Behavioral Economics: How Psychology and Economics Impact Decision-Making

We Love the Word “Free”

If we’re choosing between something that’s free and something that’s heavily discounted, we innately reach for the free item, even if the free item isn’t worth much. In perhaps the most famous study of this phenomenon, researchers offered a Hershey Kiss for 1 cent or a Lindt Lindor truffle for 14 cents. Consumers, knowing that the truffles are normally much more expensive than Kisses, overwhelmingly chose the truffle. However, when researchers lowered the prices by 1 cent, consumers far preferred the now-free Kiss over the truffle.¹

We’re Influenced by a Third Option

We don’t do a good job of comparing and contrasting two items if a third option is introduced, as that third option can change our perception of the choice we’re making. In a paper on the subject, researchers Jennifer S. Trueblood and Jonathan C. Pettibone give the example of a wedding where we are offered a choice of lobster, tilapia, or vegetable lasagna. If the lobster sounds best but they tell us they are out of lobster, we’re likely to choose the tilapia because it’s more similar to what we truly wanted. If, instead of lobster, the offered-but-unavailable dish is spaghetti and meatballs, we’re more likely to choose the lasagna if the spaghetti and meatballs sounded best.² In other words, our first choice makes it difficult for us to rationally compare the remaining options.

Our Perception of Price Is More Important Than the Actual Price

Cheaper is cheaper, right? In a numerical sense, yes, but our perception of price is influenced by more than price. We also tend to factor in how luxurious or nonluxurious a product is. The more luxurious we think a product is, the more likely we are to believe it to be more expensive than a competing product that we perceive as less luxurious, even if the two products are priced the same.³

We Struggle With Too Many Choices

Choosing from 10 items on a menu is one thing. Choosing from 100 can cause problems. That’s because when we’re presented with too many options, we tend to enter what’s called decision paralysis, where we can’t decide what choice to make. Rationally, we should be able to evaluate hundreds of choices at a time. But our minds aren’t rational, and when faced with a lot of choices, many of us walk away rather than make a choice.⁴

We’re Easily Influenced

There’s a reason the field of marketing exists: It works. And one way it works is that our minds are easily primed to make a decision favorable to the marketer. In one study, psychologists A.C. North and David Hargreaves alternated playing either French or German music in the wine area of a supermarket. They found that on days they played French music, sales of French wine went up, and on days they played German music, sales of German wine went up.⁵

How Can You Learn More About Psychology?

If you’re interested in the ways our psyche affects decision-making and other aspects of our lives, consider earning an MS in Psychology. Through a master’s in psychology program, you can gain in-depth insight into the ways our minds work—knowledge that can help you advance a career in many different fields. Careers in psychology range from the academic to positions in marketing and advertising.