Profit growth and constant search for new opportunities are two basic goals of business as it is. Meanwhile, nowadays business, or better to say “entrepreneurship”, became one of the most popular kinds of investment. Investing a capital into an enterprise, contributors count on multiplying their budgets. But how to evaluate whether a certain project is worth your funds? How to consider all the risks in advance? And lastly, what is the way of determining whether the value you come up with is rational?
The answers to all the questions listed above (and many more!) can be retrieved from behavioral economics studies. Behavioral economics is a sub-field of finance as a field of studies. It examines various cognitive, psychological, emotional, and social factors of economics-related decisions. Throughout all the diverse topics, today we’ll focus on one of the most valuable ones: irrational value assessment and harm it might cause to your investments. Below is a list of core facts everyone should find out about irrational behavior economics.
- Careless research is your top enemy. Never use value of anything else, which you consider similar, for comparison instead of detecting the actual cost of something. Inaccurate data drags irrational decision without you even noticing it. Start with careful preparations for value assessment process before sticking to any numbers.
- “Default” option is not always the best option. No matter what side you at, customer’s or entrepreneur’s, human nature is no stranger for you. Once you were convinced to make a certain decision a single time, you’ll follow this pattern in future, regardless if it rational or not at that very moment. Your mind will set already known behavior as a “default” one, and you will have to work hard to overcome this trap and take a decision, which is actually appropriate.
- Get to know logic of irrational consumer. This might sound ridiculous initially, but believe us, the conclusions you could get from such a research are invaluable. Keep in mind, that all human beings are “wealth maximizers” in nature. Meaning, what sounds illogical for you, might be a common sense for your client. Behavioral finance theory focuses on numerous “anomalies” and how these can be explained, so better check new findings of this field from time to time.
- Count of higher perceived value. If you are willing to build long-term relations with your customer base, avoid giving free products or services frequently. As we have already mentioned, the initial behavioral pattern of getting goods from you for free will stay on your customers’ minds. For example, if your company tries to fill in the need for academic assistance in students, entitle your marketing company with something like “find college papers for sale here” instead of “free college papers”. The higher the price a client pays, the more valuable and respectful his/her attitude towards a company is.
- Develop risk tolerance in your customers, as well as colleagues. Confidence in a positive outcome is a crucial factor for a personal decision making process in financial regards. There is nothing wrong with being risk-averse, yet do not confuse this term with being scared of using opportunities for growth. Encourage your clients making their buying decision by assisting them with value assessment and explaining how they would benefit from collaboration with you. And do not forget to provide same encouragement to your partners and personnel.
- Follow up satisfaction-demand ratio. High level of customer satisfaction makes your clients develop emotional bond with your company or product. When goods you are selling come with happiness or any other positive emotions, consumer utility growths. In its turn, this utility increases demand due to unconscious relation between positivity and your brand name.
There is no doubt that establishing a profitable company or launching a successful project is impossible without full understanding of the market. Initial business evaluation and value assessment determines the formation of company’s development strategy, optimization of managerial policies, investment attractiveness, risks ratio, and relations with competitors. No business process can be made without a professional view from the third party – that is what differentiates an irrational value assessment from an adequate one. Following an authoritative opinion based on real numbers and calculations is a guarantee of your success.
Bio: Michael Stoddard is an author for EduBirdie. His main area of interest is economics and personal finance assistance. Michael is always ready to answer any questions concerning these topics.