual incentives that promote the user to be disciplined and maximize their learning experience. The key lies in turning actions and exercises into fun challenges and creating a story behind the user’s progress so that he stays addicted to the “game” and finding out what is next. These gamified features transform the user’s involvement and the nature of the task at hand (from boring L to exciting J). 

This concept may appear to the reader as simple, straightforward, or even common. However, behind these ideas and their application, there is a team of designers, whose objective is to put themselves in the users’ point of view and trace their mental steps. Where would they quit? There is the need, as in any problem-solving situation, to identify and understand the problem, conceptualize the right game mechanic, and finally test it to figure out if the correct mental aspects of the user’s cognitive perception were addressed. In fact, this is a complex process. Amongst all the known (and unknown) biases, being able to understand the real drivers of a specific human choice is a behavioral trial by itself, thus this synergy between behavioral science and gamification enhances the strengths of both areas. 

Like Duolingo, many other non-game situations are being transformed by fun, consequently increasing motivation and creativity. Yet, we should never take this as a closed subject. Taking Education, for example, it has been a static, unchanged sector for several decades, that stimulates risk aversion. As Scott Hebert said in his 2018 Ted Talk on gamification uses for education, “the Education system is a system in an engagement crisis”. Children are in school to learn, and shouldn’t be scared to fail or be creative and innovative. We should encourage autonomy and make learning fun so that the behavior and opinion towards school takes a positive and rewarding turn. The setup of a non-game question needs to address the participants (as different individuals), their expectations, and all the time-sensitive and contextual factors, hence it is clear that children’s opinions on how to learn should be taken into consideration. Only then can their behavior be effectively altered over time, possibly creating a new generation of learners. 

In sum, gamification constructs a setting where the user is led towards a specific outcome, like learning a new language or a new subject in school, through the construction of a fun, engaging, and playful setting. At the end of it all, it is a win-win. 

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Sources: John Bell’s Website, Nudge Unit , Dr. Zac Fitz-Walter, The Power of Gamification in Education

Scientific revision: Patrícia Cruz

When we think of behavioral economics, we usually tend to relate it with producer and consumer decisions and the construction of economic models to better understand decision-making. However, its applications goes way beyond that. Throughout this article, we will try to explain how behavioral science can help fight a major issue of modern society: Gun control.

According to the most recent National Firearms Survey, there are approximately 4.6 million children in the United States that live in homes with at least one loaded and unlocked firearm. Despite the strong recommendation of the American Academy of Pediatrics for people to store it safely away from children, studies find that one in three US homes with a child under 18 years old has a firearm, of which 43% are unlocked and loaded. Thus, it is not surprising that firearm-related injury was the leading cause of deaths among children and adolescents in 2017, with the odds of a child being killed by a firearm being 36 times higher in the US than in any other high-income country.

In this article, we will apply behavioral economic theory to identify some of the cognitive biases that may explain the motives that lead millions of people in the US to purchase guns and, more precisely, that lead millions of parents to store firearms within their children reach. The main advantage of analyzing this critical issue is to understand both sides of the debate as to solve some ambiguities about the best way to minimize fear while maximizing personal and public safety. Moreover, it is important to educate legislators about the behavioral economics’ principles that may impact decision-making, so that they can implement strategies to enhance safer firearm storage practices and contribute to injury prevention efforts.

So, how can we explain the overpowering need to own guns in the U.S? Would you ever own a gun? For what purpose? Most people would answer that it is simply a way to protect oneself from someone else that owns a gun. However, this will inevitably result in an economics problem called the Tragedy of the Commons. It means that the individual has an incentive to consume a resource but at the expense of everyone else. One classic example is what would happen if every shepherd allowed their sheep to graze in a common area. If everyone thought that way, then it would result in harmful over consumption, essentially being detrimental to everyone.

To have an even better picture, we can use the study tool Game Theory in order to further analyze this issue. Hypothetically, imagine you were in an ideal world where the rest of the society was gun free, and everyone would feel relatively safe. Now, imagine that your friend has the idea of owning a gun because that will make him feel even safer. His individual payoff will increase but he is not taking into consideration the effect that this will have on others, namely that he is armed, and the rest is not. Hence, he is better off than the rest, leaving others worse off in comparison. In this particular case, it is obvious that the society as a whole is better off when no one owns a gun. However, from the moment that one single individual makes the decision of buying a weapon, everyone else feels that they could now benefit from deviating from the optimal point to society (no guns), leading to a snowball effect, where at the worst-case scenario everyone owns a gun.

Now, let’s imagine that you’re an entrepreneur who despite all the business knowledge, past good grades and amazing ideas, your past 6 attempts at creating a business restaurant have flopped. However, in the seventh attempt you feel it in your heart that this will be the one despite the endless advice to not pursue and stubbornness to admit defeat. What do you know? You failed for the seventh time. So, what happened? This is one of the various scenarios in which some people exhibit the optimism bias.

The optimism bias refers to “our tendency to overestimate our likelihood of experiencing positive events and underestimate our likelihood of experiencing negative effects.” This of course can be quite dangerous depending on the circumstances. Once again, this is one of the many biases that can make us irrational and ignore important information that can either make or break our outcome.

In terms of gun usage, optimism bias can shed light on many of the decisions and thoughts that gun owners make. For example, too much optimism can lead a gun owner to think that despite the various gun related crimes and even domestic accidents, being in those said dangers will never happen to them despite worryingly increasing every day.

Moreover, with the increasing mass shootings and gun violence in the United States, gun owners have become more aware of possible dangers and want to be protected. This leads them to unlocking their firearm and maintaining it loaded for the sake of individual safety and their family, ignoring the threat it may impose on the household members, especially children. So, why does this happen? Behavioral economics can explain this behavior as availability heuristic bias.  This can be defined as the propensity people might have to place more significance on events that are more easily remembered than ones that become harder to imagine. No parent wants to hurt their child but rather protect them, which unfortunately leads to accidents.

Present bias can also be related to these accidents as people have the tendency to give greater importance to events that are closer to the present rather than ones in the future. Individuals might view the immediate risk of gun accidents with children as lower than potential future benefits (protecting them from intruders), and this leads to the mistaken belief about possible advantages in the future against what something may cost today.

In this article we hope to raise awareness to a major issue of modern society, and how alternative methods such as behavioral economics can help explain this many times misinterpreted phenomenon.
Having this said, we also must recognize that firearms have been and will continue to be part of our society, as they have been around for over 650 years and, as of now, there are over 875 million guns in the world.
This begs the question, if firearms are staying, what must change? The simple answer is the usage of those firearms; however, this is easier said than done and first we must understand why we don’t use guns properly.
Throughout this article we try to present the multiple behavioral biases that shed light on the many times perceived “irrational” usage of guns and with this, give the first step to change behaviors: understand what we do and why we do it.

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With the introduction of the Internet into our society, online transactions between producers and consumers were made possible and thus, e-commerce was born. Amazon was one of the first renowned e-commerce websites in the USA that paved the way for thousands of other businesses to start selling products on the internet as well. Thanks to easy access, convenience and mostly pleasant experiences the digitalization of sales has developed exponentially, shaping consumer’s buying methods and needs.

Additionally, social media was also created due to this technological breakthrough, as a way for people to communicate, share thoughts, recommendations and information. These online communities then evolved into much bigger platforms, not only to socialize, but also to serve as retail and marketing tools. 

Moreover, ever since the Covid-19 pandemic became a part of our lives, social media platforms and e-commerce have boomed tremendously. Faced with lockdown measures, a wave of isolation and uncertainty settled into people’s minds which caused an unprecedented change in their behavior as consumers. Online shopping and bulk-buying (excessive purchase of a certain good) became the new norm. As a result, businesses and brands had to adapt in order to meet these changes in new ways of selling and marketing.

This article will discuss how e-commerce and social media has influenced consumer behavior.

From the first e-commerce online platform to worldwide digital marketplaces, running an online business is not only a new concept, but also a highly competitive one, due to low barriers of entry. As a result, securing consumers and making them become loyal customers is at the top of the priorities of any online business.

Amazon was one of the first online retailers to implement user reviews and ratings for their products, which to this day is a very common tactic among these markets. However, any person can access a website for the first time and leave it immediately the second after with no inconveniences imposed or time wasted. Behavioral economics can help these online stores with nudging strategies for potential consumers that find themselves on what is called a sales funnel (a way to illustrate what processes to apply as you observe each stage of a potential consumer’s buying decision).

Starting at the top, we have ToFu (Top-of-the-funnel) consumers, mainly first-time website visitors. At this stage, the biggest concern is to ensure your business is trustworthy and that you somewhat segmentate your customers according to their preferences. Such can be achieved through lead generation quizzes during a sign-up. It is very likely that many of us have come across a BuzzFeed quiz to know which character in a famous series we are or what type of coffee we relate to today and found it quite entertaining. This is an example of an interactive and creative way to offer first time customers more personalized products and specially gather more information about them, without them even realizing that they are providing you with crucial data regarding their preferences.

Businesses such as vitamins and hair care subscriptions are known to use this strategy in order to best select products that each consumer would be more willing to buy. Questions such as the example below, pop up one by one and in between a request for your e-mail address may appear. While they ask, it is common to notice a small text explaining what the purpose is for giving the information to them, e.g., “So we can save your answers”, reclaiming a sense of awareness and trust to the consumer, making them comfortable in sharing valuable personal data.

Another way to gather more information about new consumers and ensure trust is through social media. A study from GlobalWebIndex shows that social media influences 71% of consumer behavior. Big platforms such as Facebook, Instagram, Twitter and recently TikTok put a huge emphasis on advertisement as their main source of profit, which is personalized to each consumer. Thanks to the ongoing pandemic this strategy has caught more and more attention from all businesses, as we are tucked away in our houses with much more time to spare scrolling through our phone.

Such paved the way to a new and very popular career path known as social media influencers.These people are content creators on these platforms that form a large and loyal audience, sometimes up to millions, thereby even being viewed as internet celebrities. A research study in 2017 (De Veirman, Cauberghe and Hudders) states that having a large number of followers leads to the belief that an influencer is likable and popular, which creates opportunities for successful promotion of brands. This differs from a traditional ad, because of the interactive aspects made possible by social media, as followers have a sense of connection and identification with the influencer. Thus, this highlights the importance of social proof, since an advertisement done by an internet personality that you follow is mostly considered a credible and genuine recommendation.

Furthermore, down-the-line we get to the MoFu (Middle-of-the-funnel) customers, they are the ones who have engaged with e-mails and products but have not made a purchase yet. Therefore, subtle and profitable nudging strategies to better guide them through their shopping experiences are applied. Some that stand out are, for instance, recommending products based on abandoned items on shopping carts, but even more interesting, sending sales promotional e-mails in the form of calendar invites. During busy events and holidays, such as Black Friday and Christmas, one can feel quite overwhelmed already with the numerous sales and promotions that are happening at the same time. A good way to stand out from the crowd is to send out beforehand the calendar’ invites to your customers with the dates and hours of when the sales are starting.
In both strategies, the company and the consumer are benefited, as the latter also enjoys recommendations in accordance with its preferences.

Lastly, we reach the BoFu (Bottom-of-the-funnel) costumers. These are consumers who are ready to buy for the first time or are repeated customers. In this case, the payment process needs to be easy and nudge their specific purchases with the right incentives. A common and frustrating situation is when you find yourself eager to buy that jacket you always wanted, but unfortunately it happens to be out of stock. Businesses redeem themselves by instead redirecting the customers from the sold-out page to similar or top-rated items and wish lists. Besides, and by also triggering FOMO (fear-of-missing-out) on consumers, companies establish a certain benchmark of items’ value in the shopping basket for free shipping discounts, in this case, two distinct effects come into play, not only does the consumer feel the urge to make the best possible deal, but also is affected by the power of the “free” in the shipping part.
As Dan Ariely showed in his book “Predictably Irrational”, when people were given a choice between a 15cent premium chocolate and a 1cent low quality one, only 27% chose the low quality one. In comparison, by simply dropping the price of each chocolate by 1 cent (maintaining the same economic incentives but now with the low-quality chocolate as free), the number of people who went for the low quality one were now 69%.

Furthermore, with continuous technological advancements, payment transactions have never been easier. With the introduction of PayPal Express, checkout frictions have mainly disappeared. A business report by Volusion, states that online merchants who offered this option have said that its buyers increased by 5.4% with 83% of PayPal users being first time consumers. An online purchase has now evolved to be one click away from your mobile phone.

All in all, e-commerce opened the doors for new businesses and careers to emerge and as lockdown and the pandemic unfold, these behavioral strategies will only be amplified as more people from all age groups globally adhere to these platforms. Social media and Influencers have also helped advertisements be more targeted and viewed as authentic and thus, becoming more effective, forever changing the paradigm of marketing and consumer behavior. 

Sources: Big Commerce, Miva, Maryville University Blog, Volusion, Sleeknote, Search Engine Watch, Forbes.

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Reading time: 5 minutes

Imagine yourself in a clothing store. You find the perfect pair of jeans but, unfortunately, they’re WAY above your budget. However, the store saleswoman says that right now it’s at 35% off. Joyfully, you might think it’s a bargain and you might agree to buy it. Now, picture yourself waiting in the entrance of a restaurant.  You are told to wait 30 minutes but when the 30 minutes are up, your name isn’t called. However, when the host says it’ll be just 5 more minutes, rather than complaining about it, you start getting excited that it’s almost your turn. Do you notice a pattern? In both situations, your expectations before deciding were strongly influenced by the information you received and that served as reference point for your actions (the 35% off doesn’t seem expensive in comparison with the full price and a 5-minute wait is nothing compared to half an hour). 

This phenomenon is known as anchoring. It is a type of cognitive bias,¹ where a person is exposed to (typically) a first piece of information (whether it be a number, an idea, a belief, etc.) and that piece of information (this is the anchor) will be the reference point for all subsequent decisions. Once the value of the anchor is set in stone, all future negotiations or arguments are discussed in relation to that anchor. We invite you to explore this intriguing psychological effect, learning more about how exactly it manifests and how we can outsmart it. 

A very common anchoring effect can come in the form of numbers.  An experiment has been used to measure the strength of an arbitrary anchor when judging house prices using a group of college students. The students were first given an introductory 10-minute presentation on facts and figures regarding the housing market in the beginning of the experiment. After the presentation ended, they were asked to write down the last three digits of their phone and then multiply that three-digit number by one thousand. Finally, when asked to estimate the house prices, the results showed that the student’s estimates were strongly influenced by the arbitrary number or rather anchor, despite going through the presentation. Notice how the number was completely randomised. There is no correlation between your phone number and the housing prices, yet the effect was still present. Therefore, irrelevant information can appear “relevant” even when it is completely nonsensical. 

The effect can also be present in negotiations. During courtroom proceedings, an attorney and prosecutor might discuss the sentencing of a defendant in hopes of achieving a fair trial. However, these discussions might not always be fair. For example, when looking at the news about the results of a court case, you might notice that people charged with very similar, if not, equal crimes are sentenced differently. This can be explained by the anchoring bias. In the research paper, “Heuristics and Biases in Judicial decisions”, Eyal Peer and Eyal Gamliel found that judges were highly susceptible to this effect! Both novice and experienced judges were given two different demands for a sentence by an alleged prosecutor. One sentence was 12 months, and the other was 34 months. The results showed that when given the 12-month demand, the judges requested more information that was consistent with this sentence and the same was done for the 34-month demand. Rather than using their own judgement, they used the number as a reference point despite it not being legally relevant to the actual crime.

Businesses also are known for taking advantage of the “first impressions” felt by their clients through their marketing campaigns. Let’s look back to the release of the original iPad. After Steve Jobs listed the iPad’s amazing features, he asked the audience how much they think it should cost. He initially said that the price was $999 and left the number there for a few moments. Afterwards, he concluded that Apple was able to meet its cost goals and so the actual starting price of the iPad was $499. In the presentation, the number $999 was destroyed by a falling number $499. In that exact moment, we can see that the iPad was perceived as “cheap” because the previous price became the anchor.  

Of course, anchoring can come also extend past the numbers. We can easily be influenced by opinions or ideas and set those as our anchors.  For example, let’s suppose that your parents lived well into their 90s or even 100s. You might expect that, being their son/daughter, you will also live a long happy life. However, this anchor can lead you to ignore the fact that your parents lived a much healthier and more active lifestyle that could’ve helped them reached a very old age while you may eat poorly or lead a sedentary lifestyle. Again, we can see how the anchoring effect can not only be inaccurate but also lead us to think poorly and not reconsider the repercussions. In a more serious situation, let’s say that you are feeling ill, and you consult a physician in order to take a better look at you. While the person examining you is indeed a licensed physician, their first impressions of you regarding your symptoms inevitably will create an anchor point for them while will impact every examination or assessment you do with them.  

There are various ways that help mitigate the influence of the anchoring effect. Two studies have shown that before accepting an anchor, it’s important to list the cons or arguments on why that anchoring point is disadvantageous. Thomas Mussweiler, a professor of organizational behavior expressed the following: “In a real-world setting using experts as participants, Study 1 demonstrated that listing arguments that speak against a provided anchor value reduces the effect. Study 2 further revealed that the effects of anchoring and considering the opposite are additive”. Another way to reduce the impact of anchoring is by “dropping you own anchor”. For example, when looking for a home. Do not simply stick by one desirable price point. You’re better off finding a home with similar features, similar square foot, similar price points, etc. The more you research, the easier it is to determine a reasonable anchor. In case of any doubt, the last step would be to simply know when to walk away. When for example determining your salary for a job, if you find that the employer is giving you a salary below the average and refuses to budge from it, it’s not a bad idea to respectfully decline and/or walk away.  

From the convenience store around the corner, to the courthouse, or even passing through the most mundane interactions we have, anchoring is everywhere we look. It´s a fascinating phenomenon that is bound to be part of nearly every decision we make. Anchoring is a mental shortcut that allows our brains to make comparisons and value the numerous items we see every day, however, as any other shortcut in life, it has its risks. With the help of this article, we hope that you, as, a judge, an entrepreneur, or simply a consumer, can harness the advantages of this effect, but at the same time, be AWARE, of its dangers. 

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