Heuristics and biases

People can do amazing things to find their way through the mazes of offers and information every day. Yet they are not supercomputers. Their information processing is limited and therefore deviates from complete rationality ("bounded rationality"). These deviations are often referred to as "cognitive biases" (distortions in thinking). The source of such biases can be heuristics (rules of thumb). Some of the most influential biases include the following.

  • Status quo bias: People often do not deviate from defaults and maintain the status quo because deviations are laborious or because defaults are perceived as guidelines. At the same time, the status quo is established randomly in many areas or evolves over time. However, even in these cases, it influences consumer behavior and decisions in many areas of life—for example, with default settings for retirement provisions, with the electricity provider or the configuration of browser settings.

  • Loss aversion: If study subjects own a coffee mug, they charge a higher price to sell this mug than they would have been willing to pay to buy the same mug. Based on this and similar studies, it is recognized that people have a strong dislike for losses. As a result, differently formulated information can lead to different behavior despite the same content ("framing"). For example, framing can emphasize losses or profits not realized for certain financial decisions. Since, due to loss aversion, losses are considered more serious than profits not realized, loss framing increases the activation of consumers.

  • Social norms: The behavior of others is often used as a guide for how to behave ourselves. If we observe that the majority of our friends go to the polls for elections, it increases the likelihood that we will vote as well. By correctly communicating advantageous social norms, it is therefore possible to promote desired behavior such as energy conservation or healthy nutrition.

  • Self-regulation deficits: Does this sound familiar? A new year's resolution is broken, an appointment forgotten and long overdue retirement planning is postponed again and again. The necessary skills for such tasks are finite and a lack of them can lead to adverse consequences. Strategies such as self-commitments and reminders that counteract self-regulation deficits can mitigate these problems.

  • Preference for the present: Anticipation is supposedly the best form of joy. In reality, people usually prefer consumption in the present. This becomes apparent, for example, with climate change, for which considering the future would be more helpful than the preference for the present. In addition, a decision may vary depending on when it is made. For example, the same amount of money today is valued higher than it will be tomorrow, although its value does not change and should therefore be valued equally. Preferences are hence neither fixed nor stable in all circumstances.

Examples of the successful application of Behavioral Insights can be found here.