Why should we know about behavioral economics
For the record: Many students misunderstand that economics = investing in stocks; Behavioral economics is also like investing in stocks; In fact, it is not. Behavioral economics studies the subject of real economic activities (people) and discusses the specific characteristics of individual behavior. I am not an economics major, but I have been studying in my spare time when I am interested. I hope I can communicate with you and learn from you.
Let’s start with some chestnuts (bury a few pits) :
Why the same goods, different places (scenes) and different prices, will let consumers produce different decision-making behavior; The same mineral water or beer, in different places, the price is different, consumers will be happy to invest money to buy.
Why did a few people lose money on the stock, can you hold loss-making stock all the time not to put? Sometimes you’re stupid enough to sell a profitable stock?
Why do some people lose a lot of money gambling? Or do you want to keep betting? Finally ruined!! This is what I couldn’t figure out, you know? Why would they do that?
Why are some people still obsessed with buying lottery tickets? Every time on my way home from work, I would pass a lottery shop and see a lot of people buying lottery tickets. If we know about Bayesian probability or if we learned about probability in high school, we know that winning the lottery is very unlikely; When also wonder why?
Why can you feel his salary is low sometimes, even if raised salary also can be very lost? Sometimes I will hear my friend complain that his salary is low, but he just got a raise.
Why is it obvious that a thing is not willing to buy at ordinary times? Do you buy it for your loved one on an important holiday? Usually a frugal person, in the important festival will spend a lot of money to buy gifts for the closest people;
Why in the face of various psychological routines of businesses, entering shopping web pages or apps, a variety of passwords, red envelopes, gift certificates flying everywhere, and the system according to the personal recommendation of the order, group purchase discounts… . And at various shopping festivals throughout the year (like Double 11, etc.), still can’t resist chopping off your hands? (I can’t help it sometimes)… .
I have been thinking about the above problems before, why most people make such decision-making errors, until I saw the de materials (books, videos) related to behavioral economics, which actually correspond to some decision-making errors in life one by one, and have been reasonably explained.
Behavioral economics is the most practical economics. It is more down to earth. It exists in every aspect of our lives. It affects us all the time; For individuals (consumption, investment, life, etc.), enterprises (supermarkets, companies, mom-and-pop shops, etc.), government is also of great significance;
Understand behavioral economics, which helps us recognize and correct biases in decision making; That’s the beauty of behavioral economics.
Let’s learn about behavioral economics. ~!! ;
Understand the history
In fact, when behavioral economics was born, it was not viewed favorably by the mainstream. Let’s take a look at the historical development… .
In 1759,Adam Smith, author of “The Wealth of Nations” (who is the mother? Eve? He wrote a book called The Theory of Moral Sentiments, which discussed the relationship between human psychology and economic activity (people are emotional, not completely rational);In the twentieth centuryTraditional economic rapid development, the mathematical economics, build a rigorous theoretical system) on mathematical deduction, assumes that people are rational into rational person (70 s), economics into an era of prosperity (new classical economics (for example Marshall, etc.), the modern western economics (Keynes, etc.), for example), interested can check the related information, I’m not going to go into that; In fact, at this time, behavioral economics had just begun, but it was not favored by the mainstream for a long time because it deviated from the assumption of rational man in traditional economics. It was quiet for decades from 1950 to 1990… .In the late 1970sThe real birth of behavioral Economics, two key papers: 1979Daniel Kahneman 与 Amos TverskyProspect Theory: Risk-based Decision Analysis andRichard Thaler1980 towards an Empirical Theory of Consumer Choice
In 2002,Nobel Prize in EconomicsDaniel Kahneman(will bePsychological research 和 Economic researchDaniel Kahneman is actually a psychologist; His books include “Thinking Fast and Slow,” which most of you have read; He and his best gay friendAmos Tversky (died early, otherwise he would have won), they often study behavioral economics together and come up with several famous theories through many experiments, such as prospect theory.In 2008,A great thing happened —The financial crisisBehavioral economist Robert Shiller was one of the few who successfully predicted the collapse of the U.S. housing market leading to the financial crisis. The financial crisis was later made into a film, the Big Short, for those interested; This crisis, for behavioral economics, is also a turning point! Because of the severity of the financial crisis, mainstream economists began to reflect on why traditional economics could not predict the financial crisis. They call on the Economist to think hard about real problems based on the complex real society; Markets and institutions established solely by relying on mainstream economics cannot explain various abnormal phenomena in the capital market. The crisis also violated the efficient markets hypothesis, and people are not perfectly rational; So since this crisis (and the dotcom bubble before it), people have started to really pay attention to behavioral economics;In 2013,Nobel Prize in EconomicsRobert ShillerHe’s also the author of several books, Animal Spirits, which I won’t recommend here, check it out for yourself… . One of the few people who successfully predicted the 2008 financial crisis!!In 2017,Nobel Prize in EconomicsRichard Thaler, the author of Wrong Behavior, Nudge, The Winner’s Curse, and so on; Mr Taylor, a serious economics PhD, is Mr Kahneman’s mentor and friend; Acting in big short movies; He is also a fund manager;
Behavioral economics has also gradually been accepted into the mainstream, forming a discipline;
And mainstream (traditional) economics
Let’s do a little experiment together
Experiment 1: (1) Suppose you went to a concert and lost 1000 yuan, would you continue to go to the concert? (2) Suppose you go to a concert and lose a concert ticket worth 1000 yuan, will you buy another ticket and continue to go to the concert?
According to the above experiment 1: (1) can not find the lost money, a little bad mood, but it does not affect the continue to go to see the concert. (2) lost concert tickets, most people will not buy again, in a bad mood to go home.
Traditional economics holds that capital is fungible and equivalent; So the $1,000 loss in experiment 1 is equivalent, it’s just a $1,000 financial loss; It won’t stop you from going to a concert; But behavioral economics is not! We’ll talk about the theory of that as well;
Traditional economics Traditional economics assumes that people are rational, fully grasp information, self-utility maximization (consumers use the least money to buy the best goods or services, businesses maximize profits), self-interest;
Traditional economics assumes that everyone can make the right decision behavior;
If behavioral economics is really like traditional economics, and everyone can make the right decisions, then it needs all kinds of policy making and market regulation. What’s finance for? Businesses do not need to engage in a variety of routines; There should have been no dotcom bubble, no financial crisis, no such thing;
But the truth is that people are irrational, they have emotions, they have social preferences, they want to be recognized, and they are affected by emotions like anger, sadness and happiness. In the uncertain situation will make the decision bias;
Therefore, some economists combined psychological and economic research, which gave birth to behavioral economics, mainly to make up for some loopholes and mistakes in traditional economics;
From the perspective of economic history, behavioral economics is more like a revolution, which restores the reality of human nature. In the study of economic problems, factors affecting decision-making bias (irrationality, social preference, desire to be recognized, emotion, anger, sadness and happiness, etc.) will be fully considered.
Behavioral economics revises the deficiencies of the basic assumptions of mainstream economics on human rationality, self-interest, complete information, utility maximization and preference consistency.
Traditional economics versus behavioral economics
| The rational man hypothesis of traditional economics | Behavioral economics Behavioral bias |
|---|---|
| Self interest, profit maximization | Compare loss aversion, emotional influence, complex social preferences (e.g., trust, reciprocity, guilt, anger, etc.), usability heuristics with reference to dependence |
| Fully grasp the information, the probability of accurate event judgment | Decimal theorem, probability judgment error, overconfidence, etc |
| . . | . . |
The implications of behavioral economics
The significance of behavioral economics for people (consumption, investment, life, etc.), enterprises (companies, supermarkets, mom-and-pop shops, etc.) (big data analysis, marketing, products, business activities, promotion, pricing, store placement, etc.), and government (policy, etc.);
In fact, no matter the policies made by individuals, enterprises, or governments, etc., it affects our personal decisions all the time. Because people will have irrational behaviors, there is decision-making bias.
Decision-making basis
Two systems to understand
Let me ask you a few questions: 1+1 =? You can immediately answer 2; So 134 plus 379 times 625 minus 469/2 is equal to? “That’s when you need to think;
So before we get to behavioral economics, let’s look at two systems, two systems that affect how people make decisions;
Because thinking about everything takes a lot of energy, the brain gets tired, so it avoids thinking; People tend to rely on intuition, memory and experience when solving problems; Even when people follow various assumptions, they often make mistakes (decision bias), so rational economic man’s assumptions are too idealistic and simplistic to fit reality.
If you’ve read “Thinking Fast and Slow” (by Nobel Prize-winning economics professor Daniel Kahneman), you should have.
Interactive chestnuts:Which line segment of A and B do you think is longer? They are the same length;
Do not know you still think of love my Chinese songs? Is it fifty-six? Fifty-six signs? This is because the brain will process some useless information and the memory will fade, so sometimes the memory may not be reliable.
The invisible gorilla experiment tells us that when we focus on one thing, we block out other relevant information, which is why we programmers focus on writing code and want to be left alone. When our attention is on the screen, even if someone walks by, we don’t pay much attention; We often overlook what we don’t pay attention to, or we only see what we want to see.
Human cognitive process: information processing system; Human brain information processing process: information acquisition (memory, environment, etc.), information processing (simplified information processing, emotional influence, information description response, new information attitude), information output, information feedback (cognitive dissonance, loss aversion, etc.); Often these processes are susceptible to the context of decisions, the consequences of actions;
Rational thinking requires at least two premises:
- Obtain comprehensive, prepared, and useful information
- Having unlimited resources available to process data;
Psychological data
Fast system
For example, when you buy a cell phone, people often intuitively think, this phone is great! When your life is in danger, your fast system will tell you, run, life is in danger!!
Slow system
For example, when you buy a mobile phone, people often instinctively think, this phone is good! But then slow systems come up with all sorts of ideas; When your life is in danger, your fast system will tell you, run, life is in danger!! But then the slow system will rationally analyze the coping strategy;
other
Overconfidence: Performance: underestimating difficulty; Overestimate ability; Excessive optimism; Attribution bias (successful people attribute their success to their knowledge and personal abilities; Stock profits, think he is a god, vision is very accurate); Causes: cognitive limitations, confirmation bias, biological causes;
Addiction: several theoretical explanations (decision failure, endogenous preferences, epidemic explosive points, ratchet effect);
Social preference: altruistic behavior (related altruism, pure altruism, reciprocal altruism)
Fair preference:
Social norms and market norms: In behavioral economics, people have altruism, reciprocity, pure altruism, relative altruism and other motivations; Under the motive, there is no need for reward, to do something that we think is unreasonable, such as a lawyer who gives free legal aid to civilians, some volunteers, etc.; Market norms, trade is the first principle, here there is no friends, relatives and other motivation factors, only trade; Here it’s black and white: you give labor, I give money; When these two norms collide, whose norm is more powerful? For example, the social relationship between the school and the parents, the use of market norms to restrain the problem of tardiness, counterproductive, pay a fine, feel comfortable for being late; The original is to restrain late, hope everyone on time; After a few weeks, the fines were lifted and social norms returned. More people showed up late. Social norms and market norms have all failed; As the example shows, social norms collide with market norms, social norms exit, and once social norms break down, it is very fast and very difficult to rebuild; Another example, next door is a teacher, you use social norms to give you a long time to make up for a year, no money to give? Does it feel right? What else can a neighbor do? Common sense, is not appropriate; Therefore, when dealing with the problems related to market norms and social norms, we must pay attention to the boundary of market norms and social norms.
conclusion
| System type | Characteristics of the | conclusion |
|---|---|---|
| Fast system | Intuitive system, unconscious and rapid, automatic response, dependent on emotion, memory, experience | No brainpower, protagonist |
| Slow system | The rational system, the energy consuming system, requires attention and mobilizes attention to analyze and solve problems | Brain power, supporting role |
System 1 is unconscious, and the resulting cognitive biases (psychology: human decision-making in uncertain situations is usually at risk of going wrong) are hard to detect. Add to this the fact that system 2 requires a great deal of self-control and energy dissipation, and we tend to be more relaxed with lazy thinking and make snap judgments. That is to say, most of the time, people make irrational decisions, they make biased decisions.
When your life is in danger, your fast system will tell you, run, life is in danger!! But then the slow system will rationally analyze the coping strategy; But at the end of the day, at the end of the day, your coping strategies, some of them are based on system 1 experiences and memories that affect System 2;
Avoid Mistakes — From Nudge 1). Reduce intuitive confusion (design of decision options to reduce misleading intuitions): Such as some anti-human design
Provide tolerance for error.: Such as Type-c or Apple interface (Apple design is still good)
3). Optimize the default options (considering the inertia of intuitive thinking on the default options, working from the perspective of most people should be good for most people):
4). Provide adequate information (to overcome biases and improve decision-making):
The three major cornerstone
Prospect theory, heuristic cognitive biases, and psychological accounts constitute the three cornerstones of behavioral economics.
Prospect theory
Prospect theory: decision maker will choose a reference point to judge the gain (gain) and loss (loss) (decision);
Let’s start with some interactive chestnut: Interactive question 1: Suppose you have 500 yuan in cash (1) a 100% chance of getting 100 yuan; (2) There is a 50% chance of getting 200 yuan, and a 50% chance of getting 0 yuan; Interaction Question 2: Suppose you have 500 yuan in cash (1) 100% will lose 100 yuan; (2) 50% chance to lose 200 yuan, 50% chance to lose 0 yuan; 【64% choose 】
Conclusion: This interactive chestnut tells us that people are very loss-averse and loss-averse; Problem 1(aversion to return risk, most people do not choose probability in the face of certain return); Problem 2(chase the risk of loss, and then determine the loss before, will choose probability, bet luck); The pain of loss is greater than the pleasure of gain, which leads to the value function curve;
The value function
As can be seen from the value function curve, the loss function curve is steeper than the gain function curve, which also shows that the loss is more painful than the gain.
When we face loss and gain, it is not one time, but many times or mixed, and we will explain how many times and mixed.
According to the value function curve, the analysis is given when people face multiple gains/losses and mixed gains/losses (combined and separated) : [1] When people face multiple gains (separated gains) and multiple gains are evaluated separately, the utility is higher; V (z) = V (x+y) < V (x) + v(y))
For example, salary design (1. Salary 5500 yuan, year-end bonus 0,2. Salary 5000 yuan, year-end bonus 6000 yuan), the second method increases the utility.
For example, the use of an app is all about completing certain tasks or reaching a certain stage, giving certain rewards to motivate you to continue using it, rather than waiting for the completion of all stages or tasks to give you all of them.
So, good news should be split up, and good benefits/rewards should be given in small chunks (e.g. in-game level rewards, each stage/level, etc.);
Problem: Small xu went out to buy lottery ticket to win 200 yuan, the company sent bonus 1000 yuan, how to return to explain with wife? Answer: multiple earnings need to be said separately, first say winning, later say the matter of bonus;
[2] In the face of multiple losses (consolidation losses) : multiple separate losses can be combined to reduce consumer utility; Value function (V (-z) = V (-x-y) < V (-x) + V (-y)) such as free shipping (60 yuan) and no shipping (50 yuan + 10 yuan postage), too many people will choose free shipping. Free shipping and no free shipping will lead to different shopping decisions, because if multiple losses are separated, we will reduce our utility more, which will make consumers very painful; So in the face of multiple losses, we should combine the evaluation, reduce the utility of consumers, reduce their pain;
For example, parking fee, a monthly fee (55 yuan), pay once a day fee 2 yuan, which will you choose? Must be a monthly package of comfort, because and above the same situation;
That’s why group pricing, monthly/annual services (gym, cell phone plan, etc.), take one-time charges, don’t separate to charge you again and again, because it’s multiple losses, so they are merged; Similarly, if we see multiple losses, we merge businesses;
Problem: small xu go out by fine 200 yuan, arrive the company to return late by fine 200 yuan, how to return and wife explicate? Answer: many losses should say together, direct account, today’s loss of 400 yuan can be;
[3] In the face of mixed earnings (integration of small losses and loss), when faced with large gains and small losses, the merger evaluation was carried out; Value function (v(z) = v(x -y) > V (x) + v(-y)), for example, pay tax on wages, usually pay after-tax wages, will not give you pay pre-tax wages, and then let you pay taxes, this will make many people uncomfortable;
Problem: small xu company sent bonus 1000 yuan (big profit), be fined 200 yuan (small loss), how to return and wife explicate? Answer: should amalgamate tell wife, today sent bonus 800 yuan;
[3] In the face of mixed losses (separation of small gains and big losses) : In the face of large losses and small gains, separate evaluation; Value function (v(-z) = V (-x + y) < V (-x) + v(y)) When consumers suffer a huge loss, if they get a little gain, they will feel great comfort, which is also called the “silver edge effect”; For example, buy a laptop to send a mouse, buy a car to send things and so on; For example, tax incentives, was collected for a year (every month) of several thousand yuan of tax, the end of the year to return hundreds of pieces, which will make many people very happy;
Problem: small xu company sent bonus 200 yuan (small income), be fined 1000 yuan (big loss), how to return and wife explicate? Answer: should separate tell wife, although be fined 1000 yuan today, but the company sent 200 yuan bonus;
Summary (multiple gains/losses, mixed gains/losses) :
| situation | practice |
|---|---|
Facing multiple returns |
Multiple returns, assessed separately |
Faced with multiple losses |
Multiple separate losses, combined assessment |
Faced with mixed returns |
Large gains and small losses are assessed together |
Faced with mixed losses |
Large losses and small gains are assessed separately |
Formula: two profits should be separated, two losses should be integrated, big loss should be separated, small loss should be integrated, gain and loss should be similar to integration.
Conclusion: Multiple or mixed gains/losses can be used to influence human decisions (minimize losses and maximize gains) in business, policy, etc
Transaction utility
Traditional economic point of view: utility refers to the satisfaction program felt when consuming goods. Utility size can be expressed in order or rank… .
Behavioral Economics: Acquisition utility (the utility a good brings minus the price paid) [the acquisition of utility depends on the value of the good to the consumer and the price the consumer paid for it] Transaction utility (the price the good actually pays versus the reference price (the price the consumer expects) 【 Transaction utility depends on the difference between the Price consumers pay for the commodity and the Reference Price of the commodity, that is, whether the transaction is preferential compared with the Reference Price. 】 (1) The actual price paid (commodity or service) > the reference price (expected price), the transaction utility is negative, and the consumer is uncomfortable. (2) The actual price paid (commodity or service) < the reference price (expected price), the transaction utility is positive, and the consumer feels that he has made money, he is happy, and he has taken advantage of it
The same goods, different places and prices, you will produce different decisions; This is why it is clearly the same hot pot, many people are willing to give Haidilao or other businesses, pay more money, because in addition to delicious, they are willing to pay extra money for the environment, service and other factors here;
Why in the face of various psychological routines of businesses, entering shopping web pages or apps, a variety of passwords, red envelopes, gift certificates flying everywhere, and the system according to the personal recommendation of the order, group purchase discounts… . And at various shopping festivals throughout the year (like Double 11, etc.), still can’t resist chopping off your hands?
That’s why we can’t resist cutting our hands off when it comes to shopping streets, deals, etc. Using the graph of value function to analyze, for consumers, all kinds of concessions, discounts, etc., are benefits, positive utility increase; Consumers will feel that they are not spending money, but making money!!
Transaction utility is positive:People feel that a deal is a good deal, which motivates them to do it;
Transaction utility is negative: people feel cheated, regret and may cancel the transaction;
Expand knowledge: In addition to reducing prices, discounts, discounts, etc., it is also important to raise consumer expectations; We can also improve the quality of goods, services and so on to improve the utility of transactions, so that consumers are willing to pay more money, consumers will feel happy after paying the bill, it is also worth it, businesses also get high profits, consumers and businesses win!!
Payment decoupling: one advance payment, one or more consumption; Multiple installment, multiple consumption; Payment after a time, multiple consumption;
- One advance payment, one or more consumption: for example, supermarket shopping, with gift cards, consumption will be more indulgence; Gift cards are pre-paid and separate the time between purchases and purchases; And such as the phone fee monthly, membership of the annual card system;
- Multi-purchase: For goods that can be consumed over and over again (durable goods, such as mobile phones), people will
The future paymentIt is apportioned to the expected future consumption. By apportioning, the consumer is able to evaluate the accountThe future payment和Future earningsCompare; - Payment after one purchase, multiple purchases: Common with credit cards; Although a credit card needs to be paid back in the future, the rational consumer will make a purchase with the future payment in mind. But credit cards allow consumers to ignore the cost of purchases when they spend; Cash payment will increase consumers’ perception of spending, while credit card will decrease, which will eventually lead to an increase in credit card consumption limit.
Four basic conclusions
Four basic conclusions derived from prospect theory (reference dependence, determination effect, reflex effect, loss aversion) :
1). Referential dependence: Most people’s judgment of gains and losses is often determined by reference points (historical value, current situation, expected value, other people’s situation, general situation, etc.).
Question: why can you feel your salary is low sometimes, even if raised salary also can be very lost? Answer: For example, Xu’s previous salary was 3,000 yuan, and his expectation (reference point) increased to 4,000 yuan; When the boss gave him an increase of 4500, when he heard about the situation of others, such as Xiao Li increased to 6000 yuan, then Xiao Xu’s current reference point became 6000 yuan, compared to the current increase of 4500, so Xiao Xu will feel very lost, very uncomfortable;
Therefore, the individual’s decision is made by comparing the change or gap between the final result (4,500 yuan) and the reference point (6,000 yuan), to determine whether he has gained or lost. Xiao Xu finally makes a decision, whether to quit or what to do next?
In life, there are many related examples of reference and dependence, such as shopping around, you will feel that a certain item is too expensive or too cheap, and such as the ancient saying that it is difficult to go from extravagance to thrift (used some expensive things, sometimes really can not go back), it is easy to go from thrift to luxury; And you see someone as bad or good; Or your expectations; You have your own reference points and so on;
Here I cite a very low profit impression of an example, such as the sale of tens of millions of Lamborghini – poison, given a coupon of 10,000 yuan, here is a joke, I believe many people are not happy; The sensitivity to revenue is very low; Tens of millions is a reference point, 10,000 yuan, the profit of the imperceptibility is very small;
Finally to an interactive small chestnut, the company travel plan choice: plan A: the company to 1500 yuan, no need to add additional costs. Plan B: The company will pay 1,500 yuan, and you need to pay another 2,500 yuan. Which would you choose?? Most people will choose plan A, because 1500 is A reference point, and the extra 2500 is A loss for them, so they will feel A little unhappy.
The main reason why it is difficult to take a taxi in rainy days is that in addition to the danger of driving in rainy days, the demand is large and the driver has earned enough money (the reference point is that he may earn enough 500 yuan and go home to rest).
2). Certainty effect: When people are faced with certainty return and probability return, most people will choose certainty return (most people are risk averse when they are in the return state).
For example: 1) buy one get One Free raffle (probabilistic benefits)
Question: why did some people lose money on the stock, can hold the loss stock all the time not to put? Sometimes you’re stupid enough to sell a profitable stock? Answer: because in front of certain earnings (profitable stocks), most people are risk averse, and they prefer to settle down while good, just like “a bird in the hand is better than two birds in the bush”, so they are more inclined to sell the profitable stocks!!
A). 100% get 100 yuan B). 10% get 1000 yuan and 90% get nothing which one would you choose? Most people would choose the first scenario. How about you?
So it’s better to give somebody a probabilistic payoff than something with a definite payoff; Such as how much money, for XXX goods; What kind of coupons, vouchers and so on;
3). Reflex effect: Faced with definite loss and probabilistic loss, most people will choose the probabilistic loss of betting.
When a person is faced with the choice between a certain loss and the expectation of luck, they often choose to gamble.
For example, gambling loses a lot of money (definite loss), which is why many people are willing to continue gambling even though they know the probability of continuing to lose money (probabilistic loss), and eventually lose all their assets. In addition to the reflex effect, there’s another reason they believe they’re going to win it back, and we’ll talk about the law of small numbers;
Question: why did some people lose money on the stock, can hold the loss stock all the time not to put? Answer: Because the stock that has lost money is a certain loss, most people will choose to bet (probability loss), believe that the stock will rise again, so this is why most people hold on to the stock that has lost money;
A). 100% lose 100 yuan B). 30% get 500 yuan and 70% get nothing which one would you choose? Most people would choose the first scenario. How about you?
3). Loss aversion: According to the previous loss function curve is steeper than gain function curve, most people are more sensitive to loss than gain.
In fact, in life, many people are very sensitive to loss; For example, finding a hundred dollars never makes up for the pain of a hundred dollars.
Interactive chestnuts: 1). You go to a shopping mall to buy a furniture 2000 yuan, the business not only charge for distribution, but also charge for installation of labor costs; Are you willing to keep buying? Most people should not choose to buy, will continue to look at other businesses, after all, people are very sensitive to loss;
Most of us choose familiar brands, products, services, and people (such as products endorsed by a famous star or person…). Like being charged a deposit… . It’s hard to think of going back and losing the deposit… . Bought a movie ticket, ugly, continue to see… Order takeout/food sucks, so you have to finish it… . The above examples are all about loss aversion… .
Heuristic cognitive bias
Heuristic cognitive dissonance, or heuristic bias, is refers to people tend to make decisions based on “rule of thumb”. Relying on “heuristics” decisions made with uncertainty, can only say that is likely to be the correct conclusion, but if missing are important factors and phenomena, the information of the defect will lead to serious deviations in judgement and estimates.
Representational bias
Interactive Chestnut: Xiao Li is diligent, knowledgeable and cares about social welfare; He graduated from a university and majored in electrical engineering. What do you think his job is? 1). Electronic engineer, and is a member of environmental Protection Society 2). Android system engineer 3). A school teacher replied: Xiao Li’s job is actually an Android system engineer, in fact, he is an engineer of our company, ha ha, did not expect!!
Representative bias: To put it simply, when we look at a certain issue, we tend to make impulsive judgments based on some representative characteristics (results, other representative examples, similarity), and ignore other more decisive information, which finally leads to our decision-making bias. (In uncertain situations, people will take a feature of the problem and infer the result directly, without considering the real probability of the feature and other reasons related to the feature); Major manifestations (Ignoring base probability, ignoring sample size, gambler’s fallacy)
We pay special attention to data or information that is obvious, intuitive, easy to understand, and eye-catching, but we tend to ignore information that is concrete, tangible, and scientific.
The most famous examples are vivo, Oppo, Miniso, Fairwhale(a wholly-owned subsidiary of SevenTwolves), Valentino VIZIA(not Valentino) and other companies with foreign names, Plus the marketing means and so on, let a lot of people think they are a foreign lofty big brand, in fact, they are A Chinese company;
When we see someone from a big star, a famous university, or a big company, we think that person is good at everything (ability, technology, communication, etc.). This is what we call the halo effect.
Representativeness bias is the cognitive bias in the information processing stage. Easy to generalize. When we receive some result, other representative examples, representative characteristics of similarity, we tend to make biased decisions about some people and some things;
Understanding this mistake will not only help you avoid mistakes in investment analysis, but also help you deal with similar problems in your daily work and life.
Law of small numbers
Why are some people still obsessed with buying lottery tickets?
Law of small numbers (law of small numbers) : is a psychological bias, intuitive thinking, people have a small sample of events have been wrong estimates, which leads to a lot of people infatuation with small probabilities, make erroneous decisions;
Most people think that they are lucky, always think that luck will fall on their head; Most people are obsessed with low-probability events;
For example, some people buy lottery tickets, gamble to make money, start a business and make a fortune, etc., or because they won some money by a small probability, let oneself mistakenly think that they can make a fortune by buying lottery tickets and gambling;
There are now blind boxes, in fact, and lottery, raffle similar behavior, draw the hidden money (explosive money) or high value in the market;
This is also why the study of success is easy to brainwash. The examples are all real small-probability success events that make some people hot-headed.
Insurance (car insurance, all kinds of insurance) a lot of people will buy; Especially after natural disaster, insure rate can rise instead!!!
That is to say, under uncertain conditions, people will always measure their own limited data or reference standards, and make decisions based on this. Everyone’s perspective and data are limited. Some people only see the process, while others focus on the results, so the decisions and judgments are always “biased”. As the “law of small numbers” points out, it is no accident that when people make judgments or decisions under uncertain conditions, they tend to overestimate the whole and see the big from the small.
Classic example (the law of small numbers – gambler fallacy) : the first annual meeting of the small xu inserted the board small xu second annual meeting did not win the prize small xu third annual meeting did not win the prize small xu fourth annual meeting, two years in a row did not win the prize, this should finally win the big prize. . The annual meeting ended, still no prize.. . Annual lucky draw (accompany to run for many years);
The opposite is the corresponding law of large numbers: in a large number of repeated occurrences of random events, there is often an almost inevitable law, which is the law of large numbers. In general terms, the theorem is that the probability of a random event approximates the frequency of a random event if the experiment is repeated many times without changing the experiment. There is a certain necessity in chance.
The law of large numbers is a statistical law; The law of small numbers is a psychological bias. The law of large numbers is a science; The law of small numbers is a superstition. The law of large numbers is neutral; The law of small numbers is a negative term.
So, on a daily basis, we need to be aware of the decision bias that the law of small numbers gives us;
Availability bias
Now, when we hear masks, little yellow cars, what do you think? Must be the new crown, no refundable deposit!!
Now you need to buy a mobile phone, which one of the following will you choose: 1). Apple 2). Huawei 3). Vivo, Oppo 4). Now in retrospect, you chose a certain phone for some reason, did others tell you? Advertisement? The other?
Availability bias: People make decisions based on easy-to-use information in their memory; In other words, the easier information is to remember, the more likely it is to be used as a basis for judgment, for decision-making; Major manifestations (significance bias, memory retrieval bias)
We are more likely to be influenced by what we see or hear, rather than thinking in terms of statistics.
This is why advertising or marketing can easily brainwash or influence consumers’ decision-making behavior: 1). Brain platinum (this year’s festival does not accept gifts, gifts only accepted brain platinum); 2). Boss Zhihiring (find a job, talk to the Boss directly), 3). Gree (good air conditioning gree made)), 4). Vivo, Oppo everywhere advertising, TV, subway, shops and so on; 5). Fragrant milk tea around the earth?? Your yida and so on; 6). Spring Festival Gala “Find Lee Hom”, what is Page, 4.10 black hole photos, League of Legends, CBA and other hot marketing events; So we need to keep up with hot marketing (my brand + hot)… .
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. . And what you hear every day (friends recommend to you, video evaluation, etc.), will also affect your judgment, so say you want to chase a girl, get her best friend first, and then let them help to say good things about you every day, over time, she will give you a good person card, hey ~~!! .
No matter in life, work, really need to be slow and steady, do well, make some events, will leave a deep impression in everyone’s memory, whenever everyone think of, strong ability, good technology, the first can think of you, then…. . Optimization is not far away!!
And finally a chestnut: 
So this also leads some people to make some bizarre decision-making biases when they are exposed to a lot of information; For example, after certain natural disasters or fires and so on, to buy insurance and so on;
By understanding the availability bias, we can avoid some of our own decision-making errors, and we can also apply it to life, business, marketing (keep up with hot spots), and other activities to influence the judgment of others.
anchoring
1). The Economist electronic edition, 1 year /60 yuan 2). The Economist magazine print + electronic, 1 year /120 yuan which would you choose? Most will choose the first option; This leads to the paper + electronic version of the sales is not good, do this? All you need to do is set an anchor reference point, see chestnuts below;
1). The Economist electronic edition, 1 year /60 yuan 2). 3). Which would you prefer, the Economist, Print edition, cny 130? Most would choose the second option;
Interactive Chestnut 3: VIP members, computers, tablets, mobile phones can be used; 1) 25 yuan per month for members; 2). Membership for 3 months is 68 yuan; 3) 168 YUAN (original price 233) for 12 months, enjoy Himalayan membership for 1 year;
Anchoring effect (anchoring adjustment heuristics or anchoring heuristics) : When we need to evaluate an event or a person, we tend to use certain values as initial reference values.
When we need to evaluate an event or a person, we tend to use certain values as the initial reference value.
Anchored closed talk, one egg, two eggs, open talk, eggs? Easy to be rejected; Use the anchored closed spell, which is not easily rejected; So, the next time you ask your friends out for dinner, do you want to go straight to zhao-shu, hotpot or chuan chuan? Don’t ask if you want to eat again!!
There are many other scenarios anchored, such as Starbucks, medium, large and venti cups of milk tea, and high, low and medium matches of electronic products.
Discount & Limit temptation: Cross out the higher original price and offer a lower one next to it (the higher the original price, the higher the customer’s anchor value)
Without an anchored initial reference, we simply don’t know whether we’re getting expensive or cheap.
For example: Taobao, Pinduoduo, other platforms… . How w should you price your last product? . Can fix a middle price; Between the lowest price and the highest price, so that your product sales will be much better;
Mental accounts
Getting a $10,000 salary, a $10,000 year-end bonus, and a $10,000 lottery win are all equivalent to $10,000 in traditional economics, but for many people, the spending decisions on that money will be very different… . Here’s a theory — mental accounting;
Mental account: Consumers divide their spending into different accounts for overall management. Different mental accounts will affect consumers’ consumption decisions.
Mental accounting is the concept of Richard Thaler, a professor of behavioral science at the University of Chicago; Mental account is an important concept in behavioral economics, one of the three cornerstones;
In addition to wallets, bank cards, Alipay, wechat and so on, there are many intangible accounts;
Several different consumer psychology accounts:
1). Essential living expenses (daily expenses); 2).Family building (children's education) and personal expenses; 3).Emotional maintenance expenses(an account for strengthening relationships) 4).Hedonic leisure expenditure; 5).Change the account(a small mental account spent with little thought); 6).Windfall account(Unexpected income income account. Because money comes unexpectedly and effortlessly, it is spent without much thought); 7). Invest in savings, buy a house, buy a car… .
(1) Suppose you go to a concert and lose 1000 yuan, will you continue to go to the concert? (2) Suppose you go to a concert and lose a concert ticket worth 1000 yuan, will you buy a new ticket and continue to see the concert? Answer: In the previous experiment 1, why do you go to a concert and lose 1,000 yuan (personal expenses) and 1,000 yuan worth of tickets (enjoyment and leisure expenses), the same is 1,000 yuan, why do you show different situations? The fundamental reason lies in the psychological account, because there are different psychological accounts;
The hole in front,whySomething you wouldn’t normally buy? Do you buy it for your loved one on an important holiday? Also be because mental account (affection maintains account) ha!! For example, a course of 199 yuan/year only costs a few cents a day (change account); Diamond rings, wedding photos; Buying gifts for parents; Buy things for children; Buying gifts for loved ones or friends; A few dollars for a purchase, a donation, etc… .
Here is a lot of business routines, such as 199 yuan/year course, only a few cents a day, a few cents for the change account, you are willing to spend this money, you can pay more attention to the life around the business routines. For example, a cup of coffee worth more than ten yuan a day is just ‘small money’ for some people.
Once you get paid, you will scrimping and saving money. Once you get an extra windfall, like a bonus or something, you may use the money to travel, buy digital products, cosmetics, etc.
Sometimes it is not easy to spend the whole money (large amount), but it is easy to spend the small change (small money). This is also the change account mentioned above. If you want to save money, you should keep your change account and the account of unexpected money.
Why there are mental accounts: It has to do with self-control. The reason we divide our spending into separate accounts is to prevent ourselves from overspending.
Combined losses (Prospect theory – Value function)
There is a typical phenomenon known as “aggregate losses”. Such as usually are not willing to pay hundreds of dollars to do screen saver and maintenance, but in spent several thousand dollars, tens of thousands of dollars for a thing, often feel a few blocks, several hundred yuan at this time is money, in fact, in life, this kind of phenomenon is very common, such as selling computers, have you bought a computer will allow you to add a memory stick or and so on, but also bought electronics products, Will try to sell you something else;
Take a look at the routine jingdong gives you. For a mobile phone costing 3299 yuan, it will sell you a 159 broken screen saver for 2 years, and a 99 yuan external screen saver for 2 years. If people buy a mobile phone, we will feel that 159 and 99 are small cake in front of a mobile phone costing 3299 yuan. Adding a hundred more marginal psychology will feel very weak)Diminishing sensitivity:According to the value function analysis, for example, 3299(reference point) + 159 and 100(reference point) + 159, the loss of 159 yuan is the same, the latter is more sensitive than the former; So it would be relatively painless to spend 159 yuan on the premise of 3299 yuan spent;
Then there’s the situation where you buy a desktop computer for thousands of dollars, and people are offering you extra memory, hard drive, mouse, etc., or other services, and you’re usually happy to take it.
Another important concept of mental accounting –“Payment isolation (when consumers are unable to directly correlate consumption costs with benefits, they subjectively think that the price of goods is reduced)“:
1). The mobile phone of 3299 yuan is paid in 153.83×24 instalments. The mobile phone is also given to you. Another way is to give the phone to you after it’s done in stages. Answer: Many people will choose the former, because the costs and benefits are directly related to each other. During the process of using a mobile phone, every installment of money paid for a mobile phone feels worthwhile. This is the behavioral economics of the psychological account of income and expenditure management, people like to use the cost of consumption and benefits (the use of mobile phone process) directly corresponding;
2). 3299 yuan hainan tour, A. Travel first, pay monthly instalments. B. Start by installments and travel after the installments. Answer: Many people would choose the latter; In many cases, the costs and benefits of consumption (the process of travel) are separate and not always one-to-one; In the case of travel, prepaid travel money, due to the effect of payment isolation, we often enjoy the travel process will feel free. If the payment is deferred, the cost of deferred payment will affect the revenue now, and the pleasure of the travel process will be discounted.
In the traditional market, we always pay the money and deliver the goods in one hand until the appearance of credit card, huabei and other things (low psychological value). Credit card, huabei and other consumption of the purchase process and the payment process is separate; Easy to ignore the original cost of goods; Payment isolation exists not only in the advance payment process, but also in the deferred payment process.
I can also see some of my classmates, opened a fitness club members, in order to make track for a play or opera, opened a VIP member, the start was also able to corresponding consumption costs and benefits, basic it is in use, with the passage of time, consumers forget the existence of the cost, then have to pay the segregation phenomenon, this phenomenon is also called “pay devaluation”;
Payment depreciation: consumption cost and income (consumption process) match, as time goes by, people will forget the original consumption cost, ignore the original value of consumption;
Derivative theory
From these three cornerstones, many theoretical and practical scenarios are derived
Framing effect (Semantic Effect)
Framing is a concept developed by Daniel Kahneman;
Different ways of expressing the same question can have a huge impact on one’s decision making. It is mainly reflected in people’s sensitivity to “loss” and “gain”;
To cite a few small examples: 1). The nightclub girl studies hard during the day (many people will praise her). College students go to nightclubs (which many people despise);
2). The survival rate within one month after surgery is 90%. The death rate within a month after surgery is 10% (many people are scared).
3).A. Saved 200 lives; B: One third saved 600 lives and two thirds all died; When the answer is the same, many people will choose Plan A;
4). A meat is 90% fat-free; Some meat contains 10% fat
The previous examples are obviously the same result, with different description, people will make different decision-making behavior; As mentioned in the previous prospect theory, people are inherently loss-averse and risk-averse;
Chestnuts in the consumer sector: 
1). The laptop costs 3,000 yuan and the shipping costs are 50 yuan. 2). The notebook is 3050 yuan, free of postage;
There are some goods order description (psychological account + frame effect) : 1). Members 1 year 360 yuan 2). Members only need a few cents a day
(According to the value function of prospect theory, when 298 yuan is used as the reference price, there is also “plus”, so that consumers will feel the pain of loss) 2). Alipay/wechat pay 300 yuan, cash discount discount, cash payment 298(discount 2 yuan).
Here I made a map of Hive’s payment method (a little ugly, don’t worry about the details), it doesn’t say alipay, wechat Pay plus 0.9 yuan. Instead of 1 yuan as a reference point, with China Merchants Bank discount, only 1 cent; Even if there is no CMB APP people, using Alipay, wechat pay will not feel the pain of loss;
The framing effect is that what you say is more important than how you say it!!
Theories that explain framing can be broadly divided into three categories: prospect theory (used in combination), cognitive theory and motivational theory
Endowment effect
Once an individual has an item, they value it more than they did before they had it
The more effort and emotion consumers put into a product, the more they overestimate its value.
I heard from a friend before that he bought a second-hand Switch game card on Idanyu and the man sold it to him at the original price, as if you would like to buy it or not, and there was no free shipping. He refused to bargain, saying he had put in a lot of time. The problem is, the time you put in is nobody’s business; This is why the Switch player has an endowment effect on his card, so he feels the value of the card is high;
Things you do or assemble yourself, code you write, projects/products you participate in, things you buy for a long time… . Like MIUI user participation, open source community participation etc… .
Seven days without a reason
When endowment effect is invalid: 1) The experienced person effect will be weakened; 2) Endowment effect is related to reference points;
Proportion of prejudice
The proportionality bias, the perception of the proportion or the multiplier itself, is more sensitive than the perception of the number itself
For example: 100, if you lose 50, that’s a 50 percent reduction. If 1000, if you lose 50, it’s just a 5 percent reduction, which is less.
A few examples:
1). In the promotion, the goods with low price should be discounted and the goods with high price should be reduced. For example, 100 pieces of spicy hot pot 20% off, in fact only reduced 20 yuan, we will feel preferential, to eat a meal, the original price of 2999 pieces of course down 200 pieces, in fact 9.6 discount less than, consumers will feel less than 200 cost-effective;
Commodity price > 100 yuan, discount show the price concessions. For example, for travel or digital products worth thousands of yuan, 10% or 10% discount is not a good deal, but it is very attractive when the discount is several hundred yuan.
2). Exchange and purchase with a price increase
Making consumers psychologically focus on small items with a large percentage of price changes will create a sense of good value.
3). It is easier for consumers to feel the value of a very expensive item when it is paired with a cheap item than when it is sold separately. For example, 200 yuan for a coat, 10 yuan for a pair of socks, 201 yuan can take away the coat and socks at the same time, people are more likely to buy an extra 1 yuan for socks when buying coats, thus driving the sales of socks. Examples of this can be found in many shopping malls.
4). Some pricing uses different price expressions to produce different illusions. The price is put behind the big number, 30 yuan 80, 80, 30 yuan, expensive put behind, feel cheap, “buy a watch to get 5 cigarettes”, “buy 5 cigarettes to get a watch”
Peak-end law (process neglect)
Critical moment MOT!!
The Peak-end Law (Daniel Kahneman) : The memory of an experience is determined by two factors, the feeling of the peak (whether positive or negative) and the end; Most of us selectively remember the climax and the ending.
The peak-end law is common in games, such as the game took 5 kill, 3 kill, the final crazy demolition of the opponent base, win MVP, etc., most of the experience memory is concentrated inExperience peak (pleasure of killing, teamwork, etc.) 和 End time (instant explosion,MVP, etc.);
For example, for a certain person, we tend to remember his various highlights and ending;
For example, shopping in IKEA has a lot of unpleasant experiences, such as having to walk through the whole store to buy only one piece of furniture, having few clerks, and having to find goods on the shelves and move them down, etc. But the peak-end experience for customers is good. One CRM consultant (and ikea regular) said: “To me, peak is about value for money, practical and efficient display areas, trial-free experiences, and delicious and convenient food. What is the end? Could be that $1 ice cream at the exit!”
Of course, in personal life, in work, in business, in marketing, in stores, in products, in games, in movies, and so on, there is this peaking law;
Status quo bias
People value anything they think is part of the status quo more than anything they think is not part of the status quo, and they are unwilling to change the status quo even if it is more advantageous to change it.
7 days with no reason to return and exchange, taking advantage of the user’s current situation bias, and free trial (e.g. 3 months free broadband 10M LITRES 100M, etc.)
Status quo bias: due to the endowment effect, people are averse to changes in the status quo and afraid of losses caused by changes (the “loss aversion” principle mentioned above);
Adaptive bias
It is a powerful behavioral psychology that people can eventually adapt to both good and bad circumstances.
A person to any one thing, have after will get used to.
Good things for a long time, will also get used to, bad things for a long time, will also get used to.
When you buy a new phone, you feel bad even if you accidentally touch it. After a few months, you don’t feel bad even if you drop it.
Shopping platforms will lose their freshness after a long time, which is why e-commerce often conducts some activities to give users a sense of freshness and expectation.
Some game platforms are also included. After playing the game for a long time, it will not feel interesting, so some game platforms will launch activities or add some gameplay, such as League of Legends, eating chicken and so on.
Working for a long time or doing one thing for a long time, it will also feel uninteresting, so it needs freshness or a little stimulation.
So in business and work, we need to make some changes to users or employees.
Veblen effect
The purpose of consumers to buy some goods is not only to obtain direct material satisfaction and enjoyment, but also to obtain psychological satisfaction to a greater extent.
This has resulted in a strange economic phenomenon, such as the high price of goods, that expensive is good, often due to vanity, comparison and other psychological factors to make impulsive choice.
For example, some people love to install, the business will meet their needs.
Intertemporal choice
Costs and benefits are spread over time.
Long-term incentives, which may have little incentive effect (discounted value) for the present, are more likely to have a preference for immediate gratification than delayed gratification, known as intertemporal preference.
There’s something in everyone’s brain called the “time discount.” Simply put, something to be acquired in the future, even if it is risk-free, is discounted by the time it has to wait.
For example, preparing for a few years later is a big meal, not as good as eating it now; There are business routines, new users register to reward XXX things or free order and so on; And the last three days heard on the street, the last three days of sales; There are also some malls that end in a few days (such as JINGdong seckill); There are also ads that take effect in days; The main point of these examples is that most people have a preference for instant gratification.
Intertemporal selection theory
- Discounted utility model: Based on the hypothesis of “perfectly rational man”, this model believes that when people make intertemporal choices, they will calculate the present value of utility in different periods according to a fixed discount rate, and then choose the scheme with the highest present value utility to achieve the maximization of total utility. Hypothesis (independence of consumption hypothesis; The discount function is independent of the form of consumption; The plan is integrated; The instantaneous utility function doesn’t change over time; . …).
- Deviation from the discounting utility model:
- Hyperbolic discount model: Intertemporal decision making in which only people make irrational actions in the long run (shopaholic; Girls chasing beauty, do not want to lose weight; Want to get rich overnight), from the theory (hyperbolic discount), cause people to pay too much attention to the immediate interests, the understanding of long-term interests is insufficient; Say frankly a bit is carpe diem, for a long time like this will become waste; A person who has the ability to delay gratification, who wants to achieve something valuable and meaningful, can’t do it without a long period of accumulation and learning, and the effort of dropping water through a stone.
Economical prejudice
As Jobs famously said, “Our customers don’t want to take advantage, they want to feel like they’re taking advantage;”
When people trade, they not only buy the goods, but also feel they are getting a good deal.
Like how much the original price, how much after the discount. Or like how much full minus how much… Free mail is also to meet the feeling of cheap, and coupons, is really full of routines.
For example, the integral card, full 2000 points for things, which sent 500 points in advance. Jingdou can offset the money, and there are all kinds of activities to encourage you to buy jingdou.
The transaction utility mentioned in the foreground theory can be used as the basis for this analysis;
The resources
Book Recommendations: “Thinking, fast and slow”, “strange behavior”, “business school – get – Liu Run five minutes”, “the gambler creed”, “booster”, “super brain behavioral economics”, “price game”, “priceless” and “wrong”, “booster”, “the winner’s curse”, “behavioral economics, theory and application”, “irrational exuberance”, journal of consumer psychology, “Consumer behavior”, “why customers buy, the maps of bounded rationality: towards the psychology of behavioral economics, the buy buy time of behavioral economics, the reason of irrational, earth people are unreliable,” animal spirits “, “the choice of value”, “the undercover economist 3: irrational world of rational economics”
Read through the article “Thinking, Fast and Slow” heuristic Cognitive Bias -MBA think tank psychological account peak-end law framework effect representative bias
Video materials:
What is behavioral economics? “Wrong” behavior — Behavioral Economics you must know — Beijing Union University
Behavioral Economics — Guanghua School of Management, Peking University
Palm College — Behavioral Economics micro course
Behavioral economics in ten minutes!
investment
At the end
We’ve talked about why we know behavioral economics, and the history of behavioral economics, including the three cornerstones of behavioral economics (prospect theory, heuristic cognitive bias, and mental accounting), and some of the derivative theories;
Programmers who don’t know behavioral economics are not a good product;
I was studying behavioral economics just out of curiosity, and I was wondering why I couldn’t stop cutting my hands off when there were so many different ways to do business. Why some government policies, I am very comfortable with; For investment and financial management, behavioral economics gave me another explanation; Although learning behavioral economics is not going to make me rich overnight, I feel that there is another interesting thing in my life, and I can see some things from a different perspective… .
Attached is my mind map for the entire article: 
First time to share in the companyThank you for your comments,
