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Question:

The aim of this exercise is for you to identify, catalogue and explain instances of some of the heuristics and biases that have been uncovered by the behavioural economics research program.

What you are required to do is to find a real, current example of a business model, pricing strategy, marketing technique etc that exploits, or relies on for its success, one of the following:

  • Anchoring
  • Framing (including heuristics and biases that can be interpreted asvarietiesof framing)
  • Lossaversion
  • Intertemporal choice anomalies (e.g. dynamic inconsistency, magnitude/sign effects, speedup-delay asymmetryetc)

This has to be something that you have observed in the world around you currently, not an example from course materials, books, articles or other second-hand sources. You need to hunt this one down yourself. Document it with photographs, screenshots or whatever representation is most appropriate. Be sure to supply the time and place in which you encountered it (either real or online – supply a url for the latter) in your response.

In discussing your example address these points:

  • What is the phenomenon (i.e. of the four listed above) that you haveidentified, and what are its implications?
  • Why and how does it underpin the example you areusing?
  • Is your example better explained by employing behavioural economics than by not (i.e. is your example inconsistent with/hard to explain using standard microeconomics)? Why, or whynot?
  • Are people made better off through the existence of your example, or is there a case for a policy intervention to preventit?
 

Answer:

Introduction:

In real world, people receive greatest benefits and satisfaction by taking optimal decisions. In the field of economics, people get large number of options along with scarcity constraint from where they need to select the best option that can satisfy them significantly. In this context, behavioural economics deal with psychological and economical aspects of a human to understand about their irrational activity at the time of decision making (Wilkinson and Klaes 2017). Heuristics implies as a rules of thumbs or cognitive shortcuts that can simplify any decision. In this process, a person can easily substitute a difficult question with comparatively easier one. Heuristics have some disagreements compare to rationality and bias. A cognitive bias, on the contrary, implies a systematic error to think by considering that judgement differentiated from the acceptable and desirable norms, based on former logic. Sometimes, the heuristics applications become linked with cognitive biases that may arise due to representativeness and availability though they cannot show that motivation of a person rather these occur due to error outcomes based on information processing (Thaler 2017). Some other cognitive biases, which have functions of self-serving can motivate people strongly. On the contrary, through some other types of biases like confirmation bias, people can motivate or unmotivated. Some well-known forms of cognitive biases are anchoring, framing, loss aversion and in temporal choice anomalies.

This report intends to select anyone of these biases to discuss further in the context of practical example. This is because these forms of behavioural economics can be observed within a business model along with pricing strategy and marketing technique and so on (Astebro, Herz, Nanda and Weber 2014). This report considers the process of anchoring based on which it can analyse a real as well as current model of business. After that, the report will discuss that whether behavioural economics is more consistent than standard concept of microeconomics or not.

 

Brief overview:

Anchoring: According to some cognitive psychologists, a heuristic can be represented as a mental shortcut that can interpret various complex problems during the process of decision making. Therefore, people generally believe on the first information that they receive during this decision making process (Jahedi, Deck and Ariely 2017). For instance, during an auction related to any product, people always offer a price higher than initial bid while biding below this price is considered as illogical, even if the initial price remains comparatively high that the actual price of that product.

Under anchoring, different biasness can be observed, such as, priming, framing, availability biases along with confirmation bias and groupthink. The following section has discussed about these biases, based on some specific activities of a business that can be observed in real field.

Anchoring Bias in the context of marketing:

 To explain the anchoring bias, various actions can be represented. According to some psychologists, multiple unit pricing system can influence supermarket sales to improve further. For instance, different statement of advertisement can motivate consumers to purchase a certain product over another. People prefer multiple unit pricing compare to that of price of a single unit product though the amount of unit remains same. Another example states that consumers can be affected by setting the limits of purchasing quantity.  According to real field analysis, psychologists have observed that limited sale of a product can increase its selling. People prefer to buy this limited item instead of another one that can be obtained unlimitedly. In another example, psychologists have discussed about the initial price setting. When a consumer purchase a car, the initial price offered to the consumer set a standard of this product. Therefore, customers start to negotiate the price considering this initial price as base without considering its legitimacy. Hence, from the entire discussion it can seen that number can influence a consumer effectively for purchasing a particular product without considering economic relevancy.

Over the several time periods, decisions have various outcomes based on intertemporal choices. Maximum choices need decision makers for trading off benefits with costs for different time being. Thus, decisions regarding savings, education, work effort, exercise as well as nutrition and health care are considered as intertemporal choices (Holden and Quiggin 2017). In this context, discount utility theory is used widely to analyse intertemporal choices. Through this framework, one can describe positive behaviour as well as optimal behaviour.

Under anchoring, different biasness can be observed, such as, priming, framing, availability biases along with confirmation bias and groupthink. The following section has discussed about these biases, based on some specific activities of a business that can be observed in real field.

 

Counter strategies:

The above-mentioned concept of economics can be described precisely with the help of behavioural economics instead of standard concept of microeconomics. This is because in standard concept of economics, economists consider that consumers act rationally. Therefore, consumers always intend to purchase a product with comparatively lower price at which their utility can be maximised. According to basic concept of demand, price and quantity demanded has negative relationship. This implies that when price increases quantity demanded decreases and vice versa. Moreover, according to the concept of indifference curve, a consumer always intends to maximise his utility when his budget constraint is given.  

However, the concept of behavioural economics does not support this situation. In this context, consumers behave like an irrational behaviour where they do not consider utility maximisation.

The concept of decision-makingprocess has possessed various biases. For strategic planning activities, large number of resources is invested though important decisions are sometime ignored due to judgement and this further brings risks of biasness and misaligned incentives (Thomson, Lebiere, Anderson and Staszewski 2015). Over optimisation along with risk aversion have some important sources regarding strategic decisions error, among various cognitive distortions. This is because all strategy related decision has some risk elements.

Meeting plays an important role for business to take strategic decision. In real environment of work, meeting plays a vital role to take any decisions and to contact with other members of the organisation. Instead of this, meeting also possesses various biases. One of the biggest issues related to the meeting is about the preference for some specific people, who gives disagreement regarding any decision (Rao and Tilt 2016). Instead of exploiting the opportunity for obtaining the desired objectives, leaders sometimes expect that other members of meeting can start to doquestions for criticising the project, while at the same time they become curious about their uncooperative views. The hierarchical structure of a company sometime leads staff members to conduct free debate within meeting (Tang et al. 2018). In this context, people always do not agree for some aspects with their seniors, as they possess different point of views and consequently wait for receiving theultimate responses from their seniorexecutive. In this situation, the impact of group think occurs. This form of biasness also is associated with a connection between overweighting authority and anchoring regarding decisions.

 

Utilising the behavioural economics in case of an organisation:

Utilising the ethical behaviour in an organisation over the years has become a crucial part for the large organisation. It allows them to work with strategic motivation and consider the business opportunities with effective decision making. As a large retail chain, thus Wesfarmers has been chosen in order to analyse the implication of the behavioural business and to check how it has influenced the strategic decision making of the firm. Wesfarmers' being an reputed organisation as it essential target considers satisfactory returns to the firm’s share holder by the means of exceptional management and discipline within the financial setup of the firm (Biddle 2017). The Wesfarmers Way is the system for the organization's plan of action and includes core value estimations of trustworthiness, transparency, responsibility and entrepreneurial spirit, which are distributed on Wesfarmers' site allowing better connectivity between the firm’s operation and the customer as well as stakeholders. The Wesfarmers Way, together with the Code of Conduct and different approaches, control the conduct of everybody who works at Wesfarmers as the endeavour to accomplish their essential target (Pulkeret al. 2018). The Board and senior officials of the Group endeavour to guarantee that their own particular activities and choices are reliable with Wesfarmers' core values. Enhance or making use of databases of historical data; considering opportunities to create flatter decision-making structures to encourage innovation and reach higher levels of performance has enabled the firm to perform better during the present date due to utilisation of the behavioural economics (Zummoet al. 2017). Next to this it can be seen that it look for opportunities to strengthen existing top-down accountability by combining it with bottom-up mechanisms that make it easier for clients and citizens to report upward; and. Besides this, look for ways to use non-monetary incentives and to amplify the effect of financial incentives by structuring them as losses and triggering them with as little delay as possible. Potential applications for the behavioural economics and managing authorities include:

  • Using data from 2014-20 to generate benchmarks for reference class forecasting in the post-2020 Cohesion Policy for milestones, absorption rates, error rates, costs and outreach (Sullivan and Gouldson 2017)
  • Facilitating citizen and civil society reporting on key areas of project compliance via the open data platforms of the EC and member states
  • Considering the restructuring of the performance reserve as a loss instead of a gain and timing it to be released more frequently and earlier.
 

Conclusion:

From the above analysis it has been seen that behavioural economics is one of the essential elements that enhance the performance of the businesses. Through the utilisation of the behavioural economics, firm now can enhance their strategic decision making potential and enhance the opportunities to produce higher amount of sales through effective customer handling procedure. As per the case study of Wesfarmers, it can be seen that the firm has potential to enhance the managing authorities with the utilisation of the behavioural economics and thus it has faced better customer orientation within the organisation during the recent years. To conclude, it can be said that the behavioural economics is one of the latest tools that can enhance the performance of a firm and lead to the operation success of the same.

 

References:

Astebro, T., Herz, H., Nanda, R. and Weber, R.A., 2014. Seeking the roots of entrepreneurship: Insights from behavioral economics. Journal of Economic Perspectives, 28(3), pp.49-70.

Biddle, I., 2017. Target Marketing: Gaining customer details to maximise marketing strategies. Busidate, 25(4), p.10.

Brown, J.R., Kapteyn, A. and Mitchell, O.S., 2016. Framing and Claiming: How Information?F raming Affects Expected Social Security Claiming Behavior. Journal of Risk and Insurance, 83(1), pp.139-162.

Holden, S.T. and Quiggin, J., 2017. Bounded awareness and anomalies in intertemporal choice: Zooming in Google Earth as both metaphor and model. Journal of Risk and Uncertainty, 54(1), pp.15-35.

Jahedi, S., Deck, C. and Ariely, D., 2017. Arousal and economic decision making. Journal of Economic Behavior& Organization, 134, pp.165-189.

Menon, A., 2018. Bringing cognition into strategic interactions: S trategic mental models and open questions. Strategic Management Journal, 39(1), pp.168-192.

Pulker, C.E., Trapp, G.S.A., Scott, J.A. and Pollard, C.M., 2018. What are the position and power of supermarkets in the Australian food system, and the implications for public health? A systematic scoping review. Obesity Reviews, 19(2), pp.198-218.

Rao, K. and Tilt, C., 2016. Board composition and corporate social responsibility: The role of diversity, gender, strategy and decision making. Journal of Business Ethics, 138(2), pp.327-347.

Sullivan, R. and Gouldson, A., 2017. The governance of corporate responses to climate change: An international comparison. Business Strategy and the Environment, 26(4), pp.413-425.

Tang, T.L.P., Sutarso, T., Ansari, M.A., Lim, V.K.G., Teo, T.S.H., Arias-Galicia, F., Garber, I.E., Chiu, R.K.K., Charles-Pauvers, B., Luna-Arocas, R. and Vlerick, P., 2018. Monetary intelligence and behavioral economics across 32 cultures: Good apples enjoy good quality of life in good barrels. Journal of Business Ethics, 148(4), pp.893-917.

Thaler, R.H., 2017. Behavioral Economics. Journal of Political Economy, 125(6), pp.1799-1805.

Thomson, R., Lebiere, C., Anderson, J.R. and Staszewski, J., 2015. A general instance-based learning framework for studying intuitive decision-making in a cognitive architecture. Journal of Applied Research in Memory and Cognition, 4(3), pp.180-190.

Walasek, L. and Stewart, N., 2015. How to make loss aversion disappear and reverse: Tests of the decision by sampling origin of loss aversion. Journal of Experimental Psychology: General, 144(1), p.7.

Wilkinson, N. and Klaes, M., 2017. An introduction to behavioral economics. Macmillan International Higher Education.

Zummo, H., McCredie, B. and Sadiq, K., 2017. Addressing aggressive tax planning through mandatory corporate tax disclosures: An exploratory case study. eJournal of Tax Research, 15(2), pp.359-383.

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