Behavioural economics studies how psychological, social, cognitive, and emotional factors influence economic decisions. As humans, our "primitive" brain can lead to irrational behaviors that favor instant gratification over long-term gain. Understanding these human biases is important for decision-making that achieves long-term sustainability. Some key biases discussed include anchoring bias, loss aversion, bandwagon effect, and instant gratification bias. Overcoming biases requires acting counter-intuitively and recognizing how biases can negatively impact organizations, economies, and the environment.

1. BEHAVIOURAL ECONOMICS ...
IN A NUTSHELL

2. WHAT IS BEHAVIOURAL ECONOMICS?
Behavioural economics studies the effects of
psychological, social, cognitive and emotional factors on
the economic decisions of individuals and institutions, and
the consequences for market prices, returns and resource
allocation.
Definition taken from Wikipedia

3. WHY IS THAT IMPORTANT?
As human beings, our ‘primitive’ brain in the modern world leads to irrational
behaviours and decision-making. Our survival mode of fight & flight
encourages us to take the path of instant gratification over long-term gain. This
irrationality needs to be a consideration when decisions are made for a
better future and for long-term sustainability to be achieved, be that economic,
organisational, societal, financial or individual.
The next slides set out a number of research concepts that can help you to
understand how our human biases affect how we make the decisions we make.

4. BEHAVIOURAL ECONOMICS
The Anchoring Bias
The Bandwagon Effect
Behaviour Change through
Design
The Choice Paradox
The Truth about Dishonesty
The Drachten Traffic Experiment
The Framing Effect
The IKEA Effect
The Instant Gratification Bias
The Isolation Effect
Loss Aversion & Status Quo
Overcoming Fear & Stress
The Risk Aversion Bias
Reciprocity

5. THE ANCHORING BIAS
‘As human beings, we value the first piece of information seen
higher than what follows.’
An example of a simple practical application:
So ... Always prioritise what you want people to remember
and value early on in any communication.

6. THE BANDWAGON EFFECT
‘As more people come to believe in something, we tend to join the crowd because
we prefer to conform and/or derive information from the crowd.’
Whether a positive or negative activity,
most people will follow the momentum of
a crowd. One business model which shows
the impact of the Bandwagon Effect on
innovation and the adoption of
technologies in the workplace is Roger’s
Innovation Adoption Curve.
Image source -Wikipedia

7. BEHAVIOUR CHANGE THROUGH DESIGN
In Belgium and the Netherlands they have put large butterfly nets
along the cycle paths to encourage people to throw their litter in the right
place rather than littering just anywhere.
This design is based on a marketing
theory called 'Nudge' which uses people's
natural/instinctive behaviours as the
starting point of any design.
Image source: http://deludoloog.nl/?page_id=83

8. THE CHOICE PARADOX
‘Too many choices will lead to indecision and lower sales.’
Yet choice is important in achieving purpose and encouraging ownership,
personal responsibility and, believe it or not, enhancing quality of life and
extending life expectancy.
An American field experiment was conducted to assess the effects of
enhanced personal responsibility and choice on a group of nursing home
residents. The outcome showed that residents who were given responsibility and
choice over relatively small decisions such as how to personalise their rooms
and what to have for dinner, among other choices, had improved well-being
and lived on average longer than residents living in a nursing home where all
the choices were taking by the staff team.

9. THE TRUTH ABOUT DISHONESTY
Are you more honest than a banker? Under what circumstances would you lie, or
cheat, and what effect does your deception have on society at large? Dan Ariely,
one of the world's leading voices on human motivation and behaviour, explores the
truth about mass dishonesty by ‘good’ people and its economic impact. Click to
image to watch ‘The Truth about Dishonesty’ on YouTube.

10. THE DRACHTEN TRAFFIC EXPERIMENT
In the Netherlands, transport planner Hans Monderman has pioneered a new
method which involves removing traffic signs, lights and in some cases, road
markings.
By doing so, traffic flow was restored and
people started to show more courteous
behaviour to other road users and take
more personal responsibility for the
appropriateness of their speed.
Noteworthy Conclusion:
Less rules, more autonomy with personal
responsibility!
Image source: www.treehugger.com

11. THE FRAMING EFFECT
Instigating RISK Avoidance
When people are presented with a
scenario of gain they tend to avoid
risk.
Instigating Risk Awareness
However when presented with a
scenario of loss, they start seeking out
more risky, yet more resourceful
activities.
‘Innovation requires risk taking. Taking risks requires informed, fact-
based decision-making.’
Source Unknown

12. THE IKEA EFFECT
‘People place disproportionate value on things they themselves have
created, yet undervalue items created by others.’
In organisations many departments overvalue the strategies, plans
and policies they create and undervalue the strategies, plans and
policies others create, which often results in competitive behaviours
between departments. Competitive behaviours can really hold back
organisational transformation.
We have the power to think differently and create different
behaviours, but we must acknowledge our own biases first before we
can move from competitive to collaborative ways of working!

13. THE INSTANT GRATIFICATION BIAS
‘People accept smaller payoffs in the here-and-now over
larger pay offs later on.’
This is particularly relevant in relation to people personal finances, where
many people invite loans and credit cards, without planning how to pay
them off. This financial bias also exists within organisations and can stop
organisations from becoming financially viable.
This is also relevant in relation to people’s contributions to future
sustainability of the economy and planet, where long-term pay-offs may
come too late in people’s own life times and future generation inherit a
world less well off. A bit dramatic, but unfortunately these issues are not
immune to our ‘instant gratification’ bias.

14. THE ISOLATION EFFECT
‘People value items and/or criteria that stand out higher even
though different does not necessarily mean better.’
This can be observed in many aspects across organisations, not least in recruitment
processes. This is however highly contextual and can differ from person to person,
depending on the individual filters.
For example, an interviewer who values qualifications will favour the person who stands
out by having a higher degree of education, while the interviewer who is themselves
‘self-made’, will seek out entrepreneurial criteria that stand out in the interviewee.
Interviewers therefore have a high responsibility for communicating the right culture and
expectations, and ensuring biases do not reduce the diversity any team needs. It is also
crucial to recognise that different roles may require different approaches in getting the
right person.

15. LOSS AVERSION & STATUS QUO
Loss aversion
People prefer avoiding losses to
acquiring gains.
Status quo
People like things to stay relatively
the same.

16. OVERCOMING FEAR & STRESS
If you want to overcome your fears it is useful to understand your own ‘fight
& flight’ responses to your environment. At times of high pressure, most
human beings tend to express ‘fight’ by trying to take more control, and
when the brain becomes too overwhelmed human beings ‘switch off’. These
are important survival mechanisms that have keep us from ‘burning out’.
The trick is to act ‘counter-intuitively’. Human beings have the ability to
reflect and create different outcomes. Fear and stress often lead us to more
ill-health. The most resilient people know when to ‘let go’ of the stresses
and worries. It is understanding that ‘less is more’ in a world where ‘more for
less’ is demanded but not necessarily needed.
Relevant article: Train Your Brain to Overcome Fear

17. THE RISK AVERSION BIAS
BETTER KNOWN AS THE ELLSBERG PARADOX
‘We exhibit strong risk aversion, meaning we have an inherent preference for the
known over the unknown.’
This means that at times of Volatility, Uncertainty, Complexity and Ambiguity
(VUCA), people try to create their own safety and stability, guided by the
brain’s fight & flight responses, and become more controlling of their own
environments. This leads to high levels of change aversion, clinging on the status
quo and other irrational behaviours.
As such, organisations who wish to survive VUCA need to work with the few
people who thrive on ambiguity & move towards uncertainty. These individuals
are often referred to as ‘mavericks’, ‘risk takers’, ‘rule breakers’ or ‘disruptors’
as they challenge the status quo. This often creates increased distrust, tensions
and conflict at a time when collaboration is what is needed.

18. RECIPROCITY
‘People tend to respond friendly and cooperatively to others who
act friendly and cooperative, while people who approach others
with frustration will find their approach mirrored back at them.’
Or in the words of Mahatma Gandhi:

19. IF YOU WANT TO LEARN MORE ...
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