The behavioral economics of product design

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While these aren’t exclusively design theories, they are interesting nuggets of wisdom that intersect both behavioral science and economics. I’m a firm believer that a good product designer should be armed with an arsenal of multi-disciplinary knowledge at the table. If you haven’t read The Making of Behavioral Economics: Misbehaving by Richard H. Thaler, I highly recommend it.

#1: Endowment effect

Endowment effect states that we tend to value what we already own, or have experienced. This applies to physical items, digital items, and experiences. Let’s take an every day example: we are more likely to shell out for a house we’ve already lived in, or a car we’ve already driven at the dealership. The same can apply to digital products & services as well.

Longer free trials can help build sense of endowment.

The idea is that if we get a user to initiate the trial, they’re already halfway through the door. Once they’ve experienced the value of the product, the pain of losing it is sometimes so great that they’d pay over market price to keep it.

#2: Value theory & Weber-fechner law

Humans by nature are more attuned to changes than absolutes. Imagine you walked out of a heavily air-conditioned hotel (say, 65-degrees) into balmy 75-degrees. If you were me, you’d probably exclaim, “Wow, it’s HOT!” In the converse scenario, I’d probably cry out, “Wow, it’s FREEZING!” In reality, neither 65-degrees nor 75-degrees should cause much outcry. We tend to perceive deltas more easily than absolutes.

When designing for items with changing market value, showing a price delta might help users better understand value. If I’m in the market for buying, it might be more useful to show -66% YTD delta rather than 112.43 USD.

If I own Meta stock, I might be more interested in the value delta (-226.11 USD) multiplied by the number of shares I own, to better gauge my losses.

Screen shot of Meta stock YTD as of November 2022.

In the case of Weber-fechner, the amount of change we perceive is relative to the original value. In this scenario, a $50 discount on a $100 jacket will probably have a bigger effect than a $50 discount on a $200 jacket. A saving of 50% is a “better deal” than one of 25%. If our wallet has $100, and we lose all $100, it’s going to stink a lot more than getting charged a $100 late fee on your credit card totaling $5,000.

#3: Myopic loss aversion (Narrow framing)

The flip side of Weber-fechner is myopic loss aversion, which states that the more frequently one looks at their portfolio, the more risk-averse they become. This applies to stocks, cryptocurrencies, or items with high value fluctuations outside ones own control. This can have unintended side effects, causing users to sell too early, or tighten their pursestrings when they should be buying.

When designing for financial applications, this is important to note. Showing users losses outside of their control can have unintended side-effects. Informing users is important, but cadence and market-awareness is also important.

Let’s take an example of Intuit’s Mint financial planning app.

  1. They’ve been sending me weekly net-worth updates in a bear market. Not actionable, unless they want me to relinquish my stocks at a loss.
  2. They’ve been telling me that my spending was outpacing my earnings on a weekly basis, when I was taking a temporary career break.

While all these reminders can be helpful, what it’s suffering from is narrow framing. Mint is aware of deltas, but only within a very short timeframe — making their deductions ill-suited for my financial situation.

Mint suffers from narrow framing — they are only aware of deltas within a short timeframe, rendering their predictions ultimately useless in my situation.

#4: Sunk cost fallacy

Sunk cost fallacy is the phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial.

In a war where thousands of lives have been lost, retreating might feel like the lives were lost for naught.

In a relationship with significant time and emotional investment, leaving might feel like efforts and time were wasted.

In a product like Spotify, effort invested in creating playlists and feeding the algorithm is a sunk cost as well. This also applies to businesses using Salesforce or Workday — they will have already invested too many resources into their system to move. That is the sunk cost.

When designing solutions, think about how a customer might perceive sunk costs, either in or against your favor. Someone who has been leasing a car might not want to own the car unless the sunk-cost barrier has been removed. How might your design help eliminate some of those barriers to purchase?

Conversely, how might you design a product for emotional investment to make it much harder for a customer to switch to another competitor?

Closing

The ideas above are not exactly design theories. That’s the point. Product design is unique work that touches on a breadth of disciplines. The work of a product designer isn’t strictly input-output, (you’re not a mockup monkey… right?) So I hope this article arms you with some knowledge during product sessions.