Behavioral economics is the study of how psychological, social, and cognitive factors affect our economic decisions. In contrast to the assumption accepted by classical economics that economic agents behave in an exclusively rational way, behavioral economicsassumes that individuals, at times, move away from that supposed rationality.

So, if people do not always behave under the assumption of the rational,
What influences that decision-making? And, on the other hand, can this supposed deviation from the “logical way” of acting be measured?

What aspects of behavior influence our decisions?

Apart from the rational, the cost-benefit analysis, there are other causes that explain our preferences and, therefore, the choices. And many of them we are not fully aware of. Knowing what incentives or motivations can influence when purchasing a product or service, apart from the price, can help its design or define the way to communicate it.

Here are some of those non-rational causes that affect our decisions:

1. Incentives and motivations:

People usually react to extrinsic incentives, that is, to rewards for performing some action. For example, we work for a salary, we increase the demand for a good if its price falls, or we take a course if it helps us find work. But this is not always the case, sometimes we work to help a family member or a friend, we buy more expensive products for “prestige” or we study more because knowledge makes us feel good. They are the intrinsic motivations, or actions we perform for the mere satisfaction of doing them without the need for any external incentive.

2. Social influences

These influences can be informative, we look at what others do to act accordingly, or normative, we make decisions because of the pressure we feel when we are part of the group.

3. Biases:

In our day-to-day lives, most of the time we make decisions by simplifying the process of action. Often, it works well, but other times biases are created, moving us away from rationality. Some of the most common biases are:

• Availability bias:

It consists of using easily accessible information. This information may be emotionally recent in content and distorts our perception of risk. An example would be to assess the quality of a product or service, according to the specific experience that a friend or family member has had with it.

• Representativeness bias:

A situation is judged by its resemblance to others that we already know. For example, most people tend to think that we are middle class, when in fact many of us may be in the highest deciles of the income distribution, or in the lowest ones.

• Anchoring bias:

A decision is made based on a benchmark. A case that reflects this type of bias is usually observed is that of prices close to a round one: if a product is priced at 99.99 it creates the anchor at 99 instead of 100, which makes the product appear cheaper.

4. Risk taking:

• One aspect to take into account in the explanation of how our decision-making is is risk. In general, people are adverse to it, although not in all cases equally. The context and our personality affect, but also the way we obtain profits: we do not respond in the same way if we obtain a product with effort, as if it is given to us as a gift; We value it more in the first case, just as we are more likely to spend an amount of money if it is a prize than if it is our salary.
• Another example that is current, and that has to do with our position on risk, is that we prefer to leave our savings unreturned, knowing that they are losing value due to inflation, rather than take the risk of investing in other products that could give more profitability (variable subtraction).

5. Time and planning:

Most of our decisions involve time planning. In the short term we act very impatiently (present bias), however, when it is a decision that will take place over a long period of time, we prefer to postpone it. For example, if decisions about quitting smoking, going on a diet, going to the gym or studying English are greatly influenced by this bias: “tomorrow I’ll start…”.

So far we have seen that our decisions depend on many aspects, apart from those dictated by reason. But can we anticipate them? It would be of little use to us to define behavioral economics if we cannot measure the causes of our decisions.

Include behavioral economics in our research

So far, most studies are based on cognitive aspects, that is, on “what I think I should do”. That is why consumers, citizens, potential customers are asked what they would do in a specific situation. But on many occasions, “what I think I should do” is not what “I’m finally going to do”.

A classic example is the decision to quit smoking. A good proportion of smokers will answer that they should quit smoking, and that they are willing to do so, because it is not a good habit for health; on the other hand, it will be very difficult for them to make the decision and carry it out. Why?, because it is affected by many other variables that are not taken into account in studies such as personal emotions, bias of the present (procrastination), perception of self-control (we do not see ourselves able to do it), etc.

The same happens with the intention to buy a product. Let’s imagine that we ask: Would you buy a product produced under criteria of respect for the environment? Most of us would answer yes, if we asked it this way. But when we go to the supermarket, it is very likely that we would make another decision if there are other similar products that are cheaper, even if they are produced without taking into account the environmental cost.

Sometimes the opposite happens: even though a product is more expensive than a similar one, consumers buy it, due to issues related to prestige, imitation, social pressures, etc. On the other hand, if we were to ask in a questionnaire about which attributes influence the purchase of a certain product, imitation or fashion would be less important and price more.

We, taking into account the bases of behavioral economics, seek to understand citizens in a deeper way, knowing the drivers that influence decision-making, so that products and services can be defined according to their needs.

For all these reasons, we evolved from studies such as the following, in which intentions are defined based on cognitive beliefs (what is declared):

Others, based on the Theory of Planned Action, in which we investigate how emotions, social pressure, or the cost of taking a solution affect them.

How do we introduce behavioral economics into our work system?

Incorporating different types of variables into our methodologies and analyses, in order to see those that really influence behavior:

• Beliefs: the product is of quality.
• Emotions: Does buying this product make me feel good?
• Social influence: Everyone in my family has this product. My friends have bought one just like it.
• Perception of control: I can’t afford this product. I can’t find it in my usual stores.

In other words, to analyse decision-making, whether it is the predisposition to a purchase or social behaviour, we take into account the following types of variables:

A.- Demographic variables:

They are the ones that are commonly used: sex, age, educational level, etc. These variables help to explain part of people’s behavior, but not in its entirety, being, on their own, less and less relevant when it comes to explaining social behavior.

B.- Psychological and social variables:

It is important to describe how people live, how they think. Communication technologies help to blur the traditional separation between social groups based on sex or age, and to create new groups based on interests, lifestyles or life conceptions. We ask people for variables that help us measure the construct we are interested in.

• Attitudes: towards innovation, environment, food, etc.
• Lifestyles: use of time, type of leisure, social networks used
• Values: solidarity, generosity, care for the environment, etc.
• Aspirations: how they see themselves in the future, plans for the coming months, etc.

C.- Behavior:

It is also important to measure behavior in the face of a specific stimulus. In this case, the best approach is the experimental one; It does not take for granted that people behave in a certain way, but rather analyzes how they react to different situations, in different environments, and under different influences. Thus, we use A/B tests: we subject different samples to different stimuli, and measuring the reaction of each of them.

Therefore, at MADISON INSIGHT AND ANALYTICS we go a step further, and expand the methodologies of our studies and research to adapt them to this new approach, taking into account the diversity of variables that influence human behavior.

• We introduce questions in the questionnaires that allow us to define profiles and archetypes based on lifestyles, attitudes, emotions, etc.
• We used profiles based on lifestyles and behaviors when selecting the sample, both in quantitative and qualitative studies.
• We propose dynamics in our qualitative methodologies, which make it easier for us to relate psychological or social profiles and ways of proceeding.
• We experiment, measuring behaviors in the face of different types of stimuli.