Monday, September 11, 2017

Don't Look Back In Anger

When you are staring at a multiple choice question and you have no idea what the answer is and so you go with the “C” fallacy and you get it correct.  It makes you feel good.  How about on the math test where Miss Othmar makes you show your work?  You get 90% through and you make one mistake that leads to an incorrect answer.  You feel terrible.  Luck plays a bigger role in our lives than we realize.

What determines a good decision?  It’s the outcome, of course.  Is it possible this is a stupid decision even though it worked out well?

Past performance does not guarantee future results. The core of the illusion is that we believe we understand the past, which implies that the future also should be knowable.  We understand the past less than we believe we do.  It is that the language that the world is more knowable than it is.  It helps perpetuate a detrimental illusion.  The inability to reconstruct past beliefs will inevitably cause you to underestimate the extent to which you were surprised by past events.

This new IPO is the next Google. I knew Google was going to do well, but didn’t buy the IPO. I’m not going to make the same mistake again. The reality is that, at the time of its IPO, Google’s success was a lot less certain than it now seems. Investors seeking to replicate the success of Google with another stock may be setting themselves up for disappointment by not adequately accounting for the likelihood of less favorable outcomes.  

What most people don’t know is that a year after founding google, the owners were willing to sell their company for less than $1 million, but the buyer said the price was too high.  There were events before and certainly many successful decisions after but, that single luck incident makes it easier to underestimate the ways in which luck affected the outcome.

We are prone to blame decision makers for good decisions that worked out badly and give them too little credit for successful moves that appear obvious after the fact.  Suppose you were in this presentation with Richard Thaler.  In a meeting with 23 executives plus the CEO of a profitable company in the print media industry, this scenario was presented:

You were offered an investment opportunity for your division (each executive headed an independent division) that will yield one of to payoffs. After the investment is made, there is a 50% chance it will make a profit of $2 million, and a 50% chance it will lose $1 million. Thaler then asked by a show of hands who of the executives would take on this project. Of the twenty-three executives, only three said they would do it.

Then Thaler asked the CEO a question. If these projects were “independent” – that is, the success of one was unrelated to the success of another – how many of the projects would he want to undertake? His answer: all of them! By taking on twenty three projects, the firm expects to make $11.5 million (since each of them is worth an expected  half million), and a bit of mathematics reveals that the chance of losing any money overall is less than 5%.

Although hindsight and the outcome bias generally foster risk aversion they also bring undeserved rewards to irresponsible risk seekers.  Leaders who have been lucky are never punished for having taken too much risk.  Sensible people who doubted them are seen in hindsight as mediocre, timid, and weak.

Decision makers who expect to have their decisions scrutinized are driven to bureaucratic solutions and reluctance to take risk.  As malpractice litigation became more commonplace, physicians changed the way they practice medicine.  They ordered more tests, referred more cases to specialists, applied conventional treatments even when they were unlikely to help.  These decisions protected the physicians more than they benefited the patients, creating a potential conflict of interest.

The vast majority of coaches in sports error on the side of caution when a big or late game decision needs to be made.  It is easier to explain away a punt on fourth down or a bunt to move a runner over even if analytics show you it decreases your likelihood of winning.  If the team wins everything is forgotten.  Some teams win almost in spite of the coaching decisions made. Ned Yost Kansas City Royals Coaches like the rest of us have someone to answer to whether it is the media or the president of the club.  What if you were one of the print media executives and your department lost that $1 million?

Stories of how businesses rise and fall strike a cord by offering what the human mind needs.   A simple message of victory and failure that identifies clear causes and ignores the power of luck and inevitably of regression are more straightforward.

A valuable trait that goes unnoticed is self awareness.  We like to think in our chosen career that we went to school for and/or put in countless hours of training have molded us into an adept professional.  It did and it has.  You can hold the floor at a dinner party when the subject turns to TPS reports.  Knowing what you don’t know.  Controlling what you can control.  It may sound clich├ęd.  Lets not fall for outcome bias unless of course it works in your favor.

Brevity & Associates

Monday, August 28, 2017

The Heart Wants What It Wants. What About The Brain?

The brain wants what it shouldn’t have:  Choices.  People say they want more choices but, then can’t decide.

There is a famous jam study that is often used to bolster this point. Sheena Iyengar, a professor at Columbia University and the author of “The Art of Choosing,” conducted the study in 1995.
In a gourmet market, Professor Iyengar and her research assistants set up a booth of samples of Wilkin & Sons jams. Every few hours, they switched from offering a selection of 24 jams to a group of six jams. On average, customers tasted two jams, regardless of the size of the assortment, and each one received a coupon good for $1 off one Wilkin & Sons jam.
Here’s the interesting part. 60% of customers were drawn to the large assortment, while only 40% stopped by the small one. But 30% of the people who had sampled from the small assortment decided to buy jam, while only 3% of those confronted with the two dozen jams purchased a jar.

It is much easier to make money by catering to consumers’ biases than by trying to correct them.  George Akerlof and Robert Shiller, wrote about the economics of deception and manipulation.  They explain that if people have a weakness from which a business can earn unusual profits, a business will do so.  They provide the memorable and visceral example of people being irresistibly attracted to the scent of cinnamon and the success of Cinnabon.

Businesses in unregulated free markets will profit from catering to satisfy people’s weaknesses. Companies may not have enough incentive to improve people’s decision-making skills because businesses can profit more from exploiting people’s cognitive biases instead of empowering people to choose wisely.  Companies cannot capture all of the benefits from teaching people to choose wisely because some of those benefits are uncertain, delayed, and spillover into many other wide-ranging domains.

The brain is like Will Hunting and I’m Robin Williams at the end of Good Will Hunting.  It’s not your fault.   Here’s an illustration from Richard Thaler back in  1983:

You are lying on the beach on a hot day. All you have to drink is ice water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite brand of beer. A companion gets up to go make a phone call and offers to bring back a beer from the only nearby place where beer is sold (a fancy resort hotel) [a small, run-down grocery store]. He says that the beer might be expensive and so asks how much you are willing to pay for the beer. He says that he will buy the beer if it costs as much or less than the price you state. But if it costs more than the price you state he will not buy it. You trust your friend, and there is no possibility of bargaining with (the bartender) [store owner]. What price do you tell him?”

Notice that the companion chimes in with a warning that the fancy resort might charge more. This is a slight contamination of the story, but perhaps not critical.
“Not surprisingly, when the two versions of this questionnaire were administered to Participants at an executive development program, those receiving the fancy resort hotel version gave significantly higher responses than those receiving the small, run-down grocery version (medians: $2.65 and $1.50).”
Thaler’s tapping into people’s intuitions to stick to standard theory. He claims that his result is clean because it “occurs in spite of the following features”:
1. In both versions the ultimate consumption act is the same - drinking one beer on the beach. The beer is the same in each case.
2. There is no possibility or strategic behavior in stating the reservation price.
3. No "atmosphere" is consumed by the respondent.

Many people find managing their household finances emotionally stressful, painful, and unpleasant.  The empirical finding that people experience household management as having negative affect is important because people are likely to engage in little or suboptimal financial and retirement planning behavior due to procrastination.   Then they rush to minimize their anticipated, experienced, and remembered unpleasantness.  The continued extinction of traditional pension plans has made this more important yet people are unwilling because of the way it makes them feel.
Tell people what they want to hear.  It is how elections are won.  Empowering people to make better decisions by improving their decision-making processes seems noble but, shouldn’t market forces dictate that?
If you have bought or refinanced your house recently you have undoubtedly received correspondence “Urgent: About Your Mortgage” which gets people to open the mailing.  The company pulls at your heartstrings to protect your family with the ability to pay off your mortgage if you die prematurely.  The reality is you may be buying decreasing term insurance which could cost 30% more than level term insurance(doesn’t decrease).  The insurance agents that do the best don’t overcomplicate it.  They play up the mortgage protection aspect and keep the choice simple for the client.  The agent who goes in with the intent of explaining the difference and trying to educate the client runs the risk of losing the sale by overcomplicating the process.

Is knowledge power or is ignorance bliss?  My professional life would feel less stressful if I took the latter.  Don’t fight it and just give the people what they want.  Let them eat cake.  Knowing what I do about behavioral economics helps for a couple of reasons.  First, I know most people don’t think like me(economist with no heart).  Second, appealing to someone’s heart is going to help me reach a desired outcome most importantly for the client but, also for me.   

Friday, July 28, 2017

When It's Impossible to Empathize

Have you ever met a person whose values were so different than yours that it was impossible to empathize?
Image result for sociopath

I often talk about empathy in selling with the people who engage me in sales training.  For this purpose, I’m not talking about the kind of empathy you feel when you see a kid fall off his bike or learn of a person who has just lost a family member.  Since this type of empathy comes natural to almost everyone, it doesn’t need to be taught.

The way we teach people how to empathize is targeted toward reaching a desired outcome.  We ask unique questions that give us an opportunity to understand what is important to the client.  We are looking for the client’s desired outcome (even if they aren’t specifically telling you).  If you can understand where the client wants to be, then you earn the ability to present a way to get there.  We call this Empathy With Accuracy.  

This method of selling isn’t new.  But, the way people communicate has changed by leaps and bounds over the last couple of decades.  So, understanding how to seek out opportunities to be empathetic in person, over the phone, by email, text, skype, and social media is new territory.  We must constantly stay on top of creating the right client experience through all forms of communication.

Getting back to those rare people with whom you cannot relate… the best thing is probably to just forget about trying to sell to them.  I am always up for a challenge.  I have sold things to people from all walks of life.  I have sold to the ultra rich, dirt poor, perfectionists, bohemians, Christians, Jews, Muslims and Hindu.  One thing I know to be true is that you are wasting your time trying to sell to someone whose values are so far from yours that you can’t understand what drives them.  

These people will work you, putting no value on your time or expertise.  They will try to find every angle to get over on you.  They will sap you of all your hard work and intellectual capital and then take the business to someone else, who is willing to take it a step further… Like offering an illegal rebate or some immoral enhancement to the deal that you would not even think to consider.

I’m writing this article, because this just happened to a colleague of mine “John” and I want to bring it to light.  John was recently (after 6 months of very hard work) able to offer a friend, who is a prominent businessman in the Raleigh area, a product that was contractually better than what the friend/client already had.

The client in this situation showed signs of an immoral and irrational behavior from the beginning of the process.  His nature was that he couldn’t be satisfied with even the highest standard of work from John.  He would complain over things that most buyers would be excited about.  He was also hot and cold.  He would be into the sales process with quick responses and helpful info for a week or so and then John wouldn’t hear from him over a simple request for 3 weeks.  When the final offer was in, he seemed unhappy and reluctant to buy, even though he was saving 30% on a product he was already paying for.  He complained that the process took too long and looked for holes in the contract.  He couldn’t find any because there weren’t any.  The contract was actually substantially better than what he was already paying for, yet still, he was trying to find a reason not to buy it.  During the whole process, it seemed like the client was challenging John to beat his current deal, while feeling certain that it couldn’t be done.  And when it was soundly beaten, it was as if the whole process was cheapened further.  Instead of feeling appreciation, he felt disgust.

In the end, the client took John’s intellectual capital and hard work and handed the same deal to a better friend of his (the same guy who sold him the original contract!!).  The commission on the deal was about $10,000.

So what do you do when it seems like this is happening to you?  Here is something that I learned a long time ago that works well.  You let the process commit the client.  You don’t do anything special for them.  Actually, it’s better to fall back on protocols.  Keep it dry and stick to only the essentials of completing the case.  This way, the quality and the value is still great for the client, but you protect yourself from getting emotionally committed to the case and wasting time.  If the client doesn’t follow through, forget it.  It was never going to happen.  Often times though, the people with whom we cannot empathize will end up buying when you take a robot like approach.   

-Insurance Professor