Not only did all the opinion polls get the recent federal election result wrong, but all the bookies got it wrong too. How did it happen? It’s hard to say definitively, but maybe the pollsters didn’t pay enough attention to the way we make decisions.
The study of behavioural economics analyses how we make decisions and the biases that influence our decision-making and a lot of them may have influenced behaviour during the election period.
Here are four biases that likely played a part in the recent federal election – they’re worth reflecting on because they could be affecting your daily decisions about small business and your money as well:
Confirmation bias describes how we often put the conclusion first, search for evidence to support the conclusion, and discount anything that differs from the conclusion. Many people were probably guilty of assuming that Labor would win, without looking for the indicators that suggested it could be closer than it was.
The lesson: Confirmation bias can be dangerous in small businesses if you start with a conclusion. You might believe that a new product will be well-received because you like it, but that doesn’t mean your clients will. Try to test your opinions before making decisions by encouraging your team to share a different view, or by holding a group pre-mortem together (where you imagine why a new initiative might fail in the future).
Our fear of loss is twice as powerful as the feeling we get when we gain something. There were many policies discussed in the lead-up to the election, including Labor’s proposal for franking credit reform that would have removed benefits for a portion of Australian investors. In reality, this was only likely to affect a small number of investors but all people knew was that they might lose something called a “credit”. It’s likely that loss aversion bias influenced voters who were worried about losing something.
The lesson: Getting something extra is always great, but behavioural economics reminds us how clients feel if they lose something. It’s a very powerful emotion and businesses need to consider how they can use it as an opportunity rather than a negative.
Status quo bias
Status quo bias describes how we often, rightly or wrongly, favour the status quo and anything that differs is often incorrectly perceived as a loss. Perhaps the experts underestimated the power of status quo bias in the election.
The lesson: In business and life, this bias can affect us in many ways, including not scrutinising our utility companies, service providers and super funds as closely or regularly as we should because it’s easier to remain with someone we know. Regularly review the fees you’re paying for services, investing, superannuation and insurance – yes, it takes time but it’s easier than it used to be to shop around and make sure you’re getting the best deal available.
Present bias describes how most people favour more immediate benefits over benefits that may affect us in the future. Some benefits politicians proposed wouldn’t be seen for a long time, whereas changes to tax policy can really tap into our desire for an immediate benefit.
The lesson: This bias particularly influences our money and investments and can severely affect our retirement savings. While it can be very tempting to spend today instead of saving for tomorrow (or to borrow so you can spend today) remember the benefits of compounding interest on your savings and investments. Your future self will thank you.
Ted Richards, Director of Business Development, Six Park