The C Factors

Social Norms

C Factor No.1

Social Norms

We are herd animals, therefore we measure our behaviour in relation to each other and decide what is acceptable & appropriate in social settings

Example
When a pretzel cart passed through a train, 1 in 12 passengers bought pretzels. However, when people were cued by other passengers eating pretzels sales increased to 1 in 7 people.

C Factor

Herrmann, A., Rossberg, N., Huber, F., Landwehr, J. R., & Henkel, S. (2011). The impact of mimicry on
sales–Evidence from field and lab experiments. Journal of Economic Psychology, 32(3), 502-514.

Authority Bias

C Factor No.2

Authority Bias

We tend to trust people in authoritative positions such as doctors or celebrities, therefore we place more importance on their opinions and contributions

Example
A famous experiment showed that 65% of people administered painful electric shocks to participants when instructed to do so by a doctor, which shows the influence authority has on behaviour, even when inconsistent with our values

C Factor

Milgram, S. (1963). Behavioral study of obedience. The Journal of Abnormal and Social Psychology, 67 (4), 371.
Benartzi, S. & R. Thaler (2007). Heuristics and biases in retirement savings behavior. Journal of Economic
Perspectives, 21, 81-104.

Empathy Gap

C Factor No.3

Empathy Gap

We underestimate the influence of emotions & urges on our future decisions. How we think we will act and how we actually act can vary dramatically

Example
Investors know that the best strategy is to buy stocks at low value and sell at high value. However when the market drops their emotions prevent them from acting rationally. They panic sell when they should wait until the stocks regain value

C Factor

Van Boven, L., Loewenstein, G., & Dunning, D. (2005). The illusion of courage in social predictions:
Underestimating the impact of fear of embarrassment on other people. Organizational Behavior and Human
Decision Processes, 96, 130–141.

Cognitive Overload

C Factor No.4

Cognitive Overload

Having too many options can make us decline to make any decision due to the fear of not making the optimal choice

Example
Sales of jam in a supermarket increased 10x when the choice of flavours was reduced from 24 to 6. Customers decided not to buy any jam when presented with 24 options as the decision was too difficult

C Factor

yengar, S.S., & Kamenica, E. (2010). Choice proliferation, simplicity seeking, and asset allocation. Journal of
Public Economics, 94 (7-8), 530-539.
Iyengar, S.S., & Lepper, M. (2000). When Choice is Demotivating: Can One Desire Too Much of a Good Thing?
Journal of Personality and Social Psychology, 79 (6), 995-1006.

Loss Aversion

C Factor No.5

Loss Aversion

People feel the pact of losses twice as strongly as they enjoy acquiring equal gains.

Example
Employees awarded with a bonus at the start of the year, with the threat of revoking the bonus based on performance, made more effort to maintain a good performance than employees who received a bonus at the end of the year

C Factor

Mittone, L., & Savadori, L. (2009). The scarcity bias. Applied Psychology, 58(3), 453-468

Frame Dependence

C Factor No.6

Frame Dependence

Our choices are affected by context and the relation to available comparisons. In other words, how options are framed affects our choices

Example
When presented with 2 cameras costing $170 and $240 respectively, no difference in purchase decisions was found. However, when another camera costing $470 was introduced, the majority of people chose the middle option at $240

C Factor

Fryer Jr, R. G., Levitt, S. D., List, J., & Sadoff, S. (2012). Enhancing the efficacy of teacher incentives through loss
aversion: a field experiment (No. w18237). National Bureau of Economic Research.
Gunaratne, J. & Oded (2015). Influencing Retirement Saving Behavior with Expert Advice and Social Comparison
as Persuasive Techniques. in Persuasive Technology, Springer, 205-216.

Mental Accounting

C Factor No.7

Mental Accounting

We use different mental bank accounts and rules of thumb when making decisions about whether to purchase a product

Example
People often have a special “money jar” set aside for a holiday, while still carrying substantial credit card debt. The special fund is treated differently from the money used to pay off debt, even though it’s exactly the same

C Factor

Prelec, D., & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and
debt.Marketing science, 17(1), 4-28.

Present Bias

C Factor No.8

Present Bias

We are impatient & tend to be biased towards making decisions that provide instant gratification & often put off decisions that are associated with future outcomes

Example
When presented with a choice of receiving £150 today or £160 in 4 weeks and then asked to choose between receiving £160 in a year or £150 in 48 weeks, people will invariably choose the £150 now but will be willing to wait for the full year to receive the £160

C Factor

Ainslie, G. (2001) Breakdown of Will. New York, Cambridge University Press.
Loewenstein, G. & J. Elster, Eds. (1992). Choice over time. New York, Russell Sage Foundation.
O’Donoghue, T., & Rabin, M. (1999). Doing it now or later. American Economic Review, 89 (1), 103-124

Status Quo Bias

C Factor No.9

Status Quo Bias

People don’t like change & prefer things to remain the same. The more we behave a certain way, the more automatic this behaviour becomes

Example
When the default option for organ donation was switched from opt-in to opt-out, consent rates significantly increased to almost 100%. Opting-in became the default behaviour

C Factor

Johnson, E.J., & Goldstein, D.G. (2003). Do Defaults Save Lives? Science, 302 (5649), 1338-1339.
Beshears, J., Choi, J. J., Laibson, D., Madrian, B. C. (2009). The Importance of Default Options for Retirement
Saving Outcomes. Social Security Policy in a Changing Environment.

Optimism Bias

C Factor No.10

Optimism Bias

We are much more optimistic than we are realistic. We tend to overestimate our knowledge, underestimate the risks & exaggerate our ability to control events

Example
When a group of people were asked how they would rate their driving skills relative to the wider population, 80% believed that they were better-than-average drivers, despite this being statistically impossible

C Factor

Clark, Robert L., and Madeleine D’Ambrosio. Financial education and retirement savings. Available at SSRN 390642 (2003).
Nofsinger, J R. (2005). Social Mood and Financial Economics. Journal of Behavioral Finance 6, (3), 144-160.
McCormick, I.A., Walkey;, F.H., Green, D.E. (1986). Comparative Perceptions of Driver Ability: A Confirmation and
Expansion. Accident Analysis & Prevention 18 (3): 205–208.

Commitment Bias

C Factor No.11

Commitment Bias

Once people have made a commitment to do something, they are much more likely to achieve the end goal. This is sometimes referred to as the sunk cost bias

Example
When asked to specify their exercise goals & sign a contract to acknowledge their commitment, people were 50% more successful in achieving their fitness goals than those who did not sign a contract

C Factor

Goldhaber-Fiebert, J. D., Blumenkranz, E., & Garber, A. M. (2010). Committing to exercise: contract design for virtuous habit
formation (No. w16624). National Bureau of Economic Research.

Ambiguity Aversion

C Factor No.12

Ambiguity Aversion

People have a preference for risks that are associated with known probabilities than uncertainties where probabilities are unknown

Example
People prefer partaking in activities where the probabilities are known - such as gambling - over activities where the decisions rely on uncertainties, such as choosing an appropriate life insurance policy

C Factor

Ellseberg, D. (1961). Risk, Ambiguity, and the Savage Axioms. Quarterly Journal of Economics, 75 (4) 643–669

Saliency

C Factor No.13

Saliency

People are more likely to look at and remember the details of salient objects relative to their neighbours

Example
Neuroscientists tracked the eye-movements of consumers as they chose between snack items. They found that when consumers chose between a product they prefer & a visually enhanced but less preferred product, people tend to choose the latter