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The Three Rules Of Behavioral Economics That Can Lead To Success

Entrepreneurs know there's little room in the startup process for error, and these three principles can help minimize it.

The Three Rules Of Behavioral Economics That Can Lead To Success
[Photo: MoneyforCoffee via Pixabay]

As just about every entrepreneur, business leader, or even ordinary job seeker knows, the success often comes with very thin margins of error. Look back on that big job you landed or the major growth you've seen your company through, and chances are, you'll spot plenty of ways things could've gone sideways but didn't.

How can you increase your company's likelihood of success? This is where the science of behavioral economics—the merging of economic theory and social science—can help. These three key principles can help you make better decisions about how you grow your business and chart its course forward.

1. Focus On Losses, Not Gains

We're often told to look on the bright side—to focus on wins and growth, to think positively. But behavioral economists understand that one of the most potent motivators of human behavior is the fear of loss. In fact, researchers have found that people are far more motivated to not lose something than to gain something of equal value—at a ratio of about 2-to-1.

So how can you leverage this fear of loss? First, when you have a goal that you need to meet, put something (like money or reputation) at risk. For instance, if you don’t finish a project by the end of the month, you'll give $100 to a friend. But don't just promise yourself you'll do that: Give that friend the $100 first and instruct him or her to only give it back to you if you reach your goal on time.

If you're running a business, you can make loss aversion work in your favor by clearly telling potential customers what they'll lose by choosing not to invest in your product or service. Too often, sales pitches and presentations only focus on gains. Sharing the beneficial outcomes you can deliver is important, but there's a mountain of research suggesting that articulating potential losses can sometimes be an even more powerful motivator.

2. Show What Others Have Done

Think of the last performance you saw that ended with a standing ovation. As more people around you join in, do you feel the urge to get up and start clapping too? If you are like most people, you’ll likely find yourself rising to your feet, even though you hadn't planned to do so. Why does it feel so difficult to resist that urge?

It's largely thanks to the well-known principle of social norms. These standards or expectations of behavior are highly influential. For example, when researchers partnered with a hotel and used social norms to influence how guests used towels, they were able to increase reuse by 26%. Here’s what they did: Guests were told that the majority of prior occupants had reused their towels. This created the impression that it was normal for people who'd stayed in the room to do that, so most people simply followed suit—saving the hotel money and helping the environment.

When you show others how most people in their particular situation act, they will usually follow. For marketing purposes, this can be as simple as stating, "Many people in your situation . . . " or "Our most popular option is . . . " Also, share surveys, stories, and data that indicate what a lot of people are doing, and you'll probably find that others will see whatever it is that your company is recommending in a more favorable light.

3. Never Call Something "Free"

To gain new customers, startups regularly allow buyers to try their product or service for a short period before buying it. The challenge, of course, is getting those free trial periods to end in purchases. How? Don't say, "It's free." Behavioral economists have found that labeling something as free diminishes its perceived value. Instead, state the monetary worth of what you're offering and only then give it at no cost.

Want prospective customers to try a subscription to your product? Try informing them that you're so confident they will love it that you will offer them "three months, which is valued at $120, at no cost." This way, the perception of value is $120, whereas, if the request is framed as a "free three-month subscription," then the value assigned drops to nothing. Ultimately, people will only want to buy things they see as valuable.

You may be right that the success you've got your eye on leaves little room for error, but understanding these foundational principles from behavioral science can help you avoid the most common slip-ups. Later, looking back, the path that got you to the top may seem a lot smoother and straighter than it might have been otherwise.

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