Behavioral Economics is the study of the psychological, social, cognitive, and emotional determinants of human economic behavior. It helps explain illogical appearing human decisions by understanding their true motivations. Examples include loss aversion, confirmation bias and the herd effect. In loss aversion, most people are more likely to avoid losing $100 than selecting an alternative in which they may gain $100.
Utility Expectation is the value placed on a future state as the result of a human decision. In Behavioral Economics, it is the anticipated “worth” of the result of a transaction of goods or services. The extent to which this expectation is fulfilled is the basis of brand preference, brand loyalty and brand switching.
Buyers make decisions about which product or service to purchase based on multiple factors, both economic and psychological. In our models, these factors may include the product’s price, the “feeling” of ownership and the perception of the product’s performance. Behavioral economics creates a context in which each of these factors have relative degrees of impact on expected utility and the decision which follows.
Imagine going to your usual morning coffee shop, the one at which you grab a cup on the way to work, and finding a newly opened coffee shop next door. You decide to try the new spot and are pleasantly surprised by the barista’s greeting and the incredible cappuccino. The next morning, do you return to your usual coffee shop, or the new one you just tried?
Not everyone will make the same choice since different factors play different roles to different decision makers. However, it is possible to predict their choices based on consumers’ own experiences and the decision heuristics they employ. In this way, behavioral economics guides marketers by surfacing their expectations of utility and loyalty.
Behavioral Economics Guides
We are privileged to collaborate with Behavioral Economics Group and other leading behavioral economists around the world to provide the latest ideas and practices from academia, business and public policy.