One of the best skills you can develop in the game of business is persuasion a.k.a (the understanding of behavioral science).

The understanding that humans are not purely rational, situation calculating beings is quickly becoming the norm.

Governments around the world are adapting this approach into their policies. However, the world of business is actually lagging (badly) behind.

We like to believe that every human decision is based on a simple rational weighing up the pros and cons of a particular action.

Let’s take an example - why people commit crime - to show the flaws of this approach.

The University of Chicago economist, Gary Becker, created the Simple Model of Rational Crime (SMORC) to explain why crime happens.

It states that, in any given situation, a potential criminal weighs up the benefits of the crime (financial gain) versus the potential costs (likelihood of going to jail).

The problem with SMORC is that it assumes humans to be completely rational beings who only act based on self interest.

If this were true, all of us would be committing certain low-risk crimes on a daily basis.

Dan Ariely, James B. Duke Professor of Psychology and Behavioral Economics at Duke University writes:

“We wouldn’t make decisions based on emotions or trust, so we would most likely lock our wallets in a drawer whenever we stepped out of our house…”

Two systems of thinking

In his book, Thinking, Fast and Slow, Daniel Kahneman popularized the term ‘system 1’, or ‘fast’ thinking to explain our instinctive, emotionally driven, less-conscious decision making processes.

He used the term ‘system 2’, or ‘slow’ thinking to describe our rational, analytical, and logical decision making.

It shouldn't surprise you that some estimates indicate that our system 1 thinking accounts for 90-95% of our daily behavior.

How behavioral science changes how we think about business decision-making

By examining the psychological, social, cognitive, and emotional factors that influence decision-making, behavioral science challenges the traditional economic assumption that people always act rationally in their best interests.

Here are some of the key ways in which behavioral science has reshaped business decision-making:

1) Understanding Biases and Heuristics

Humans are lazy (by nature.) We often rely on mental shortcuts, known as heuristics, to quickly make decisions. Although they can be efficient, they also often lead to systematic errors or biases. Examples include:

• Confirmation Bias - The tendency to search for, interpret, or remember information in a way that confirms our preconceptions. This can lead decision-makers to only pay attention to data that supports their existing beliefs, thereby missing out on contrary evidence that might be crucial for a sound decision.

• Loss Aversion - The idea that people feel the pain of a loss more acutely than the pleasure of a similar gain. This can cause companies to be overly conservative, avoiding beneficial risks because they're overly focused on potential downsides.

• Anchoring - People often give disproportionate weight to the first piece of information they receive (the "anchor"). In negotiations or pricing strategies, the first number mentioned can unduly influence the final decision, even if it's arbitrary.

2) Nudging

Imagine you're walking down a path and come to a fork. You're unsure which way to go, but then you notice a slight tilt or inclination to the left side, gently leading you in that direction. This subtle guidance is what businesses use to make millions.

Here's a breakdown of the concept:

• Subtle Guidance - Guide choices by making certain options more salient or easier to choose. Importantly, they respect freedom of choice.

Choice Architecture - Influence decisions by how choices are presented. Even simple changes in the presentation of options can have profound effects on decisions.

Examples in Business:

• Default Options - One of the most powerful nudges. For instance, when enrolling employees in a retirement savings plan, making the default option "enrolled" rather than "not enrolled" can significantly boost participation rates.

• Simplification - Making forms or choices simpler can guide people toward a desired outcome. Complex choices often deter action.

• Social Proof - Showing what others are doing can nudge people to conform. For instance testimonials showing other people are succeeding using your systems or a statistic saying "9 out of 10 guests reuse their towels" can increase the chances of desired action.

3) Non-linear decision processes

You're in a maze. Instead of a straight path leading directly to the exit, there are twists, turns, loops, and unexpected detours.

Each decision you make isn't just based on the immediate path ahead, but on a whirlwind of emotions, past experiences, the influence of others, and even the order in which you encountered choices.

We don't move from Point A to B in a straight line.

Here’s how businesses are using this to their advantage:

Marketing and Advertising:

• Emotion-driven Campaigns: Recognizing that decisions aren't purely logical, marketers can craft campaigns that tap into emotions, memories, and stories. For instance, many successful adverts use narratives that tug at heartstrings or evoke nostalgia rather than just listing product attributes.

Product Design and Pricing:

• Bundling - Bundle products or services together. You will influence perceived value, making your offer more appealing even if customers wouldn't have bought all the items separately.

• Psychological Pricing - Pricing items at $9.99 rather than $10 exploits non-linear thinking. The first price often feels substantially cheaper, even if the difference is only a cent.

Sales Strategies:

• Building Rapport - Sales representatives who understand the non-linear decision-making process know the value of building emotional connections and trust with customers.

• Up-selling and Cross-selling - A grasp on anchoring and framing, salespeople can position additional products or premium versions in a light that makes them more attractive to buyers.

Hope you enjoyed this one and apply these strategies in your business.

Toussaint Gilbert