Behavioral Economic Tale

In a small, vibrant town known for its cozy cafés and creative thinkers, there was a coffee shop named ‘The Café Dilemma.’ It wasn’t your typical coffee shop. Sure, they served excellent lattes, croissants, and exotic tea blends, but what really drew people in was the quirky way the café operated. Every day, customers faced unique decision-making situations, each tied to the study of human behavior. It was here that our protagonist, Emma, a young marketing professional, unknowingly began her journey into the world of behavioral economics.

The Café Dilemma - The First Encounter: The Price of Free

One chilly morning, Emma walked into The Café Dilemma, craving her favorite dark roast coffee. As she approached the counter, she was greeted by a sign:
“Buy a croissant for $2 and get a cup of coffee for $1! Or buy a croissant for $3 and get the coffee FREE!”

Emma paused, confused. The deal seemed simple enough, but something about it tugged at her. Shouldn’t she just go for the second option? After all, free coffee sounded tempting! But as she thought more, she realized the first option was technically cheaper.

This little trick was Emma’s introduction to a principle in behavioral economics called the zero price effect. People tend to overvalue anything that is free, even when it’s not necessarily the better deal. In this case, Emma’s emotional attraction to the word ‘free’ nearly led her to pay more for the same combination of items.

Anchoring and the Menu

Having chosen the $2 croissant deal, Emma picked up a menu to decide on her next visit’s meal. The menu listed various breakfast sets:

1. The Budget Bite: $6

2. The Classic Combo: $12

3. The Deluxe Breakfast: $24

Without thinking too much, Emma felt drawn to the Classic Combo. It seemed reasonable, especially compared to the Deluxe Breakfast, which seemed overpriced. What she didn’t realize was that this menu was carefully crafted to exploit a cognitive bias called anchoring. The Deluxe Breakfast, though not meant to be the popular choice, served a purpose: it made the Classic Combo appear more reasonable by comparison. Had the Deluxe option not been there, the $12 set might have seemed expensive.

In behavioral economics, anchoring refers to the human tendency to rely heavily on the first piece of information offered (the ‘anchor’) when making decisions. In this case, the high price of the Deluxe Breakfast acted as the anchor, making the Classic Combo seem like a better deal.

The Endowment Effect: Holding On to What’s Yours

As Emma enjoyed her coffee, she overheard a conversation at the table next to hers. A man was selling a rare, limited-edition coffee mug from the café’s collection for $40. A woman, intrigued but hesitant, said, ‘I wouldn’t pay more than $25 for it.’

The man insisted the mug was worth every penny, and Emma could see he was emotionally attached to it. This conversation highlighted a common behavioral bias: the endowment effect. Once people own something, they tend to overvalue it simply because it’s theirs. For the seller, the mug had sentimental value, but for the buyer, it was just a mug.

Behavioral economists often explore how ownership changes perception. People value things more highly once they own them, which can lead to overpricing or difficulty letting go of possessions.

The Power of Defaults: The Sugar Dilemma

Finishing her breakfast, Emma reached for the sugar dispenser. The barista suddenly appeared and asked, “Would you like to try our zero-calorie sweetener today instead of sugar? It’s healthier.” Emma hesitated. She liked her coffee sweetened with sugar, but she also felt guilty for not being health-conscious.

Before she could decide, the barista added, “We’ve been offering this as the default choice lately.” That sealed the deal. Emma went with the sweetener.

What Emma didn’t realize was that she had just fallen prey to the default effect. When a specific option is presented as the default, people are more likely to choose it because it requires less mental effort than making a conscious decision. Behavioral economics shows how the design of choices, often subtle, can significantly influence people’s actions.

Loss Aversion: The Case of the Forgotten Wallet

As Emma prepared to leave, she reached for her wallet and realized it wasn’t in her bag. Panic set in. She retraced her steps in her mind, realizing she must have left it at home. Frustrated, she considered leaving the café empty-handed but then saw a sign on the wall: ‘Forget your wallet? Pay us back next time!’

Relieved, Emma promised to return the next day. Still, she couldn’t shake the unease she felt about not having her wallet. This feeling was driven by loss aversion, a principle that suggests people feel the pain of losing something more acutely than the pleasure of gaining something of equal value.

In behavioral economics, loss aversion explains why people are more motivated to avoid losses than to seek gains. For example, Emma’s anxiety over her missing wallet far outweighed any excitement she might have felt about getting her coffee without immediate payment.

The Exit: A Choice of Tips

At the exit, Emma noticed something else: a digital tipping system. After swiping her card, she was presented with three options on the screen:

• No tip

• 10% tip

• 15% tip

Emma felt uncomfortable selecting “No tip,” and even though she usually tipped 10%, the presence of the 15% option made her reconsider. She selected 15% without giving it much thought.

This situation involved social pressure and choice architecture—the way in which different options are presented to influence decision-making. The café had set up the tip screen so that customers would feel compelled to be generous, especially when faced with the social expectation of tipping in public.

The Behavioral Economics Lesson

As Emma left the café, she realized that every decision she had made that morning—from choosing her breakfast combo to tipping—was shaped not just by rational thinking but by subtle psychological influences. Her journey through The Café Dilemma had been a lesson in behavioral economics, the study of how real humans, with all their biases, quirks, and emotions, make decisions in the real world.

From the allure of ‘free’ items to the power of defaults and the discomfort of loss, Emma had experienced firsthand the principles that govern decision-making. These same principles guide consumer behavior in the marketplace, inform public policy, and shape everyday choices, often without us realizing it.

As Emma walked away, she couldn’t help but smile at the clever design of The Café Dilemma. It wasn’t just a coffee shop. It was a classroom in disguise—a place where behavioral economics came to life in the simplest, yet most profound, of ways.