Cognitive Biases, Mental Models, and Business Competition
Cognitive biases are powerful tools for marketers and salespeople to leverage. Used in an ethical manner, they allow brands to stand out from the competition and build trust with consumers.
Biases are mental shortcuts or heuristics that we use to make decisions quickly and efficiently. They can be helpful or harmful, depending on how we use them.
False Consensus Bias
The false consensus bias is the tendency of individuals to overestimate how common their own beliefs and opinions are. This can lead to misjudgments in decision-making, research, and design. The false consensus bias is driven by a combination of factors, including the availability heuristic and a desire for validation. The availability heuristic is the human brain’s tendency to rely on the most easily accessible information when making judgments. This leads to a cognitive shortcut that limits awareness of alternative perspectives. The desire for validation is also a contributing factor, as people tend to seek out and surround themselves with like-minded individuals, which can reinforce the false consensus effect.
This can have a number of negative effects, including risky behavior, poor decision-making, and misunderstandings. For example, a person may engage in risky behaviors such as drinking and driving or drug abuse because they assume that most people do the same thing. This can lead to serious consequences for the individual and others. In addition, the false consensus bias can cause misunderstandings when it comes to marketing and product development. For example, a business may develop a product that they believe their target market will love, but it turns out that the audience doesn’t respond to the product in the way that the company expected.
To avoid the false consensus bias, businesses should make a conscious effort to seek out diverse views and voices. This can be done by following accounts and joining groups on social media that challenge their perspective, or by practicing digital empathy, which involves consciously trying to understand the thoughts and feelings of others in the online space. Additionally, it can be helpful to regularly reflect on one’s own assumptions and beliefs to see if they might be influenced by the false consensus bias.
Halo Bias
People make a lot of presumptions that don't require much thought. These presumptions can be beneficial for assessing your surroundings quickly or socially, but they can also distort the truth unhelpfully. For example, if you see someone crying, you might assume they're sad even though it may not be the case. In the workplace, these biases can influence performance evaluations and hiring decisions. They can even affect the way you buy food, leading you to think something is healthy when it's not.
The halo effect is a common cognitive bias in which positive impressions you have about one aspect of something or somebody influence your perceptions of that thing or person as a whole. For instance, if you find a candidate attractive, it will be hard to revise your impression of them as being generous or smart, even if you encounter evidence that proves otherwise.
Businesses can leverage this bias by presenting their products with positive associations that are authentic and familiar. A celebrity endorsement, for example, creates a halo effect around the brand that endorses it. A product line extension, such as a shampoo's inclusion in a green beauty kit, can also create this effect if the brand is known for its eco-friendly initiatives.
The decoy effect is a type of halo bias that can be used to influence choice and decision-making by showing a less appealing option alongside a more desirable one. For example, when choosing between a small, medium, and large serving of popcorn at a cinema, the addition of a low-priced "decoy" option can nudge customers toward the larger size because it appears to be a good value. The key to using this bias effectively is being transparent about your marketing tactics. False or inauthentic associations will backfire and create skepticism rather than trust.
Anchoring Bias
Anchoring bias is the human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. This bias can lead individuals to make inaccurate judgments and insufficiently adjust away from their anchor. For example, when asked to guess the price of a drink at a coffee shop, people tend to overestimate its cost based on the first number they hear — even though other drinks may be available for cheaper prices.
For businesses, this bias can create a host of problems. For example, in a hiring situation, HR associates might skew their judgment by looking at bits of data on resumes, such as where a candidate went to school or where they previously worked. This might cause them to favor applicants from prestigious schools over those from state colleges, even if the former has more relevant experience.
The power of the anchoring bias has been shown in dozens of studies. For example, when German judges with years of experience were asked to judge a woman who was caught shoplifting, those who were initially anchored to the number 9 sentenced her to more months in prison than those who were anchored to the number 3.
The anchoring effect is often exacerbated by mood and personality. In fact, researchers Englich and Soder found that participants are more likely to suffer from this bias when they’re sad than when they’re happy. This cognitive bias is also influenced by confirmation bias, the tendency to seek out information that confirms one’s initial impressions. For example, a patient who complains of pain in their left foot might have a doctor ask about any other symptoms such as tingling and burning, even though these can be indicative of many different conditions.
Framing Bias
Framing bias is a tendency to judge a choice as positive or negative based on how it’s presented. This bias is rooted in people’s natural aversion to losses and preferences for certain gains. It can influence risk-taking, for example when a medical procedure’s success rate is presented as a guaranteed gain rather than as a potential loss. The same principle can be applied to marketing, for example when a product’s benefits are emphasized rather than its drawbacks.
The framing effect is a popular topic of research in psychology and business. It’s important for marketers to understand how this cognitive bias influences their audiences in order to make the most effective marketing campaigns possible.
A number of factors affect the framing effect. The most significant factor is an individual’s previous experience and knowledge on a subject. This reduces the impact of framing bias by allowing individuals to make more objective decisions. In addition, additional information and the use of visualizations can also minimize the impact.
Other factors that can influence framing bias include the type of stimulus and the decision-making context. For example, a person’s reaction to a given scenario might be different depending on whether it’s a hypothetical situation or a real-life event. Finally, the decision-making process might also be affected by the order in which options are presented.
Understanding and strategically leveraging these cognitive biases can provide businesses with powerful tools to enhance decision-making, improve customer retention, and optimize market strategies. However, this strategy comes with some ethical considerations that need to be navigated carefully. The best approach is to always be aware of the impact that your choices and actions might have on others, and to strive for unbiased decisions.
Decoy Effect
Decoy Effect is one of the most powerful cognitive biases to leverage in business. It involves the presence of a third option in a choice set that causes consumers to change their original preferences for choosing a target. This is because the decoy has a similar or superior value to the target, but it is not available at the time of choice.
A variety of experiments involving beer, cars, restaurants, lottery tickets, camera film and television sets have shown that the addition of a decoy increases people’s preference for the target option. However, the size of this effect depends on how the decoy is positioned in terms of its relative value to the target and the overall size of the selection set (the total number of options presented).
When the decoy is superior in an attribute, it tends to have a stronger influence over choices. This is because the decoy acts as a reference point for comparisons between the target and competitor. For example, if a computer company wants to increase their market share in the laptop segment against competitor A and competitor B, they can add a decoy C that is cheaper but has less storage capacity than both A and B. Consumers will then prefer A for the greater storage capacity even though it is a more expensive model.
Asymmetric dominance decoys have the strongest effects, but it is important to keep in mind that these are not universal. For instance, some studies have failed to replicate the effect. This may be because the effect does not generalize to all groups, or because there are specific moderating factors that need to be accounted for.