This week’s topics revolved all around our different senses: Smelling, tasting, seeing, and how these inputs are being processed by our brain. Admittedly, making a sensible link between these topics and behavioral finance – besides the obvious connection of seeing what is happening around us, making sense of it, and reacting to it accordingly – makes writing this blog post a more difficult task. We found, however, some interesting parallels between our two subjects of interest.
First stands the remarkable fact that smell and taste (which together form our perception of flavor) don’t pass through our brain as simple ad-hoc perceptions: the mouth-watering sensation of eating a pizza, or the sudden alarming sensation of your pizza getting burnt in the oven.
On the contrary, flavor perception is intrinsically linked with certain types of memory formation. To prove our point, simply go back two sentences and observe your reaction to reading about pizza. Most likely you WILL instantly get that mouth-watering feeling as if you are about to take a bite! Similarly, evoking some of our strongest memories are oftentimes tied to perceptions of smell and/or taste. The distinct smell of the house you grew up in, the perfume a loved one uses, etc.
All of this raises the question: How large is the potential effect flavor sensations can have on our behavior?
Even though you might never have heard of this term, you will most likely have “fallen for it” many times already. Scent Marketing is the deliberate and strategic use of scents to influence consumer behavior, affect brand perception, and ideally, increase buying tendency. (https://medium.com/@vishalnoel7/a-type-of-marketing-which-you-probably-didnt-know-of-scent-marketing-5db27578014c)
If the scent dispersed in or by a clothing store, coffee shop, or bakery can have such a large impact on you, what could be the potential applications of this in Behavioral Finance? Could panic sales on Wall Street be mitigated by diffusing the soothing scent of lavender on the trading floor? 😉
A Tale of Two Tables
Coming back to visual perception, another very interesting concept that was covered in the Finance and Neuroscience courses is the “Table Illusion”.
When looking at the two tables below, which of the two would you say is longer, and which is wider?
In fact, both have exactly the same dimensions! The interpretations of this illusion in Neuroscience and Behavioral Finance differ, however. Without going into too much detail in both:
- Neuroscience: We perceive the two tables as having different dimensions because our brain is trying to use a 3D interpretation of a 2D illustration, leading to “errors” in size perception.
- Behavioral Finance: Your intuitively & automatically thinking System 1 prematurely jumps to the conclusion that the tables’ dimensions are unequal. At the same time, we fail to scrutinize System 1’s suggestion and consider it to be true, because our deliberate & actively thinking System 2 (which would be responsible for this task), is lazy. In short, we fail to question our own initial conclusions.
These two explanations do not seem to have the same scope at first sight and tackle the problem from different angles. For us, however this is exactly what motivates us to not only look at Finance questions from a behavioral perspective, but also consider the possible neural origins behind it.
For more reading on the above-mentioned System 1 and System 2, we can highly recommend behavioral scientist & nobel-prize winner Daniel Kahneman’s book “Thinking, fast and slow”.
Disclosure: The authors’ don’t earn a commission on pizzas or books mentioned in this article being sold.