CEOs make tough decisions in their career. Many rely on data to guide them. Findings from behavioral economics studies can help them succeed in their careers.

Behavioral economics combines psychology and economics to determine why people behave the way they do. It can be valuable in predicting customer behavior so you can make the best decisions for your company. It can drive initiatives that enhance growth.

Understanding the Principles of Behavioral Economics

Behavioral economics covers a wide scope that can be useful in various aspects of life. Here are the ones businesses should focus on.

• Loss Aversion: People often make decisions to avoid losses rather than achieve gains. You can use this psychology by framing marketing messaging to play on loss aversion tactics. Language like “Don’t Miss Out” is an ideal example.
• Anchoring: Anchoring means people focus on the initial information that’s presented to them, even if it’s irrelevant. You can incorporate this principle in marketing by presenting a high price point followed by a low price point. The strategy will make the low price points seem more reasonable.
• Social Norms: People are influenced by the behavior of others. You can capitalize on this strategy when you advertise products and services. Let consumers know about customers who have used your product in the past. Testimonials can be useful. You can also use language like “thousands of people have used this product…”
• Incentives: Incentives inspire action. They do more than drive sales. You can also reward employees to boost productivity in the office.
• Bounded Rationality: Bounded rationality is the theory that people make decisions based on the knowledge they have. You can sway decisions by providing information. Educate consumers, stakeholders, and colleagues about your products and strategies to boost sales and smooth negotiations.
• Market Inefficiencies: The market plays a huge role in behavioral economics. When prices are high, people are reluctant to invest. However, drops in the market can drive sales, even if prices are still inflated. CEOs can use this information to make predictions that increase profitability.
• Choice Architecture: Choice architecture refers to how products are displayed in a retail setting. For example, you may have bottles of salsa in the chips aisle to encourage people to purchase it as a dip. Positioning also makes a difference. For example, some companies like to place items that appeal to children low down where they are likely to see them.
• Framing: Framing involves how information is presented. For example, if you begin a sentence with “unfortunately” people will see it in a negative light. Choose positive words to spin your information for marketing and negotiation purposes.

Putting it To Practical Use

So how can CEOs integrate behavioral economics into their business strategies? Here are a few suggestions.

Marketing

Marketing and behavior economics go hand in hand. CEOs can work with marketing teams to determine the best strategies to drive sales. Play on loss aversion. Use anchoring to make prices more appealing. Provide social norm data and incentives.

Price Strategy

Market Inefficiencies and anchoring can help CEOs arrive at a smart pricing strategy. Companies that introduce products at a high retail rate, and then drop the price soon after release will get more sales. Consumers will believe they are getting a good deal.

Product Packaging and A/B Testing

Companies can use packaging to make their products more appealing. For example, they may market a shampoo for all hair types. They can then re-release the shampoo and market it for curly hair. This strategy can drive sales among people with curly hair.

The concept is closely tied to A/B testing which allows you to do your own behavioral economics studies. It can be integrated across various aspects of business.

Negotiations

Behavioral therapy does more than boost sales. It can also help in the negotiation process. Frame solutions in a positive light and give stakeholders the information they need to encourage them to share your point of view. It will help get everyone on the same page and drive initiatives.

Decision Making

Leaders who have a good grasp of behavioral economics will make smarter decisions. They will understand how the input affects outcomes. They can use the data they collect to predict the best solutions for their companies.

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Additional Resources

The CEO’s Role in Addressing Workforce Mental Health

A CEO’s Guide to Forming High-Performance Teams

CEO’s Role in Fostering Diversity, Equity, & Inclusion