Behavioral Economics: Cognitive and Behavioral Sciences for Marketing

The development of cognitive and behavioral disciplines since the nineties has led to a growing and natural convergence towards the world of economics, thus marking the birth of what we define as “behavioral economics“. This interdisciplinary area of economics and cognitive psychology brings to light the importance of the subjective and irrational factor in the economic decisions of individuals and populations, previously ignored by classical economic theories.

Behavioral economics thus integrates insights from psychology and behavioral sciences to study how psychological, cognitive, emotional, cultural, and social factors influence individuals’ economic decisions and the consequences of these decisions on the market and economic policy. Unlike traditional economics, which is based on the assumption that individuals are rational and act in a way that maximizes utility, behavioral economics explores deviations from perfect rationality and how they affect economics.

Behavioral and cognitive sciences

We have seen how behavioral economics arises from the convergence of the field of economic sciences with that of behavioral and cognitive sciences

Behavioral sciences focus on the study of human behavior, analyzing how individuals act under certain circumstances and what factors influence those behaviors, exploring the causes and consequences of such behaviors in the social and physical environment. Such disciplines include psychology (especially social psychology and experimental psychology), anthropology, and sociology.

Cognitive sciences, which study the way the human mind operates, functions and behaves, are often connected, overlapped and sometimes included with behavioral sciences and embrace cognitive psychology, linguistics, philosophy of mind, cognitive neuroscience.

In the hexagram, the scientific connection between behavioral and cognitive sciences, deeply interconnected as the mental processes studied by cognitive sciences are fundamental to understanding the behaviors examined by behavioral sciences.

Fundamentals of Behavioral Economics

Behavioral economics starts from the consideration that human beings in their purchasing decisions are subject to a series of influences capable of guiding the purchase intention in an unconscious way, including:

1. Bounded Rationality: Individuals tend to make decisions based on a limited understanding of the available information, often using heuristics that can lead to suboptimal choices.
2. Inconsistent preferences: Individuals’ preferences can vary based on context, the way options are presented (framing), and other psychological factors, leading to decisions that may seem irrational or inconsistent.
3. Heuristics and Bias: Individuals often rely on cognitive shortcuts (heuristics) that can lead to systematic errors (bias) in judgment and decision-making. Behavioral economics has therefore highlighted the importance of adapting messages and offers to the specific motivations, biases and behaviors of different consumer segments.
4. Limited self-control: People often struggle to resist immediate temptations in favor of greater future benefits, which can lead to decisions that contradict their long-term goals.
5. Emotional drivers: Purchasing decisions in terms of value and frequency are profoundly influenced by emotional drivers capable of making the customer connected to the brand at a deep level of association and identification.

Recognizing these factors and knowing their influence has allowed Marketing to implement methodologies that take advantage of them, including decoy pricing, nudge marketing, and the halo effect.

Decoy pricing: redefined pricing and the inclusion of baits

Pricing techniques have been greatly influenced by behavioral economics, one above all, for example, the birth of the so-called “decoy pricing” or the anchoring effect. In fact, the presentation of prices can influence the perception of value and purchasing decisions, the appropriate use of a price scale in synergy with the offer of available options can decisively guide the perception of the value of the product or service offered. The basic idea is to introduce an option (the “decoy” or bait) that is not intended to be sold, but rather to make another option more attractive in the eyes of the consumer.

Nudge marketing: Marketing rethought on gentle nudges

Nudges, or “gentle nudges,” have become a key tool in marketing to subtly influence consumer behavior without limiting options or freedom of choice. Nudge Marketing is based on small suggestions or changes to the context that can guide consumers towards decisions that companies want to promote. The term was born in 2008 with the book “Nudge: improving Decisions about Health, Wealth, and Happiness.” in which the economist Richard H. Thaler , Nobel Prize winner in Economics, and Prof. Cass R. Sunstein of Harvard Law School explore how the use of such gentle nudges has the power to profoundly influence behavior.

Marketing communications redesigned on mental heuristics and cognitive biases

We have seen how humans use mental heuristics and cognitive biases to make decisions quickly and efficiently. By instrumentalizing the heuristic of availability, availability and social proof , it is possible to guide the customer process in the four AIDA phases through which the consumer moves from brand awareness to purchase according to the model theorized by Elias Lewis: Awareness, Interest, Desire, Action. For example, showing how much other consumers love a product can trigger social proof heuristics. Providing limited options can trigger availability heuristics. Presenting information in a way that is easy to process can trigger the ease heuristic.

The theory of perspective

Focusing a message on avoiding a loss rather than obtaining an equivalent gain and offering guarantees or return policies that reduce the perception of risk motivates the client more according to the theory of perspective formulated by Daniel Kahneman and Amos Tversky in 1979. According to this theory, people value losses more intensely than equivalent gains, and are generally risk-averse when it comes to gains, but risk-averse in situations of potential loss.

The halo effect

It refers to a cognitive phenomenon whereby the perception of a positive (or negative) feature of a product or brand affects the perception of its other features or associated products by influencing the process of brand perception and purchase decision formulation. In fact, if a consumer has a strong positive impression of a product from a brand, it is likely that he will transfer these positive feelings to other products of the same brand. The halo effect also explains why celebrities or influencers and association with causes and events are effective in improving overall brand perception.

Operant conditioning

Behaviors can be shaped or modified based on the consequences that follow those behaviors and is used to encourage consumers to perform certain actions through the use of positive reinforcement, negative reinforcement, and punishment.

1. Positive reinforcement: The introduction of a positive outcome as a result of a behavior, for example, if a customer receives a coupon or reward after making a purchase, they are more likely to repeat the purchase in the future.
2. Negative reinforcement: An action to remove a negative outcome, such as offering free shipping to overcome the barrier of additional costs, incentivizing customers to complete their purchase.
3. Punishments: A negative outcome as a result of negative behavior, such as a loyalty program that expires if the customer doesn’t make a purchase within a certain period.
4. Termination: This happens when a behavior that was reinforced in the past no longer receives reinforcement, for example if a customer is used to receiving frequent discounts and these cease.