Does the status-quo bias explain our apathy when it comes to switching services?

Think about it...how many times have you switched your...
  • Bank
  • Accountant
  • Telco provider
  • Electricity company
  • Dentist
  • Doctor
  • Lawyer
  • Health insurer
Why is it that we become so rusted on when comes to these types of services providers? Behavioural economists would suggest it's the status-quo bias principle at play. Status-quo bias occurs when "the properties of alternative options are evaluated as advantages or disadvantages relative to the current situation, and the disadvantages of the alternatives loom larger than their advantages" (Kahneman 2003, Maps of Bounded Rationality: Psychology for Behavioural Economics)

There are two reasons why the disadvantages of switching appear to loom larger than the advantages:
  • Loss aversion (we focus on the negatives): Behavioral economists have established that we feel the pain of losses more than we enjoy the pleasure of gains. So when we think about change we focus more on what we might lose rather than on what we might get. Even people who aren’t all that happy with their current provider, then, are still likely to feel anxious about whatever will replace it. (source: www.newyorker.com) We have found this especially true when it comes to services people don't really understand or perceive to be complicated like mobile phone plans or home loans
'Better the devil you know than the devil you don't'
  • Endowment effects (we overvalue things we own): A simple demonstration of this was an experiment (conducted by Kahneman, Knetsch and Thaler, 1990) in which some students in a class were given coffee mugs emblazoned with their school’s logo and asked how much they would demand to sell them, while others in the class were asked how much they would pay to buy them. Instead of valuing the mugs similarly, the new owners of the mugs demanded more than twice as much as the buyers were willing to pay. (source: www.newyorker.com) How many times have you heard, 'My chiropractor is really good, you should see her' or 'I've got a really great mechanic' etc. People will often over value the benefits they are receiving from their service provider. For example in the telco space, we have found people paying almost 3 times more than they need to because they have not switched their mobile plan in 10 years, because they still think they are on a good deal!

Basically it's always going to be an up hill battle to get people to switch from their current service provider, because you will be fighting our fundamental human nature to resist change.

Therefore, often brand strategies need to be developed to help give momentum to tactical initiatives that might have the potential to break through the status-quo barrier. Here are just some thought starters...
  • Reduce the perceived risk of switching by building a friendly/customer-centric/credible brand image and then offering 6 months free subscription
  • Give people reasons to doubt the value they are currently getting by position your brand as the 'challenger' and then offer something that none of the competition would dare to

Is 'Anchoring' to blame for low retail spend?


Anchoring is a behavioural economic principle that explains how we can be influenced by seemingly useless information. Retailers have been using anchoring since the dawn of time, e.g. was $179 now only $99 (note: $179 is the anchor).

A study conducted by Dan Ariely (Behavioural Economist Guru) with college students found anchoring also works on a subliminal level. Students were asked to write down the last 2 digits of their social security number before bidding on items in a silent auction. Those with higher social security numbers placed consistently higher bids than those students with lower social security numbers.

With online purchases only making up a fraction of Australian retail spend, it's hard to believe the story retailers are telling the media about the unfair trading conditions in regards to GST not applying to online stores.

Taking anchoring effects into account, it would be a fair to say "...the real damage the internet is doing to some local retailers: it’s not the spend, it’s the knowledge it gives them on pricing."
Source (www.smh.com.au / Retailers stung by new thrift)

It seems more likely that the average consumer is now simply more aware of how much things costs and will walk out of your store if your price doesn't match expectations, rather than an explosion of consumers shopping online to avoid paying GST.

With consumers now more price aware and frugal, retailers will need to start getting more innovative to keep their margins or simply lower their prices

Audi using 'Framing' effects to sell their new car

$169 a week for a luxury Audi

The above is a good example of how to use 'framing' to sell a product.

The 'framing' strategy is quite simple:

Audi is looking to attract younger buyers to its new Mini rival by offering them a weekly payment deal similar to a mobile phone plan.

The $169 drive-away weekly plan for the new A1 includes servicing costs, interest payments and insurance. It even covers replacement wheels and tyres if you get a flat or damage a rim on a kerb.

The company’s managing director Uwe Hagen says the 36 or 48-month contracts will appeal to a generation of buyers used to paying monthly amounts for their rent, broadband connection and mobile phone plan.

Source: SMH

Behavioural economics and reality TV

I've been looking for an excuse to blog about behavioural economics for some time now, not because I'm any expert on the subject matter, but more out of fascination and interest

Let's start off with a wikipedia definition:

"Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market prices, returns and the resource allocation"

The basic premise behind behavioural economics is that many of our purchase decisions don't make rationale sense. For example, many people would agree that travelling across town to save $50 on a $100 dress makes more sense than travelling the same distance to save $50 on a $30,000 car. In fact, when asked why, we often have to post-rationalise why we buy things because we were probably on auto-pilot at the time. Seriously, how much thought do you put into every single item you purchase?

Marketers are starting realise that the frame work and environment in which purchase decisions are made actually have the most influence over what people buy. For example, restaurants will often have a $500 bottle of wine on the menu to make the $40 bottle seem reasonable and the $15 bottle too cheap. Additionally, previous experience at restaurants tells us that $40 is a reasonable amount to pay, so choosing the $40 bottle (for most people) becomes a simple decision. Just like the 'cake or death' example below:


Understanding how to make decisions simple for people, from my limited understanding of behavioural economics, is the aim of the game. That is, you play to peoples 'confirmation bias' (read more on wikipedia here)

Keeping this in mind, have you ever wondered why reality TV is so easy to watch? After reading this wonderful post on the Everyday Sociology Blog, about how 'Dancing with the Stars' confirms to just about every gender norm imaginable, I felt a sudden wave of realisation wash over me. Bloody Hell! Reality TV is so popular because it confirms our own perceptions of reality! Let's take a few examples:
  • Beauty and the Geek: Seeks to confirms that beautiful women are dumb
  • Masterchef: Seeks to confirm amateurs can cook at a restaurant level
  • The apprentice: Seeks to confirm business people are cut throat and agressive
  • ...and the list could go on!
Inspired, I'm now constantly trawling the web for more behavioural economic examples and implications...stay tuned.