This story was first posted on Business Insider, check it out here
Halfway through my college career I nearly gave up studying economics. I hated how economists acted like we all operate inside an optimal, rational world. “Rational” is not the first word I’d use to describe human behavior.
But near the end of my sophomore year, I discovered behavioral economics. By looking at how human psychology affects consumer decisions, I realized that “irrational” behavior could be studied and designed around. Heck, it’s not even irrational — it’s just behavior.
Humans often make major financial decisions — like buying a house or accepting a new job — with our hearts as much as our heads. That philosophy informs my decisions every day, both in terms of which startups to invest in as well as the guidance I offer as an investor. I invest in early-stage businesses in the areas of consumer, fintech, and edtech. I also invest in LATAM and underrepresented founders.
Changing behavior is hard
As anyone who’s ever managed another person (or raised a child) can attest, changing human behavior is extremely difficult. Companies that bet the future on their ability to alter their customers’ habits are likely to lose. They can save themselves a lot of pain by designing around the foibles and idiosyncrasies that make us human.
Companies have even begun to hire “Chief Behavioral Officers” to incorporate human psychology into the design of their products. This is increasingly common in finance and fintech: Dan Ariely at Lemonade is one of the most well-known CBOs; Merrill Lynch, Barclays, and Bank of America also have similar teams. And it’s not an especially new idea: Back in 2009, I worked at the Federal Reserve for a group that used a behavioral lens to analyze the financial crisis.
I’m a firm believer that every consumer startup, especially fintechs, should consider incorporating principles of behavioral economics into their design toolkits.
Here are a few of my favorite examples of how startups have used behavioral science to design around consumers:
2 Mental Accounting….
3 Loss Aversion & Attraction….
Check out the Business Insider article to read how companies like Uber, Lemonade, N26, Whitebox, and more are using these insights: