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

Monday, July 10, 2017

“Morality, like art, means drawing a line somewhere”

It’s December 31st.  You’ve had an ok year.  You are about 3% short of where you need to be for the year.  The higher ups raised your performance goals 10% compared to last year.  They never lower them. Pressure is on.  Stakes are high.  You have a mortgage to pay and a family to feed.  If you don’t hit your year end numbers, you don’t get that big bonus you’ve already spent.  Worse yet, maybe you get fired.  Money problems are one of the most significant factors that lead to divorce.  What do you do?  Do you change a number around?  Sell something to a client that they may not need?  Not only is there not a consequence there is a reward.  Dishonesty can permeate through a system and show up not because of selfish interest but because of a desire to help.

The prevalent theory of dishonesty is the idea of cost–benefit analysis.  What can I gain? What can I lose?  From there we figure out if this is a worthwhile act of dishonesty. If there’s a big cost, we’re not going to be dishonest.  It is really more complicated than that. There are psychological, environmental, or societal factors that may exist to help keep us honest.  

Locksmith Parable

Locks are on doors to keep honest people honest.  1% of people who are honest will always be honest and never steal.  Another 1% will always be dishonest and always try to pick your lock and steal your television.  The rest will be honest as long as the conditions are right.  One of the frightening conclusions is that what separates honest people from not-honest people is not necessarily character, it's opportunity.  Because of the commonality and danger of the first step, what is the difference between people who commit crimes and those who don’t? Is it just missed opportunity?  It’s all about the ability to rationalize dishonesty.

Where Do You Draw The Line?
If it is okay to nudge the truth a little bit but, where do you draw that line?  There is an excerpt from “Three Men in A Boat(to say nothing of the dog)”  I knew a young man once, he was a most conscientious fellow, and, when he took to fly-fishing, he determined never to exaggerate his hauls by more than twenty-five per cent. “When I have caught forty fish,” said he, “then I will tell people that I have caught fifty, and so on. But I will not lie any more than that, because it is sinful to lie.”

Dan Ariely, author of “The Honest Truth About Dishonesty” ran an experiment and gave people 20 simple math problems: each one was a matrix of numbers where people had to find two numbers that added up to ten.

It was a simple enough exercise that anyone could do, but he didn’t give them enough time. At the end of five minutes, people had to put their pencils down and write on another piece of paper how many they solved correctly. They then put the original test paper in the shredder, so nobody would know the true number they had solved. They received $1 for each problem they claimed to have solved correctly.

  • On average, people solved four problems but reported solving six.
  • Nearly 70% cheated.
  • Only 20 out of the 40,000 were “big cheaters”, people who claimed to have solved all 20 problems. They cost the experiment $400.
  • They also found more than 28,000 “little cheaters” who cost the experiment $50,000.

So although there are some big cheaters out there, they are very rare and their overall economic impact is relatively low. On the other hand, there are a lot more “little cheaters” out there and their economic impact is incredibly high.

What The Hell Effect

You made it past 12/31.  What did you decide?   On to January 1st.  Those resolutions aren’t going to break themselves.  It’s diet time.  Now you’ve made it a whole week.  You have been eating healthy the last 7 days.  The moment you say: “today i’m not on a diet, I’ll have a burger.” Once you say “I’m not a dieter”, which is how you defined yourself until now, you usually don’t go back to that definition. You form a new definition for yourself: “I’m not a dieter, what’s the point?”  Once you cheat one time you are more likely to keep doing it.

Dan Ariely, ran a study utilizing a vending machine. The machine was set up to say that bags of candy cost 75 cents on the outside, but its mechanism on the inside was set to zero cents. So when people put money in the vending machine, they would get extra bags of candy, and all of their money back. A big sign on the vending machine read, “If there’s something wrong with this machine, please call this number”. Nobody called, but nobody took more than four bags of candy.

We all struggle with honesty and self-protection.  We want to think of ourselves as decent, honest individuals, which is not consistent with being a liar.  On the other hand, we want to justify being dishonest when it is self-beneficial or protects us from painful truths. Consequently, we walk that fine line between being honest and being dishonest, between acting in accordance with reality and tweaking that existence. Honesty is something of a state of mind. When we lie, it's not always a conscious or rational choice.  

The Solve - Do You Swear To Tell The Whole Truth?

If I caught up with you on your way to work on December 31st and made you sign a form stating all of your reporting is accurate, truthful and in the clients’ best interest, would that have an impact on your day?  Ariely and his colleagues had one group of study participants to recall the Ten Commandments, and the other group to recall 10 books they had read in high school. The latter group largely engaged in widespread but moderate cheating when given subsequent reward-based tasks designed to measure honesty. But the group that recalled the Ten Commandments didn’t cheat at all. The result was the same when they reran the experiment on a group of self-declared atheists who were asked to swear on the Bible.

Oscar Wilde said “Morality, like art, means drawing a line somewhere.”  In every industry, age, and walk of life we are presented with choices that stretch our moral fiber.  Knowing how powerful our brains are at dictating our conscious and subconscious thought process is half the battle. The next time you preface a statement with "To tell you the truth" or "I'm going to be honest with you" ask yourself if that really needed to be said and if everything up to that point was a lie.

Tuesday, June 27, 2017

Anal Fishers

Do you have Anal Fishers?  You know, as friends?  

I know some people who spend their time worrying about the weather and the moon phases.  They think (and talk) about wind direction and water levels and water clarity.  They organize their tackle boxes by color, weight, diving depth, brand, or whatever else.  Their rods and reels are matched, maintained and oiled.  And they could tell you the retrieve speed of all their reels and how many ball bearings they all have.  Their coffee tables are covered in editions of BASS Magazine, and they always have a fishing forum open on their computer.  You could eat off the floor of their bass boats, but they don’t allow their guests to bring food in them because of the crumb risk.  

Watch this old SNL video. It's hilarious.

Here’s the thing, though.  They never actually go fishing.  And when they do, they usually come home with some sort of overanalyzed excuse about why the fish weren't biting.  I know that you know people like this.  They are more planners than doers.  

It isn’t just in fishing that you find these type of people of course.  That just happens to be one of my sports of choice and it makes the title funny.

Anal Fisher.jpg

This reminds me of those in business world who focus on rules, procedures and protocols instead of free thinking and creative problem solving.  These people are usually employees, not business owners.  When they are business owners, they do better as franchisees, since there is a set framework.  

Being Anal Retentive, as Freud characterised it, or having mild Obsessive-Compulsive Personality Disorder (OCPD, not OCD) isn’t always bad for business.  We may even desire these traits in some professionals.  Computer programmers, engineers, and actuaries need to be precise.  

What about consultants, designers, salespeople, and doctors?  Would you prefer these people to be free thinking problem solvers, or rule followers?  Your opinions on this probably vary.  I would say that it could be situational, but flexibility is a nice skill to have when things don’t line up perfectly.  

Right or wrong, I happen to enjoy working and fishing with people who just push through the problems and make it happen.

-Insurance Professor

Friday, June 16, 2017

Anchoring Away: How Much Should You Pay For Something?

How do you know how much you should pay for something? How do you know what’s a deal and what’s a ripoff? You need some sort of reference point...a cue to help you evaluate.
The anchoring effect is a cognitive bias that influences you to rely too heavily on the first piece of information you receive. Stores use it all the time to convince you to buy.  So if you’re shown a pair of jeans for $100 and then a similar pair for $150, then the pair for $150 seem expensive. But if you’re shown a $300 pair and then a $150 pair, the same $150 jeans seem like a steal by comparison.
Remember when J. C. Penney introduced “everyday low pricing?”  They wanted to eliminate coupons and instead create a best price all the time atmosphere.   Too bad they weren’t aware of the power of the anchoring effect. When sales slid bigtime, they got the message. Customers need that anchor number to inform them that they are getting a bargain.

All buyers, no matter what they are purchasing, want to know these two things:
1) What does it cost?
2) What do I get?
Potential customers believe if they know what they’re getting in exchange for the money they’re giving up, they can choose whether or not the product is worth it. Here’s the problem: human beings aren’t rational buyers.  Whether or not something is worth it depends on several factors. Most importantly, it’s decided by our expectations. Expectations are set by anchoring.
Dan Ariely did an experiment on pricing for The Economist.  When he surveyed 100 MIT students about those pricing options, Ariely got these results:
Subscription type
Cost for a year
Percentage who chose it
Web only
Print only
Print and Web
Why did the Economist even bother with that $125 print only option? Ariely conducted a second survey that shows why. In the second survey, Ariely removed the $125 print only option and asked a separate set of 100 MIT students what they would choose.
Here’s what happened:
Subscription type
Cost for a year
Percentage that chose it
Web only
Print and Web
The mere presence of the print only option even though no one chose it prompted a much higher percentage of people to choose the more expensive $125 print and web option. The difference would have amounted to 43 percent more hypothetical revenues for the Economist. Print and web for $125 seems like a much better value when it’s anchored by a $125 print only option and a $59 web only option.
So if you are engaged with a client, should we artificially inflate our prices and let the anchoring effect work its sales trickery?  Um, no.  There is an offsetting sales principle called price integrity which is crucial for building trust and continuous business relationships. We shouldn’t present a higher price without demonstrating more value and we shouldn’t show a lower price without a reduction in benefit.  In both directions, clients should expect and see integrity in the price.

I Know the Market: Trust Me
In an experiment conducted some years ago, real estate agents were given an opportunity to appraise the value of a house that was actually on the market.  They studied the house and the comprehensive booklet of information that included an asking price. Half the agents saw an asking price that was significantly higher than the listed price of the house; the other half saw an asking price that was lower than listing.  Each agent was asked about a reasonable buying price and the lowest point at which they would agree to sell if they owned it.  
What factors affected your judgement?
Remarkedly, the asking price was not one.  They took pride in their ability to ignore it.  Wrong, the anchoring effect was 41%.  That’s a $82,000 difference between a $200,000 house and a $400,000 house assuming it’s the same house just listed differently.  A group of business school students with no real estate experience was 48%.  The only difference was the students admitted to being influenced and the professionals did not.

Does that mean we should disregard the anchoring effect altogether?  If we are providing value, we should be aware of the anchoring effect to help us deliver the highest level of benefit for which our clients are willing to pay. This might mean presenting solutions in a good, better, and best approach for a particular need. Our best option is our anchor and provides the most benefit to our client. Consequently, it has the highest price. If our client is unable or unwilling to purchase this solution, then we have established a point of reference for both benefit and price, allowing us to adjust down our solution until we fit the highest level of benefit with the highest acceptable price.

Peoples’ objections to price rarely have anything to do what is or is not fair. They come from a place of inexperience and emotion.  The client simply doesn’t have the background you have and relaying the message can be difficult.  As someone who is trying to do the best thing for the client you are torn between the elements of price integrity and getting the business.  You have to avoid paralysis by analysis that a prospect can slip into and present your solutions in a manner that gets them to act.  If done properly it is a win for both sides.