Why You Buy

Behavioral economics is a new science that sheds light on some of our most important decisions. It is the study of how and why people make money-related choices. Here are some of the things the studies have shown thus far:

Decision Paralysis

One study showed that customers spent more when given four samples of jam to taste than when they had twenty to choose from. Too many choices seemed to lead to an inability to decide. Limiting options may be a useful sales technique, according to this research finding.

Sunk-Cost Fallacy

People are more likely to attend an event if they paid for the ticket than if they got it free, even with the same information and interest. The money is spent, and logically has no relevance to the decision, but this phenomena of behavioral economics persists even when this is pointed out. Aren't most of us going to feel worse throwing away a ticket we paid for?

The applications are obvious, if you look. Perhaps, for example, rather than giving away tickets to "get rich" seminars, the organisers would get better attendance by selling their "$100" tickets for $3. Just having paid something makes people more likely to attend.

Confirmation Bias

We tend to act economically in a way that confirms our current beliefs. When negotiating to buy the exact same model of Mecedes, for example, current owners, who presumably already believe in the value of a Mercedes, pay $7,000 more, on average, than new Mercedes customers. I'm sure you can imagine the value of this knowledge to companies that sell high-priced items.

Extremeness Aversion

People seem to instinctively avoid extremes, according to the research. Given a choice of televisions costing $300, $500, and $700, for example, not many buy the $700 one. Add a $1200 television to the choices, however, and more will then buy the $700 one, because it is no longer the most expensive one.

In the information coming from these studies, you'll find much to help your sales and marketing efforts right now. You can also learn enough to protect yourself as a consumer. For more on behavioral economics, watch for "Why You Buy, Part Two."

Steve Gillman has been studying every aspect of money for thirty years. You can find more interesting and useful information on his website; http://www.unusualwaystomakemoney.com

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