How do you use psychology to influence economic outcomes?

The Indian government has implemented nudge-based policies to encourage citizens to save and invest. For instance, tax-saving investment options like Public Provident Fund (PPF) and Equity-Linked Savings Schemes (ELSS) are presented as default options during tax filing, nudging individuals to consider these options and promote long-term savings.

Nudge theory is a bit like a trusted friend subtly pointing us in the right direction. It's not about taking away our choices, but about tweaking how they're presented to help us make better decisions. This tiny psychological ploy can have a significant effect, from encouraging us to increase our retirement savings to pushing us in the direction of greener lifestyle choices. But it must be utilized wisely. After all, nobody likes to be manipulated, even if it's for their good. Thus, even if nudging has a lot of potential for influencing economic outcomes, we must never lose sight of the value of openness and respect for individual liberties.

In my experience a Nudge Theory can be prescribed even to those events that are happening to show you something is going wrong but you never take in consideration that option. Sometimes in business sales are not going as it should, but this nudge is not a ring for the board and therefore we end up in a position to make radical changes. In Albania, for 10 years the government has undertake several policy ignoring the Nudge that came with the progressive number of those who left Albania. Ignoring that nudged created a vacuum that now we are facing with the reduction of the population.

Psychology can be used to influence economic outcomes in a number of ways, such as understanding how people make decisions, influencing people's emotions, and changing people's beliefs. For example, psychologists have found that people are more likely to want something if it is scarce, and more likely to make a decision if they see that other people are making the same decision. This knowledge can be used to increase demand for products or services and influence economic decisions. By understanding how psychology can affect human behavior, businesses and governments can use this knowledge to design products, services, and policies that are more likely to achieve desired economic outcomes.

When I was in college, I worked in a women's dormitory serving food. One day the dairy truck got hijacked, so we were low on cottage cheese. I thought that was funny, and I mentioned it to a few residents at breakfast. We had a run on it and ran out of it. However, we had never seen so many cups of uneaten cheese coming back to the dish washers.

I think it's important to articulate -- genuinely -- what your bandwidth is and the fact that you want to get things done with some pace. If people don't respect your time, you don't want to work with them in the first place. If they don't want what you're selling, a "limited time offer" isn't enough to change the game. I don't like playing with people's emotions, so the only kind of scarcity and urgency I want to create is real scarcity and urgency. If those are key elements to a decision-making calculus, I think it's useful to remember to mention them. But don't lean into them just so people feel insecure / like they might be missing out. Do it only when it's honest and helps make things move forward.

Scarcity and urgency (scarcity of time) can be utilized directly, as in the examples above, or indirectly. (For ex. Tickers of previous purchasers like, "Someone from Ohio just bought this product," suggests the item is selling fast but also has the added advantage of some social proof because we want things others want. It works because consumers who perceive themselves as under time pressure will acquire/seek less information and process the information more automatically. However, it's important to note that consumers who perceive themselves as lacking time will also give more weight to negative information.

Indian e-commerce platforms often use scarcity and urgency tactics to boost sales. During online shopping festivals like Diwali or Big Billion Days, they highlight limited quantities and time-bound deals, creating a sense of urgency among consumers to make immediate purchases.

One of the best examples that I can think of is the precious stones industry that uses scarcity to drive perceived value A diamond or moissanite on a ring looks all the same to a naked eye - so why is diamond's perceived value much higher than moissanite? Simply put, diamonds are much more difficult to source than moissanite; Higher the grade and size of the diamond -> higher the scarcity -> excessive perceived value For instance, Cullinan Diamond ($400+ m. at 530 carats) is worth exponentially higher than Centenary Diamond ($100 m. at 274 carats) Both diamonds originated from South Africa, guess what else is common between the two? Their utility - both are useless (Disclaimer: above comparison is oversimplified)

Anchoring in Pricing Strategies: Indian retailers often use anchoring to influence consumer perception of prices. During sales events, they might show the original price crossed out and the discounted price displayed prominently, creating a perceived value and encouraging consumers to make purchases.

One of the most famous examples of framing is describing ground beef as 25% fat or 75% lean. We tend to prefer larger numbers and positive concepts. We like to reject negative things and choose positive things. Therefore, 75% lean will often perform better. People are more willing to risk or take a chance when you frame an offer in terms of avoiding a loss rather than a gain. (Ex. buy now to avoid paying full price.) And small payments (less risk) convert better than one large price. Benefit messaging, on the other hand, is often associated with products we buy while in a bad mood (think: retail therapy). Research has also found benefit framing works better with more abstract or intangible offerings like services or experiences (trips).

consumers heavily rely on social proof when making purchase decisions. E-commerce websites frequently showcase product reviews and ratings, influencing buyers' choices and building trust among potential customers.

One way in which companies use social proof to shape their customer’s behavior is by sharing favorable customer reviews, quotes and statistics to make certain decisions seem more like “the norm”.

Reciprocity is so powerful that it is one of the main tactics used by police during confessions. However, asking someone for a favour can be even more powerful. Ask a customer to "please share this," for example, and they're more likely to convert. Why? Cognitive dissonance. You wouldn't do a favour for someone you don't like. And we buy from people we like. Similar tactics using this basic idea include: Foot-in-the-door technique - Described above. Door-in-the-face technique - Ask for an outlandish favour, which a customer will clearly refuse. Then, ask for a smaller favour. "Well, if you can't do that, would you be willing to do this other little thing for me?" It suggests a concession (favour) and feeds the Foot-in-the-door technique.

Insurance companies leverage loss aversion to promote various insurance products. They highlight the potential financial losses that could occur in emergencies and offer insurance plans as a safety net, encouraging people to protect themselves and their assets.

One thing to add here is that sunk cost fallacy is closely related to the IKEA effect. We're more likely to be satisfied and hold more tightly to products, services, groups, and other things we must sacrifice or invest in to obtain. Consider a software trial, for example. You get in and spend time trying everything and setting it up. It may even have data that it won't allow you export. You're more likely to convert because you've invested time or effort. IKEA, who the effect was named after, gets you to love your purchases by making you work to find things and then put it together yourself. And they charge a higher price for it. Membership in fraternities and sororities works on the same principle.

Motivation, Ability to act, and Opportunity (MAO) drive the basics of marketing principles and how consumers make and approach their goals. - Whether a purchase is a high (careful, conscious consideration) or low effort (heuristic, automatic thinking) - Whom it appeals to (present or future-focused) - The success of their efforts - Consumers who perceive themselves as failing are more likely to give up and put in less high-effort thought. - How far away a goal is. If a goal is far away, research shows that consumers often focus on *if* they can achieve it. As a goal gets closer, they begin to focus on *when* they can achieve it.

Psychology and Economics is intertwined with each other way more than we think. One such branch of Economics that we can study to understand the impact of Psychology in Economics is Behavioural economics. This branch not only highlights how consumers behave under various conditions but also how it economically impacts their short term as well as long term decision making process. One important aspect that this branch also teaches is that unlike the ideal economic model assumption of rationality, consumers aren't actually always rational or logically making their decisions. One interesting behavioural economics experiment or theory to look at is the Nudge theory. I leave it to the readers to explore more about nudge theory. :)

This is a huge topic, and even bigger when you begin to consider the larger economy. However, it is missing some favourites. For example: - Research finds that consumers are often less happy with their purchase when they know that they can return it. - Priming can enhance your marketing. Advertising with a read discount sticker can prime consumers to look for a red buy button. Advertisements featuring relaxing beach scenes prime consumers to think about how relaxing the related product might be. - Choice tactics (emotions, brand loyalty, familiarity, variety seeking, etc.) utilized by consumers depend on context, experience, and availability. - Brand position - Lesser known brands can increase the appeal of market leaders