How Brains Buy
© Alan Newman
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Most of our decision making is subconscious.
We often make sense of our decisions
after the event.
‘We’ are not in charge: our brains are.
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WHAT WE’RE GOING TO COVER IN THIS PRESENTATION
We’re going to look at four things:
1) A brief scene-setter from the world of behavioural economics to
introduce the ideas of (i) bounded rationality (ii) System 1 and
System 2 thinking and (iii) Heuristics and cognitive biases.
2) The psychology of a purchase. What factors are being processed by
the brain?
3) How many types of purchase are there?
4) And finally, to encourage an insight or two, we’ll consider a matrix
that relates the various psychological factors of a purchase to the
types of purchase that we’ve identified.
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Among his many accomplishments, Nobel laureate Herbert Simon
introduced the notion of bounded rationality. This is the idea that
when we make decisions, our rationality is limited by:
• the information we have
• the cognitive limitations of our minds
• the time available to make the decision.
This ties in with the idea of cognitive load which refers to the total
amount of mental effort being used in the working memory. These two
related ideas may seem obvious but until they came to the fore the
conventional wisdom was that we were rational decision makers with
time on our hands.
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Bounded Rationality
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In his book, Thinking – Fast and Slow, psychologist and Nobel Prize
winner Daniel Kahneman noted that we have two thinking systems.
Perhaps unsurprisingly they are referred to as System 1 and
System 2.
System 1 is used about 95% of the time.
Every day we make
hundreds of micro-decisions and because we’re doing this intuitively
and subconsciously we don’t even realise we’re doing it.
THAT’S IMPORTANT.
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Two Thinking Systems
System 1
System 2
• Fast
• Slow
• Effortless
• Effortful
• Subconscious
• Conscious
• Intuitive
• Calculating
• Subjective: experience based
• Objective: evidence based
• CONTEXT DEPENDENT
• CONTEXT INDEPENDENT
• We use it most of the time
• We use it rarely
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Heuristics
When faced with complex decisions
brains use subconscious short cuts
and rules-of-thumb called heuristics.
(Example: price is an indication of
quality. “We get what we pay for.”)
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Cognitive Biases
Just as right-handedness or left-handedness are muscular biases, we also
have cognitive biases. These are examples of System 1 thinking. They are
non-rational (rather than irrational) strategies that brains use to make
quick decisions in the face of limited information and time pressure.
Examples include the confirmation bias, framing, the hindsight bias, loss
aversion, mental accounting, the optimism bias, the status quo bias,
time-inconsistent discounting, and the zero-risk bias.
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Mental Accounting
We treat money differently
based on where it has come
from and what it is to be
used for. To economists this is
non-rational behaviour. Rather
than rationally viewing every
pound as identical, we put
different pounds in different
‘mental accounts’. We may
designate some of our pounds
as ‘safety’ money which we
invest in low risk financial
products while, at the same
time treating other pounds as
‘flutter money’.
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Multiple Selves
Each of us is a personal
combination of :
• Bargain hunter
• Gambler
• Miser
• Spender
• Tycoon
Under what circumstances does
each one step forward?
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Brains and Time
Brains are good at thinking
about the past or planning the
future if we have a timescale
of one year. That fits with
seasons that repeat themselves.
And because they repeat why
would brains waste valuable
resource calculating Year 2 when
it is a repeat of Year 1? A
consequence of this is that brains
(subconsciously) exhibit a strong
preference for the here-and-now,
perceive the future as risk laden,
and rewriting the past to fit the
present.
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The Psychology of a Purchase
Consider what goes on in your brain when a purchasing
decision is being made.
1. Anxiety level
2. Arousal
3. Cognitive load
4. Emotional engagement (enjoyment, excitement, fun)
5. Risk – how do brains perceive it?
6. Shortcuts (biases and heuristics)  (We’ve covered this)
7. The time factor
 (We’ve covered this)
8. The trust factor (e.g. In a professional, a friend, or brand)
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Many of us are driven by anxiety – or, more accurately, driven to reduce it.
Life is a series of ‘To Do Lists’ that we have to tick off. No sooner have we
ticked off one item, and reduced our anxiety, the next one on the list
demands our attention. But this state of affairs can drive achievement.
ANXIETY affects how brains buy in two ways.
First, because making
purchases can give us brief-but-many feelings of pleasure, shopping (and
especially impulse buying) can, in the short term, reduce anxiety.
On the other hand, the activity of shopping can increase anxiety. Have I
paid too much? Do I really need this? Will he/she like it? (Such negative
aspects of shopping are often part of social anxiety.)
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1 Anxiety
“A feeling of worry, nervousness, or
unease about something with an
uncertain outcome.”
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When we’re in a state of high AROUSAL we are active, attentive, and excited.
Our pupils dilate and we sometimes hear that stores use cameras to detect this
so that they can better target marketing messages.
For some of us SALES increase our level of arousal. (Think about the hype and
queues we see at Black Friday.)
In an aroused state we are more prone to make impulse purchases. We also
become competitive – if we see somebody else want to buy something we
want to buy it too, especially if it is perceived as scarce, whether we initially
wanted the item or not.
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2 Arousal
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The idea of COGNITIVE LOAD is related to that of bounded rationality that
we heard about previously. It refers to the total amount of mental effort
being used in the working memory.
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3 Cognitive load
Using brands
and/or our previous
purchasing decisions
is an efficient way
of reducing
cognitive load.
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Emotional engagement. To what extent are your feelings and emotions
connected to the brands, goods or services that you are considering buying?
(TV advertising, btw, is a high engagement, low attention medium).
If, for example, you are brand loyal then you have a degree of emotional
engagement that is always switched on to some degree or other. That is a big
advantage for the seller who is competing for your attention in an
environment characterised by a lot of ‘noise’.
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4 Emotional engagement
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For some of us buying something new, or buying something in a new
way (e.g. at an online auction for the first time) is perceived as risky
and we psychologically pull away from the purchase.
For others this is exciting and the novelty makes the buying
experience more enjoyable.
This is a good example, if one were needed, of why it is important to
know our customer and not be lazy or stereotype-prone when it
comes to segmenting our market.
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5 Risk or Excitement ?
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We’re a social species and part of that wiring, it seems, is that our default
state is to trust.
On the face of it that might seem odd because, in the short run, abusing trust
in others would pay off wouldn’t it. But in real life not only do we often meet
the same person more than once but also word gets around.
Reputation is a social currency. It has value.
Making decisions based on information, people, or sources we trust works
more often than not and it saves us time and effort working things out for
ourselves.
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8 The Trust Factor
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Although it may come as a surprise to actuaries and economists the evidence suggests that our
default, as humans, is to trust other humans – even strangers.
Because there is one word – trust – we can easily fall into the trap of thinking that there is one
thing. But trust isn’t ‘one thing’. It is multifaceted. And at its heart is vulnerability.
At the base level trust (in an organisation) is based on its competence to do the job. I trust a
bank to operate its ATMs efficiently but I do not trust it when it tries to sell me products I neither
want nor need.
The next level of trust is based on integrity. When something goes wrong can I trust this
enterprise ‘to do the right thing’?
Then comes trust based on insight. Have you demonstrated that you know me well enough to
act in my best interests as perceived by me?
At the top of the pyramid is trust based on intimacy. Have you shown that you know me well
enough, and care about me sufficiently, to anticipate my needs and wants and help satisfy them?
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Types of Purchase
In this short presentation we take a look at eight types
of purchase that we commonly encounter:
1. Advised purchase
2. Considered purchase
3. Distressed purchase
4. Fun purchase
5. Grudge purchase
6. Impulse purchase
7. Repeat purchase
8. Self-gratification purchase
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Advised Purchase
Many purchases, whether it’s a new
home or a complex financial services
product , benefit from advice given by
someone trained in a particular and
relevant profession or job.
In these instances we are benefiting
from System 2 thinking (at least on the
part of the adviser).
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Considered Purchase
Many of us also activate System 2
thinking when we consider information
from expert sources, even if we’re not
using face to face advice. In these
instances we are coming close to how
classical economics sees us: calculating,
objective and measured. As often as
not we use this strategy to avoid
making a wrong decision.
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Distressed Purchase
A distressed purchase is one where you have no choice. You have to buy the products or
services in question immediately or within a very short space of time – and this often causes
distress. Hence the term. One example is having to find somewhere to buy petrol, under
pressure, when the fuel tank is showing Empty: even if you do not wish to interrupt your
journey. Another example would be having to go and buy nappies at an ungodly hour at an
inconvenient location because the last one has just been used.
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Fun Purchase
In some situations the process
of gathering information and
considering options is not an
effortful, time-consuming
chore (as may be the case
when considering a pension
plan); it is an enjoyable part of
the purchasing experience.
Choosing where to go for a
special holiday would be a
good example of this. So what
can we do to make our
purchasing journey FUN ?
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Grudge Purchase
Grudge purchases are the products and
services that we buy because we have to
even though we’d rather spend our money
on something else.
They are the new car tyres, a TV licence, or
washing powder. We only think about them
when we need to buy them.
They are also the purchases where having
them does not bring instant gratification.
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Impulse Purchase
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Repeat Purchase
“Familiarity breeds favourability”
is a marketing maxim. Add to this
the fact that brains are habit
machines and we can see why
repeat purchases are so powerful.
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Self-gratification Purchase
Self gratification is defined as the
indulgence or satisfaction of one's own
desires.
Consciously we may know that that some of
our purchases had little merit and we should
not have made them. But the fact that we
are not alone in this is illustrated well by the
L’Oreal catch phrase, “Because I’m worth it.”
If it’s true for lot’s of people, and it’s on TV, I
can’t be that bad, can I?
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To bring some of these ideas together, consider this matrix.
In each cell is the relationship between the type of purchase
on the horizontal axis, and brain state on the vertical axis,
High, Medium or Low ?
Ask yourself why this is and how you can use your answer to
improve your business and customers’ experience.
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Bringing it altogether . . . .
Advised
Considered
Distressed
Fun
Grudge
Impulse
Repeat
Self
gratification
Anxiety
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
Arousal
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
Cognitive load
(High)
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
Cognitive
biases
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
Emotional
engagement
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
Risk
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
Time
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
Trust
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
H. M or L
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To Summarise
1. HOW DO BRAIN BUY? It’s complicated.
2. INSIGHTS FROM PSYCHOLOGY.
–
Bounded rationality, System 1 and System 2 Thinking, Heuristics
and cognitive biases, Brains and time.
3. THE PSYCHOLOGY OF A PURCHASE
–
Anxiety, Arousal, Cognitive load, Emotional engagement, Risk or
excitement, Trust.
4. TYPES OF PURCHASE
–
Advised, Considered, Distressed, Fun, Grudge, Impulse, Repeat,
Self gratification.
5. MATRIX to encourage insights.
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