Behavioural Economics and Wellness
Originally published in Startups Magazine Issue 7
Turning your great idea into a startup is an important achievement. Nonetheless, the journey of your startup can be stressful and things usually don’t go as you planned. I had the same experience myself. Certainly, during my six years of freelancing, things did not always go as I expected.
These ups and downs may have a negative impact on wellness for entrepreneurs. In this article, then, I’ll take a look at some behavioural-economic strategies to improve wellness.
For readers who may have missed my previous article, let me remind you what behavioural economics actually means. Behavioural economics is the combination of human psychology, decision science and economics.
How are behavioural economics and wellness connected? We, humans, make more than 3,000 decisions per day. These decisions are heuristics, influenced by biases and mostly emotional. According to studies by Daniel Kahneman, 80% of our decisions are emotional, whether we are making a business decision or ordering a coffee. Sadly, we are not good at making the right decisions all the time, but our decisions are often fairly good.
If we consider the wellness of entrepreneurs, these are people who have to make countless decisions about their startups, and of course, that involves a lot of stress. It’s not easy to make the best decisions within a limited time-frame. You have to develop your product, increase sales, work on finance, help your team and, on top of that, you need to live your own life. These are not easy things to cope with.
Behavioural economics cannot minimise or eliminate these decisions, but it can highlight some shortcuts to reduce your stress whilst making them. I would like to cover a couple of behavioural-economic principles that will help you to improve your wellness.
we make different decisions depending on how the information is presented to us. The framing effect is how we perceive reality. Of course, reality is not something we can change, but at least we can change our perceptions of it. The journey of building a startup involves lots of good and bad experiences, but the key point is to frame anything you experience as a benefit for the future of your business. When you frame a mistake as a learning experience, something to avoid doing again, that's something very useful for the future. Whenever you experience an issue, never go into negative framing; just think about what you can learn from this.
We often mentally anchor our thoughts or decisions to the first piece of information we receive, regardless of whether it’s relevant. I experienced the anchoring effect during my early years as a freelancer. I created an anchoring point of success based on someone else's success and tried to compare myself to that. This is one type of anchoring effect that entrepreneurs may be prone to - comparing ourselves or our products with others. The problem is, we don't know the background of that person or business, however much our mind loves to place an anchoring point and tries to compare us with them. If this helps to motivate you to work hard, it may be useful. On the other hand, if taken to extremes, it can be depressing and demotivating. Life is not something static and it is different for everyone, so our anchoring point to a competitor may not be a good representation of our success.
People tend to overestimate the probability of positive events and underestimate the probability of negative events happening to them in the future (Sharot, 2011). We all love to dream about happy endings and there is nothing necessarily wrong with that. Bear in mind one downside, however! When we always expect happy endings for our decisions, they tend not to work out as perfectly as we expected. This can demotivate us – for example, when you release a product and you expect people to buy it and nothing happens. Of course, this is disappointing and may even make you unhappy. You spent so much time, money and resources on creating that great product, but no one was interested in it. Sadly, we all experience this problem. The key point is to keep the optimism bias as a motivation to develop your products but not to stick to it for a long time. When something goes wrong, it’s helpful just to turn off the optimism bias and try to diagnose why it went wrong.
This is a mental shortcut that relies on immediate examples coming to a given person's mind when evaluating a specific topic, concept, method or decision (Tversky & Kahneman, 1974). And we very often base our decisions on these heuristics, as I mentioned earlier. Availability heuristics explain how we make a quick decision with our existing knowledge and the memory structure in our brain. We usually try to estimate the future based on what we have experienced before. When you run a Facebook campaign and do not get very good results for your business, you will continue to have this experience in your mind. When you need to run social media ads for your business, you will remember this experience and make a decision accordingly. This event happened a long time ago, however, and there is no guarantee it will happen again. Making a decision based on past experience may prevent you achieving a future success. Apart from that, your negative entrepreneurial memories may simply depress and demotivate you. You might be forming an unnecessarily pessimistic vision of the future based on a negative experience of the past.
The wellness of your mind is a very important asset of your business. You create and develop your startup through your mind. There is no single way to improve wellness, but behavioural-economic principles can help you to think twice and change your perceptions towards negative experiences. This way, you will be eliminating thoughts and memories that negatively affect your wellness and you can also reduce your stress levels. When you consider the life journey of successful people in business, no one had a perfect journey. They had to deal with the same issues that you experience, but by framing those problems differently, they maintained their mental wellness and were ready to meet the next challenge.