How Are Behavioral Biases Influencing Consumer Behavior?

• Behavioral biases play a key role in our purchasing decisions
• Understanding how the biases are affecting us is crucial
• Understanding the real drivers behind our purchases is a skill
• Stemming rational behavior

Understanding Behavioral Economics

It is vital to comprehend behavioral economics in order to gain a thorough understanding of consumer behavior. A subfield of economics called “behavioral economics” studies how cognitive biases and human psychology affect how we make decisions. Finding out about different pricing strategies, innovative advertising tactics, and consumer reactions to certain goods and services can be greatly aided by studying behavioral economics. 

Understanding the biases can help an analyst determine the prices of the products and tailor the marketing needed to target the right customers.

There are basically two types of biases.  First is Cognitive Biases. Cognitive Biases are the biases that stem from faulty cognitive reasoning. The best part about cognitive biases is that it can be corrected or eliminated through better information. The other is Emotional Biases. Emotional biases are the biases where our emotions are in charge. Unlike Cognitive Biases, emotional Biases are difficult to correct because they originate from impulse or intuition rather than rational calculation.

Let’s dive deeper into those biases and do the analyses.

Cognitive Biases That Affect Your Decision-Making

Let’s start by discussing cognitive biases.

• Anchoring Bias: This bias occurs when consumers use the first piece of information to inform their subsequent decisions. As an illustration, let’s say a product initially costs $200. However, the price increased to 140 after a year. People will utilize 200 as the anchoring price when valuing the merchandise. This is how businesses provide discounts by using this bias.
• Confirmation Bias: This is the propensity for people to place a higher importance on information that supports their preexisting ideas than they do on information that does the opposite.   For Example: Loyal customers prefer to read the positive reviews only and conveniently ignore all the negative reviews. This is how the brands use this bias to connect with people emotionally and solidify their brand reputation.

•  Framing Bias:  This bias is related to the processing of information. Under this bias, a person answers differently based on how the question was framed or how the information was presented. For example: It hinders decision-making when companies highlight the positive information at the front with big fonts and include all the drawbacks at the back with small fonts.
• Mental Accounting Biases: It is a bias where people create multiple categories and use those categories to influence their spending. People usually have a defined set of money for each category like necessities, entertainment, clothing, etc. For Example, People usually put aside some money for holidays. Firms use this bias and give discounts to customers so that they spend more.

Emotional Biases That Affect Your Decision-Making

Let’s begin with understanding Emotional biases.

• Loss Aversion Bias: People have a strong tendency to accept benefits and aggressively resist losses. For instance: Businesses leverage these biases to sway customers’ decisions by offering them discounts. When this happens, customers feel sad about losing out on the sale, and in a way they overspend.
• Overconfidence Bias:  Under this bias, consumers have faith that they are completely capable of making decisions and know their impacts. For example: Firms have a tendency to advertise their products. When consumers see that advertisement, they think all the information is disclosed. They think with that information they can make decisions and they can easily predict the outcomes too. But, in reality, they do not have all the information to predict the outcome.
• Self-Control Bias: Under this bias, consumers usually have a tendency to prefer short-term goals over long-term goals. They are unable to decide on what should be their priority. For example: People are saving for quite some time to buy a product. But, then they see some advertisements regarding some different products. In that time, they will forego their long-term goals and get affected to pursue short-term goals.
• Status Quo Bias: Under this bias, consumers are satisfied. They do not want to change. For example: Some consumers prefer one product over another. No matter how much the price will rise, they become unwilling to switch.
• Endowment Bias: It is a bias under which consumers tend to value more the products that they own. For example: When a consumer is seeing certain product on billboards, they will immediately want to buy it. This bias says that consumers will value the product more when they buy it, even when they don’t need it.

Behavioral biases can affect most of our purchasing decisions. It is important to recognize them. Making a detailed analysis can help us understand our behavior. Leveraging technology and making rational decisions can assist us in making an informed decision.