People do not always make rational decisions. We are all subject to behavioural biases, whether we like it or not. However, it could be argued that human behaviour is ‘predictably irrational’, which brings with it great opportunities for those who want to improve their decision-making procedures.
Behavioural science and the potential power it holds can provide useful insight for business. If you understand why people think the way they do, and how they make decisions, you can influence their behaviour. The objective of behavioural science is to create better outcomes for us professionally and personally as well as for society at large. Edward Huizenga, Endowed Professor at UMIO | Maastricht University School of Business & Economics recently hosted an engaging, interactive Tea & Talent session on this topic for members of UMIO Prime.
The event was organised by UMIO in partnership with the UM Behavioural Insights Centre (UM-BIC) and the Behavioural Insights Network Netherlands (BIN-NL). Huizenga introduced participants to the essentials of behavioural science and provided examples of a recent survey on predictably irrational behaviour.
How’s my driving?
Participants of the survey were asked a series of questions about how they think they would behave in various situations. One question was about driving skills. Participants were asked to rate their driving skills compared to other drivers. The majority (61%) of participants in the survey rated their driving skills slightly above average, above average or excellent. The participants’ response to the same question during the recent interactive session reflected a similar rating spread of above average skill. These results are an example of our own behavioural biases, suggesting that we have an overconfidence in our ability when it comes to our driving skills.
So, why is this significant, and how does this impact our decision-making? Huizenga explained that being overconfident impacts our behaviour in terms of overestimation. Having an over-optimistic view about our own abilities or the chances of success, for example, can lead to starting risky projects. It also causes a miscalibration, so we may be more inclined to accept higher risk situations or outcomes. The idea that we are better than average also results in us underestimating the strength of others.
To bring this back to our driving skills, the global road safety data reflects a different picture. Every day, more than 3,500 people are killed on the world’s roads. So, there seems to be a mismatch between the perception we have of our skills and reality. Applying aspects of behavioural science to better understand this perception gap can help to improve the way in which we organise campaigns around driving behaviour for example, and thus potentially improve the outcome by reducing the number of deaths on the roads.
Prospect theory and loss aversion
COVID-19 has affected people’s behaviour in ways we could barely have imagined two years ago. Uncertainty and our relationship with a world and future that is unpredictable and uncertain, has become a key characteristic of this COVID era. The ways in which people react to uncertainty and setbacks illustrates another key aspect of behavioural science: “Prospect Theory”. The theory argues that the pain of loss is greater than the pleasure of gain. People are loss-averse; they dislike losses more than they like the equivalent gain or win. In situations of uncertainty, this loss aversion can have a powerful effect.
In a consumer survey, in response to a question about whether COVID-19 disrupted spending behaviour, only 19% said that their income had diminished due to corona, 38% said that it had possibly been affected, whereas 44% said their income had not diminished. However, in response to the statement “I am going to postpone my purchases” (i.e. Will their spending behaviour change), the responses indicate a different outcome: 23% say they would postpone their purchases, 50% say they might, and 26% say they would not postpone their purchases. So, there is an overreaction or increase of between 5% and 18% in relation to people’s behaviours around spending, even though most people had said that their income hadn’t been affected by COVID. The uncertainty around COVID-19 is one example of how people do not make decisions by only calculating costs and needs, they also have personal beliefs, biases and habits that cause them to make irrational decisions.
Strategy and behavioural science
Our behavioural biases impact our decision making. We might not always say what we think and we might not always do what we say. Theories of strategy, innovation and conventional economics have previously worked on the assumption that people are rational beings. Yet, when it comes to how we make decisions, and what influences our behaviour, we do not always seem to be as rational as we might have once thought. So why is this significant? And what can we do about it?
We know that companies are investing in technology and asking consumers what they think about new products and services. This is a vital part of any company’s strategy. They invest heavily in exploring and delivering products and services that consumers have said they like, intend to buy and use. Yet, once on the market, only 20% prove to be a success and 80% of the time, they fail to meet expectations. Why is that? What goes wrong? Is it that consumers have collectively been lying to us? Just asking consumers what they want is one thing, but, unfortunately, consumers do not always think and decide in the same way. Perhaps we have simply been asking the wrong questions to consumers.
By mixing strategy and innovation with breakthrough knowledge of behavioural science, we will learn how to achieve better success rates. This will provide a fresh perspective on understanding and transforming people’s behaviour, both consumers and employees. This combination offers us a powerful framework for better understanding and influencing people’s actions. When companies actively pursue the benefits of behavioural science, in relation to their employees, consumers, leadership teams and other actors, the payoff can be huge.
