Behavioral Economics

How free are the decisions we make? In the episode on Behavioral Economics from Realworld, we explore the human capacity to act of our own free will and conclude that we might be less free than we think.

We discover that many of our decisions are unconsciously conditioned. Throughout this article, we will analyze some examples that illustrate how Behavioral Economics influences our choices.

The pillars of Behavioral Economics

Behavioral Economics is a field established by, among others, Daniel Kahneman in the late 20th century. It is a discipline that combines principles of psychology, sociology, and economics to determine, understand, and predict people's financial decisions.

Through extensive research, it has been shown that although we perceive ourselves as rational and conscious beings, most of the time we make decisions on "autopilot," based on previously acquired learnings.

One of the areas of application of Behavioral Economics is design. By understanding how people make decisions in the real world, we can transform our way of designing products and services to influence those decisions.

This not only allows us to deepen our discourse, but also helps us anticipate usage contexts, provide new perspectives, and generate new conversion frameworks in products. Below, we will explain some key concepts of Behavioral Economics and how they apply to design.

One of the fundamental pillars of Behavioral Economics are cognitive biases, which are systematic errors that influence our way of perceiving value. For example, the halo effect bias leads us to seek reference schemes when perceiving value. If a product is new and we are not familiar with it, we may not understand the value being offered. Like when a company launches a new version of its product and uses testimonials from satisfied customers to support its quality and generate consumer trust.

In this case from Growth.Design, some varied examples of cognitive biases applied to the mobile game Mario Kart Tour are shown, including scarcity, urgency, or impulse.

Another key tool is heuristics, which are mental shortcuts that simplify and speed up the decision-making process. One important aspect is recognizing that users do not always act rationally or logically. As users, we are often lazy and seek to minimize cognitive effort when interacting with a product or service. So, as designers, we must reduce barriers and make the experience as easy and efficient as possible.

For example, the loss aversion bias leads us to value losses more intensely than gains. Companies can leverage this bias by offering "last chance" or "limited time" promotions, creating the feeling that if we do not take advantage of the offer, we will be losing something valuable.

I recommend this video on Anchoring, a psychological principle and judgment heuristic that can affect how people perceive value and make decisions:

In addition to cognitive biases and heuristics, "nudges" are cognitive pushes that facilitate decision-making in a certain direction. Too many options can overwhelm users and lead them to inaction or impulsive decisions. Therefore, we must design interfaces that offer clear and well-organized options, facilitating decision-making.

When we make an online purchase and see a message saying "other customers also bought this," we feel influenced to follow that example and add this product to our cart. Needless to say, Amazon are experts at this. ;)

The choice architecture is another important aspect in Behavioral Economics. It refers to the process by which we make decisions and how conscious and unconscious mechanisms influence that process. When designing, we must consider that people do not make decisions based solely on logic and reason, but are also influenced by emotional and subjective factors.

When designing a user interface for online purchases, the final price of a product can be clearly highlighted and detailed information about its features provided, using the ambiguity bias to influence the user's purchase decision.

How to transform our way of designing

Behavioral Economics provides us with a transformative view of how we make decisions. It shows us that, although we consider ourselves rational and conscious beings, most of our choices are influenced by cognitive biases, heuristics, and cognitive nudges.

These principles apply in different fields and sectors and have proven useful for better understanding how people make decisions and how design strategies can be improved.

By using the knowledge of Behavioral Economics, we can design products and services that better align with users' needs and preferences, influencing their decisions positively.