Latest news with #behavioraleconomics
Forbes
29-05-2025
- Business
- Forbes
Southwest Airlines Just Made A Costly Mistake In Consumer Psychology
Southwest Airlines is changing its brand identity as it begins charging for checked luggage. Starting Wednesday, Southwest Airlines began charging $35 for the first checked bag and $45 for the second. It's the end of an era for the airline that trademarked "bags fly free" and built decades of customer loyalty around that simple promise. Southwest executives have been under pressure to boost revenue by adopting bag fees, assigning seats, offering premium seating, and other practices used by their bigger competitors. For a spreadsheet-wielding accountant, these moves may make perfect sense. But, by violating fundamental principles of consumer psychology they might backfire in a big way. I couldn't find a chief behavioral officer at Southwest. If they do have a behavioral science team, Southwest executives almost certainly ignored their advice in implementing the new luggage fees. Behavioral economists know that people feel losses about 2-3 times more intensely than equivalent gains. Southwest customers aren't only seeing a $35 change in the cost of flying from point A to point B. Rather, they're experiencing the loss of something they already "owned" in their mental accounting. The well-established endowment effect says that people value something they currently own more than the same exact thing when it's not theirs. Yanking away the free bag benefit will impact Southwest's customers more than an equivalent fare increase. Robert Cialdini's consistency principle tells us people try to align their actions with their stated beliefs and with their past behavior. As humans, we are more likely to trust people who behave in a consistent way. Southwest literally trademarked "bags fly free" and built entire advertising campaigns around being different from other airlines. This major reversal is inconsistent with its long-established brand image. The change creates cognitive dissonance that damages trust far beyond the fee itself. When customers chose Southwest, they were choosing to avoid exactly this kind of nickel-and-diming. Now they're questioning what other promises might be broken next. Here's where Southwest's move gets particularly dangerous. Customers are 'anchored' to Southwest as the "no-fees" airline. That $35 charge feels disproportionately expensive because it's compared against their mental anchor of $0, not competitors' similar fees. (Anchoring works both ways. If, for example, an airline had charged $60 per bag for years, setting the price at $35 would seem like a bargain.) Even though Delta, United, and American charge similar amounts, Southwest's fee will feel worse because of the broken expectation. Southwest's own research paints a worrisome picture. In September, they projected gaining $1-1.5 billion from bag fees but losing $1.8 billion in market share. Despite this, they proceeded anyway, pressured by activist investor Elliott Investment Management's nearly 10% stake and the demand for immediate revenue increases. The early warning signs are already appearing. Social media backlash has been swift and brutal. One Instagram post about the change received over 14,000 replies – roughly 50 times their normal engagement. The sentiment isn't pretty. Mental Accounting Disruption. Customers budgeted Southwest trips assuming free bags. Now they're forced to recalculate total trip costs, potentially discovering Southwest is no longer the cheapest option when fees are included. Social Proof Cascade. Early complainers are triggering viral negative word-of-mouth. The "Southwest is becoming like everyone else" narrative spreads quickly because it violates their core differentiation. Choice Complexity. Southwest customers chose the airline partly to avoid decision complexity. Adding basic economy tickets, boarding priority options, and fee structures creates the exact confusion customers fled other airlines to avoid. Delta CEO Ed Bastian immediately recognized the gift Southwest handed competitors: "Clearly there are some customers who chose them because of that bags fly free policy. Now clearly those customers are up for grabs." Both American and Delta announced special, short-term status matches to try to siphon off Southwest's most loyal customers. United continued to offer its previous status match for Southwest flyers. Don't Break Your Core Promise. If your brand's fundamental value proposition is built around a specific customer benefit, changing it requires extraordinary care. Southwest's "bags fly free" was more than a policy, it was their identity. Understand Your Customers' Mental Models. Southwest customers weren't just buying transportation, they were buying simplicity and transparency. Breaking that mental model affects the entire relationship, not just the specific transaction. Calculate the Full Cost of Change. Southwest's own research showed the policy change would lose more in market share than it gained in revenue. When behavioral science principles conflict with financial pressure, ignoring the human aspects of your customers rarely works. Southwest projected $1.5 billion in annual bag fee revenue. But if their own research about losing $1.8 billion in market share proves accurate, this could become a textbook case of how short-term financial pressure can destroy long-term brand value. The real test isn't whether Southwest can collect $35 per bag. It's whether they can keep collecting anything at all from long-term, loyal customers who now have plenty of motivation to look elsewhere. It's too soon to tell how all this will shake out, but it's clear Southwest has placed a high-risk bet that they'll retain most of their customers despite the changed brand experience.
Globe and Mail
19-05-2025
- Business
- Globe and Mail
It could have been worse: Our irrational love of less-bad news.
Sam Sivarajan is a keynote speaker, independent wealth management consultant and author of three books on investing and decision-making. His forthcoming book will explore how to thrive in a world of uncertainty. On May 12, the stock market surged with the S&P 500 jumping more than 1.5 per cent and the Nasdaq rising nearly 2 per cent. The catalyst? News that the United States and China had reached a trade agreement where tariffs on Chinese imports would increase by 'only' 30 per cent. This was a market that, just weeks earlier, had been fretting about the possibility of 60 per cent tariffs, and 145 per cent at the start of the tariff wars. As one market analyst aptly put it to The Globe and Mail, 'what was once a terrifying scenario is now a positive development.' What we witnessed was a textbook example of how markets – and humans more broadly – can transform objectively bad news into seemingly good news, simply because it wasn't as terrible as feared. The 30-per-cent tariff, devastating in any other context, became a cause for celebration. If this sounds irrational, that's because it is. But it's also deeply human. Behavioural economists have a term for this psychological quirk: reference dependence. According to Nobel Prize-winning economist Daniel Kahneman and his colleague Amos Tversky, we don't evaluate outcomes in absolute terms, but rather relative to reference points. In their groundbreaking work on prospect theory, they showed that our perceptions of gains and losses depend heavily on the reference point from which we start. When expectations are sufficiently negative, even objectively poor outcomes can feel like wins. A 2006 study by D.A. Kermer and colleagues found that people consistently overestimate the impact of negative events and underestimate their ability to adapt to them. When the feared negative outcome doesn't fully materialize, the relief creates a positive emotional response that can overshadow rational assessment. We essentially celebrate having dodged a bullet, even if we've still been wounded in the process. This reference dependence combines with several other behavioural biases to create a perfect storm of irrational market responses. Recency bias causes us to overweight the latest information and underweight longer-term trends. When markets had been preparing for 60-per-cent tariffs, the 'recent' news of 30-per-cent tariffs dominated all other considerations – including the fact that any tariff increase is economically harmful. Similarly, anchoring bias – our tendency to rely too heavily on the first piece of information we encounter – played a key role. Once investors had anchored to the possibility of 60-per-cent tariffs, 30 per cent seemed reasonable by comparison. This ignores the reality that a 0 per cent increase would be the economically optimal outcome. We see this same psychological phenomenon at work in everyday contexts. Consider restaurant menus that feature an extremely expensive item – a $200 wagyu steak or $500 bottle of wine. Whether intentional or not, these high-priced options shift our reference point, making the $75 filet mignon suddenly feel like a reasonable choice by comparison. It's not a marketing trick so much as a natural consequence of how our brains process relative value. In markets, the threat of catastrophic tariffs created a similar psychological anchor, making merely damaging tariffs feel like a relief. Optimism bias further amplifies these psychological effects. Research led by Tali Sharot at University College London has shown that humans have a natural tendency to focus on positive information and play down negative outcomes – a phenomenon rooted in the brain's reward and learning systems. This helps explain why investors might mentally transform 'still-bad-but-less-bad' news into 'good' news, celebrating any outcome that exceeds their worst fears. Their focus on immediate relief, rather than future consequences, may cause them to overlook or underestimate potential long-term risks such as the cumulative damage from increased trade barriers. For investors, these psychological quirks create significant risks. When markets rally on objectively negative news simply because it wasn't as catastrophic as feared, it creates a disconnect between asset prices and economic fundamentals. This disconnect eventually corrects, often painfully. The more prudent approach is to evaluate news based on absolute impact rather than relative to expectations. A 30-per-cent overall tariff on Chinese goods, agreed for 90 days, will still disrupt supply chains, increase consumer prices and potentially slow economic growth. These fundamental factors should matter more than the relief of avoiding a 60-per-cent increase. Investors would be wise to ask themselves: Am I celebrating less-bad news as if it were genuinely positive? Have my reference points shifted to the point where I'm accepting suboptimal outcomes? Is my relief at avoiding disaster clouding my judgment about actual risks? Not that investors should be perpetually pessimistic. Rather they should maintain perspective and awareness to separate emotional reactions from objective analysis. The 30-per-cent tariff news wasn't good – it was simply less bad than feared. The market's exuberant reaction says more about psychology than economic fundamentals. As investor Howard Marks wisely noted: 'It's not what you buy or at what price that determines your outcome, but what happens subsequently relative to what the market expected at the time of purchase.' Understanding this principle – and our tendency to irrationally cheer when things are merely less terrible than expected – is essential for both investment success and personal growth.
