The human brain is an incredibly complex mechanism, and truly understanding it is no easy task. Yet, it remains the favorite organ of marketers. Even getting a glimpse of how consumers think and act can open the door to creating remarkable campaigns and strategies. What makes the brain so fascinating and so challenging is its unpredictability. You can never fully anticipate what might trigger a customer’s reptilian brain, the part responsible for instinctive, emotional reactions.

This is where Behavioral Economics comes into play, a field that explores the intersection of psychology and marketing. Incidentally, it’s one of my all-time favorite disciplines, offering invaluable insights into understanding and influencing consumer behavior.

Theories About Human Brain

There are three fascinating theories that I’ve always found invaluable for understanding the brain’s unpredictability, particularly in consumer behavior. These concepts explore how we think, feel, and act, revealing the deeper mechanisms at play.

The first is the Triune Brain Theory, which describes the brain’s evolution in three layers. At the base is the reptilian brain, responsible for survival instincts and basic behaviors. Above that is the mammalian brain, which governs emotions, memory, and social behavior. Finally, the human brain, or neocortex, handles higher cognitive functions like reasoning and decision-making. But what marketers need to know that is despite the sophistication of the neocortex, consumer decisions are often driven by the reptilian brain.

The second concept comes from Daniel Kahneman’s Thinking Fast & Slow, where he explains the brain’s two systems of operation. System 1 is fast, automatic, and intuitive, handling tasks like recognition and simple decisions. Meanwhile, System 2 is slow, deliberate, and analytical, managing more complex and effortful thinking. In everyday purchases, consumers rely heavily on System 1 because it’s easier, consumes less energy, and aligns with our natural preference for simplicity.

Finally, there’s Sigmund Freud’s Iceberg Theory, which divides the mind into three layers. The conscious mind encompasses our immediate awareness, while the preconscious mind holds memories and thoughts that can surface with effort. Beneath these lies the unconscious mind, filled with hidden desires and emotions that influence behavior without us even realizing it. Much of what drives consumer behavior resides in this unconscious layer.

These three theories offer profound insights into the human brain, helping us understand the instinctive, intuitive, and hidden forces that shape decision-making. They remind us that consumer behavior is often far less rational and far more fascinating than it appears.

Top Marketable Cognitive Biases

As we’ve seen, the factors that control consumers’ minds and influence their decision-making processes don’t come from the conscious parts of the brain. Instead, they arise from deeper layers, operating automatically and often without our awareness. With this in mind, let’s dive into a few cognitive biases that directly and/or indirectly shape our daily purchasing habits.

FOMO

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FOMO stands for “Fear of Missing Out” and it evokes a fear, anxiety or unease that one might experience if they missed out on enjoyable or rewarding experiences. In marketing and advertising, FOMO is leveraged by creating a sense of urgency, scarcity, or exclusivity to encourage people to take action, make purchases, or participate in events to avoid the fear of missing out.

Social media is a great tool to create FOMO not only in consumers’ mind but in our everyday life too. Just imagine you receive an invitation to a friend’s party, but you’re feeling tired and not really in the mood to go out. However, when you start scrolling through your social media feed and see photos and videos of your friends having fun at the party you start feeling a sense of anxiety and worry that you’re missing out on a great time. FOMO sells.

HERD BEHAVIOUR

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Almost everyone is the “victim” of herd behaviour. Because it gives us a sense of belonging, safety and protection from being left out of a group. Nobody desires to be outcasted. If you look around your circle you can easily observe that individuals in a group tend to follow the actions of others, even if those behaviours may not be rational or logical. We do it even more frequently especially when we lack information, have no idea what to do, feel danger or so. It is a safe choice to follow others.

Imagine you are walking down a popular street filled with restaurants as a tourist and you are hungry. You see two restaurants side by side: one restaurant is bustling with a full house and has a long waiting line of people eagerly waiting to be seated, while the other restaurant next to it is empty with only a few customers. Which one would you go in? It is highly probable that you’ll choose the full restaurant assuming that the full restaurant must be better in terms of food and service even though you don’t know the restaurant and have no idea whether it is true or not. This is how we are being influenced by herd behaviour.

ENDOWMENT EFFECT

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The endowment effect is a cognitive bias where people tend to place a higher value on something that they already possess than on something that they don’t own, even if the two items are identical. One classic example of the endowment effect comes from a study by Daniel Kahneman, Jack Knetsch, and Richard Thaler. In the study, participants were given a mug and then given the opportunity to sell it or trade it for an equally valued alternative (pens). The researchers found that participants required approximately twice as much compensation for the mug once they owned it compared to the amount they were willing to pay to acquire the mug.

You surely have heard about the freemium model where a company offers a basic version of a product or service for free to attract users, with the option to upgrade to a premium or paid version for additional features or benefits. Well this is the perfect usage of the endowment effect. Once they own it the price of the upper model will not seem as much as it used to be.

BARNUM EFFECT

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In a nutshell, tell people vague and general but positive things so they will find a way to accept those statements as accurate descriptions of themselves. This effect is named after P.T. Barnum — a 19th-century showman who used this technique to make his horoscopes and other predictions seem more accurate.

Barnum effect is widely used in marketing, where companies use slogans that are vague enough to apply to many people, but still appeal to individuals on a personal level. “You might like this product because it’s perfect for your style”-like generalised messages still convince customers to perceive these recommendations as highly accurate and relevant to their interests, even though they are based on limited data and may not necessarily be unique to them.

DECOY EFFECT

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Imagine you walk into a coffee shop and glance at the menu. You see two options: a small coffee for $3.50 and a large coffee for $6.00. The large coffee seems too expensive, almost double the price of the small one. You start questioning whether it’s worth it, or if you should just get two small coffees instead. The pricing seems to be playing mind games with you.

But then, the coffee shop introduces a third option: a medium coffee for $5.50. Suddenly, the $6.00 for the large coffee doesn’t seem as unreasonable anymore. Why not add 50 cents and get a larger coffee if you are okay to get the medium one because the small is too small? This is what’s known as a “decoy” option and it’s strategically designed to make the large coffee more attractive in comparison.

It’s a subtle but powerful marketing technique that taps into our psychology and influences our choices, ultimately leading to increased sales and revenue for the coffee shop.

FRAMING EFFECT

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In 1970s, Paul Slovic — professor of psychology at the University of Oregon together with Sarah Lichtenstein conducted a very interesting study. Participants were presented with a hypothetical situation where a deadly disease outbreak was expected to kill 600 people. They were then given two options for dealing with the outbreak:

Option 1: A program that would save 200 people.
Option 2: A program with a 33% chance of saving all 600 people and a 66% chance of saving no one.

In this “positive” frame, Option 1 emphasised the number of people saved and as a result, was chosen by the majority of participants as the sure gain of saving 200 people. However, when the same situation was presented in a “negative” frame the majority of participants chose Option 2 — the uncertain option with the possibility of saving all 600 people — just because Option 1 ensures 400 net death.

Option 1: A program that would let 400 people die.
Option 2: A program with a 33% chance that no one would die and a 66% chance that all 600 people would die.

This is called the Framing Effect. The framing effect is a cognitive bias in which the way information is presented, or “framed,” influences people’s decision and perception. By the way, I’d choose the 80% fat-free option.

ZEIGARNIK EFFECT

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The Zeigarnik Effect is a psychological phenomenon that describes the tendency of the human mind to remember incomplete or interrupted tasks or activities more vividly than those that are completed. Why? Because our brain keeps incomplete tasks or unresolved situations at the forefront of our minds and they create a sense of mental tension and discomfort until they are completed or resolved.

One of the major triggers of this effect is Sunk Cost Fallacy — tendency to continue investing in a task or situation because of the resources already invested, even if it may not be the most rational decision.

How to utilise this effect in marketing? Well, set abandoned cart reminders in your website, use progress bars to visually track customers’ progress towards making a purchase, release teasers before the main videos, incorporate gamification elements while crafting new campaigns and many more.

HYPERBOLIC DISCOUNTING

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Did you know that people prefer smaller but immediate rewards to delayed rewards even if the delayed rewards are objectively more valuable? But there is a reason why it is called hyperbolic. Unlike the exponential discounting — which has a constant discount rate regardless of time factor — a hyperbolic discount has a higher discount rate in the near future and lower discount rate in the distant future.

Let’s imagine I offer you two options: $100 now or $200 in one year. Even if the present value of $200 in one year is still much higher than $100 now many people might choose the immediate reward. But as psychologist George Ainslie observed, people might prefer $200 in one year over $100 in 9 months. This could be due to concerns about the reliability of receiving the delayed payment and the potential for earning interest on the immediate amount. But as the time period goes further, the risks apply to both option and the degree of instant gratification decreases — then choosing the bigger reward seems logical.

For further expansion of this topic, I recommend to read the following books:

Thinking, Fast and Slow by Daniel Kahneman
Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner
Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein
Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

The Psychology Behind Consumer Choices

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