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INSIGHTS LIBRARY

How Cognitive Biases Shape Consumer Behavior

Updated: Aug 17, 2023


Understanding the Psychology Behind Consumer Preferences



As a business leader, or a product manager, have you ever wondered why consumers prefer a particular brand or product, even when there may be other, objectively better options out there? How does a consumer make decisions? And why understanding the psychology behind consumer preferences is important?


I think therefore, I am!


Most people think that they are very rational when it comes to making decisions on what to buy. This was also the assumption in the study of economics for hundreds of years, that individuals are rational agents (i.e. Homo economicus). However, it could not be further from the truth. Daniel Kahneman's and Amos Tversky’s research challenged this fundamental belief and showed us that when it comes to decision making, humans are predisposed to irrationality. In fact, this work on human irrationality and decision making won Mr. Kahneman the 2002 Nobel Prize in Economics (Mr. Tversky died in 1996.)



Daniel Kahneman & Amos Tversky


Successful marketers like Apple, Coke, Nike have known this secret for centuries and created brands basis fundamental human archetypes or personas versus selling just product features! However, the field of behavioural sciences has received a lot of attention in the last decade as many of the technology businesses and product mangers seek deterministic insights to influence consumer behaviour.


Heuristics are commonly defined as cognitive shortcuts or rules of thumb that simplify decisions, especially under conditions of uncertainty. These also result in cognitive biases which are can also be seen as quirks and idiosyncrasies of the human mind. They are our 'Psychological Blind Spots’ which were the result of our brains’ evolutionary adaptation. Our brain has the tendency to take shortcuts, getting caught up in complicated human emotions, giving in to social pressure and making quick judgments based on limited information, rather than engaging in a more thoughtful and deliberate decision-making process!




Understanding these subtle, often overlooked, inclinations of the human mind, can provide insight when studying consumer behaviour and underlying motivations in using or sometimes having barriers to a product. So, let's look at a few of these cognitive biases that shape the way people view your brand and products.



1. Endowment Effect


It is a cognitive bias where people tend to overvalue items that they own or feel a sense of ownership towards.


IKEA store format encourages customers to try out furniture in their stores, encouraging them to sit on chairs, lie on beds, and so on. By doing so, customers start to feel a sense of ownership towards the furniture, as they have already imagined themselves using it. Their app enables you to even “place” a furniture in your room for you to see how it looks!


Once customers have experienced the furniture physically or virtually, and they feel a sense of ownership, they are more likely to purchase it. In addition, IKEA also offers low prices and flat-pack options, which further reinforce the sense of ownership as the customer has invested time and effort in assembling the furniture. This is an example of a successful use of the endowment effect to boost sales and customer loyalty.





2. Confirmation Bias:


This bias refers to the tendency to seek out and interpret information in a way that confirms pre-existing beliefs or expectations. So, in marketing, consumers are more likely to notice and remember messages that confirms their cultural beliefs and notions, while behaviours or products that are not integrated in rituals typically find it challenging to penetrate.


One big example of this breakfast cereals. Indians have grown up eating hot breakfast and years of advertising by biggies like Kellogg’s made little dent as cold milk and cereal just didn’t add up to idea of a nourishing breakfast. The category growth jump shifted only when INR10 packs were added and perhaps opened up consumption of the snacking occasion apart from a lower entry price.


Food & beverage companies like Tropicana and Licious prominently use "100% juice” and “100% fresh and hygienic” and clearly label for “no hormones; antibiotics; no preservatives” to build trust with potential customers who are looking for high-quality, safe food products.




3. Availability Heuristic & Mere Exposure Effect


The Mere Exposure Effect is another bias where repeated exposure to something increases a person’s liking for it. It is also sometimes referred to as the Familiarity Principle.


The Availability Heuristic is a mental shortcut where people make a decision based on information that is easily accessible and available to them. This heuristic is often used when people make decisions based on their first impressions.


Brand saliency hence build trusts, say for example repeated exposure to say brand Amul’s tagline "Taste of India" creates a 'loop effect' and it became a widely accepted truth.


Furthermore, research conducted by Bornstein et al in 1987 suggested that exposing people to something subliminally will foster a greater association with it. Designers use colours and other symbols to create the desired brand imagery. For example, Amazon's logo, which is composed of an arrow that goes from A to Z and forms a smiling face, gives consumers the feeling of inclusivity and helps build a consumer brand relationship.





4. Authority Bias


According to Milgram (1961), people tend to trust and believe the opinions of authoritative figures. This is known as Authority Bias. That's why Sensodyne uses "experts" in their ads to make their sensitive teeth promise more credible.


But on the other hand, Sabyasachi takes a different approach by dressing up famous celebrities like Deepika Padukone, Virat Kohli and Anushka Sharma in their real life to make consumers feel like they're part of an exclusive club.


So, whether you're using experts or celebrities, remember that the authority bias is real and can be a powerful tool in your marketing arsenal.



Celebrities Wearing Sabyasachi on their wedding


5. Loss Aversion


Insurance companies understand that to avoid losses, people would rather pay a small and regular price than take a chance on getting hit with a large, unexpected bill. Loss aversion bias explains that a loss or say one poor customer experience tends to leave a much darker and more lasting mark on our memories than gains or many good customer experiences.


Companies like Netflix and Amazon Prime offer free trials as it's well understood that once a user starts using the service, they'll be hooked and won't want to give it up. And if they add a deadline (utilising scarcity principle), it makes us even more likely to extend our membership!


6. Anchoring Bias



This occurs when people rely too heavily on the first piece of information they receive when deciding. For example, a consumer may be more likely to purchase a product when the price is dropped, if they see a higher price point first, as it sets a mental "anchor" for what the product is worth. Savvy bargainers use this technique well as once you set a high initial price, you typically end up paying higher!


During Big Billion Days Flipkart starts by setting a high starting price and then offering discounts. The result? Customers are eager to jump on the incredible deals and snap up items before they sell out!


Is it enough to understand Biases?


Cognitive biases are like secret tunnels into the minds of consumers, giving marketers and researchers a better understanding of how people make decisions. However, knowing biases is not enough - they don't produce behaviour; they simply describe it.


With over 200 different biases, it's clear that consumer behaviour is anything but simple. And while a well-timed 'Nudge' in the right direction can help, there's no

magic formula for success. An individual bias is an oversimplification of human behaviour! When however understood and leveraged in context of the underlying needs, aspirations of the people using a product and their purchase journey, they may guide to actionable inputs needed to create effective marketing and product strategies.




Conference

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