Behavioral Economics

Editor's Notes

• #2: Thank you for hosting this program Jeremy. Today, we’re going to talk about one foundational aspect of of behavioral economics – the chemicals in our brains and how they affect decisions. Probably not what you expected, but a few of these chemicals are a foundation block of behavioral economics.
• #3: According to our friends at Google, behavioral economics is a method of economic analysis that applies physiological insights into human behavior to explain economic decision-making – so what does that mean in simple terms? First we need to draw a comparison between behavioral economics and conventional economics.
• #4: The core tenant behind conventional economics is that the human decision-making process is based on making choices that result in the most optimal level of benefit for the individual. Essentially, that we are all proficient little economic robots that know what makes us happy and we make choices that maximize that happiness. So for example.. In a conventional economics world.. A sober, blackjack player in Vegas knows to ask the dealer for another card when he or she is sitting on an 11. the probability of pulling a face card or a 10 is high and this is the rational thing to do to get 21 and win the bet. But what about the stock market? About 40 years ago is when behavioral economics started getting headlines. Economists started asking hard questions – If people are so rational, why do they follow the herd and buy when the market is inflated and sell when the market is depressed? A best seller “A Random Walk Down Wall St”, written by Burton Malkiel in 1973 summed it up well. As human beings, When the market is hot, we’re over-confident that it will continue to go up. We follow the herd during both bull and bear markets, and we have a unbelievably strong psychological bias to avoid losses – the combination of these factors causes us to act irrationally and time the market poorly.
• #5: But it turns out the ideas of irrational economic behavior have been around a lot longer. On of the father’s of conventional economics, Adam Smith, has recently been credited for his foundational work in behavioral economics. Professor Nava Ashraf of Harvard Business School did a deep dive on one of Smith’s lesser-known works “The Theory of Moral Sentimants” and realized how closely the virtues Smith wrote about in this work from 1759 related to the emerging field of behavioral economics. To quote professor Ashraf: “[Smith] believed that much of human behavior was under the influence of the passions—emotions such as fear and anger - and drives such as hunger and sex—but these passions were moderated by an internal voice of reason, which he called an impartial spectator."
• #6: So… although the ideas have been stewing for quite some time, it is modern psychology and neuroscience that has brought some clarity to what is actually going on in our heads… Deep in our brains, there are chemicals that are quietly pulling the strings and influencing our behavior. I am not referring to our higher brain, the Neocortex. I’m talking about the older regions of the brain, deep down in our brain that control our emotions and our instincts. 
• #7: Today, we’re going to talk about 4 of these chemicals and we’re going to relate that back to product design and product marketing. Quick caveat - this is not an exhaustive list, and I am by no means a neuroscientist - there are many more chemicals and complexities in the interactions of these 4 chemicals that I won’t be able to cover, so consider this a primer on a handful of chemicals that I feel are relevant to today’s social and mobile world. The 4 chemicals we’ll cover are.. Dopamine – AKA Brain Candy Serotonin – AKA The Power Molecule Oxytocin – AKA The Love & Trust Molecule Cortisol – AKA The Stress Hormone
• #8: Why Is This Relevant To Product Marketers and Managers? Understanding these chemicals and how they influence behavior will help all of you product designers and product managers build better user experiences that delight the market, and it will help product marketers determine how to price to increase conversions, the amount your prospects pay for your services, and even the quantity they buy.
• #9: But, a quick warning. This is powerful stuff, and praying upon people’s dopamine incentive system can be evil if done for the wrong reasons - dopamine is after-all the same chemical that is released in the brain when a human being ingests nicotine, alcohol or cocaine.
• #10: Oh, one last thing before we dive in.. You’ll see this little take-away bag on some of the slides.. This highlights a key learning point in today’s talk. I’ll also do a recap on all of today’s key take-aways at the end of the talk.
• #11: First let’s talk about Dopamine. Dopamine motivates persistence in the pursuit of things that meet your needs. It is released when we achieve a task, but more importantly it is released before we have completed a task as an incentive for us to get across the goal line.  One of the risks I discussed earlier is that it is highly addictive and habit forming.
• #12: So let’s explore a practical example of how to trigger dopamine. Here is a great email nurture campaign that Udemy leverages to give you a little shot of dopamine for accomplishing part of a goal. In this case it is a online short course. The key is that they “congratulate” you and encourage you to “keep going”. This generates a feeling of accomplishment which triggers the release of dopamine in your brain. The positive feeling you experience reinforces your desire to finish the course. In fact, you may actually “crave” finishing the course so that you can get another hit of dopamine.
• #13: So let’s explore a practical example of how to trigger dopamine. Here is a great email nurture campaign that Udemy leverages to give you a little shot of dopamine for accomplishing part of a goal. In this case it is a online short course. The key is that they “congratulate” you and encourage you to “keep going”. This generates a feeling of accomplishment which triggers the release of dopamine in your brain. The positive feeling you experience reinforces your desire to finish the course. In fact, you may actually “crave” finishing the course so that you can get another hit of dopamine.
• #14: Ok, next up.. Serotonin, or as I like to call it - the Power Molecule In an amusing book titled “Your Too Kind, The History of Flattery” author Richard Stengel referenced a study at UCLA by Professor Michael McGuire which show that dominant (or alpha) males had twice the level of Serotonin in their blood as subordinate males. What’s really interesting about the study is that all it took to reduce the level of Serotonin was to isolate the dominant male from his peers. It was the peer’s subordinate behavior that triggered the release of Serotonin. In the Netflix's Original Series, House of Cards, Kevin Spacey plays a Machiavellian Social and Political climber: Frank Underwood – in the show he is both the alpha male and subordinate depending on his environment. His lust for power is a playbook serotonin addiction.
• #15: So here is a take-away.. badges and rewards for the completion of key tasks or business milestones are a big deal at my company. The rewards are public , and that is KEY to this working – they are visible to the whole company– and I’ll tell you - it works. A senior product marketer at our firm joked with me recently that as much as she KNEW the psychology behind it, she was still susceptible to it and very proud when she achieved top influencer status. This reward system drives healthy competition amongst sales teams but can also work with your brands top influencers to creates a sense of community status.
• #16: This is one of my favorite episodes of South Park. Many of you have probably seen it, it is all about the Facebook. In this scene, Stan Marsh’s dad walks down the hall to his room one morning, to ask him why Facebook says they are no longer friends… The irony of a father asking his son why his computer says they are no longer friends. Books have been written about the psychology of Facebook and we’re not going to go deep into that today, but one chemical at the core of it is Oxytocin. Oxytocin is the feeling of togetherness or love, it drives us to generosity.  It helps us open-up and be vulnerable, and it allows us to feel belonging. It can induce feelings of optimism, self-esteem, and it builds trust. Amazingly, not only the giver and receiver of kindness get a hit of it, but even witnesses get a hit of Oxytocin. The effect of Oxytocin is instantaneous trust-building and it is increasingly being seen as something that can help people overcome their social inhibitions and fears.
• #17: So how can we apply this to our products? Biologically, we are wired to work together. We get Oxytocin rewards when we take care of one another. Giving and receiving trust, love, and loyalty gives us these chemicals.  They make us feel security, they grease the social machine. So to take advantage of these things, build user and customer communities and make it easy for the community to “share” and “like’ what each other is contributing.
• #18: Ok.. The 4th chemical today is the bad chemical.. Cortisol is the stress hormone. Before adrenaline, it is our bodies first response to a fight or flight situation.  It is trying to get us to identify real or imagined danger. Sadly, our brain’s ancient early warning system which controls the release of Cortisol doesn't understand that today we work in offices and are no longer on the savanna running for our lives. It doesn’t realize that we are not in real danger when we are late on a deliverable or late to a meeting with our boss. We feel stress when we feel unsupported. We are strong creatures though and we will adapt to an unhealthy work culture: lack of trust in colleagues, layoffs, etc. but it impacts our health negatively.  It increases blood pressure, messes up glucose levels, and shuts down the immune system. Cortisol will even inhibit the release of Oxytocin and all of its positive effects. But most interestingly, Cortisol impedes cognitive ability. In other words, it blocks our ability to think clearly. The practical take away here is that we want to reduce the friction in our user experiences and in our calls to action. Reduce stress and make buying and using your applications as easy as possible.   
• #19: So here is a quick story. When faced with too many options, we are unable to evaluate them all. This concept is known as cognitive load. Have you ever sat down at an old-school neighborhood diner with a thousand items on the menu and struggled to decide what to order? There is a famous “Jam Study” that a Professor Sheena Iyengar at Columbia University  conducted in ‘95. Her team set up a booth at a California gourmet grocery store. During one period, they would stock the booth with 24 types of delicious Wilkin & Sons Jams, and during the other period, they would reduce the selection to 6 choices of jam. What do you think happened?
• #20: What’s interesting is that Sixty percent of customers were drawn to sample from the 24-choice selection, vs. only 40 percent at the smaller 6 jam selection. But 30 percent or 10 times the number bought from the 6 jam selection, vs. only 3 percent of those confronted with 24 jams.
• #21: 10x the conversion rate really showed the impact of cognitive load on the decision making process. Within behavioral economics there is a theory called cognitive laziness which proposes that people use a variety of techniques to reduce the effort of making decisions. What’s really interesting about the Columbia University study is that consumers are attracted to that broader variety - BUT when it comes time to the decision to buy… They freeze up. This is a key finding as it pertains to getting conversions to paying customers. So what can we learn from this…
• #22: A study by Nelson Cowan found that the magical number was 4 when it came to short-term memory. So product managers and marketers - Keep the pricing simple and you’ll increase conversions. On the screen is an example from Optimizely as of August, 2014. Notice, only 4 pricing options – and not only that, they are defaulting my decision to buying 1 year up-front for a 10% discount, and defaulting me to the most expensive Enterprise option which feels like a little bit of price anchoring as well. This is a really great example of how to reduce friction in purchasing decisions.
• #23: So if you take anything away from this webinar, I would screenshot this table.. It is a recap of today’s key take-aways.. We talked about Dopamine, the brain’s candy and some practical ways to trigger it using an email nuture campaign from Udemy. We talked about Serotonin, the Power Molecule, and how public awards, badges, and status triggers it We talked about Oxytocin, the Love & Trust Builder and how to let your user community share and like what each other contributes Finally, we talked about Cortisol, the Stress Hormone. To avoid it, reduce friction in decision making, opt-in your users, and limit purchase decisions to 4 options.
• #25: Thanks everyone for joining today. I love this topic and I hope you enjoyed the discussion.