Category Archives: System 1 and System 2

How To Use Behavioural Science To Boost Conversions

Why Is Behavioural Science The Key To Effective Marketing?

In the book, The Growth Strategy That’s Being Ignored, by Paul Rouke, a number of the contributors argue that for conversion rate optimisation (CRO) to be a significant driver of growth a customer centric approach needs to be embedded into the company’s culture from the C-suite downwards. There was also a consensus that it is essential to understand users and align the customer experience with their desires and motivations.

“We need to re-align optimisation to the user experience. Understanding our users, listening to their feedback and empathising with their needs is the only way to truly understand what needs to be optimised.” Dr David Darmanin, Founder & CEO of Hotjar  – (from The Growth Strategy That’s Being Ignored).

However, whilst this sounds all well and good, CRO can only be a driver of genuine business growth if it first persuades more visitors to achieve their goals. The business’s goals should of course be aligned to customer goals. Think about it, improving awareness, engagement, intent or the overall customer experience doesn’t matter two hoots unless you persuade more users to convert in  a profitable and sustainable way.

“Conversion rates area a measure of your ability to persuade visitors to take the action you want them to take. They’re a reflection of your effectiveness at satisfiying customers. For you to achieve your goals, visitors must first achieve theirs.” Bryan Eisenberg, Founder & CMO at IdealSpot – – (from The Growth Strategy That’s Being Ignored).

To persuade users we need to understand the nature of human decision making. This means identifying how the mind operates and what mechanisms are involved in human decision making? But also what are the main forces that shape behaviour? To what extent do factors such as emotions, context, past experience and social influence drive behaviour?

Why behavioural Science?

Behavioural science examines both of these aspects of human decision-making. Behavioural economics for instance covers the analysis of our cognitive function, but also social, contextual and emotional factors that shape human behaviour. Neuroscience is making great advances in understanding how our brains respond to different types of stimulus. Most of these factors are largely ignored by the field of economics and yet much of marketing theory has been influenced by economic thinking.

For example are people really rational, independent thinkers? In the book Herd, Mark Earls points out that humans are “super social apes” and we constantly monitor and copy the behaviour of others. We align with groups we wish to associate with (herd theory) or copy others to learn new ideas and behaviour (social learning). This means we are automatically drawn towards brands that people in our social networks buy. In this respect we are almost the exact opposite of the agents that economists assume we are.

Behavioural science therefore allows us to gain a deeper understanding of the decision making process and the factors that influence user behaviour. So what are the practical implications and how can we use them to improve the persuasiveness of our digital marketing activity? Below are six key insights and implications for CRO.

1. What About The Subconscious Brain?

Marketing is often ineffective because it fails to target both the conscious and non-conscious parts of the brain to get an emotional response. A purely rational argument does not communicate to the part of the mind that makes most of our decisions, but at the same time behavioural science cannot save a poorly designed product or weak value proposition.

The psychologists Daniel Kahneman and Amos Tversky have shown that the mind works at two levels. System 1 is our fast, intuitive, emotional and largely automatic brain which is continuously running in the background. It also largely steers our other level of thinking, System 2. This is a slow, analytical, and deliberative brain. We use System 2 for self-control and cognitive effort, such as resolving complex problems and mental maths. However, because System 2 quickly depletes a shared pool of cognitive energy we use it sparingly and so we rely on System 1 for most simple decisions.

Image of difference between System 1 and System 2

This concept of the mind has been further supported by Professor Gerald Zaltman whose research suggests that up to 95% of our purchase decisions are made by our non-conscious brain. Roger Dooley also makes the point in the book The Growth Strategy That’s Being Ignored.

“Today, there are many poorly optimised websites that even elementary CRO approaches can help. Once the basics are fixed, though, more sophisticated approaches will be needed to keep improving conversion rates. A key part of these better tactics will be to focus on the customer’s non-conscious decision-making using brain and behavioural science.” Roger Dooley, Founder at Dooley Direct LLC – (from The Growth Strategy That’s Being Ignored).

Implications for CRO:

  • The explosion of literature about the non-conscious part of the brain has led some marketers to focus purely on emotional messages. This is misguided as a strong explicit goal forms the foundation of relevance and motivation to purchase. Ensure you establish a strong connection between rational and implicit (psychological) goals to avoid conflict between the System 1 and 2.
  • Targeting the non-conscious brain requires thinking about our underlying motivations that we often don’t express but are important drivers of behaviour. This means considering how people want to feel about their actions and the brands they buy. Even if people are not consciously aware of a message that targets an implicit goal research (Ruud Custers & Henk Aarts, 2010) indicates that it can still become more accessible in a person’s memory and so the brand has more chance of being top of mind.

“Implicitly activated goals not only make products or brands more accessible, they also result in a more positive attitude.” – Phil Barden, Decoded.


  • Lean Cuisine for example used underlying motivations to create an ad “#WeighThis” which went viral. The ad creators realised that eating healthy, low fat food is often not about your weight. People make an effort to take care of what they eat for a purpose. Psychologically they want to feel good about themselves. As a consequence the ad focused on getting people to talk about what really matters in their lives. Rather than using scales to measure their weight they were asked to weigh what they are most proud about their life. 
Image of Lean Cuisine ad "#Weigh this"
Image Source:


  • Asking people direct questions about why they purchased a product or made a decision is fundamentally flawed. Customers don’t have full access to their underlying motivations and post-rationalise when asked to explain why they made a certain decision.
  • Focus groups are the biggest failure here as you also have group dynamics involved which makes feedback almost impossible to interpret. They are often the default method of research and appear to be popular because people enjoy watching a group of strangers rationalise about their product or creative.
  • But in reality we don’t sit in a bubble with a bunch of strangers trying to say clever things about something we don’t really care that much about. Neither is it normal to talk about digital content when we know the person who thought up the idea may be watching us behind a one-way mirror. This is as about as far from reality as anything we could think up in our wildest dreams.
  • Observing users (e.g. usability research), listening (e.g. social media monitoring) and using implicit research methods (e.g. Implicit Association Test) are more reliable methods of research as they don’t rely on self-reporting. Direct questioning at the time of a user visit can be useful to obtain feedback on the user experience, but be aware of the limitations of such research.
  • For understanding how people react to new content or new products the most reliable method is a controlled experiment. The scientific method used for A/B testing for instance allows us to measure real changes in behaviour rather than rely on biased and flawed research techniques.

2. Psychological Rewards Drive Attention:

Brands are objects in our minds and relatively few brands connect at an emotional level. We respond emotionally to brands because they help us meet psychological goals not because we are particularly loyal to them. Brands, however, can use these psychological territories to differentiate themselves from competitors and to improve their appeal to customers.

Neuroscience research (Berns & Moore, 2012) indicates that products and services activate the reward system of our brain. Indeed, this is more predictive of future sales than subjective likeability and the intensity of the brain’s response is related to the value we expect the product to deliver.

A neuroscientific study (Carolyn Yoon, 2006) indicated that brands are simply objects to the brain and brands are not perceived to be people with personality traits. People buy products to achieve explicit (rational) goals which relate to the product category.

Brands on the other hand help us meet implicit or psychological goals. People respond emotionally to a brand when it helps them achieve a goal and not necessarily because we feel deeply attached to it. However, the more important a goal is the stronger we relate to brands that are relevant to that goal.

Marketing consultancy Beyond Reason combined findings from both neuroscience and psychological research to create a comprehensive model of implicit motivations. Research shows that implicit goals focus our attention so that even subconsciously we notice brands that may help us achieve an active psychological goal. Brands that we think are most likely to help us achieve a goal get the largest share of our attention. This may explain the attraction of guarantees and compelling value propositions that promise a desired outcome.

Image of Beyond Reason's implicit motivation model
This motivation model is the intellectual property of BEYOND REASON.


Our brains respond to the difference between reward (i.e. achieving goals) and the pain (i.e. the price) we feel when considering a purchase. When the difference is sufficiently large we will be open to purchasing a product. The net value can be changed by increasing the expected reward (i.e. improve the benefits or performance of the product) and or reducing the pain (i.e. lower the price). Another way to improve the perceived value of a product is to use social proof to demonstrate how popular the brand is.

Implications for CRO:

  • Use the Beyond Reason implicit goal map to review your value proposition and messages on key pages. Beyond Reason’s implicit research methodology identifies and provides a weight to each implicit purchase motivation so that you can align your value proposition and communications to your customers’ psychological goals. You can then use A/B testing to evaluate how communicating these psychological goals influence conversions on your site or app.
  • People like what they buy, not buy what they like. Providing reasons, both rational and emotional can help to persuade visitors that what you offer is what they are looking for. However, the serial position effect suggests that you should position your most important points at the beginning and end of a list. Don’t list your benefits in descending order of importance because people have a tendency to remember the first and last items in a list.
  • Focus on habit formation or disrupting existing habits. Research by the late Andrew Ehrenberg suggested that most brand loyalty is driven by habits and availability, not by a strong emotional attachment to the product. Marketing strategy should be designed around people’s habits. It is easier to piggy back onto an existing habit rather than create a new one and so look to see how your product or service relates to everyday behaviour.

 3. The sales funnel is a myth!

Decision making is not a linear process as suggested by many models of consumer behaviour. It’s complicated and is not conducted in isolation from what else is happening around us. This means that people are easily distracted because they have multiple goals battling for attention at any one time.

  • The traditional sales funnel suggests we act rationally and go through a mythical sequence of steps before purchasing. In reality our brains are constantly bombarded by stimuli and as a coping mechanism our brain creates a cognitive illusion that makes us feel in control and rational. However, this process filters out information that our brains deem to be unimportant and distorts other inputs to protect and enhance our self-esteem.
  • In these circumstances a more appropriate analogy would be a leaking bucket that is standing on a ship’s deck. The water in the bucket is anything but tranquil as it is constantly being churned up by emotions, incomplete and inaccurate memories, social interactions and many other factors that can instantly cause us to change course. In figure 1 below I have summarised all the key elements that behavioural economics identifies as influencing behaviour.

Figure 1

Image of behavioural economics decision bucket
Source: 2017


Implications for CRO:

  • Cognitive biases such as confirmation bias, backfire effect and bias blind spot shape our view of the world and make it very difficult for brands to change strongly held beliefs. What this suggests is that brands may be wasting their time and money by targeting existing customers of large competitors as they are unlikely to alter their opinions and habits unless something seriously goes wrong. Don’t use rational arguments to change people’s beliefs because often this will just result in those ideas becoming even more entrenched.
Image of cognitive bias codex graphic
Image Source:


  • Brands can grow faster if they focus on increasing overall penetration by targeting visitors who are not strongly affiliated to any particular brand and use CRM activity to engage existing customers. This is supported by research published in the Journal of Advertising Research  which points out that your next customer is likely to be your most profitable visitor because average basket values increases as a brand franchise grows in size.
  • The insight here is to be less concerned about what your competitors are doing and put more effort into communicating a compelling proposition to new users and visitors to your site.

“Brands need to target inclusively and stand for a vivid, clear but broadly appealing benefit. A narrow, exclusive focus on the ‘most profitable’ households is a recipe for stagnation and decline, not for brand health.” Journal of Advertising Research, 2002.

  • Repeat key messages at key stages of the user journey to improve the likelihood that visitors will notice them. Repetition also plays to the availability heuristic which means we are more likely to believe something that is familiar to us.

“When you hear the same story everywhere you look and listen, you assume it must be true.” Barry Schwartz, The Paradox of Choice: Why More Is Less, Revised Edition

4. Brands are framed by people not brands:

Because people are extremely social beings we have highly developed and complex social networks. We are constantly thinking about or observing the behaviour of others. Much of our behaviour is made and shaped by interactions with other people.

Whether it is the brands our parents purchased when we were young, what our colleagues talk about at work or the latest game that our Facebook friends are playing. These interactions are key to many of the choices we make and often we are not even consciously aware of how others influence us.

Indeed, to influence mass behaviour Mark Earls argues that we need to stop thinking about customers in the “I” perspective and begin considering them part of social networks and tribes of “Us”. He uses the analogy of trying to predict how a fire spreads through a forest. We wouldn’t concern ourselves with the characteristics of an individual tree and focus on a tree in isolation. Instead we consider how trees are connected to each other and how the landscape might influence the spread of the fire.

Implications for CRO:

  • People often conform to trends or fads, and may even ignore their own beliefs because they don’t want to miss out (i.e. loss aversion) on what everyone else is doing (see bandwagon effect). Use social proof (e.g. Facebook followers, customer numbers and testimonials) to communicate how popular your brand is to benefit from this phenomena.
  • Ratings and reviews are especially important when people are faced with a large number of similar options as they often don’t have the time or expertise to evaluate each item. Here social proof acts a short-cut for determining which providers they can trust.  com effectively uses the Trustpilot rating platform with a prominent site rating in the header and clear customer rating and review information just above the price on the product page.
Image of product page with prominent ratings and reviews
Image Source:


  • When you faced with a number of similar options, such as pricing plans, people find it difficult to decide between them. One way behavioural economics suggests you can make it easier for users is to indicate which plan is your customers’ most popular choice. Many visitors will select the most popular plan because it is seen as a ‘safe option’ when faced with uncertainty.

Spotify extensively utilise the bandwagon effect in their music app by displaying how many people are following a song, album, artist or playlist. This encourages users to explore new music and build their own playlists. Such behaviour improves user engagement and increases the potential value of customers.

Example of social proof from


  • People also consciously copy the behaviour of others when they want to be associated with like-minded people and participate in similar experiences. Use customer research to understand what beliefs and attitudes are most important to your visitors and align your behaviour and business ethics accordingly.

For example, Innocent drinks sell a range of premium smoothies to a health conscious audience. However, to communicate its high ethical standards it has a brand promise to be socially responsible in how it sources its ingredients and it guarantees to give 10% of its profits to charities which fund projects that alleviate hunger around the world. This socially responsible stance fits well with many of its customers and probably helps it to maintain a premium price.

Innocent smoothies promise
Image Source:


  • Be careful about social norms and traditions when entering a new market or launching a new product. When Apple launched the original iPhone in Japan in 2008 it struggled to sell because it didn’t conform to market norms. By 2008 Japanese consumers were already accustomed taking videos and watching TV shows on their smartphones. The iPhone did not even have a video camera or the ability to include chips for debit card transactions or train passes. In Japan many people use trains to get about and credit cards are rarely accepted.
  • Pepsi broke a social norm with the Kendall Jenner ad as they tried to use political protest for commercial gain. By attempting to co-opt a movement of political resistance and mimic anti-Trump and Black Lives Matter protests, Pepsi over stepped what was perceived to be acceptable by many people.
Image of Kendall Jenner in Pepsi ad giving a can to policeman
Image Source:


5. People do not seek a perfect solution:

Most of the time people are satisfiers rather than wanting to maximise economic utility. We don’t have the time or resources to look for “ideal” solutions. We use our gut instinct and heuristics to identify who we can trust and aim to avoid disasters rather than seeking perfection. We are probably happy most of the time if our decision results in something that is in the third quartile.

Implications for CRO:

Avoid using words to describe your offer as “ideal” or “perfect” as this is not aligned with real user behaviour. People want to know who can be trusted rather than if your product will change their lives.

Everything is relative. People automatically want to compare offers because they don’t necessarily know what above average looks like. Including comparative information on your site which includes some benefits where you are inferior to your competitors can help build confidence in your brand. People understand it is rare to find something that is better in every aspect and value honesty in the people they deal with.  An independent source for comparative information can carry further weight.

Offer money back guarantees or free returns to demonstrates confidence in your product. This also reduces the perceived risk of the customer making a mistake and feeling regret.

6. Ease the pain of payment:

Neuroscience research has indicated that an excessive price activates a part of the brain called the insula. This is normally a part of the brain associated with experiencing pain which suggest the people can suffer from a form of mental pain when considering the cost of an item.

Implications for CRO:

Free trial offers and buy one, get one free offers are good strategies for reducing pain felt due to the price of an item. This also plays to our human tendency to be loss averse. People fear loss greater than a gain and are also attracted to free or discounted offers because they hate the feeling of regret when they miss out on something appealing.

Image of chart showing hyperbolic discounting curve
Image Source:

Delaying payment can also significantly improve a user’s likelihood to convert because a payment in the future is perceived to be worth less than a cost immediately incurred. (see hyperbolic discounting). Ecommerce stores routinely benefit from this phenomena by using buy now, pay later promotions and by allowing customers to pay in monthly instalments. is very effective at using  the buy now pay later proposition to reduce the pain of a purchase and this allows the e-commerce retailer to charge a significant premium for products on its site.

Image of spread the cost banner on
Image Source:

Brands can also reduce the pain from a payment by using the concept of mental accounting to associate the purchase with an existing household budget. People have a tendency to allocate money into separate subjective pots, such as house, weekly shop, holiday, savings, windfall gains and housekeeping money. They tend to be more willing to dip into some accounts, such as housekeeping and windfalls, than others, such as savings or house (i.e. rent or mortgage).

Image demonstrating mental accounting
Image Source:

To benefit from mental accounting brands can seek to position their product or service as naturally coming from an appropriate and easily accessible mental account (e.g. air freshener from weekly shopping). In addition brands could allow customers to allocate items to different accounts (e.g. banking apps) to help people manage expenditure according to their mental accounts.  uses its brand name to associate itself with the mental accounting concept because in the UK it is still common practice to keep spare change or money for a specific purpose  in jars. Traditionally it was common to use jam jars to store cash for different needs (e.g. beer money and milk money).

Image of email from which uses mental accounting concept with the use of the term jar
Image Source:


Behavioural economics in particular provides us with a framework and language to create strategies for behavioural change. As shown above, behavioural science creates many opportunities for us to be more persuasive online. Roger Dooley is correct in suggesting that we need to be better at targeting the non-conscious brain because this makes most decisions. However, neither should we forget to link the emotional with rational reasons why we buy as without System 2 thinking we may lack substance.

Beyond Reason’s implicit motivations model provides valuable insight into how we should discuss brand positioning. Many brands have similar features and benefits, but we can use implicit motivators to have informed discussions about how to best differentiate our brand using deep psychological and emotional goals.

The importance of social interaction cannot be overstated. Brands are nothing without human interaction, whether between customers or with staff via digital channels or offline conversations. People use the popularity of your site as a short-cut to deciding whether they can trust you. Social influence should, therefore, be one of your strongest strategies for influencing visitors to engage and convert.

As well as seeking to increase the value of your brand (e.g. through product enhancements) behavioural economics suggests we also look at the pain of price. It is important not to look at these factors in isolation because it is the net difference between the perceived value and the cost of an item that determines likelihood to purchase.

Thank you for reading my post and I hope it has given you some ideas on how to improve your site and generate hypothesis for A/B and multivariate testing. If you found it useful please share using the social media icons below.

You can view my full Digital Marketing and Optimization Toolbox here.

To browse links to all my posts on one page please click here.

  • About the author:  Neal provides digital marketing optimisation consultancy services and has worked for  brands such as, and He uses a variety of techniques, including web analytics, personas, customer journey analysis and customer feedback to improve a website’s conversion rate.
  • Neal has had articles published on website optimisation on  and as an ex-research and insight manager on the GreenBook Blog research website.  If you wish to contact Neal please send an email to You can follow Neal on Twitter @northresearch, see his LinkedIn profile or connect on Facebook.


Are People More Rational When Buying Financial Services & Big Ticket Items?

Insights From Behavioural Economics:

I’ve worked as a customer insight and research manager in financial services (FS) for most of  my career. During this time I’ve noticed that colleagues often assume that people are more rational when buying financial products compared to other categories of goods and services. There is a perception that FS products are more ‘serious’ than your average fast moving consumer goods product (FMCG).

This view is sometimes supported by The Consumer Involvement Theory. The theory suggests FS purchases fall into the high involvement and rational segment of the model. This is due to the relatively high cost of FS products and that purchases are more about logic and less about emotion. You don’t buy a pension everyday!

Image of mri-head scan

But what does the evidence from experiments in behavioural economics and neuroscience indicate about rational decision making in the face of risk and uncertainty?  Are consumers’ really discreet, self-determining individuals who make considered, rational decisions?

This view increasingly looks misguided and is probably a fallacy created by our own minds to make us feel in control of our behaviour. As Mark Earls points out in his book Herd:

“Our failure to acknowledge the truth about human nature distorts our attempts to understand human behaviour and frustrates our attempts to change it. Bad theory = Bad Plan = Ineffective action.” Mark Earls on Stephen Pinker, Herd

Behavioural economists Dan Airely and Nobel laureate Daniel Kahneman have uncovered strong evidence that rational decision making is often an illusion. That is not say people don’t behave differently when considering money issues. Dan Ariely found that just thinking about money makes people more selfish, self-reliant and less charitable. However, these traits don’t necessarily make people more rational in their FS decision making.

image of US $100 notes

Insight identified from behavioural economists challenge many of the basic assumptions of traditional economics and related theories of decision making. Some of the Key insights are:

  • Emotions – Human decision making is unconsciously driven by our emotions and social norms much more than we have appreciated in the past. This is due in part by our reliance on our fast, intuitive, but largely unconscious mind. Daniel Kahneman refers to this as system 1. This makes the majority of our decisions. But its frequent use of  rules of thumb (heuristics)  make people prone to biases that can lead to sub-optimal decisions.
Image of woman looking happy and holding word Joy


  • Answering an easier question – Because we find cognitive thought hard work, system 1 will often substitute an easier question for a difficult question to answer instead. It will do this automatically if we are unable to easily retrieve an answer to a hard question.
  • Context dependency – Our state of mind and the decisions we make are heavily influenced by the environment within which we find our selves. This leads to inconsistencies in our decision making that we are largely unaware of.
Image of computer memory chips


  • Memory – Our recall of events is unreliable and heavily biased towards the beginning, the peak of activity and the end of an event. We neglect the duration of an event and have little awareness of our true motivations. Indeed, every time we try to retrieve a memory our brain has to reconstruct it and inevitably this changes what it contains. This explains why sometimes we create false memories that we genuinely believe are accurate.
  • Illusion of understanding – Kahneman uses the acronym WYSIATI (What You See Is All There Is) to describe our tendency to think that the limited information we have about the world is all that there is to know.  Humans create narrative fallacies in an attempt to make sense of what are often random events.

“Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.” Daniel Kahneman, Thinking, fast and slow

Image of Herd of Wildebeest and Zebras walking in Masai Mara, Kenya 1995


  • People herd –  As Mark Earls points out humans are a “super social species”. Our behaviour is unconsciously influenced by what other people do and more so than we realise or like to admit. In the face of uncertainty we look to how other people behave and will often follow their lead.
  • Demand is social – Mark Earls  argues that market size and market share are primarily a function of consumer-to-consumer interaction. The implication being that rather than focusing on supply side factors, marketing should pay more attention to understanding and modelling interactions that generate mass behaviour (i.e. consumer-to-consumer interactions).

“You have to understand the rules of interaction – the accepted behaviours and rules of thumb of the individuals whose interaction generates the complexity of behaviour that you are studying – because these will shape the outcome of interactions.“ Mark Earls, Herd

  • People care about others – Real people are also sometimes generous and willing to contribute to the good of the community. These are not the characteristics of a rational person described by traditional economic theory.
  • We think of a reason after the event – So peoples’ decisions are mainly influenced by factors that they are not consciously aware of. Humans review and post-rationalize decisions. This suggests that our perceptions of a product or brand are likely to change after an action rather than before as implied by traditional marketing models like AIDA (Attention, Interest, Desire, Action).  It should probably be changed to Context, Attention, Emotion/social norms, Action, Review, Memory (C.A.E.A.R.M). Not a great acronym, but I still find marketing people using the old AIDA model so we do need to encourage them to move on from it.



So what specifically does behavioural economics have to say about FS decision making?  Risk and uncertainty is at the heart of Daniel Kahneman and Amos Tversky’s Prospect theory. Three cognitive principles form the basis of the theory:

  • The perceived value of a decision outcome (the utility derived) is dependent upon the history of one’s wealth (the reference point). This may seem obvious, but traditional economics does not recognise that a poor person will perceive a gain of £1,000 as generating more utility than would a millionaire. A person’s reference point is often the current status quo.
  • People experience diminishing sensitivity to both sensory changes (e.g. light) and to changes in wealth. So for example the subjective difference between £1,000 and £1,100 is much smaller than between £100 and £200.
  • Humans are loss averse. When compared against each other people dislike losing more than they like winning. Thus losses loom larger than gains even though the value in monetary terms may be identical. This explains why investors find it painful to sell shares that are below their purchase price and find it easier to sell shares that are in profit. This is not rational behaviour.


Loss aversion is key to understanding how people perceive financial services, and  gambling of course. Extensive research has been undertaken to estimate the psychological value of losses and gains. These studies have identified a loss aversion ratio of between 1.5 and 2.5. This means that a loss that is identical in money terms to a gain is valued up to 2.5 times more than the gain.

Image of roulette wheel

Interestingly, professional risk takers such as fund managers and full-time gamblers  are more tolerant of losses. This may be because they are less emotionally aroused than the amateur investor. Loss aversion leads to predictable behaviours in a number of situations:

  • If a potential loss could be ruinous or would threaten their lifestyle, people will normally dismiss the option completely. Only obsessive gamblers would normally consider this type of situation.
  • Where people are presented with a situation where both a gain and a loss are possible people tend to make extreme risk averse choices. For example a person is presented  with the choice between a small guaranteed gain over 5 years (e.g. a deposit based account) and a stock market linked product that carries a low risk of a large loss. People have a tendency to focus on the large potential loss and often select the former, less risky option. This is why advisers will focus on the large upside potential of a stock market linked investment and try to play down any potential for large losses.
  • Where the choice is between a certain loss and a larger loss that is just a probability (i.e. there is a chance of no loss), diminishing sensitivity can result in  excessive risk taking. This explains why private investors sometimes refuse to cut their losses on poorly performing shares and instead invest more money (to reduce the average purchase price) in the hope that the price will recover sufficiently to avoid a loss. This is known as the sunk-cost fallacy.

“Loss aversion is a powerful conservative force that favors minimal changes from the status quo in the lives of both institutions and individuals.” Daniel Kahneman, Thinking, fast and slow.




  • When considering FS decision making it also necessary to understand how consumer evaluate risks. There are two key biases that relate to the psychological value (weight) given by people to different probabilities or risks.

Image of royal flush poker hand

  • The possibility effect results in highly unlikely (low probability) events being given more weight than they justify. This helps explain the attractiveness of both gambling and insurance policies that cover unlikely events (e.g. extended warranties).
  • The certainty effect leads to events that are almost certain being given less weight than their probability justifies.
  • Indeed, research shows that unlikely events (1% to 2% probability) are over weighted by a factor of 4. However, for an almost certain event the difference is even larger. In experiments a 2% chance of not winning was given a weighting of 13% (or an 87.1% chance of winning).


  • Where the odds of an event are very small (e.g. around 0.001% or less) people become almost completely indifferent to variations in levels of risk. Rather emotional factors and how a risk is framed are the key drivers of how people react to these levels of risk. This explains why after a terrorist attack there tends to be more focus on whether insurances cover such risks even though the level of risk (to an individual) remains extremely low. It also helps to explain why people are often too willing to bet on extreme events happening.

“When the top prize is very large, ticket buyers appear indifferent to the fact that their chance of winning is minuscule.” Daniel Khaneman, Thinking, fast and slow

  • Kahneman also found evidence that rich and vivid descriptions of an outcome (e.g. the lifestyle of a lottery winner) helps to reduce the impact of probabilities. In particular he found that people are more heavily influenced (in terms of weighting of probabilities) if an event is described by using frequencies (e.g. the number of people) than by abstract concepts such as chance or risk.


  • Due to our use of intuitive thinking (system 1) and the laziness of system 2, most people have a tendency to evaluate individual risks separately and independently. People tend to make decisions when a problem arises rather than trying to look at the bigger picture.


  • What Khaneman found was that this approach will almost always lead to sub-optimal decisions due to our focus on loss aversion. The best solution is to aggregate decisions together. A professional investor achieves this by always looking at individual shares as part of a balanced portfolio. This reduces the impact of loss aversion on our preferences.


  • People hold their money  in different accounts, some of which are real and some are only mental (e.g. money from my dad to buy my daughter a present). There is normally the everyday spending account, general savings, savings assigned for emergencies, maybe savings designated for private education and so on. People use mental accounting as an aid to self control. They have a clear hierarchy of willingness to use these accounts to cover their immediate needs and have an emotional attachment to the state of their mental accounts.
  • Mental accounting is a form of narrow framing and can have disastrous consequences in financial services. It often leads to private investors to set up a separate mental account for each share they own. This results in investors wanting to close each account as a gain. So when they need money for their daughter’s wedding what do they do? They have a very strong preference to sell winners rather than losers. It also helps to explain why consumers might have an outstanding credit card balance of £2,000 (with an APR of around 20%), and yet have savings of £10,000 (paying just 4% interest). These are not rational behaviours.
Image of man with hands over face


  • Emotions are also an important factor in how we evaluate gains and losses. Most theories of decision making assume that people evaluate available options in a choice separately and independently. This does not reflect human nature. People feel regret when the experience of an outcome is affected by an alternative option that was open to them, but they did not choose. Thus missing out on selecting the top performing managed fund may influence the perception of your investment choice.


  • The evidence clearly suggests no. People are prone to the same biases when purchasing FS products as they are when buying consumer goods. Even the result of the 2016 UK referendum  on membership of the EU appeared to be more driven by gut instinct and emotion than rational deliberation. Similarly,  FS decisions are often subject to powerful disruptive forces (e.g. loss aversion and mental accounting) than every day purchases.  This demonstrates the importance of regulation to protect people (e.g. cooling off periods) and consumer education in the FS sector.


Image of a calculator


  • Senior management in the FS sector is dominated by a series of very numerate professions who are highly skilled at estimating risks and calculating probabilities. There are actuaries in life & pensions, underwriters in general insurance and lending, bankers, accountants, and a smattering of economists. Given their training and experience of dealing with risk and uncertainty they are less prone to key cognitive biases such as risk aversion and mental accounting. For this reason FS management are less likely to appreciate how strongly consumer behaviour is influenced by these biases.

I observed an example of this when I worked for a large UK life assurance company.  We developed a Guaranteed Capital Bond that protected your initial investment and provided some limited potential to benefit from any rise in the stock market. It researched well, but the CEO (who was an actuary) thought it wouldn’t sell. It didn’t offer enough upside potential if the stock market grew strongly. The Director of Sales & Marketing (a sales person) was supportive of the launch because he understood how loss averse people can be. I don’t need to say who won the argument when it went on sale.


 I could write a whole post on the implication for market research arising from the above insights. Instead I would like to finish with just a few suggestions for consideration:

Google Analytics homepage

  • Use analytics to better understand current customer behaviour. In the digital age we can now use web analytics to track and measure online customer behaviour. We also have the ability to conduct online experiments (i.e. A/B and Multivariate testing). But even in the off-line world there are many sources of data to explore and analyse before we need to conduct primary research.
  • Fewer focus groups please! In some FS organisations focus groups appear to be the default research tool. In a previous post, Should you stop using focus groups, I pointed out my own concerns about this method of research. Interestingly John Kearon of BrainJuicer made a similar observation:

“Yes, they (Focus groups) can reveal powerful insights in the hands of a great researcher, but all too often they are just the lazy default of unquestioning research buyers and produce little or no insight on the subject at hand.” John Kearon, BrainJuicer

  • Don’t ask direct questions but instead observe behaviour. People are unreliable in their recall of why they make decisions. Insights are more likely to emerge from observing human behaviour during key experiences than trying to ask direct questions. This can be carried out in a number of ways including ethnography, auto-ethnography, eye tracking  and analysis of customer interactions (e.g. telephone calls) with customer facing staff.
  • Covert monitoring of behaviour. There is plenty of evidence to show that people behave differently when they know they are being observed. I used video mystery customers (using a hidden camera) to evaluate training and development needs for one company’s sales team. I was informed that almost all of them met agreed standards when they were accompanied on visits by a trainer. However, almost the opposite was observed when we analysed the videos of the mystery customer appointments. Unless you have regular monitoring of service standards in place you can’t be sure what level of service your customers are receiving.
  • Customer facing staff. Listening to sales people, advisers, brokers, telephone agents, people who speak with customers on a daily basis can very insightful. People are better at observing how other people behave than trying to explain their own behaviour. Experienced sales people collect a wealth of knowledge about how customers respond to different strategies, what turns them off, what excites them, what confuses them and what appears to motivate them.
  • Co-create. A collaborative approach to research encourages mutual respect and shared learning. Including social influencers (i.e people who shape attitudes and behaviours of their peers) in the process helps ensure the generation of more innovative ideas than would be the case with only experts and working parties involved. Collaboration also helps break down barriers between different stakeholders and speed up concept development and refinement.
  • Crowd sourcing. There is growing evidence that asking large groups of people to participate in predictive markets can be a very good way of selecting winners. James Surowiecki’s book, The Wisdom of Crowds, has a mass of evidence to support this approach.

“By examining the interactions and behaviours that a particular group of people has, it is possible to identify the underlying rules that drive it.” Mark Earls, Herd

  • The mistake many organisations make is to see Word of Mouth (WoM) as a channel rather than the way consumers interact and influence each other. To benefit from this insight it is necessary to understand the conditions of interactions (e.g. the environment) and the rules of interaction (e.g. how people engage with each other).  By making small changes to either or both of these elements of interaction we may be able to significantly influence individual and ultimately group (e.g. private investors)  behaviour.

Now published on the GreenBook Blog market research website!

Thank you for reading my post. I hope it challenged your thinking about consumer decision making and the implications of behavioural economics for marketing.

You can view my full Digital Marketing and Optimization Toolbox here.

To browse links to all my posts on one page please click here.

Further reading:

Thinking, fast and slow – By Daniel Kahneman.

Herd  – How to change mass behaviour by harnessing our true nature – By Mark Earls

Thinking, fast and slow by Daniel Kahneman, Herd by Mark Earls (@Herdmeister), Influence by Robert B. Cialdini, PHD (@RobertCialdini) ; Predictably Irrational by Dan Ariely (@danariely); the Upside of irrationality by Dan Ariely; The Wisdom of Crowds by James Surowiecki; Consumer.ology by Philip Graves (@philipgraves); Nudge by Richard Thaler (@R_Thaler).

  • About the author:  Neal provides digital optimisation consultancy services and has worked for  brands such as, and  He identifies areas for improvement using a combination of approaches including web analytics, heuristic analysis, customer journey mapping, usability testing, and Voice of Customer feedback.  By  aligning each stage of the customer journey  with the organisation’s business goals this helps to improve conversion rates and revenues significantly as almost all websites benefit from a review of customer touch points and user journeys.
  • Neal has had articles published on website optimisation on  and as an ex-research and insight manager on the GreenBook Blog research website.  If you wish to contact Neal please send an email to You can follow Neal on Twitter @northresearch and view his LinkedIn profile.

What Does Psychology Tell Us About Using CAPTCHA On Websites?

In his book Thinking, fast and slow, Daniel Kahneman outlines how the human brain uses two different mental systems for making decisions:

  • System 1 – The fast, automatic, little or no effort, intuitive, but largely unconscious mind.
  • System 2 – The slow, disciplined, effort hungry, largely conscious mind that monitors system 1 and allocates attention to  more complex mental problems that require it. However, this system is lazy and will rely on system 1 whenever it thinks it is adequately handling decision making.

As an example of how these systems work here are some simple puzzles. The answers are at the bottom of this page.  Do not try to calculate the answers, but listen to your intuition:

1. A bat and ball cost $1.10 (one dollar and ten cents).

The bat costs $1 more than the ball.

How much does the ball cost?

2. If it takes 5 machines 5 minutes to make 5 widgets , how long

would it take 100 machines to make 100 widgets?

  • 100 minutes OR 5 minutes

3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size.

If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?

  • 24 days OR 47 days

These 3 questions made up the Cognitive Reflection Test that experimenters recruited students from Princeton to take. The questions were selected because they all suggest an immediate intuitive answer that is incorrect. For the bat and ball puzzle the number 10 (10 cents) tends to come to one’s mind. This is the intuitive answer but is wrong. If the ball did cost 10 cents and the bat is $1 more than 10c ($1.10)  that would make the total cost of the bat and the ball $1.20, not $1.10 as stated in the puzzle.

When the test was administered, half the students were given a test paper with a small font and washed out print that was legible, but difficult to read. The other half were given a test paper in normal print. Interestingly, 90% of the students who received the test paper in normal font got at least one question wrong. However, only around a third of those given the difficult to read paper got any questions wrong. This is because the difficult to read paper caused cognitive strain (i.e. shit we have a problem!) which automatically activates system 2. This mobilizes our full attention and allocates resource that is more likely to reject answers suggested by our intuition (system 1).

What this demonstrates is how easily we are happy to rely on our intuition (system 1) when things appear to be going well (i.e. no complex problems to solve). We rely on system 1 for making most our decisions, but this can sometimes cause us to jump to conclusions that are incorrect.


Implications for Conversion Optimisation:

  • If you want to ring alarm bells and activate your customer’s system 2 then make the font small and difficult to read. This may occur during the registration process for websites that use the Captcha security test (Completely Automated Public Turing test to tell Computers and Humans Apart). No wonder this may seriously damage your conversion rate! If you have been using persuasive copy to encourage sign-up this security mechanism could undo all your hard work as it causes cognitive strain and activates a person’s system 2. This system is more likely to reject the reason for an impulsive decision and abandon a transaction.
  • This model of decision making also suggests sites should avoid asking visitors to remember instructions or promotional codes etc (e.g. displaying codes as images that cannot be copied and pasted). The more information that a website expects visitors to remember for future use the more likely it will lead to cognitive strain which will activate system 2. If mental effort is needed for storing information there will be less available for other activities and people become prone to missing messages or instructions during a website journey.
  • The use of two different mental systems also challenges the way organisations use traditional research and usability testing for assisting website design. In a previous post, Why should you stop using focus groups?, I outlined why focus groups can be a misleading research tool.
  • However, standard usability testing, particularly in labs, are prone to some of the same kinds of bias. What Kahneman’s work suggests is that direct questions often engage the wrong system (system 2) and that observation of behaviour is more likely to provide true insights. It also supports the benefits of ethnographic research where people are observed undertaking a behaviour in their natural environment (e.g. in their home) rather than in a user lab. Ultimately though the most reliable way of understanding what affects visitor behaviour will be an online experiment.


Thank you reading my post. If you found this useful please share with the social media icons on the page.

You can view my full Digital Marketing and Optimization Toolbox here.

To browse links to all my posts on one page please click here.

Further reading:


  • About the author:  Neal provides digital optimisation consultancy services and has worked for  brands such as, and  He identifies areas for improvement using a combination of approaches including web analytics, heuristic analysis, customer journey mapping, usability testing, and Voice of Customer feedback.  By  aligning each stage of the customer journey  with the organisation’s business goals this helps to improve conversion rates and revenues significantly as almost all websites benefit from a review of customer touch points and user journeys.
  • Neal has had articles published on website optimisation on  and as an ex-research and insight manager on the GreenBook Blog research website.  If you wish to contact Neal please send an email to You can follow Neal on Twitter @northresearch and view his LinkedIn profile.

Answers: 5 cents, 5 minutes, 47 days