 Hello everyone, and welcome to Behavioral Economics for Product Managers. Thanks for joining. Let's get started. So what even is behavioral economics? Well, in the past, economics was heavily focused on allocating resources efficiently. It was thought that people acted completely rationally. By this, they would act in such a way where their behavior could be predicted, modeled, and optimized by engaging with markets. However, as time went on, people began to question just how rational these economic actors were, especially in light of things such as recessions and market bubbles. They felt that human emotions often changed behavior in unpredictable ways. As a result, they argued a new era of economics was needed, one that blended with the field of psychology, to really understand how humans would behave in an economy. From this, behavioral economics was born. Within traditional economic thought, a central idea was that the more was always the better. In fact, a central idea was that if you were not selling to a customer, it was because you just don't have the product they want. Naturally, this led to an explosion of micro-product differentiation. These images from my local supermarket show just how far this has gone. Even with water, there are over 25 different varieties on offer, ranging from different flavors to even acidity levels. However, behavioral economists have begun to question and test this assumption. For example, Sheen Iyengar from Columbia University recently set up an interesting experiment. She went to hundreds of different locations in the US and set up stands selling jam. On one of the stands, she sold 24 unique varieties of jam. On the other, she sold only six varieties of jam. She controlled four time of day, the income of the area, and a host of other variables. Interestingly, she found the stand selling just six unique varieties of jam sold 10 times more. Even though the stand with more varieties generated more interest from shoppers, this interest did not actually translate into greater sales. In addition, she ran similar experiments with retirement and insurance plans and noticed the same form of choice paralysis. So what's a PM to do? Firstly, keep your offerings refined and streamlined. Aim for a simple selection and start with your core offerings. At stream, we brought this lesson to our pricing page, shown to the right. Here we focus on our main plans and remove the noise of secondary offerings. The second lesson is about the power of defaults. Here, Dan Goldstein from the University of Chicago noticed something curious. Organ donation rates vary drastically between Germany and Austria, with a low of 12% in Germany and a high of 90% in Austria. He questioned why this was the case. Was there something particularly selfish about Germans? Or maybe Austrians were particularly good Samaritans. He found out that the difference could be explained by the actual process of registering to become an organ donor. In both countries, you are asked about organ donorship when filling out paperwork to apply for your driving license. In Germany, the form has you opted out of organ donorship and requires you to fill out eight pages of paperwork to become one. However, in Austria, you are opted in by default to become an organ donor and have to check a box to specifically say that you don't want to be a donor. So what's a PM to do? Acknowledge the power of defaults. People will be tied to the status quo. Reduce friction as much as possible. Try to keep the process short. At stream, we took this lesson and applied it to a new premium feature we were rolling out. We took our customers who were using the beta of the product and divided them in two. Half were asked if they wanted to use the feature now that it was live and required to fill out a form. The other half were given the option you see below, a banner opting them into the feature by default with the option to opt out should they need to. Those that saw this option were almost twice as likely to use the premium feature compared to the first group. The third and final lesson comes from the work of Nobel Prize winning behavioral economist Daniel Kahneman. His findings focus on patients undergoing a colonoscopy. Famously, this procedure is not pleasant and medical orthodoxy was split on the best way to do it in order to minimize pain for the patient. Some physicians felt the best way was to go with speed, opting for a quick procedure that involved sudden spikes of pain, particularly at the end of the procedure. This type of procedure would be completed in under 10 minutes and you can see it represented in the patient A cohort graph. Others felt you should move more slowly and carefully. This would result in a longer overall procedure, roughly 25 minutes in length, but would lead to less intense spikes of pain, particularly in the final moments. By giving patients a special device to rate their pain, Daniel was able to record pain in real time for patients given the different procedures. Importantly, at the end of the procedure, he would then ask patients to rate overall how painful the experience was. To his surprise, he found that patients in the B cohort felt the procedure was not as bad overall compared to those in A. This was because patients really only recollected the final moments of pain when assessing the entire experience afterwards. This gave rise to something now known as the peak end rule, which states that when recollecting an event, the final moments of the experience are more heavily weighted in our mental calculus. So what's a PM to do? Think about the final moments you have with your customer, particularly when things have not gone well. At stream, we applied this lesson to our interface for when customers reported a bug to us. Before, bugs were submitted through a form that gave customers no feedback. Now, when someone goes through the trouble of submitting a bug, we thank them with a lighthearted message. We found that with this method, customers get a lot less disgruntled and are willing to work with us more closely as we fix a path forward. So putting it all together, lesson one, less is more. Keep those product choices refined and prevent user paralysis on your platform. Lesson two, remember the power of defaults. Harness the power of the status quo and reduce friction wherever you can. Lesson three, all's well that ends well. Remember that the final moment warps the full recollection and always try to finish on a good note. And that's all. Thanks for joining. And if you would like some further reading around the topics discussed today, check out the links on the screen.