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How Psychology 101 Can Help You Run a Better Business

The last time you probably opened a psychology book was Freshman year of college for Psychology 101. Chances are you were not thinking how you could one day use the material from this class as a successful business entrepreneur.

The study of psychology encompasses the study of how people think and how they can be motivated or deterred. What could go better with business than a solid understanding of how people “tick”? By pulling out your old textbook and implementing strategies found in a basic psychology class you will give yourself the ultimate foundation for entrepreneurial success.

The use of psychology in business can allow you to motivate your employees, hire intelligently, expand and grow, negotiate contracts effectively, improve your staff’s performance, market better, bring in more customers, and realize your goals.

Psychology of Influence and Persuasion

Your business sells a product or service. You want more people to purchase what you offer. Sales and marketing are all about understanding relationships and effectively interacting with clients. Psych 101 covers the tactics of influence and persuasion.

So you have a fantastic idea for a product of service and now you need to convince everyone to buy into it. How can you get clients or financial backers to believe in your idea?

Influence and persuasion can be tricky which is why it is useful to understand the psychological principles behind influencing people.

Perhaps the best known in the field of influence was Robert Cialdini, a professor of psychology and marketing. Cialdini’s Six Principles of Influence, described below, lay out how you can get people to say yes to what you’re asking.

1. Reciprocity

The Principle: When someone gives us something we feel a sense of indebtedness to give them something back.

The Example: If a team member helps you with a project you might feel like you have to support her ideas when she brings them up in a meeting. Or you might feel you have to purchase from a supplier that has offered you extra discounts.

How to Use: Identify your objectives and decide what you want from the other person. Then identify what you can give them in return. You can employ the Cohen-Bradford’s Influence Model, which looks at how to use reciprocity to gain influence, or choose to remind them of how you have helped them in the past.

The Influence Model

This model is based on the law of reciprocity—that all good or bad things we do for others will be paid back over time. Follow the steps to successfully influence through reciprocity.

a. Assume All are Potential Allies: When you try to influence someone who seems to be difficult can make you anxious, upset, or insecure. Approach the situation assuming instead that the person is a potential ally.

b. Clarify Goals and Priorities: Why are you trying to influence this person? What do you need from them? Keep your personal goals out of the situation—avoid wanting the last word or to be “right”. Focus on work goals and ignore personal motivators.

c. Understand the Other’s World: Get an understanding of how he/she is judged. What metrics do they work by? How are they rewarded? It will clue you in to what they might want from you in return. Try to discover what drives his/her behavior. Consider:

  • How the person is measured at work
  • What his/her primary responsibilities are
  • The culture of their organization
  • What peer pressure or supervisor pressure he/she might experience
  • Under what expectations does the person work
  • What is most important to this person

d. Identify Currencies: You need to determine what really matters to your potential ally. Most often the “currency” valued will be one of the following:

  • Inspiration-related: People who most value vision or morality might want to find meaning in what they are doing. You can appeal to them through showing the significance of your product and demonstrating how it will help others or is the right thing to do.
  • Task-related: People who value this want to get the job done. You can appeal to them through money, personnel, or supplies. You could offer help on a product they’re working on or your organization’s expertise in exchange for their help.
  • Position-related: This type of person values recognition and reputation. You will want to publicly acknowledge their efforts or explain how buying in will improve their reputation in the industry.
  • Relationship-related: They want strong relationships with their colleagues. Appeal to them by connecting them to your organization on a personal level.
  • Personal-related: This type of person takes their work personally. Show sincere gratitude for their help. Encourage them to make their own decisions.

e. Handle Relationships: You need to figure out what kind of relationship you have with your potential ally. If you’re on good terms, directly ask for what you need. If you don’t know them well, focus on building trust. Get to know them and practice active listening.

f. The Give and Take: Once you know what your ally needs and what you can offer, make the exchange. Make sure it’s done in a respectful way that builds trust and expresses gratitude.

2. Commitment and Consistency

The Principle: People will go to great lengths to remain consistent in their words and actions. If you commit to something you are more likely to go through with it, even if it ends up being irrational.

The Example: A colleague discusses an idea with you and it peaks your interest. You are more likely to support that person’s proposal if you had verbally demonstrated initial interest, regardless of how you now feel.

How to Use: Try to get people to commit early, verbally, or in writing. Sell a taster of your product. While they may change their minds later on, buying it is an early commitment. Or get them to sign up for your email newsletter. They will be more likely to eventually purchase from you.

3. Social Proof

The Principle: People have “pack mentality”. If someone else likes something, we’re more likely to like it as well, regardless of if we know them or not. People are more likely to purchase something if it is recommended to them by someone they know and trust.

The Example: Others in the office stay late, so you are more likely to do the same.

How to Use: Create a “buzz” about your product. Generate support from people influential in the industry. Demonstrate your popularity through testimonials and ratings on your marketing material or by highlighting the number of people using your product. Encourage happy customers to talk about your product on social media.

4. Liking

The Principle: We are more likely to be influenced by people we like. If we feel a connection to the person asking something of us, we are more likely to say yes.

The Example: A company may look to team members to recruit family or friends as product purchasers because people are more likely to buy from people they know and trust.

How to Use: Take the time to build trust with your potential clients and behave consistently. Create a brand personality that people find happy, sociable, and professional. Have an “About Us” link on your website to make a customer feel more connected to your company on a personal level.

5. Authority

The Principle: People are hard-wired to respond to people in positions of authority. This is why we will do most things our boss requests. Someone’s influence over us can be swayed by a job title or uniform.

The Example: A pharmaceutical company will advertise doctors who support their products as part of their marketing campaigns.

How to Use: Get support from influential and powerful people and get their assistance in backing your idea. Network with people who might be good contacts. When you are marketing a product, highlight influential customers who use it, get comments from industry experts, and discuss data-backed findings. Having impressive offices, clothing, and hand-outs can also help with authority.

6. Scarcity

The Principle: Items are more attractive when they are harder to get or when we may lose the chance to acquire them. We are motivated by the thought we may lose out on something.

The Example: If we’re told a product is the last one, we are more likely to purchase it.

How to Use: You need to alert people to what they are missing out on if they don’t act quickly. Limit the availability of product, set a closing date for a special offer, or create a limited edition. Use urgency to back your concept by identifying urgent consequences or problems that might arise if they don’t act quickly. However, a study by psychologist Howard Leventhal showed that people will ignore urgent messages if they are not given information as to how to follow-up. Make sure you let people know where to find your product or service!

Another psychologist you can look to is Ivan Pavlov and his research on classical conditioning. He explored paring of stimuli to gain emotional or physical reaction. How can you use this in business?

Consumer behaviors are shaped by pairing of stimuli. A certain smell, song, or image can instantly conjure up an intense emotion in us. This is because the smell, song, or image has been paired with a memory of something important. For example, when you see golden arches forming an M, your mouth may start to water because you unconsciously pair it with McDonald’s. You too can use classical conditioning on consumers by always playing the same song when your commercial plays, having a strong logo stamped on everything related to your product, or using an iconic image to sell your product. Any time a consumer hears the song or sees the logo or image they will think about your product.

Action Paralysis affects consumers. Cialdini, the same psychologist of influence above, did research proving that adding a minimum donation amount increased donations for the American Cancer Society by 78%. You should remind customers how easy it is to get started and offer incentives like no payment for the first 6 months to break through action paralysis.

Labels are important drivers for customers. If people think they are important they are more likely to live up to the label given them. Create subgroups of your customers and label them, for example, as Bronze, Silver, and Gold. Being part of a superior group will make customers want to live up to the label.

You can also use the principle of reinforcement in dealing with potential clients. In psychology, reinforcement refers to any stimulus which increases the probability of a specific response. You can reinforce the reaction you want from your clients through positive reinforcement. If they buy your product or read your marketing material, offer them a free gift.

Through using influence and persuasion, you can become good at effectively convincing others to buy into what your business offers. In using psychological strategies and applying them to sales and marketing, you can gain trusting clients and maintain beneficial relationships.

Psychology of Innovation and Leadership

As an entrepreneur you must be a strong leader. You must motivate, drive the company, create meaningful and tangible goals, and create a strong team. This can, of course, be a challenge.

As the leader of your business, you are the key to success. Being an entrepreneur and being an innovator are often synonymous. It requires risk, creativity, and passion. How can psychological tactics help you become a great business leader and entrepreneur?

1. Affective Bias: This is being emotionally attached to your innovation. If an innovator feels they need to have control of an idea, they may not be rational in pursuing the idea and therefore, make a lot of mistakes in the process. Fear of sharing ownership and not accepting the support that would help him/her be successful can lead to entrepreneurial disaster. Many people want to pursue their ideas on their own and aren’t open to outside resources. This can severely hinder your product’s success. Be open to outside help and pursue the resources you need!

2. Emotional Intelligence: Learning how to effectively read people and understanding why they do what they do can be very useful in designing a product or service to fill a need. Knowing how to read nonverbal cues can tell you what a person is actually thinking or feeling because they are harder to disguise than words. You can use this in pitching your product to a future client or in managing your own team.

3. Anchor Lines: Psychology has found that people base judgments and decisions around familiar positions, and make adjustments relative to that point. Most of the time this psychological shortcut helps us make faster and smarter choices. However, with innovation, you can’t create something new by anchoring to an old idea. Thought centers around existing knowledge so the best way to generate new thinking is to introduce new material like juxtapositions, famous quotes, visual images, or extreme opposites. By adding stimulus you can provoke the creative process and allow one to look at old problems in new ways. By using practice perceptivity (actively seeking new ideas and inspiration) you can reset “anchors” and introduce your team into a state of innovation.

4. Lead with Fun: Psychological research has found that having fun is an essential part of innovation. When people feel motivated to work by intrinsic factors like interest level, passion, and enjoyment, versus external factors like pay or evaluation, they are much more creative. During brainstorming sessions, a positive environment and humor can be helpful in uncovering the innovation your company needs.

5. Associative Thinking: This type of thinking can help leaders make effective decisions for their business. When you are faced with an unknown situation, your brain automatically tries to retrieve information from a past experience that has similarity. These experiences become the basis on which you interpret the new situation. Per psychological study, these associations are influenced by biases, attitudes, and emotional states. Managers who use associative thinking in the process of innovation and strategy can gain an advantage. It’s possible to create exercises in associative thinking like case-based reasoning, analogy, and pattern recognition to help you combine intuitive associations with rational analysis, useful in future decision making. You can teach your employees to do the same.

Psychology of Your Team

As an entrepreneur, you rely on your team to make your vision a reality. How can you use the tenants of psychology to make sure your team is meeting their potential?

Leaders don’t exist without followers. The success of a team depends on both. Knowing how to identify your team members will let you use their strengths most effectively.

Psychologist Robert E. Kelley developed a theory of followers and breaks them down as either passive or active and as dependent or independent. As a leader you can identify who in your team is what type, and work to empower them to be exemplary followers. Based on the combinations he classifies them as follows:

1. Conformist: This type of follower is a “yes” person. They tend to always agree, to the point of it hurting their performance. They are dependent and active and will unquestioningly support their leader and the team project.

2. Passive: This type of follower will only do what is directly asked of them and no more. They are dependent and passive and are not particularly committed or enthusiastic. They prefer to follow other’s leads.

3. Alienated: This type of group member tends to agree to what’s happening out loud, but inside are unhappy and critical. They are independent and passive, thus lacking commitment to the leader, group, and project.

4. Exemplary: This type of follower is an effective team player who often takes initiative in tasks and problems. They are independent and active and know how to be constructive when working in a team. They can be depended upon. This is the best kind of follower a leader can have. A leader must transform the various types of followers on his/her team into an exemplary follower.

5. Pragmatic: This type of follower’s goal is to survive—and doesn’t have natural independent/dependent/active/passive makeup. Generally they hover in the background and contribute occasionally.

If you can better understand the makeup and characteristics of the members of your team, you can create more cohesion within the group and allow team members to work to their strengths. Psychological profiling can be a useful tool in team selection, team member development, and arranging your team in sub-committees to better accomplish goals. The better you know your team the more cohesion you can create.

Looking at everything from the language a person uses to write to their body language, you can understand and predict future behavior in team situations. No attributes are 100% good or bad, and if you manage your team well and assign projects intelligently, you can use everyone’s attributes to help with your business’s vision. Some of the major tools used by many organizations to build effective teams are found below. Look for the best one for your organization, and remember, only one tool may not be sufficient. You may need multiple tools for ultimate success.

  • Adversity Quotient: an indicator of capacity to withstand and thrive in challenging circumstances in business and the workplace.
  • Enneagram: tool based on 9 personality types that relate to major roles people adopt in society.
  • DiSC Management Strategies: associated training program for providing feedback and improving on self and team management at work.
  • Herrmann Brain Dominance Instrument: 120 item self-reported diagnostic tool that profiles thinking styles. Can be used for team building and profiling.
  • Human Synergistics: thinking style and personality profiling feedback system and training program to be completed by an individual or team to assess strengths and areas for improvement.
  • Keirsey Temperament Sorter: identifies 16 personality sub-types based on Carl Jung.
  • Myers-Briggs Type Indicator: most widely used personality assessment questionnaire which identifies 16 personality types.
  • Team Management Systems: Finds the kinds of roles people prefer to fill in teams, and provides individual and team analysis. It’s used to improve the quality of team-performance.

People act differently when they are in groups. People are innately concerned with image and how we are seen by others. Social Facilitation is the psychological principle that when we are around others, our behavior tends to change. It found that when observed, people tend to perform better at simple tasks and worse on complicated tasks. This is because people try harder in the presence of others but also are more self-conscious so they make more mistakes. This is useful to know as a manager. If you want your employees to do better on simple or complex tasks, consider if having a team around is the best idea.

In managing a group, also consider avoiding Groupthink. Conformity stems from a natural human desire to be socially accepted and to make wise decisions. During group brainstorming exercises the desire for social approval can stunt creativity. Psychologist Solomon Asch found that a group can easily fall into a pattern of conformed thought, or groupthink. However, you can be an effective leader and break groupthink by suggesting that there are no bad ideas and maintaining an open environment to express ideas where nothing will be off the table. You could also share an atypical or absurd idea to make everyone else feel comfortable sharing freely. If, as a leader, you act as an innovator advocate, you can change the dynamic of the group from conservative to creative.

A final concept to consider is Social Loafing where, as a group gets larger, the individual contribution decreases proportionate to the group size. There is a diffusion of responsibility created when a group increases in number. Consider breaking your team into sub-teams so they feel they are still an important, contributing member of your business.

Psychology of Motivation

Use the ideas and theories listed below to motivate your employees to accomplish your company’s goals.

1. Hierarchy of Needs: Abraham Maslow believed that people were motivated by needs and organized these needs into a hierarchy of needs triangle. The needs of each level must be met before a person can progress to the next level. This can be directly applied to business. From this you can see that you need to recognize and create solutions for your staff to become satisfied in their life before you can achieve ultimate results with your team.

  • Level 1 – Psychological Needs: salary, decent working environment
  • Level 2 – Safety needs: safe working conditions, job security
  • Level 3 – Social needs: good atmosphere, friendly coworkers and managers
  • Level 4 – Esteem needs: job title, recognition of achievements
  • Level 5 – Self-Actualization: opportunities for creativity, personal growth, promotion

2. Motivator-Hygiene Theory: Frederick Herzberg determined that people have two types of needs.

Motivator needs: These can be satisfied by giving employees stimulating and challenging work. This helps with job satisfaction.

Hygiene needs: These include company policy, working conditions, wages, etc. that directly affect a worker. If you meet these you prevent job dissatisfaction.

As a leader you need to maximize your employee potential by recognizing opportunities to promote satisfaction and dissatisfaction in the work place.

3. Intrinsic vs. Extrinsic Motivation: Some of your employees will be motivated by different forces.

Intrinsic: A motivation that arises from within an individual, like completing a complicated problem just for personal gratification, or learning something new because he/she is interested. So an employee who is intrinsically motivated and feels a passion for their work will do anything it takes to get the company to succeed.

Extrinsic: A motivation that arises from outside the individual, usually spurred on by recognition, paycheck, or an award. You can use this motivator when you are looking for a way to get your staff to go above and beyond their current productivity.

4. Equity Theory: Stacy Adams found people are motivated if they feel they are receiving compensation equal to what others receive. Employees must feel equal among peers to be motivated in the workplace. People unconsciously assess themselves and how productive they are compared to coworkers and expect equal compensation for their output. As a manager, you should be cognizant of workforce perceptions in regards to pay and rewards.

5. Operant Conditioning: B.F. Skinner discovered that reinforcing positive behavior will increase the likelihood that it will be repeated, and vice versa. In business, it’s important to increase or lessen certain team behaviors to make the team more effective. This theory says that praise and reward can be used to encourage good behavior. Thus, praising an employee in front of peers for a success will make your employees want to repeat that action to also receive praise. Positive reinforcement can also be given in terms of incentives, bonuses, or more autonomy.

6. Goal Setting Theory: Edward Locke found that worker’s motivation is a direct relationship to their goals. By setting specific and challenging goals for your team, like profit goals or time goals, you will increase productivity.

7. Expectancy Theory: People are motivated to perform as expected because of the prospect of personal advancement. Workers will do more if they believe it will get them the desired personal results. Create opportunities for employees to achieve upward momentum and be clear about what you look for when you decide to reward employees.

8. Pygmalion Effect: Your expectations about the level of your employees’ job performances directly influence their performance. So if you expect high performance you’ll tend to get it and vice versa.


It’s amazing how much of Psychology 101 can be used in the business world. And this was just a refresher! I highly suggest ordering an Intro to Psych book off Amazon and combing through the book, seeing if any of the theories presented relate to your business’ day-to-day. By combining an understanding of human behavior with the tenants of business practice you can create a successful, sustainable, and effective business.

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood