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Marketers want to know why and how people make purchasing decisions, so they can create advertising messages and marketing campaigns that effectively sell products and services. To do this, they look at human behavior, a concept called behavioral economics. 

Behavioral economics is the study of people’s biases, personal preferences and emotional states that influence their behavior, especially when making decisions. Marketing professionals use this information to create messages to attract their target audience and persuade them to buy a specific product or service.

This type of marketing relies on biases, the mental shortcuts people use to make quick decisions. Biases can shape how consumers assess options and make purchasing choices, often unconsciously.

Confirmation bias recognizes that people are more likely to accept information that matches their personal beliefs, including their religious, political and value systems. Digital marketing professionals can use such biases to their advantage by advertising products to people based on their beliefs. For example, the algorithmic nature of modern media platforms offers the opportunity to market health products that align with people’s political beliefs.

Availability bias relies on people being more likely to use information they can easily recall rather than outcomes-based data. By saturating the market with imagery and messaging pertaining to a given product, marketing professionals can better establish their presence in the market and therefore the odds of consumers selecting their product. In this way, marketers focus on ubiquity over a product’s specific features, function or price.

After a consumer has already made a purchasing choice about a specific product, marketing professionals can use status quo bias to enhance customer engagement. This bias refers to people’s tendency to stick with what they know rather than risk making a change. If a customer has already chosen to use or engage with a product or service, they may be more likely to return to that product or service again. This concept allows professionals, including people in marketing management roles, to drive engagement with existing customers. This may look like a customer loyalty program. 

This field of economics considers the psychology of financial decision-making practices of people and institutions. Amid the emergence of cognitive psychology in the 1960s — the study of how we perceive, learn and think as a species — researchers began exploring its use in understanding people’s purchasing decisions.

Before this period, economics scholars believed that people acted as purely rational consumers, whose decision-making processes as buyers resulted from informed choices that aligned with their best interests. This belief is known as “neoclassical economics.”

Cognitive psychology considers the idea that people often do not act rationally but rather according to their biases and personal beliefs.

Psychologists Daniel Kahneman and Amos Tversky were pioneering professionals in this arena, and their efforts ultimately laid the groundwork for its applications in economics in years to come.

Behavioral economics took proper shape in the late 1970s, when economist Richard Thaler applied prospect theory and other concepts of cognitive psychology to people’s purchasing and consumption decisions. In 2008, Thaler co-wrote Nudge, a book that outlines the ways humans can be influenced, or “nudged,” by environmental and situational factors toward .

Marketing professionals can apply concepts established by Tversky, Kahneman and Thaler, among others, in their campaigns to try to raise awareness, grow brand recognition and drive sales. 

In 1974, published “Judgment under Uncertainty: Heuristics and Biases” in the academic journal Science. A primary concept explored in this article was the anchoring effect.

This idea says that, when presented with a choice under uncertain outcomes, people’s initial interaction with a provided reference point affects their decision-making, as they compare their options to the presented reference point rather than making a holistic decision. People use this “anchor” as a heuristic to assist with their decision-making rather than carefully analyze every option. The reference point may be provided overtly or tacitly.

For example, a company may use the anchoring approach to establish a suggested price for a product. If a consumer is told that an item’s suggested retail price is $100, or that a competitor is selling the product at that price, but they are presented with a sale price of $60, they may be strongly influenced to purchase the item at the discounted price. Rather than carefully researching the standard market price of the item, they are likely to rely on the “anchored” figure.  

Another key tenet of this field of economics grew out of Tversky and Kahneman’s 1979 work titled “Prospect Theory: An Analysis of Decision Under Risk,” published in Econometrica.

The concept suggests that people weigh gains and losses differently, especially as they consider uncertainty related to short-term and long-term outcomes. Essentially, Tversky and Kahneman’s theory proposed that people are more likely to make a choice that appears to reduce losses rather than acquire gains, even when both choices share the same overall outcome.

Marketing professionals can apply prospect theory — which recognizes that some people are more likely to make a choice that avoids losing a specific amount of money rather than gaining it — to convert potential customers into buyers. One such tactic is the “limited-time offer” that suggests a consumer can “save $100” by purchasing something when they're still making a purchase and not “saving” $100 in the process. The limited-time offer can also use the concept of scarcity to drive sales by implying that there are only so many remaining items left in stock, causing buyers to “act now” and think less rationally in the process. 

Psychologist Robert Cialdini expanded on Kahneman and Tversky’s work in the 1980s with a book titled Influence: Science and Practice. Cialdini established a concept in this book known as social proof, which suggests that people conform to the behavior of an accepted majority when making a decision.

Social proof can help drive sales by emphasizing the popularity of a product. This is exemplified in influencer marketing in which popular content creators are paid to extol the virtues of a product or service.  

Professionals can use marketing and behavioral psychology concepts to try to drive practical, real-world outcomes in their campaigns. For example, including a “People also bought ...” section on a website page featuring a certain product lets marketers leverage the social proof concept to influence buyers by appealing to their sense of wanting to be like other buyers of the same product.

Marketing departments can measure the success of implementing this strategy by monitoring sales that come specifically from the “People also bought ...” section. They can also promote different items in that section based on the results.

Professionals can use marketing and behavioral psychology concepts to try to drive practical, real-world outcomes in their campaigns. For example, including a “People also bought ...” section on a website page featuring a certain product lets marketers leverage the social proof concept to influence buyers by appealing to their sense of wanting to be like other buyers of the same product.

Marketing departments can measure the success of implementing this strategy by monitoring sales that come specifically from the “People also bought ...” section. They can also promote different items in that section based on the results.

Marketing professionals’ use of behavioral economics can carry with it certain challenges, including ethical considerations, as they try to convert potential consumers into buyers.

For example, while citing the scarcity of a product can increase sales, the trust of a company or product can be damaged if marketing professionals create a false scarcity around the good or service — if a product always appears as only “one left in stock,” people may realize this as a marketing ploy, which can negatively affect consumer trust in that brand.

Rather than approaching the consumer as a completely controllable and moldable asset, a “nudge” should recognize that people are able to make beneficial decisions themselves. By doing so, marketing professionals can avoid a condescending tone and respect their customers’ autonomy by trying to influence them to make choices that may actively benefit them.

To navigate the ethics of using this type of economics in marketing, professionals should also consider the wider implications of how they advertise their products, rather than focus on short-term gains at the expense of the individual’s autonomy or trust. Advertising ethically can also foster trust in the brand over time.

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