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5 Cognitive Biases That Are Killing Your Business

[Salesman to Prospect:]

[Prospect:]

[Salesman:]

While this may sound like a joke, interactions like this happen in sales more often than you think. One reason is that sales people tend to be focused on their own sales targets rather than on their customers’ needs. Of course, effective selling requires more than just listening to customers. Research in psychology and behavioral economics demonstrates that a number of prejudices have a huge impact on success in selling; prejudices that scientists call . These biases affect your behavior more than you think, largely because you aren’t aware of them. Behavioral psychologists Daniel Kahneman and Amos Twersky were pioneers in codifying significant cognitive biases, several of which play a role in common sales and marketing situations. Here are five common cognitive biases highlighted by Kahneman and Twersky and some ways you can turn them to your advantage.

Framing

Framing is an important principle in behavioral economics; it basically means that the way a proposition is presented, or framed, has a definitive effect on how decision makers will respond to the proposition. Two important biases related to framing include the and .

The Anchoring Effect

This is the granddaddy of all cognitive biases in selling and it should be familiar to experienced salespeople. The anchoring effect kicks in when people ‘consider a particular value for an unknown quantity before estimating that quantity.’ For example, if you present a prospect with a product sheet that includes a retail (i.e. ‘anchor’) price and then ask then what they would pay for the product, the prospect’s answer will be highly influenced by the price on the sheet. Steve Jobs used this technique when he first launched the iPad, first posting a slide showing a price of $999 setting the expectation high, and then by announcing the real price of $499. The spontaneous audience applause demonstrates the power of the anchoring effect.

Although people insist they are not affected by an anchor price, it is well established that this is not correct.

How to use this bias: Set an initial (high) price as the basis for negotiation, and present the highest option for products or solutions first. Buyers like to feel they are getting discount. Also, show the most expensive option first. Smart software companies do this; showing the most expensive option in the leftmost column of a pricing chart. When reading across the chart from left to right, subsequent prices seem more reasonable (through comparison).

The Endowment Effect

It is well known that people make irrational decisions when confronted with losing something they value. For example, when ticket holders for a sold-out concert were asked how much they would sell their tickets for, the price was wildly different from the price they say they would pay to buy the same ticket. A number of psychological effects are in play here, but the bottom line is that we tend to be loss averse; we get emotionally attached to what we already have while we tend to underestimate alternatives. Economist Richard Thaler calls this the Endowment Effect.

How to use this bias — In sales proposals, emphasize what your prospects will lose if they don’t accept your proposal, in addition to what they will gain. A related technique focuses on the emphasizing the fear of failure rather than on productivity gains. For example, when selling business software, explain in detail why a project might fail without the product. People will respond more to the fear of a project failure (lose of prestige, job, salary, etc.) rather than on increasing a project’s prospect for success.

Representativeness Bias

The Representativeness Bias kicks in when people make decisions based on impressions and not on facts. We all know this one. It says that stereotypes govern judgment; and while stereotypes sometimes are usually founded on a grain of truth, it is not always the case. The adage ‘dress for success’ demonstrates the representativeness bias because we assume that people who dress well or are neat are more likely to be trustworthy and organized.

How to use the bias: Leverage impressions and stereotypes to create a desired effect. Highlight aspects of your background or company that project reliability, knowledge, and competence. The impact will be real. (“He is a graduate of that prestigious MBA program, he must know what he is talking about.”)

Conjunction Fallacy

A conjunction fallacy kicks in when the probability of two events are judged to be more probable than just one of the two events. Statistically, this of course is impossible, but consider the following case. Two groups of people were asked to evaluate the price of a set of baseball cards. The first group was shown two sets, one with 10 high-value cards and 3 cards of modest value, and a second set that contained the same 10 high-value cards (without the 3 additional cards). Not surprisingly, the group valued the larger set more than the smaller set; which makes sense. Then, two other groups were shown just one of the two sets. In this case, the smaller set (without the 3 additional cards) was valued higher than the larger set. Rationally, this doesn’t make sense. Why is this? The Conjunction Fallacy demonstrates we are wired to think in terms of averages, so when items of lesser value are added to a set of valuable items, we tend to value the entire set less. Daniel Kahneman calls this the ‘less is more’ effect.

How to use the bias — The impact of the conjunction fallacy on sales can be profound. Be careful not to try and ‘sweeten a deal’ by adding a bonus which is undervalued compared to the original product/offer. On the flip side, this effect can be used to drive prospects to desired outcomes when presenting alternatives; for example, by presenting two offers side-by-side, lead buyers to a desired decision, by creating a judicious mix of products/services.

Regression to the Mean

A regression to the mean says that activities and performance tend to fluctuate, but eventually converge to an average value. For example, sales people will sometimes be successful and sometimes fail, but for each salesperson, over time, performance will tend to converge to an average number of sales. A bias kicks in when you praise a salesperson for closing a deal and then they lose the next deal. Your conclusion might be that your praise caused the salesperson to be overly confident, when it might just be that lady luck was on vacation that day.

How to use the bias — Remember that when looking at a salespersons’ performance over many similar instances, statistics plays a role in achieving overall goals; it is not wise to read too much into each and every occurrence.

Conclusion

It turns out that we are lot less rational when making buying decisions that we think, being swayed by a host of cognitive biases. Several excellent books highlight these biases and explain their causes. I recommend Thinking Fast and Slow by Daniel Kahneman, and Predictably Irrational by Dan Ariely. And don’t worry about biases, from the valuable information you will gain from these books, buying these books will one of the most rational decisions you will ever make.

Accomplished technology product and marketing expert, information overload researcher, award-winning technology and business writer.

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