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How Brains Buy© Alan Newman

https://uk.linkedin.com/in/alangnewman

© alan g newmanhttps://uk.linkedin.com/in/alangnewman

Most of our decision making is subconscious.

We often make sense of our decisions

after the event.

‘We’ are not in charge: our brains are.

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WHAT WE’RE GOING TO COVER IN THIS PRESENTATION

We’re going to look at four things:

1) A brief scene-setter from the world of behavioural economics to introduce the ideas of (i) bounded rationality (ii) System 1 and System 2 thinking and (iii) Heuristics and cognitive biases.

2) The psychology of a purchase. What factors are being processed by the brain?

3) How many types of purchase are there?

4) And finally, to encourage an insight or two, we’ll consider a matrix that relates the various psychological factors of a purchase to the types of purchase that we’ve identified.

3 © alan g newmanhttps://uk.linkedin.com/in/alangnewman

Among his many accomplishments, Nobel laureate Herbert Simon introduced the notion of bounded rationality. This is the idea that when we make decisions, our rationality is limited by:

• the information we have• the cognitive limitations of our minds• the time available to make the decision.

This ties in with the idea of cognitive load which refers to the total amount of mental effort being used in the working memory. These two related ideas may seem obvious but until they came to the fore the conventional wisdom was that we were rational decision makers with time on our hands.


Bounded Rationality


In his book, Thinking – Fast and Slow, psychologist and Nobel Prize winner Daniel Kahneman noted that we have two thinking systems. Perhaps unsurprisingly they are referred to as System 1 and System 2.

System 1 is used about 95% of the time. Every day we make hundreds of micro-decisions and because we’re doing this intuitively and subconsciously we don’t even realise we’re doing it.

THAT’S IMPORTANT.


Two Thinking SystemsSystem 1

• Fast

• Effortless

• Subconscious

• Intuitive

• Subjective: experience based

• CONTEXT DEPENDENT

• We use it most of the time

System 2

• Slow

• Effortful

• Conscious

• Calculating

• Objective: evidence based

• CONTEXT INDEPENDENT

• We use it rarely

© alan g newmanhttps://uk.linkedin.com/in/alangnewman 7

Heuristics


When faced with complex decisions brains use subconscious short cuts

and rules-of-thumb called heuristics.(Example: price is an indication of

quality. “We get what we pay for.”)

Cognitive Biases


Just as right-handedness or left-handedness are muscular biases, we also

have cognitive biases. These are examples of System 1 thinking. They are

non-rational (rather than irrational) strategies that brains use to make

quick decisions in the face of limited information and time pressure.

Examples include the confirmation bias, framing, the hindsight bias, loss

aversion, mental accounting, the optimism bias, the status quo bias,

time-inconsistent discounting, and the zero-risk bias.

Mental Accounting


We treat money differently based on where it has come from and what it is to be used for. To economists this is non-rational behaviour. Rather than rationally viewing every pound as identical, we put different pounds in different ‘mental accounts’. We may designate some of our pounds as ‘safety’ money which we invest in low risk financial products while, at the same time treating other pounds as ‘flutter money’.

Multiple Selves


Each of us is a personal combination of :

• Bargain hunter• Gambler• Miser• Spender• Tycoon

Under what circumstances does each one step forward?

Brains and Time


Brains are good at thinking about the past or planning the future if we have a timescale of one year. That fits with seasons that repeat themselves. And because they repeat why would brains waste valuable resource calculating Year 2 when it is a repeat of Year 1? A consequence of this is that brains (subconsciously) exhibit a strong preference for the here-and-now, perceive the future as risk laden, and rewriting the past to fit the present.

The Psychology of a PurchaseConsider what goes on in your brain when a purchasingdecision is being made.

1. Anxiety level 2. Arousal 3. Cognitive load4. Emotional engagement (enjoyment, excitement, fun)5. Risk – how do brains perceive it?6. Shortcuts (biases and heuristics) (We’ve covered this)

7. The time factor (We’ve covered this)8. The trust factor (e.g. In a professional, a friend, or brand)



Many of us are driven by anxiety – or, more accurately, driven to reduce it. Life is a series of ‘To Do Lists’ that we have to tick off. No sooner have we ticked off one item, and reduced our anxiety, the next one on the list demands our attention. But this state of affairs can drive achievement.

ANXIETY affects how brains buy in two ways. First, because making purchases can give us brief-but-many feelings of pleasure, shopping (and especially impulse buying) can, in the short term, reduce anxiety.

On the other hand, the activity of shopping can increase anxiety. Have I

paid too much? Do I really need this? Will he/she like it? (Such negative aspects of shopping are often part of social anxiety.)

1 Anxiety


“A feeling of worry, nervousness, or

unease about something with an

uncertain outcome.”


When we’re in a state of high AROUSAL we are active, attentive, and excited.

Our pupils dilate and we sometimes hear that stores use cameras to detect this

so that they can better target marketing messages.

For some of us SALES increase our level of arousal. (Think about the hype and

queues we see at Black Friday.)

In an aroused state we are more prone to make impulse purchases. We also

become competitive – if we see somebody else want to buy something we

want to buy it too, especially if it is perceived as scarce, whether we initially

wanted the item or not.

2 Arousal



The idea of COGNITIVE LOAD is related to that of bounded rationality that

we heard about previously. It refers to the total amount of mental effort

being used in the working memory.

3 Cognitive load


Using brands

and/or our previous

purchasing decisions

is an efficient way

of reducing

cognitive load.


Emotional engagement. To what extent are your feelings and emotions

connected to the brands, goods or services that you are considering buying?

(TV advertising, btw, is a high engagement, low attention medium).

If, for example, you are brand loyal then you have a degree of emotional

engagement that is always switched on to some degree or other. That is a big

advantage for the seller who is competing for your attention in an

environment characterised by a lot of ‘noise’.

4 Emotional engagement



For some of us buying something new, or buying something in a new way (e.g. at an online auction for the first time) is perceived as risky and we psychologically pull away from the purchase.

For others this is exciting and the novelty makes the buying experience more enjoyable.

This is a good example, if one were needed, of why it is important to know our customer and not be lazy or stereotype-prone when it comes to segmenting our market.

5 Risk or Excitement ?



We’re a social species and part of that wiring, it seems, is that our default state is to trust.

On the face of it that might seem odd because, in the short run, abusing trust in others would pay off wouldn’t it. But in real life not only do we often meet the same person more than once but also word gets around.

Reputation is a social currency. It has value.

Making decisions based on information, people, or sources we trust works more often than not and it saves us time and effort working things out for ourselves.

8 The Trust Factor



Although it may come as a surprise to actuaries and economists the evidence suggests that our default, as humans, is to trust other humans – even strangers.

Because there is one word – trust – we can easily fall into the trap of thinking that there is one thing. But trust isn’t ‘one thing’. It is multifaceted. And at its heart is vulnerability.

At the base level trust (in an organisation) is based on its competence to do the job. I trust a bank to operate its ATMs efficiently but I do not trust it when it tries to sell me products I neither want nor need.

The next level of trust is based on integrity. When something goes wrong can I trust this enterprise ‘to do the right thing’?

Then comes trust based on insight. Have you demonstrated that you know me well enough to act in my best interests as perceived by me?

At the top of the pyramid is trust based on intimacy. Have you shown that you know me well enough, and care about me sufficiently, to anticipate my needs and wants and help satisfy them?

Types of PurchaseIn this short presentation we take a look at eight types of purchase that we commonly encounter:

1. Advised purchase2. Considered purchase3. Distressed purchase4. Fun purchase5. Grudge purchase6. Impulse purchase7. Repeat purchase8. Self-gratification purchase


Advised Purchase


Many purchases, whether it’s a new

home or a complex financial services

product , benefit from advice given by

someone trained in a particular and

relevant profession or job.

In these instances we are benefiting

from System 2 thinking (at least on the

part of the adviser).

Considered Purchase


Many of us also activate System 2

thinking when we consider information

from expert sources, even if we’re not

using face to face advice. In these

instances we are coming close to how

classical economics sees us: calculating,

objective and measured. As often as

not we use this strategy to avoid

making a wrong decision.

Distressed Purchase


A distressed purchase is one where you have no choice. You have to buy the products or services in question immediately or within a very short space of time – and this often causes

distress. Hence the term. One example is having to find somewhere to buy petrol, under pressure, when the fuel tank is showing Empty: even if you do not wish to interrupt your

journey. Another example would be having to go and buy nappies at an ungodly hour at an inconvenient location because the last one has just been used.

Fun Purchase


In some situations the process of gathering information and considering options is not an effortful, time-consuming chore (as may be the case when considering a pension plan); it is an enjoyable part of the purchasing experience. Choosing where to go for a special holiday would be a good example of this. So what can we do to make our purchasing journey FUN ?

Grudge Purchase


Grudge purchases are the products and services that we buy because we have to even though we’d rather spend our money on something else.

They are the new car tyres, a TV licence, or washing powder. We only think about them when we need to buy them.

They are also the purchases where having them does not bring instant gratification.

Impulse Purchase


Repeat Purchase


“Familiarity breeds favourability” is a marketing maxim. Add to this

the fact that brains are habit machines and we can see why

repeat purchases are so powerful.

Self-gratification Purchase


Self gratification is defined as the

indulgence or satisfaction of one's own

desires.

Consciously we may know that that some of

our purchases had little merit and we

should not have made them. But the fact

that we are not alone in this is illustrated

well by the L’Oreal catch phrase, “Because

I’m worth it.”

If it’s true for lot’s of people, and it’s on TV, I

can’t be that bad, can I?


To bring some of these ideas together, consider this matrix.

In each cell is the relationship between the type of purchase

on the horizontal axis, and brain state on the vertical axis,

High, Medium or Low ?

Ask yourself why this is and how you can use your answer to

improve your business and customers’ experience.

Bringing it altogether . . . .


Advised Considered Distressed Fun Grudge Impulse Repeat Self gratification

Anxiety

Arousal

Cognitive load(High)

Cognitive biases

Emotional engagement

Risk

Time

Trust

H. M or L H. M or L H. M or L H. M or L H. M or L H. M or L H. M or L H. M or L









To Summarise1. HOW DO BRAIN BUY? It’s complicated.

2. INSIGHTS FROM PSYCHOLOGY.– Bounded rationality, System 1 and System 2 Thinking, Heuristics

and cognitive biases, Brains and time.

3. THE PSYCHOLOGY OF A PURCHASE– Anxiety, Arousal, Cognitive load, Emotional engagement, Risk or

excitement, Trust.

4. TYPES OF PURCHASE– Advised, Considered, Distressed, Fun, Grudge, Impulse, Repeat,

Self gratification.

5. MATRIX to encourage insights.

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