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  • Writer's pictureMike McGuirk

CX, meet your ally -- Behavioral Economic Theory

Updated: Jan 19, 2021

I have recently become very interested in learning more about behavioral economics and further understanding the biases we all exhibit when evaluating product/service choices and making purchase decisions. The basic premise of behavioral economics is that consumers don’t always make rational choices and don’t always understand the reasons for their actions (source Forrester, Behavioral Economics for Market Insights Professionals). The bestselling books Nudge and Thinking, Fast and Slow do a wonderful job of describing these biases and explaining how they manifest in our daily judgement and decision-making.

My interest in this topic is tied to my decade long interest in studying the benefits consumers realize when companies make the decision to shift to customer-centric business practices. Customer-centric organizations ensure the customer is at the center of the business philosophy, and they strive to provide a superior customer experience (CX) at every stage of the buying journey (source: Managing Customer Experience and Relationships). Done well, businesses, as well as consumers, should benefit from these changes. By investing in and implementing customer-centric practices, businesses can increase customer satisfaction and trust, leading to greater customer loyalty, increased customer value, and additional customer advocacy.

If companies are to truly differentiate themselves by delivering a superior customer experience, then I believe there is a real opportunity to avoid the exploitation of these often subconscious decision-making biases by implementing behavioral economics based, choice architectures. In short, successful choice architectures provide consumers’ with user friendly environments that help them make more informed decisions, leading to better outcomes.

Some of the documented consumer decision-making biases and heuristics that are particularly relevant in this CX context are:

· Status Quo - Status quo bias is evident when people prefer things to stay the same by doing nothing or by sticking with a decision made previously. One of the causes is lack of attention. For example, consumer decision-making regarding automatic renewal programs is often subject to status quo bias, and many consumers continue to pay for a subscription (e.g., magazines) they don’t even read anymore.

· Overconfidence - The overconfidence bias is observed when people’s subjective confidence in their own ability is greater than their objective (actual) performance. Many lotteries are at least partially successful because of consumers’ unrealistic optimism. Also, among investors, overconfidence has often been associated with excessive risk-taking.

· Anchoring – Anchoring is a particular form of a priming effect where initial exposure to a number serves as a reference point and influences subsequent judgments. The process usually occurs without our awareness and has been researched in many contexts, including purchasing decisions. For example, this approach has been used in consumer fundraising campaigns, where higher predefined gift selection options, within reason, often lead to higher overall donations levels.

· Framing - Choices can be presented in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness. It is common for businesses to use negative framing to illustrate risk and the need to take action (e.g., insurance providers), and positive framing to influence the sales of products/services.

(source: and Nudge)

It is my contention that businesses looking to gain the full benefit of implementing customer-centric principles should develop interactions with customers that are fully transparent and act in the best interest of the consumer. The following excerpt from the authors of Nudge help explain why this is important: “People adopt sensible rules of thumb that sometimes lead them astray. Because they are busy and have limited attention, they accept questions as posed rather than trying to determine whether their answers would vary under alternative formulations. Their choices, even in life’s most important decisions, are influenced in ways that would not be anticipated in a standard economic framework.”

One very common element of choice architecture is the use of defaults. We all have experienced this when installing software (standard or customized choices), signing up for a business webinar (receive or not receive additional business materials choices), or buying a digital magazine subscription (auto renew or manually renew choices). If delivering the best customer experience is a top business imperative, I think it is important to ask the question: are the defaults you use in the consumer buying decision journey supportive or self-serving? If it is the later, then it is important to understand that this approach may eventually erode consumer trust and loyalty.

Other important principles of choice architecture design are to expect human error and give feedback. Banks have adopted these principles in their ATM UX design to reduce the likelihood we leave without taking back our bank cards. In cases when consumers are making complex and rare buying decisions, it is particularly important to incorporate these design principles to protect and operate in the best interest of the customer. Wouldn’t it be nice if your cable provider recommended the ‘best’ package based on your answers to five questions about your personal viewing interests and you TRUST that this recommendation was optimized to match your interests to your selected package vs. revenue maximization motivations?

It is important to note, for firms hoping to gain a sustainable competitive advantage by creating better customer experiences, adopting user-friendly choice architecture systems may have an immediate negative impact on short-term profitability. Let’s face it, in my last cable operator example, you could be leaving money on the table if your ‘best’ package recommendation costs less than what the consumer was willing to pay. However, the goodwill that is built through trustworthy interactions will pay dividends for years to come through increased customer loyalty and advocacy, as your brand becomes inextricably linked with doing right by the customer!

For an example of a business that is looking to use behavioral economic theory, AI and CX practices to disrupt the current way of operating in the insurance industry, check out this article “How Startup Lemonade is Redefining Insurance for Millennials.”

I welcome your thoughts and comments.

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