Excel in behaviour, not just numbers: Why Behavioural economics is important for finance professionals

I've been lucky enough to tour around the country with the CPA Congress in the past few weeks to talk about the application of Behavioural Economics to finance.  Being a past beano, I know only too well that 1. businesses live and die by the numbers and 2. it's really not about the numbers - it's about the behaviour surrounding the numbers.  I might think 6/10 great, you might think 6/10 is bad; the number is objective but the interpretation is subjective.  That's why it's so important for finance professionals to understand behaviour if they want to significantly impact their business and their customers.

Here are three quick behavioural techniques for finance professionals.

1. Know when to fold 'em
As a finance professional you encounter this behaviour all too often. It may be a client who just won't sell bad shares, a client who simply can't be convinced to move to better performing options, or a stakeholder who refuses to close down a project that has no hope of generating a return. The numbers don't lie, but rational analysis is not what's holding your customer back.

We hate to acknowledge failure.  Selling shares that have tanked smacks us in the face with our bad decision so we prefer to avoid recognising the loss and instead sell good performers so we can feel like we've aced it!

As a finance professional, your task is to soften the blow by distancing ego from outcome.  For instance, if the time has come to sell a bad investment, try talking about broad market forces rather than individual judgment. Gotta know when to fold 'em.

2. Why one dollar isn't the same as another dollar

When Hungry Jacks ran a $2 Groupon deal for a $6.95 meal package they received over 120,000 downloads in three hours.  When ATMs started to carry a warning about a $2 fee for 'foreign' bank transactions, activity plummeted from 50% to 40%.  If $2 can change behaviour, imagine what larger amounts can do! 

If you've ever wondered why some people like prefer to get their health rebate returned as a lump sum whereas others take it as a discount off their premium, or why we stress about utility bills going up but happily buy more clothes than we need, it's called 'mental accounting' and it impacts how we spend and save money.  For finance professionals, you need to tease out how your customer is thinking about money so that you can influence their behaviour.

3. Information blinkers

If you've ever found that your client or stakeholder seems only to hear information that supports their position and ignores anything that is contradictory, then you have been introduced to information biases.  Known by names such as Confirmation Bias, Hindsight Bias and Clustering Illusion, we unconsciously use these filters to distort, accept or reject information so that it gels with our view of the world and alleviates anxiety about whether things make sense.

As a finance professional, know that your customer will be blinkered by their filter system. It's not that they don't understand necessarily, it's that you need to find a way of meshing your perspective with theirs.  Thankfully, behavioural economics provides clues on how to do this.

There are plenty more of tips for finance professionals from behavioural science, and what I love is that human behaviour doesn't have to be a mystery anymore.  Think of behavioural economics as an audit process with 'behavioural standards' in place of accounting standards and you have a ready made toolkit for influencing your customers.  At last you can excel in influence as well as numbers!

Interested in finding out more?  I am running a series of fast track webinars for finance professionals on topics like those mentioned. Click here for details.

PS Why not join like minded colleagues by signing up to the People Patterns mailing list?  Every month you'll receive a short wrap-up of behavioural tips for business. Click here for the 20 second sign-up.

Image from http://www.rgbstock.com/photo/mhALQQI/more+money+1  

The Behavioural Economics of Melbourne Cup Day

You have spent hours hunting for the right frock, shoes, bag and hat. You've been primped, plucked and spray tanned, waxed and blow dried.  You have dieted, exercised and cleansed. You've been up since the early hours, battled traffic snarls and endless queues. And now here you are.  Standing in the car park which has been claimed by heels rather than wheels, crammed in amongst sweaty strangers, sipping sour bubbles and nibbling soggy sandwiches. Ahhh, Melbourne Cup Day...proof irrefutable that we are not entirely rational beings.

In celebration of the famous Melbourne Cup, let's take a sneaky peek at the behavioural economics at play.

Overconfidence bias: 
We can be too confident in our abilities which leads to risk taking.
"I've studied the form and of course I know more than the Bookies."  

Illusion of control: We think we can control events that we can't.
"My horse always/never wins."

Actor-observer bias: 
We attribute our own positive behaviour to our character, and the behaviour of others to the situation.
"When I get drunk it's the mix of wine and bubbles that did it; when you get drunk it's because you drank too much!" or "When I win it's because I am super talented in selecting winners; when you win it's luck."

Endowment effect: 
Don't get too excited guys, endowment is about us overvaluing what we own.
"Sure I randomly drew that horse out of the hat, but it's mine and you can't have it."

Restraint bias: 
We underestimate our ability to avoid temptation.
"It's ok, I'll only have a couple of drinks."  

Remembering self: 
Our memories of an experience rather than the experience itself is what persuades us.
I remember the fun of previous Cup days rather than the reality of sore feet, sun burn and expense.

Mental accounting: 
Money is allocated to different 'mental' bank accounts.
I paid for my outfit out of a different 'mental account' than my power bill. Any money I win will be 'free' money to be used on fun stuff.

Focusing illusion:
Whatever we focus on has more importance at that moment than any other time.
"What, there's a race after the Cup??"

Clustering illusion:
We see patterns where none exist.
"The jockey is wearing my lucky colours."

Hindsight bias:
We knew it all along.
"I knew it was going to win!  I just didn't get around to placing a bet."

Sunk cost fallacy:
Once resources have been invested, we find it hard to walk away.
"I better just finish this last drink. Can't let it go to waste" or "Of course I'll wear that fascinator again!"

Sounds like fun doesn't it?  And one for the road, 

Hedonic framing:
Separate, smaller gains over a stretch of time are more pleasurable than one large win of equal value, but smaller separate losses hurt more than a once off.  In other words, the more times we are interrupted by good or bad news, the better/worse it is.
"This is the best day of my life!" or...

No. Don't worry. Your horse always wins.  Have a good one.

PS Why not join like minded colleagues by signing up to the People Patterns mailing list?  Every month you'll receive a short wrap-up of behavioural tips for business. Click here for the 20 second sign-up.

Image from http://www.rgbstock.com/images/horses/2

Being a devil: Influencing your buyer's willpower

We are really good at tricking ourselves into acts of indulgence.


Take a study by Chandon and Wansink (2007) for instance that found that when people visit a 'healthy' restaurant, they tend to underestimate the calories they are consuming.  In effect, the restaurant's healthy 'halo effect' mucks with our ability to assess our behaviour.


And similarly, a study by Wilcox, Vallen, Block and Fitzsimmons (2009) that found that the mere presence of healthy items increased the likelihood of an indulgent item being selected.  In other words, we trick ourselves into thinking we have done the right thing by our mental calorie account through merely considering the healthy item and as a reward, select the indulgence.  McDonalds seem to be playing on this through their healthier options, luring us with salads and wraps but then bombarding us with burgers and fries once there.


As the researchers write 

"Results demonstrate that individuals are, ironically, more likely to make indulgent food choices when a healthy item is available compared to when it is not available... Presence vicariously fulfils nutrition related goals and provides consumers with license to indulge".

What do these studies mean?  Context is crucial and can lower our rational defences.  And as a business, you can and should influence that context.


Business implications
For businesses there are some opportunities to consider;

• If you are marketing healthy options, you need to contextualise your product.  Presenting salads amongst pies and sausage rolls may not be as successful as segmenting healthy and less healthy choices.  
• If you are marketing indulgent options, consider the role healthy products can play in stimulating choices in your favour.  Desserts tucked in amongst fruit and vegetables might be worth pursuing.  

And for businesses not involved in food, the lesson of context still holds. Do they see your product as an indulgence or a necessity?  Help them feel like they've earned a reward to promote purchase of indulgences and if your product is more utilitarian in nature, try keeping it clear of distracting 'goodies'.


PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.

Money jars of the mind

Does the money you put aside for bills have the same value as money you spend on fun and entertainment?  Behavioural Economics would say no because we tend to think differently about money depending on its context.  It's called "mental accounting", and whilst it has nothing to do with the mental health of your CPA it is very important to know about if you are running a business.


How ING Direct are using mental accounting
ING Direct in the US have cleverly designed savings accounts that can be split out into mental bank accounts.  ING customers can create as many sub-account buckets as they want and call them by a nickname (for example 'Trip to Australia', 'New car', 'Rainy Day' and so on).  According to the article in The New York Times, ING have introduced the tool to help people reach their savings goals but this is really about good business because in order to acquire funds through personal savings accounts ING (and all banks) have to overcome some behavioural blockers.

ING Direct My Savings Goal

Behavioural blockers
To get us to save more, banks have to overcome our

1. tendency to think short-term (ie I'll buy smaller items now rather than save towards a bigger goal) 
2. laziness (ie it's too hard to save so I won't bother) and
3. 'bunny in the headlights' inertia when overwhelmed by choice (ie I get confused by which bank and which accounts I should have so I'll just stick to what I have)

Behavioural enablers

ING's new savings site overcomes the behavioural blockers by using the following techniques;

• Vividness - we are more likely to act if we can readily comprehend the outcome.  By graphically representing the savings goal and allowing the customer to use personal and meaningful descriptors for the sub-accounts, ING are helping make the savings goals come alive.  Just think how much more likely you are to save towards "ski trip $2000", "emergency fund $500" and "new car $25,000" than leaving it all lumped into a generic account.
• Hedonic framing - we get a bigger buzz out of separate gains than a single one of equal value.  By splitting the accounts into specific goals, ING is improving the customer's willingness to save because there is simply more opportunity to attain success.
• Hyperbolic discounting - our impatience means we tend to like gains that we get now more than waiting for larger gains later.  This means we risk whittling away at smaller balances rather than building towards the larger target that might feel too far away. By breaking the goals into specific accounts, we can concentrate on a mix of shorter and longer term objectives and control our impatience without jeopardising the collective savings target. 

Business applications of mental accounting

There is an opportunity for every business to map out the 'mental accounting' that applies to their industry in order to look for behavioural blockers and enablers.  In short, it's about making the purchase decision easy for your customer.  Your customer will more readily spend money with you if they feel comfortable about justifying it to the bank manager in their head, so using the same principles that ING are using to motivate spending rather than saving, consider making the benefits of purchase to the customer vivid, encourage payment by credit rather than cash because it separates the pain of cost from the joy of purchase and if your product or service delivers a longer term payoff, bring some of the benefits forward to ensure the customer gets gains in the shorter term.

Images
ING from http://www.mybanktracker.com/bank-news/2012/05/17/ing-direct-tool-helps-set-savings-goals/
Money jar from http://totalwealthcoaching.com/wp/wp-content/uploads/2009/03/moneyjars1.jpg

Gender differences in bottle shop behaviour

An article on the gender difference in booze buying behaviour grabbed my attention the other week. "Cheap Booze for him" headlined a story about some Roy Morgan research that identified that blokes were driven by bargains, whereas women sought helpful customer service ("Cheap Booze for him" by Inga Gilchrist, MXNews 4/7/11).  The article quoted bar duty manager David Dearlove as explaining that emotions were the difference, where "females want more from a situation, so they want to be waited on. Whereas guys just say 'Give me my beer' and they're done."  Very hunter-gatherer!

Devising your customer engagement plan
As this snippet of research indicates, businesses have a lot of decisions to make when structuring the optimal customer engagement plan (*refer caveat below).  In this case, "beer on sale" would likely stimulate male foot traffic and you would tend to up-weight staff at the registers.  A promotion on "wine matching" may instead stimulate more female custom, and you would need to ensure you had staff available in the aisles to direct purchase decisions.

At what point can you influence the purchase decision?
The interesting point here I think is that men in this scenario are making the decision before entering the store - indeed it is the reason they visit the store.   Women, on the other hand, visit the store in order to make a decision, and in fact be helped to make it.  This means the retailer has different opportunities to influence what the customer walks away with.

To make the most of male customers, the retailer should place high margin wine or champagne near the beer on special, suggesting the guy keep in sweet with his lady by coming home bearing gifts.  This is a technique used in grocery where nappies sell well with beer!  This opportunity for the retailer centers around the behavioural principles of sunk cost and mental accounting. The guy has already 'spent' the amount of money for the beer before he arrives in store (sunk cost), and that means that it should be easier to up-sell because any other purchase comes out of another mental bank account.

To make the most of female customers, the retailer can of course use direct customer service, but the other opportunity is to help the decision making by noting which wines are most popular, best value, match with particular foods and so on.  You have probably seen these techniques applied on point of sale, like "staff picks" or "popular seller", and these work because they use the behavioural economics principle of herding - we go where others go.  If you know other people like the wine, then there is less chance of making a poor choice.  Use of a rating system can also help to frame the decision, so a rating system for value or taste can help influence customer purchases.

Behavioural Economics can influence both genders
Whilst I do enjoy little snippets on gender differences, more important to your business is how you can influence the behaviour demonstrated by the sexes.  Male or female, your customer can be greatly influenced by strategies to get them in the door, and then again whilst in store so it may be worth you considering what Behavioural Economics can offer at each decision point.  Until next time, happy boozing.

(*Note, whilst the article on the research pointed to some gender differences which I have used in this post, there are doubtless many exceptions and qualifiers that you would need to consider before applying carte blanche to your business. Start with accessing the source research through Roy Morgan if you are interested.)

Image from http://www.bargaineering.com/images/in_posts/wine-shop-aisle.jpg