Heuristics and cognitive biases: what are they and why are they important for your business?

Present bias, confirmation bias, availability and anchoring heuristics... So far, around 200 heuristics and cognitive biases that influence people's decision-making have been identified.

If you already know a little about Behavioral Economics, you know that these are fundamental concepts of the discipline. However, they are sometimes used synonymously, although there is actually a subtle difference between the two terms.

Difference Between Heuristics and Cognitive Biases

We start from the beginning and talk about the paper ‘Maps of Bounded Rationality: Psychology for Behavioral Economics’ (2003). In this article, Daniel Kahneman tries to obtain a map of bounded rationality, defining what heuristics and cognitive biases are. In particular:

Heuristics are 'mental shortcuts' or simple rules of thumb that the mind uses to deal with problems when it does not have the resources to solve them accurately. In most of our daily decisions we use System 1 (in contrast to System 2), which is fast and automatic, and facilitates our decision making by reducing the effort in simple decisions such as “what to eat for breakfast?”.
Cognitive biases are systematic (not random) errors in thinking. That is, by using heuristics and often reaching quick conclusions, people tend to make 'wrong' decisions: in particular, decisions that deviate from the concept of 'rationality' according to traditional economic theory.

Heuristics, Cognitive Biases and Behavioral Economics

Okay, now you know what these concepts mean. But why is it important to know how heuristics and biases influence your customers' decision making? Why is it relevant to your business? Does it influence the financial health of your company?

“Behavioral Economics helps understand in depth the decision-making process of your clients to achieve your business goals”

The most intuitive answer is that Behavioral Economics is the future of business, and it is an advantage that your competition still does not apply (or is just beginning to apply). Another answer is that this discipline is your best ally, since it helps you deeply understand the decision-making process of your clients to achieve your business goals, such as:

Increase the perceived value of a product or a brand.
Increase loyalty to consumers.
Innovate a product or a brand.
Create brand awareness through the use of prices, packaging, logos.
Increase consumer engagement through communication.

And how can you achieve all this? Clearly, by understanding the heuristics and cognitive biases of your customers. What you have to remember is that this is essential not only before customers buy your products or services, but also during and after they make the purchase.

Tips to apply Behavioral Economics in the buying process

Before the purchase, it is important to analyze the path that your customers follow until the purchase of the product.

It is important to find out what barriers can prevent them from carrying out the purchase behavior, investigating what heuristics and biases can influence. For example, many times user journeys can present hassle factors, that is, nuisance factors that discourage the customer from continuing in the purchase process.

A potential design solution is summed up in the element 'Make it Easy' explored in the EAST model.

During the purchase, your customers can find themselves in a situation of 'choice overload' if they have to make a decision from an excessive number of options.

Although it is often intuitively thought that offering more options makes it easier for the client to find the best option, in reality we are creating a cognitive obstacle for our client. Having too many options leads to a greater difficulty of choice, which can lead the customer to not make a decision and abandon the purchase process (watch this video to learn more about the 'paradox of choice').

“Having too many options leads to a greater difficulty of choice, which can lead the client to not make any decision”

How do we fix this? An example is the use of default options, pre-set choices that your customers could perceive as suggestions or recommendations.

After the purchase, it is a phase that is usually forgotten, but that is of great importance to increase the satisfaction of the client with the purchased product.

Helping customers feel good about their purchases is just as important as the previous phases. If the customer is satisfied with the product, he will start talking about it and the brand, and will continue to make purchases. For example, it is very likely that after a purchase, our brains look for information to support our choices (confirmation bias).

An idea of a solution to increase satisfaction is to show reviews of other satisfied customers so that the user confirms in his mind that the purchase made is good and he feels satisfied with it.

Takeaway

Behavioral Economics is an innovative tool that allows you to get to know your customers in depth, at all times of the journey. Therefore, it is important to investigate the heuristics and cognitive biases that can influence your customers' decision-making before, during and after purchasing your products or services.

Thus, you will be able to achieve your business objectives, also improving the experience and satisfaction of your customers.

Silvia Cottone

Behavioral Science Consultant

& Worldwide Keynote Speaker