12 Common Biases and How They Influence Decision-Making

People are not rational decision makers. Quite the contrary we are highly irrational in almost everything we do. That’s because despite best intentions to remain as objective as possible there are just so many things that influence us in any given moment — both on a conscious level and on a broader emotional and subconscious level.

Biases tend to have a greater impact on the routine and largely unconscious decisions we make. These have many names but are most commonly recognized as decisions made under System 1 cognitive processes. System 1 makes decisions that are low involvement and effectively on autopilot. But because these decisions rely on shortcuts and heuristics, they may be skewed by various biases so that heuristics turn into decision making errors.

In this article, I will briefly explain what a bias is and how it’s different from decision making heuristics. Then I will list out several common decision making biases and explain how they can influence consumer choice.

What are decision making biases?

In order to make decisions about things, people need to interpret information from the world around them. Through this interpretation process people take an objective truth as a starting input and use it to construct their own subjective reality influenced by their predispositions and experiences.

In other words, people create their own little personal mind frames based on their perceptions of the true nature of things. These mind frames can then dictate behavior. But because of how complex perception can be, we often get it wrong and behave in an irrational manner. When that happens our decision making is biased. In the sections that follow, you will see many examples of exactly how this can occur.

“the way a particular person understands events, facts, and other people, which is based on their own particular set of beliefs and experiences and may not be reasonable or accurate.“

A definition of Cognitive Bias by Cambridge Dictionary

Heuristics versus biases

Heuristics are beneficial for us. They allow us to save time and mental energy in order to make quick decisions. In a world overloaded with information, signs, and cues, they are kind of like rules of thumb. Heuristics will get the job done well enough most of the time, but they can cause errors. In a nutshell, when a heuristic leads to an inaccurate or irrational outcome, it’s a bias.

#1 Anchoring

In a decision context, people form anchors that influence the entire decision making process. Anchors are usually bound to product categories and are only effective when consumers pay active attention to something, or a the very least give serious thought to purchasing something from a given product category.

For example, say you have been considering buying a new TV. During a walk, a specific TV set in a store window captures your attention. The information displayed to you there now becomes your anchor that shapes your perception of prices of other models, both at that very moment and future purchases. For this very reason, stores should not put their cheapest goods in store windows or on their homepages because then they are setting a low price anchor meaning that inclines consumers to spend less. With a higher price anchor on the other hand, consumers are subconsciously pre-programmed to be willing to pay a higher price.

Being willing to pay a higher price just because the first thing you saw was pricey is highly irrational and therefore a bias. But, it’s a highly impactful bias. Even in seemingly abstract scenarios, anchoring can be influential. Dan Ariely¹Ariely, D. (2008). Predictably Irrational: The Hidden Forces that Shape Our Decisions. Harper Collins Publishers., for instance, found that only having people writing down their social security number before bidding on an item at an auction caused those with the highest ending digits to bid 200% to 300% higher on items than the persons whose social security number ended with a low digit.

#2 Confirmation bias

A confirmation bias is the act of placing greater value on a piece of information that validates our existing beliefs about a given subject. In its extreme, it can cause people to completely discard information, arguments, and perspectives that do not fit their point of view. With the amount of information originating from different sources available at people’s fingertips, confirmation bias is immensely prominent in the world today and can cause people to hold erroneous beliefs.

An simple example of confirmation bias and how it impacts decision making is children’s belief in Santa Claus. At first, youth naivete probably sees no reason to second guess the information coming from our parents. As the kids age, they start becoming skeptical but the positive incentive is strong enough that they discard rational information proving their beliefs wrong. All the while, behavior is influenced by the wrongly held belief that if you behave well, Santa will reward you.

#3 Availability bias

Availability bias reflects our tendencies overvalue pieces of information that immediately come to mind. The logic behind this bias is something like “if I remember it then it must be important”. Availability bias largely explains why people buy what they buy in supermarket settings and is a large chunk of the reason why brands strive to build mental availability. For example, having just heard an advertisement for a given brand on the way to the grocery store will significantly increase the chances of a consumer buying that brand because it is fresh in mind and easy to retrieve.

#4 Loss aversion (endowment effect)

Loss aversion is often also talked about as the endowment effect. Doesn’t matter what terms we use, they mean the same. Essentially, loss aversion is a bias that causes people to overvalue the things in their possession and demand more to give them up than they themselves would be willing to pay to acquire it in the first place²Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39–60. https://doi.org/10.1016/0167-2681(80)90051-7.

People attach sentimental value for their objects and want the selling price to reflect that. At the same time they would never think of paying a premium for someone else’s sentimental value because it is of course irrelevant to them resulting in a highly irrational conundrum. Such a bias can lead people to prefer lesser options.

Loss aversion can also apply to psychological ownership³Dan Ariely, 2008 and it doesn’t have to be limited to a product. For example, employees or even job candidates may experience a sense of psychological ownership in a firm. However, sticking to consumer applications, consider a 30-day money back guarantee. Upfront such a promise helps the consumer execute a decision but 30 days later he or she will feel a much stronger ownership of the product and service making it that much more unlikely that the guarantee will be activated. Trial periods work largely in the same way.

#5 The bandwagon effect

The bandwagon effect is a common bias influencing decision making, especially younger consumers. It’s the inclination to buy a certain item, dress in a certain way, or hold a certain attitude simply because other people are doing it. This is also often labeled as “social proof” and it causes people to conclude that the product must be good, cool, attractive, etc., since everyone is buying it. The bandwagon effect is prominent on Amazon with its use of “best seller” tags.

You also see this bias a lot in the stock market. As people here more and more people talk about a stock they eventually buy into the hype since they conclude that there must be something to gain from it. However, this is almost definitely a bias for the worse because if jumping on the bandwagon is how you got into the stock, then odds are you are too late anyway.

#6 Inferior option

Because consumers make decisions on a relative basis, having an inferior option that enables direct and easy comparison can significantly impact decisions. Inferior options can bias two people either by forcing a decision where otherwise no decisions would have been likely to be made, and by nudging people to a preferable option, say a product with higher margins. Having two easily comparable options eases the cognitive resources required to come to a decision and therefore makes taking a decision easier.

You can trigger this bias by offering two very similar options but at different prices for example; or with a distinct difference in features. Say you offer travel packages to London and Amsterdam. Having just to options of distinct cities requires the consumer to use a lot of cognitive resources to find out what is truly the best option. But including a premium option for Amsterdam where, say, breakfast is included can nudge people towards that package. Now consumers can make an easy comparison between the two Amsterdam packages and the original two packages as they are now inferior options.

#7 Feelings as information

As I’ve said above, people use heuristics to simplify decisions. One such heuristic is simply thinking “how do I feel about it?”

Instead of going through the work to process all the information about a product we want to buy, we can simply go with our gut feelings. Gut feelings start beneath consciousness and may stay there as entirely automatic processes, but may also reach become conscious inputs to thoughts. For example, a consumer may feel frustration following a poor experience at a service encounter. Should he acknowledge the feeling he may infer a perception that the company doesn’t care about its customers.⁴Tuan Pham, M. (2004). The Logic of Feeling. Journal of Consumer Psychology, 14(4), 360–369. https://doi.org/10.1207/s15327663jcp1404_5

#8 Consumer disidentification

Consumers may want to distance themselves from the stereotypical domestic consumer in the country in which they live in. This creates a bias that may lead to irrational product choices. A large-scale study of second-generation immigrants in the Netherlands found that not only are consumers who don’t identify with the stereotypical consumer less willing to buy Dutch products but they also rate them as being of lower quality.⁵Josiassen, A. (2011). Consumer Disidentification and Its Effects on Domestic Product Purchases: An Empirical Investigation in the Netherlands. Journal of Marketing, 75(2), 124–140. https://doi.org/10.1509/jm.75.2.125

Immigrants and expats often exhibit consumer disidentification if they feel that they don’t belong to the country’s dominant in-group. For example, a French expat working in the United States may avoid product he or she thinks are popular among the average American to deliberately distance themselves and nurture a sense of uniqueness. However, in line with the study above, disidentification can also remain beneath consciousness and manifest on negative perceptions about the inherent qualities of the product.

#9 The zero price effect

The zero price effect is a bias that causes people to place an irrationally high value in things that are “FREE”. If you have ever added an item to your online shopping cart that you weren’t necessarily planning to buy but just needed a couple dollars more to get free shipping, then you’ve experienced the zero price effect first hand. Likewise if you have ever spent hours waiting in line to get something for free where maybe the time you spent waiting was even worth more.

The zero price affect is related to loss aversion. In an any given transaction, there are upsides (i.e., “I got a fantastic deal”) and downsides (i.e., “I threw money away”) but when something is free its impossible to lose — or so we think. We get lost in an emotional rush of getting a thing for free that we place an irrationally high value on the object we are receiving and irrationally low value on what we are giving up because we don’t perceive to be a loss, be it time, money or anything else.⁶Dan Ariely, 2008

#10 Halo effect

The halo effect is a bias that forms when consumers use a positive perception of one thing to influence expectations and opinions of another thing. The halo effect is extremely prevalent and its the main reason why companies use line extensions so heavily. Halo effects can also be negative though. For example, a scandal involving one company may decrease brand trust across an entire industry.

Another example of a halo effect are country of origin images. A study of decision making in car, electronics, watches and household appliances found that consumers do consider country of origin images as a halo for other categories, in particular when under low involvement and low familiarity conditions.⁷Josiassen, A., Lukas, B. A., & Whitwell, G. J. (2008). Country-of-origin contingencies: Competing perspectives on product familiarity and product involvement. International Marketing Review, 25(4), 423-440 However, just because a country makes good household appliances doesn’t mean it produces good mobile phones.

#11 Priming

Priming is an effect that biases people to act in a certain way due to a subconscious stimulus carried forward from a previous interaction. In the grocery store example I made when discussing the availability bias above, the consumer was primed by the radio commercial.

Priming effects can take almost any form but typically it will involve emotions. For example in a buying context, emotional priming nudges consumers so that they are likely to believe rational brand messages, regardless of whether any evidence is present or not.⁸Binet, L., & Field, P. (2013). The Long and the Short of it: Balancing Short and Long-Term Marketing. Emotions can also play a role on a broader scale. People are happier and more satisfied on sunny days⁹Schwarz, N., & Clore, G. L. (1983). Mood, misattribution, and judgments of well-being: Informative and directive functions of affective states. Journal of Personality and Social Psychology, 45(3), 513–523. https://doi.org/10.1037/0022-3514.45.3.513 and studies have uncovered a significant relationship between sunny weather and stock market performance.¹⁰e.g., Hirshleifer, D., & Shumway, T. (2003). Good Day Sunshine: Stock Returns and the Weather. The Journal of Finance, 58(3), 1009–1032. https://doi.org/10.1111/1540-6261.00556 On the outset this looks like a spurious correlation but the fact is that sunny weather creates a bias that causes investors to be more optimistic about the stock market.

Last but not least are expectations. Consumers’ expectations can bias judgements and as a result, decisions, via a priming effect. Expectations can cause a bias so strong that the belief itself can overcome the actual experience. For example, we expect coffee in fancy packaging to taste better and are likely to evaluate it so even if it is no different from any other variety. Hence attractive packaging design can be just as important as what it contains.

#12 Mere exposure effect

The mere exposure effect represents people’s tendencies to develop a liking for things that they are familiar with, for example because they’ve been exposed to the same thing before. This is used heavily in advertising and is one of the fundamentals of building brand salience.

Mere exposure can cause a bias due to improved perceptual fluency leading to more positive consumer evaluations. As you have most likely realized by now, consumers are lazy decision makers and therefore attempt to take the shortest and simplest route to a decision under a mere exposure effect. Consumers may refer to gut feelings about an object, as covered above, or on how easy the object is to understand, i.e., perceptual fluency.¹¹Fang, X., Singh, S., & Ahluwalia, R. (2007). An Examination of Different Explanations for the Mere Exposure Effect. Journal of Consumer Research, 34(1), 97–103. https://doi.org/10.1086/513050 The more often people are exposed to an object the better their perceptual fluency becomes which in turn results in more positive evaluations.

Be mindful that the mere exposure effect does reach a point of decreasing marginal returns. This is typically between 10 and 20 exposures¹²Bornstein, Robert F. (1989). “Exposure and affect: Overview and meta-analysis of research, 1968-1987”. Psychological Bulletin. 106 (2): 265–289. doi:10.1037/0033-2909.106.2.265 and in some cases even higher. For example in Fang, Singh and Ahluwalia’s study¹³Fang, Singh and Ahluwalia, 2007 using online banner ads, they recorded no wear-out effects after 20 exposures.

Conclusion

In this article I’ve covered 12 decision making biases and explained how they can influence consumer behavior. Biases occur when the mental shortcuts we use to simplify decisions lead us to irrational choices. Decision making biases are integral to being human and affect everyone across various contexts, some of which may be applicable to your individual situation. Being familiar with how the major decision making biases work can help you increase conversion rates, sales, and improve brand perceptions. But be careful, and be ethical. The line between using biases fairly and manipulation is thin, murky, and unique to each context.

If you found this article useful and would like my to write a similar article on another topic, send me a message and let me know. Likewise if you want to give feedback or disagree with anything I’ve written here then I would like to hear your point of view. After all the entire point of this website is to make marketing just a little easier for those who don’t have the budget for fancy agencies or the time to get into thorough research on every aspect of their marketing operations.

References

• 1
  Ariely, D. (2008). Predictably Irrational: The Hidden Forces that Shape Our Decisions. Harper Collins Publishers.
• 2
  Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39–60. https://doi.org/10.1016/0167-2681(80)90051-7.
• 3
  Dan Ariely, 2008
• 4
  Tuan Pham, M. (2004). The Logic of Feeling. Journal of Consumer Psychology, 14(4), 360–369. https://doi.org/10.1207/s15327663jcp1404_5
• 5
  Josiassen, A. (2011). Consumer Disidentification and Its Effects on Domestic Product Purchases: An Empirical Investigation in the Netherlands. Journal of Marketing, 75(2), 124–140. https://doi.org/10.1509/jm.75.2.125
• 6
  Dan Ariely, 2008
• 7
  Josiassen, A., Lukas, B. A., & Whitwell, G. J. (2008). Country-of-origin contingencies: Competing perspectives on product familiarity and product involvement. International Marketing Review, 25(4), 423-440
• 8
  Binet, L., & Field, P. (2013). The Long and the Short of it: Balancing Short and Long-Term Marketing.
• 9
  Schwarz, N., & Clore, G. L. (1983). Mood, misattribution, and judgments of well-being: Informative and directive functions of affective states. Journal of Personality and Social Psychology, 45(3), 513–523. https://doi.org/10.1037/0022-3514.45.3.513
• 10
  e.g., Hirshleifer, D., & Shumway, T. (2003). Good Day Sunshine: Stock Returns and the Weather. The Journal of Finance, 58(3), 1009–1032. https://doi.org/10.1111/1540-6261.00556
• 11
  Fang, X., Singh, S., & Ahluwalia, R. (2007). An Examination of Different Explanations for the Mere Exposure Effect. Journal of Consumer Research, 34(1), 97–103. https://doi.org/10.1086/513050
• 12
  Bornstein, Robert F. (1989). “Exposure and affect: Overview and meta-analysis of research, 1968-1987”. Psychological Bulletin. 106 (2): 265–289. doi:10.1037/0033-2909.106.2.265
• 13
  Fang, Singh and Ahluwalia, 2007