Humans behave irrationally all the time. In fact, we are so frequently irrational, that it is predictable. Dan Ariely, an expert in behavioral economics, has even written an entire book about it.
But what I find more interesting is that we lie to ourselves.
We are completely blind to these moments of irrationality. We think we always act in our best interest. That is, we believe we behave rationally at all the times. This creates massive opportunities across a variety of fields, specifically in business.
Irrationality usually means there is an opportunity for a new product or service.
When consumers predictably do something that isn’t in their best interest, it means there is room in the market. Room for tools to help them make better decisions. Room for services that curb their irrational behavior.
To illustrate, consider just one of the ways humans are irrational: “loss aversion”. The concept was first demonstrated by Nobel Prize winner Daniel Kahneman. He discusses the concept in detail in his book “Thinking, Fast and Slow “.
Putting it simple terms, we have a stronger emotional response to a loss (pain), than to a gain (pleasure). There are entire industries that take advantage of this predictably irrational human behavior.
One of the best examples dates back thousands of years. . . Insurance.
Ever since humans have been able to buy things, we’ve been afraid of losing them. I myself have paid $25 dollars to insure a $350 flight. Why?
Because my flight was in the middle of the winter. It was a lot less painful for me to pay an additional sum than risk losing it all if the flight gets canceled do to snow.
Another, more recent and less manipulative example. . . Automated Investing Services. (To be explicitly clear, I do not recommend these services. If you want to know why, send me an email)
By making investments automatic, emotional bias is significantly reduced. Most investors are comfortable holding unto an investment when it shows a gain. It feels great. They might even tell a friend about it.
But what about when the investment shows a loss? Most of us overreact. Even if all the evidence suggests the loss is temporary, we still feel pain. Investors, both amateur and professional, feel the need to prevent further loss.
A guaranteed loss of $100 is a heck of a lot less painful than potentially losing it all.
So most investors sell at a loss. The value of automated investment services, is that they help curb a loss aversion response.
Consumers are blind to their irrational behavior.
Look for ways consumers are behaving irrationally in your market.
Can you develop a product/service to help consumers behave in their best interest? (Don’t be a scum bag and exploit their biases)