Behavioural economics for The Financial Services Forum members conference 2015
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Paul Laughlin, Managing Director, Laughlin Consultancy When Customers don’t act rationally Applying Behavioural Economics © Laughlin Consultancy Ltd, not to be used without permission.
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Transcript of Behavioural economics for The Financial Services Forum members conference 2015
Paul Laughlin, Managing Director, Laughlin Consultancy
When Customers don’t act rationally
Applying Behavioural Economics
© Laughlin Consultancy Ltd, not to be used without permission.
Behavioural Economics (BE)
A quick thought experiment Would you rather…
A B
Take a 50% chance of gaining £1,000 and a 50% chance of gaining nothing?
OR Gain £500 for certain?
A quick thought experiment Would you rather…
A B
Take a 50% chance of losing £1,000 and a 50% chance of losing nothing?
OR Lose £500 for certain?
10 irrational biases (FCA)
Present Bias
Reference Dependence & Loss Aversion
Emotional Drivers
Overconfidence
Over-extrapolation
Projection Bias
Mental Accounting & Narrow Framing
Framing, Salience & Limited Attention
Decision Making Rules of Thumb
Persuasion and Social Influence
Why is this relevant to you?
Even when you treat them as individuals & target them accurately, your customers are still vulnerable to making poor decisions due to these biases. Do your customers…
1. …find your products complex & boring? 2. …need to make decisions based on assessing risk or uncertainty? 3. …need to make trade-offs between the present and the future? 4. …find these decisions emotional or fearful? 5. …lack opportunities to learn by making these decisions?
Spotting the ‘Dark Side’
FCA have stated they will use these as early warnings:
• Rip-offs: Uncompetitively high margins
• Suckers: Concentrated profits in small customer group
• Bargains: Innovative products that appear very cheap
• Traps: Contract features that often target BE biases
• Regret: Reported or potential regret
• Folly: Choices out of line with common sense
• Confusion: Observed or likely confusion
The power of eye tracking research
Generating & testing hypotheses
Research Customer Need
Bias 3? Bias 2?
Bias 1? Rational Choice
Analyse Actual
Behaviour
Analyse Actual
Behaviour Test
Mitigations
Experimental Design
Hypothesise Biases at work
Hypothesise Biases at work
Project Innovate
Can I help you?
customerinsightleader.com
laughlinconsultancy.com
@LaughlinPaul
linkedin.com/in/paullaughlin
+44 (0)7446 958061
© Laughlin Consultancy Ltd, not to be used without permission.
