The psychology of selling


PSYCHOLOGY:CLASSICAL ECONOMISTS think of the average consumer as an inherently rational being who weighs up all the options in a calculating manner and then comes to a well thought-out decision.

This rational consumer would never buy travel insurance they didn’t need when booking a flight; they would never stay with a utility provider despite cheaper options; and they certainly wouldn’t drunkenly fire up the internet at four in the morning with a credit card in hand, just because someone at the pub reminded them of the existence of Swedish rockers, Roxette.

Over the past couple of decades behavioural economics has begun examining the underlying psychology of our financial decisions, and is beginning to amass an impressive amount of data about how real people operate, rather than idealised ones.

“We’re starting to understand a lot more about people’s behaviour,” says Pete Lunn, a behavioural economist with the ESRI and author of Basic Instincts.

“We’re beginning to see that it’s not the way we long assumed it was, particularly not the way professional economists assumed it was.” This has implications for how politicians and economists regulate and model future behaviour, but also for how we manage our own consumption. Some of the insights coming from behavioural economics have been known intuitively by marketeers and advertisers for decades.

We like to follow the crowd, we favour familiarity (and so tend to prefer well-known but inferior brands over superior newcomers), we tend to go with default settings rather than making individual changes and we instinctively put all our eggs in one basket (hence the property bubble). However, even the marketeers underestimated just quite how irrational we actually were. Pete Lunn is filled with examples.

“If you offer people a cash discount for paying in cash instead of plastic, a certain proportion of people will pay cash and get the discount,” he says.

“However, if you change it so that it’s exactly the same situation but you call it a ‘credit card surcharge’ suddenly the proportion of people who do it will radically alter. Very few people will be willing to pay the surcharge and they will put in the effort and will pay in cash instead. But it’s basically the same decision.”

Lunn gives another example: “If you set up two products in a range – product A and product B – and A is cheaper than B, you usually find most people are buying the cheaper product but a small number are buying the more expensive product. It’s maybe a 70/30 split. However, if you introduce product C – a more expensive product again – suddenly more people will buy product B over A. Instead of 70/30 for A over B, it could be 70/30 for B over A. It’s the same decision but it’s framed differently.”

Lunn calls these subtle differences “framing effects” and he is aware of 70 to 80 common such framing effects.

When the framing effects change, the same scenario looks, to the average consumer, like a very different decision. What these highlight, is that the typical consumer doesn’t focus in on the details of individual choices but tend to use general rules of thumb when making our decisions. These rules of thumb the experts call “heuristics”.

“Following these heuristics is not an entirely irrational thing to do,” explains Liam Delaney, an economist from the Geary Institute in UCD, who is currently spending a year at the Woodrow Wilson School in Princeton, the Mecca for behavioural economists.

“A German psychologist called Gerd Gigarenzer called them ‘simple heuristics that make us smart’. They’re basically cultural rules we use to navigate complexity and which have built up over generations. They make sense in that without them, you could spend every minute of every single day trying to calculate everything. We wouldn’t have got out of the evolutionary environment without quick ways of making decisions and heuristics work very well in many contexts. It’s just that there are instances in modern life when they don’t serve us so well.”

Delaney and Lunn both argue that it’s almost impossible to fight your programming on every little purchase, but that it’s very important to do so with the big life decisions.

“I still catch myself making the kinds of dumb decisions I read about every day,” says Lunn. “But people use the same decision making processes for the big stuff, and that’s where it’s more worrying. Does it matter if people are losing a few cent on beans every week? Probably not. Does it matter if they’re taking up the wrong pension, or taking up no pension at all? Yes, it does. Does it matter if they’re buying overpriced houses because everyone else is doing it? Yes it does.”

Indeed, it’s on the big ticket issues that behavioural economics will soon start influencing public policy. Both Barack Obama and David Cameron are listening closely to the behaviouralists, and books like Nudgeby Richard Thaler and adviser to the Obama administration, Cass Sunstein, suggest that government has a role in shaping the “decision making environment” particularly around issues like mortgages, health insurance and pensions. In the UK, for example, the government is using behavioural insights to fight the pension gap. Psychological experiments show that people favour default options, and so in 2012 workers will be automatically opted in to company pension schemes. They will then have the option to opt-out, but most, the behaviouralists argue, will choose the default.

In the US, behavioural economists helped devise Obama’s stimulus plan – supposedly framing it in such a way that encouraged spending (aka stimulus) rather than saving.

For some this is worrying. And if you’re one of those people worried by the prospect of being gently nudged and second-guessed by the government (advocates of this type of governance call it “libertarian paternalism”), then you might be even more worried by the fact that marketing companies are increasingly learning about this stuff as well.

“Some feel it will be the rejuvenation of the marketing industry,” says Lunn. “Others find this terrifying”.

And the insights are going deeper. Richard Roche, a neuroscientist based in NUI Maynooth has for the past few years been working with behavioural psychologists such as Liam Delaney to uncover the neural processes underlying economic decisions.

“Neuroeconomics is a relatively new thing,” says Roche. “We’re looking at what’s happening in the brain when people make financial choices under different circumstances. It can help prove or disprove what economists think is happening.” Although it’s a new field, Roche ultimately feels that what we learn from both behavioural economics and neuroeconomics could help us become wiser shoppers. “I think in allowing people become more aware of how they make decisions it will help them make better decisions,” he says, but he also tells me about a new area called neuro-marketing, “where they basically put people in scanners, present them with brand names and look at their reactions”.

Taken as a whole, behavioural economics and neuroeconomics are fascinating new fields that will help us to better understand ourselves and our financial decisions. They will also, of course, help others to better manipulate us.

Thinking traps that affect our decisions: 


People are more motivated by fear of a loss than hope of a gain, hence are more likely to seek to avoid a penalty than seek to gain bonus, even if both amount to the same thing.


For example, people feel an illusion of control when they’re allowed pick their own lottery numbers, even though they are no more likely to win by being given this choice.


The tendency to spend more money when it’s denominated in small amounts (like coins) as opposed to large amounts (like large notes).


Once a specific anchor is implanted, other important details get overlooked in decision making. So, if buying a car, people might get hung up on the year of the car, or even the colour of the car, rather than other more pertinant issues, like well it’s been maintained.


There’s a tendency to think of currency as having a real value unlinked to its purchasing power. So, in experiments people think of a 2% pay cut as unfair, but a 2% rise in income where there’s been 4% inflation, as fair.


Basically reverse psychology. Marketing professionals often plaster games packaging with warning labels and age prohibitions knowing this will make some more eager to buy them.


People will overlook problems with a product to justify their decision in purchasing it in the first place.


The tendency to do or believe something because many others are doing or believing the same (anyone who fell foul of the property bubble will be familiar with this).