13 March 2013

How to Buy Pasta in a Foreign Country - Social Proof

In an earlier post on social influences on our own behavior I have addressed the topic of social conformity, mainly from the perspective of “peer pressure” or conforming to group norms and behaviors in order to no be or feel excluded.

The social influences on our own behavior have also a different side, namely that we tend to conform to social norms and to “do what others do” not only to avoid feeling excluded, but simply because we infer that “others know better”. 

Imagine the following example. You are in a foreign country and want to buy pasta from a supermarket. None of the brands on the shelves are known to you and you don’t know the language of the country, so you can’t read too much on the packages. As you are looking at the pasta bags and packages trying to figure out which one to buy, a lady comes by the shelf with pastas and picks one bag, puts it in her shopping basket and leaves. The lady looks more like a local and a lot less like a tourist.

How likely are you to pick up the same type of Pasta as the lady did? 

My belief is that you are very likely to buy exactly the same type of pasta as the lady did. This is not because you are afraid that if you would not pick the same type of pasta you would be or feel excluded from a social group. After all you are in a foreign country, you don’t speak the language and have no idea what kind of pasta is the best… how more excluded can you get?

You will pick up the same type of pasta as the lady picked because you infer that she knows something you don’t, namely which pasta is better.

Social proof is similar to “peer pressure”, but it is distinct. One similarity is that we are influenced more by the actions of people who are similar to us. For example a Manchester City fan will not be influenced by the behavior of a Manchester United fan (City and United are rivals). At the same time if you are a young male, very likely you will be influenced by the behavior of other young males.

One distinction between social proof and peer pressure is that social proof occurs only when there is some ambiguity, whereas peer pressure occurs even in situations in which there is no ambiguity. We infer that others know better, but this implies that we ourselves don’t know too much. In the pasta example, you inferred that the local lady knows which pasta is best only because you had no idea which one is better.

Peer pressure, on the other hand, acts even if you know exactly which pasta is better. Let’s assume that you go to the supermarket to buy pasta and this time you know that brand B is the best pasta in the world. However, you are not alone on your shopping trip and your “in laws” are with you. They are also shopping. Your mother in law picks up some pasta brand A (which you know is inferior to brand B). Then your sister in law picks up the same brand A pasta… now even if you know brand B is better, you might buy brand A in order to not be excluded by your extended family.

Both social proof and peer pressure lead to the same outcome – “doing what others do”, the mechanisms behind each of them are distinct.

A characteristic of social proof is that it becomes more powerful with the increase in the number of people who exhibit a certain behavior. In the buying pasta example, if you see that ten ladies and not only one buy a certain type of pasta, you will feel no doubt that you should buy what they bought.

A particularly interesting thing about social proof is that it starts from a rational (or at least reasonable) assumption, namely “if I don’t know too much / anything on a topic, then others might know more on that topic and doing what they are doing is a smart idea.” However, this very assumption can lead to perfect irrationality in the sense that “if I don’t know what to do and I simply copy the behavior of others, then someone else may have the same issue and subsequently copy my behavior, but I don’t know why I am doing what I am doing.”

The Similarity between a Colonoscopy and a Holiday

We live in a world full of “stuff”, of material possessions powered by the almighty philosophy of consumerism. Of course there are places on Earth that do not have the abundance that characterizes the “western” world, but even so, we are overwhelmed with “stuff”.

If you don’t believe me, try moving to a new home and while packing things up you will get the main idea. If you still don’t believe me, think about the “personal storage spaces” business. If we would not be overwhelmed with “stuff” why would people rent storage spaces outside their homes?

However, in this post, I don’t want to talk too much about material possessions, but rather I wish to cover the topic of experiences. Even if we are surrounded by “stuff”, our lives are not made out of “things”. The essence of living is the act of living. To put things a bit simpler, your life is made out of your experiences, of what you are experiencing every second.

We have experiences each moment in our lives. We experience sleeping (by the way, it’s not a bad idea to invest large amounts of money in a good bed), we experience eating meals, we experience using public transport, we experience driving, we experience working, we experience going out for dinner, we experience going on holiday and so on.

One interesting thing about experiences is that we believe that they are more or less like physical products, like “stuff”. We believe that the experience of a holiday in Spain is very similar to a couch. However, this is not true. Things (stuff) are roughly the same regardless if you use them at this point or if you think of using them. For example, there is not a huge difference between you sitting on your couch and you thinking about or remembering your couch. On the other hand, there is a huge difference between you being on holiday in Spain and you remembering your holiday in Spain.

The main characteristic of experiences is that the memory about an experience such as a holiday in Spain is different from the actual experience of being on holiday in Spain NOW.

As Daniel Kahneman puts it, we have two “selves”:  (1) the “experiencing Self” – the one that actually lives the experience in the present and (2) the “remembering Self” – the one that remembers the experiences lived by the “experiencing self”.  
Each of these two selves has its own evaluation of an experience. Surprisingly or not, the two evaluations are different.

The evaluation of the “experiencing self” is quite straightforward. We know how we feel and what we feel in every moment. For example if you like what you are reading now, you feel good, you are happy and so on. We know that we feel pleasure when we experience something pleasurable. Similarly, we know that we feel pain when we feel pain.

The evaluation of the “remembering self” is very different from the one of the “experiencing self”. If the two selves (experiencing and remembering) would be the same, then the memory of an experience would be the average of each and every instance of evaluations made at every point in time.

Let me illustrate a bit more. Imagine that you go on a week-end trip to a nice place in the mountains. You spend there about 24 hours and you decide to evaluate your experience every 15 minutes. This means that you will have 96 instances of evaluations made by your “experiencing self”.

If the experiencing and remembering selves would be alike, then your overall evaluation of your “trip to the mountains” experience would be the average of the 96 evaluations made every 15 minutes during the actual experience.

However, the “remembering self” is distinct from the “experiencing self” and what the “remembering self” thinks about your “trip to the mountains” experience is very different from the average of the 96 evaluations your “experiencing self” made.
What the scholars of happiness have found about the differences between the memory of an experience (“remembering self”) and the actual experience (“experiencing self”) can be summarized in two main principles.

First is the “Peak-End Rule” which says that a memory about an experience is influenced by the maximum point and the ending point of the actual experience. What this means is that apart from the maximum pleasure (or pain) and the pleasure (or pain) felt at the end of the experience, you will not remember much, or more accurately your retrospective overall evaluation of the experience will ignore all the other instances actually experienced.

For example imagine that you go on holiday to Spain. One week after you get back home, your friends ask you “how was your trip?”. In order to give an answer, you will look back and make an evaluation of your holiday in Spain. This is your “remembering self” at work. Your answer to the question mentioned above will be determined by the peak of your experience, let’s say visiting Sagrada Família (a monumental cathedral in Barcelona), and by the last thing you have experienced in Spain, let’s say the superb meal that you had on the last night before leaving Spain. Of course you could have had a miserable experience and remember getting robed (peak of experience) and the unfriendly staff at the airport (end of the experience), but let’s be positive.

Your actual experience of visiting Spain was, however, more complex than just the peak and the end of it. Fortunately or not even if you remember instances of the holiday other than the peak and the end, when making a retrospective overall evaluation you will ignore all the other instances.

The second principle about the differences between the actual and the remembered experiences is “Duration Neglect”. Closely related to the “Peak-End Rule”, duration neglect means that our overall retrospective evaluations of our experiences discard the actual length of the experience. To put things a bit simpler, when you actually have an experience (“experiencing self”) how long it is matters, but when you remember experiences (“remembering self”) how long the experience was has virtually zero importance.

Going back to the holiday trip in Spain, when you are asked “how was it?” your answer will be the same as before regardless if you have been in Spain for 6 or 7 days, as long as visiting Sagrada Família and having that wonderful last dinner in Spain still happen. However, when you actually are in Spain it matters if you are there for 6 or 7 days.

In a very famous study by Redelmeier, Katz, and Kahneman, the researchers investigated the difference between experience and memory of a painful experience (colonoscopy). One group of patients had a brief procedure, whereas the other group had a slightly longer one. The short procedure ended with a high discomfort (pain) for the patient, while the longer procedure ended with a lower discomfort (but still painful).

The actual experience was better for the patients who received the brief procedure as compared to the experience of the ones who received the long procedure in the sense that the total amount of experienced pain was smaller. However, when asked to evaluate their experience in retrospect the ones that received the longer procedure (with more experienced pain) rated their experience less bad than the ones who received the short procedure (with less experienced pain).

This is a very powerful illustration of both the peak-end rule and the duration neglect. People who have had less pain in total (short procedure), but the ending of experience was very painful remembered their experience as worse than people who have had more pain in total (long procedure), but the ending of the experience was less painful. As you can see, retrospective evaluations of our experiences are based on the peak of the experience (both groups of patients had the same peak of pain) and on the end of the experience which was different for the two groups. Moreover, the duration of the experience was ignored in the sense that people who have had actually longer painful experiences which ended with a less bad experience remembered their experience as being better (less worse) than the people who had suffered less actual pain.

Now, let’s go to the practical, business related implications of this difference between the experience and the memory about the experience.

A somehow naïve opinion on the difference between experience and memory would be to ignore it. A skeptic might think “What do I care what people remember? After all they remember whatever they want to remember!”

OK! Point taken, but answer the following question: “Who makes the decision? The experiencing or the remembering self?”  

The answer to this question is most often “The remembering self”. For example if you consider going on a holiday next year and one of your options is to go to Spain, then your memory  (“remembering self”) on your previous holiday in Spain will be crucial in your decision. It goes similar for recommending to others to go on holiday to Spain.

Another example can be about getting dental treatment. When you go to the dentist you live the experience, but when you decide to which doctor to go the next time, what actually counts is the memory of your previous experience with a certain doctor.

What can be done about this is quite simple. In many cases a business can’t control the “peak” of the client’s experience. For example a hotel can’t control the peak of a tourist’s experience in a city. However, it can do something about the end of the experience. Most hotels offer breakfast, but as far as I know none offer a “lavish good bye dinner”. The last meal a tourist has in a destination is very likely to be her “end experience” in that place. This means that by providing a nice ending to one’s holiday, the overall memory of the holiday will be more positive.

In other cases there is some control over both the end and the peak of a client’s experience. For example cruise ship operators can significantly influence the peak of the client’s experience simply because people are “captive” on a cruise ship and most of what they do on that ship can be influenced by the operator. It goes similarly for medical practices or other types of personal services because the entire experience can be controlled by the provider.

Before concluding, I would like to address one very serious question, namely “Which of the experiencing and remembering selves is more important?”.

This is a really hard question to answer. From a business perspective, the “remembering self” is more important because it is the one that will make future decisions. At the same time, the “experiencing self” is also very important because people are living in the “Eternal Now”. Moreover, the “experiencing self” is the one that may complain or be thrilled by your services.

One particular salient example of the tradeoff between the “experiencing” and “remembering” selves is the case of Asian tourists (at least in Europe). As I see it, most Asian tourists are more concerned with taking pictures and video-recording every possible landscape, building, plant, stone etc. At the same time, in my view, they actually miss their experience of visiting countries in Europe. I believe they fail to actually live the experience they go through.

I assume my observations on Asian tourists in Europe are a bit biased because I usually don’t take pictures and simply enjoy the experience.

Regardless of my impressions on Asian tourists, in many instances we are faced with the tradeoff between actual and remembered experiences. I guess both have roughly the same importance.
Note: This post is documented from:

Kahneman, D. (2011). Thinking, fast and slow (chapter 35). London: Allen Lane.

Redelmeier, D. A., Katz, J., & Kahneman, D. (2003). Memories of colonoscopy: A randomized trial. Pain, 104, 187–194.

12 March 2013

SUV over Dental Work; Belgian Beer over Book and Savings alongside Loans – The Money Jars in Your Head or About Mental Accounting

One major property of money is that it is fungible. To put things simply, any amount of money is perfectly replaceable by another equal amount of money. For example, if you have a 20 Euros bill in your left pocket, that amount can be replaced by the ten 2 Euros coins that you have on your desk.

If you have to go shopping for groceries you can take and spend either the 20 euros bill or the ten 2 euros coins. Each will buy exactly the same things.

The human brain, however, has some shortcomings when it comes to fungible things. Even if we know that any 100 Euros can be replaced by any other 100 Euros, when we make judgments about spending money and judging how much to spend on this or that, somehow money tends to not be fungible any more.

To better understand how in our minds money loses the fungible property, imagine the following scenario. You live on a limited budget and all your income is in cash (coins and bills). In order to not get into trouble, you come up with a really smart and low cost income management system. Your main expenses are: rent, groceries, transport, communications and leisure. Your smart management system consists of 5 jars (like the ones you keep jam in). Each month when you get your income, you fill each jar with the amount for each spending. First, you fill in the rent jar, then the groceries jar, the transport and communications jars. If there is anything left, you put something in the leisure jar.

Your golden rule is to use the money from each jar ONLY for the expenditures they are intended for. You do not use the money from the rent jar to pay your phone bill, nor do you take money from the communications jar to cover expenses on food.

Although rudimentary, this money management system is quite effective in getting you from one month to the other without overspending and without having unpaid bills in each of your main areas of expenditures.

This management system, however, violates the fungible quality of money. In essence if you would pay your groceries from the “rent jar”, then what remains in the “rent jar” plus what is in the “groceries jar” can be used to pay the rent.

However, this opens the door to overspending (assuming that you pay more for rent than for groceries) which in turn may lead to you not being able to pay the entire rent this month.

The role of the “jar based” money management system is to prevent the eventual shortcomings in self-control. In essence the jars are not a money management system as much as they are a self-control enhancement mechanism.      

Nowadays most people don’t have a “jar based” money management system, but one thing we still have, namely our mental jars. Even if we don’t have physical jars for our expenses, we still have our mental accounts for most types of expenses.

Take for example the case of Patrick planning a holiday trip. Patrick is thinking of going to Macedonia and the plane ticket costs 400 Euros (which is quite expensive for a flight within Europe). Patrick’s mental account (“mental jar”) for airplane tickets within Europe has room for about 250 Euros. Patrick might say that the 400 Euros is a high price and subsequently make the decision to not go to Macedonia.

At the same time, in Patrick’s “hotel room” mental account there is space for about 70 Euros per night. Thus, a hotel room that costs 35 Euros per night will be perceived by Patrick as cheap.

When it comes to the mental account of “overall holiday expenses” Patrick has about 1000 Euros. How this amount is divided between airplane ticket and accommodation (hotel) is perfectly irrelevant. However, because the plane ticket costs more than it is reasonable in Patrick’s mental account, he might ignore the fact that because accommodation is cheap (costs less than what he has in his “hotel mental account”) the overall cost is within his “holiday expenses” account. Patrick might decide to not go to Macedonia for his holiday.

Since we are talking about airplane tickets, we should mention the pricing policies of low cost airlines and the extension of these practices to regular airlines.

The low cost airlines gained a lot of market share due to the low prices for flight tickets. However other services such as transportation of luggage, serving food and beverages, using the toilet in the airplane and even using established airports (ones that actually close to the big cities) are not included in the flight ticket.

The marketing communication “trick” in this case is that most travelers did not have mental accounts for services such as “luggage fee” and their focus was on the “plane ticket fee” account. Thus, communicating that the “flight ticket” is below what is one’s “flight ticket mental account” made people perceive low cost airlines as very cheap viable alternatives to regular airlines.

What has happened in the case of low and regular cost airlines is that learning occurred. People who have used low-cost airlines learned that there are additional prices (and inconveniences) to be paid and subsequently new mental accounts were created for things such as “luggage fee”. Most interestingly, regular airlines such as KLM took advantage of this change in consumer mentality and will start charging a separate fee for luggage. Of course, KLM could have increased the prices for “luggage included” tickets, but then their prices would have not been competitive in the battle fought within the “flight ticket” mental account.

Another implication of mental accounting is related to gift giving. Gift giving is one of the social practices deeply rooted in human nature. Despite this, quite often we are faced with the problem “what gift to get” for someone. A hint on this issue comes from mental accounting.

Each and every one of us has “mental jars” for different purchases. This implies that for some purchases we are not willing to pay over a certain amount. Gifts are a very nice way to bring joy to someone by braking the celling of a certain “mental jar”.

For example, if you know that the person who will receive the gift would never pay more than 100 Euros for a coat, then it is a good idea to give as gift a coat that costs more than 100 Euros. This way the gift receiver will get something that she would never buy on her own, whereas the gift giver would succeed in making a nice gift.

Most interestingly the proposition above is valid even if the gift giver and receiver are sharing financial resources. Putting things a bit simpler, if a husband makes a gift in the form of a coat that costs more than 100 Euros to his wife, by paying from their shared account, she will still be happy because she would have not bought the coat on her own by paying out of the same shared account.

Mental accounting explains also why some products are condemned to remain cheap (at least in some markets) whereas other products have a much wider price range. Take the example of books. If a book costs around 25 Euros it is already considered an expensive one (in the mainstream market). However, people pay more than 25 euros for products that in my opinion are a bit more frivolous than books.

Think about Mark who is a university student. He sees a book that he considers buying and reading, but he is not keen on doing so. It is not mandatory reading for any course, but its topic is related to his field of study. The book costs 25 Euros. After thinking a bit about this purchase he decides that 25 Euros is too much to pay for a book that is not mandatory reading, even if it might be interesting.

The next evening, Mark and some of his colleagues decide that they deserve a treat after a prolonged study session. They go out to a nice pizza place and enjoy the evening spiced with a couple of nice Belgian beers. After all, what can be better than Italian pizza and Belgian Beer? Mark’s share of the bill is 25 Euros. He thinks it is a bit more expensive than the usual pizza and beer, but still within the limits his mental budget of maximum 30 Euros for a nice evening out.

As you can see, Mark was unwilling to pay 25 Euros for a book because the price was a bit above the limit of his mental account of “book purchases”. At the same time he had no problem in paying 25 Euros for Pizza and Belgian Beer because this amount was within the limits of his mental account for “evening out”.

The example of Mark may seem a bit frivolous to some of my readers. To a large extent I agree that missing on a book in exchange for a nice evening out can be overlooked. Most likely the impact of this tradeoff on Mark’s life is minor. At the same time, such tradeoffs between different mental accounts may have significantly larger implications in one’s life.

Take the example of Miriam who is a young woman in her late 20s. She grew up in some difficult times when medical care and healthy food were not largely available. Thankfully things have changed and now she has a nice social and economic status. She is not rich, but for sure she can afford more than most people can. Miriam and her husband are considering having a child and she as a smart young lady knows that during pregnancy medical interventions, including dental works, are not recommended. Also the risks associated with dental problems such as infections during pregnancy are high. She decides to go to the dentist and fix some of her problems caused by the unfavorable conditions during her childhood.

Miriam goes to a dental practice and after the doctors examines her, he proposes a treatment plan and makes a cost-estimate. The estimate is quite high – around 5000 Euros. She thinks that the cost is too high and decides to only get treatment for whatever is urgent and wait on the non-urgent problems. As you may know dental problems do no simply go away by waiting. If anything, they get worse.

At the same time, Miriam and her husband are considering changing their car. They want the best for their future child and even if their current car is spacious enough and in good condition they think that a SUV would offer more protection than their current sedan does. After all, what parent is not concerned with her child’s safety?

They go to a car dealer and find a nice second hand SUV. They ask the dealer how much they would have to pay if they would give their current car as buy-back. The dealer makes some calculations and comes up with the 15.000 Euros sum. Miriam and her husband think that this is a good price to pay for a SUV and decide to make the purchase.

From a “cold thinking” perspective this couple’s decision makes little sense. Miriam decided not to get (all) her dental problems fixed because she believed that 5.000 Euros is too much to pay for the treatment, while at the same time they paid 15.000 Euros for an upgrade of their car which was not necessary. Moreover, their future child is more likely to benefit from having a mother with lower risks during pregnancy than from being driven in a SUV.

From a mental accounting perspective, this couple’s action is easily explainable because the “mental jar” for dental treatment is smaller than 5000 Euros, whereas the “mental jar” for (second hand) SUV is larger than 15.000 Euros.

Mental accounting also explains the co-occurrence of savings and loans. Consider the example of Sophia and Gerri who are a couple with a young daughter. Gerri received a quite large inheritance and since they have a good financial situation, Gerri and Sophia decide that the money from the inheritance should go to their daughter for university education or whatever she will need when she grows up. The parents think that if they will have another child, the money from the inheritance will be split between their children. They go to the bank and place the money inherited by Gerri into a savings account.

A couple of years later, Sophia tells Gerri that she is pregnant. They are both very happy and look forward to having a new member of the family. As you may know, a (new) child brings some administrative issues, such as having a room for the baby. Gerri and Sophia want their daughter to keep her room and decide that they should get some work done in the house to make a room for the new-born by “cutting” some of the space in the large living room.    

Getting construction work done is not exactly cheap and the two parents get some offers from contractors. They realize that the costs are a bit over their budget. They consider taking some money out of the children’s account (the money Gerri inherited a couple of years before), but then they say that they should not “touch” that money because it belongs to their children when they will be adults. Thus they go to the bank and get a loan to finance the construction work needed for the new baby to have a room.

From a rational point of view Sophia and Gerri’s decision is perfectly irrational. It is common knowledge that banks pay interest on savings accounts lower than the ones they charge for loans. After all, that is how banks make money. So, Sophia and Gerri would bear lower costs if they would simply take some money out of their (children’s) savings account and then put it back month by month. By taking a loan, not only they still have to give the money back, but they also have to pay the costs of the loan. By taking money out of their savings account they would forgo the gain in interest from the bank, but what the bank charges them as credit cost is higher than what the bank pays for their savings.

From a mental accounting perspective, Sophia and Gerri’s decision is easily explainable. For them the money in the savings account dedicated to their children is in the “DO NOT TOUCH mental jar”. Subsequently, getting a loan to finance the building of the new child’s room is the natural thing to do.

Before ending, I would like to say once again that mental accounting has a very important function, namely to increase self-control. For example, if Sophia and Gerri would take money out of the savings account dedicated to their children, might later fail to put the money back due to self-control shortcomings. By getting a bank loan, they avoid such a problem because somehow banks manage to get people to pay back their loans. The difference between the amount paid to the bank as loan cost and the amount got from the bank as interest on their savings account is in fact a cost for a self-control mechanism.

At the same time, mental accounting can lead to not so fortunate decisions. If Sophia and Gerri pay the bank to provide them with self-control, Miriam and her husband are paying extra for a SUV and sooner or later Miriam will have to go to the dentist to solve her then acute problems. The bill from the dentist will be higher than it would have been now. By that time, their second hand SUV will be old and will require costly repairs and maintenance.

The downside of mental accounting includes more than just money related issues. Because the cost of the airplane ticket is higher than what Patrick believes it should be, he might not take that holiday in Macedonia, despite the fact that hotels and restaurants are cheaper than he are used to and the overall costs of a holiday would be reasonable. Patrick might miss on a nice holiday experience simply because he uses mental accounts.

Mental accounts are good for increasing self-control, but they can also lead to bad decisions.

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This post is documented from: Thaler, Richard H. (1985), "Mental Accounting and Consumer Choice," Marketing Science, 4 (3), 199-214. 

11 March 2013

Beautiful People are Smart and Kind – The Halo Effect

Is George Clooney a kind person? I guess, most of my lady readers will answer “Yes”. However, there is no solid base for this answer in the sense that very likely none of my lady readers have interacted with Mr. Clooney in a context that would allow them to correctly evaluate his kindness.

Probably one of the oldest judgment biases identified is the Halo Effect. It was discovered by Edward Thorndike in 1920. The main idea behind the halo effect is that our evaluation of one trait such as physical attractiveness spills over other unrelated attributes such as intelligence or kindness.

The psychological mechanism behind the halo effect is a mixture of heuristics. When evaluating, for example, someone’s intelligence, the correct question to answer is “What is this person’s IQ?”. However, this question is hard to answer in the absence of the result of an IQ test score. At the same time, it is easy to see if someone is attractive. Here is where attribute substitution occurs. We believe that good looking (attractive) people are more intelligent.

The affect heuristic is the most relevant one when it comes to the halo effect.  When asked if someone is intelligent (which is hard to answer), we tend to give the answer to the unrelated question of “Do I like this person?” which is easy to answer. However, the halo effect and the affect heuristic are distinct.

The halo effect has a reverse also known as the “Devil effect”. In essence people who are evaluated negatively on one trait are perceived negatively on other unrelated traits.

The halo effect has implications on aspects of life more significant than the kindness or intelligence of movie stars. For example in human resources management, particularly in recruiting, the halo effect might occur. Professional recruiters are trained to correct for things such as physical attractiveness. At the same time, in absence of a very well structured “ideal candidate” profile, the halo effect may occur with a starting point (trait) other than good looks. For example, a person can score high on relevant work experience, but if the profile does not specifically include “self-management” abilities or “taking responsibility”, the recruiter might simply imply that the candidate scores high on these traits too.   

The halo effect occurs in marketing related aspects. For example good looking cars are perceived as reliable even if there is absolutely no link between the two. If you don’t believe me, try Alpha Romeo…

Another instance of the halo effect in marketing is not at the product level, but rather at the portfolio level. For example, if one company produces a high end product, then people will infer that other products from the same company will have similar qualities as the high end one.

The halo effect is a very good illustration of how we tend to make judgments about unrelated aspects of a person, product, company, country etc. Some traits are correlated and the halo effect is useful, but more often than not it occurs when aspects are not correlated.

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This post is documented from: http://en.wikipedia.org/wiki/Halo_effect

The Fall of the Western Roman Empire and Marketing Communications “Classics” - Anchoring and Adjustment

Probably the most known empire in history is the Roman Empire (at least for cultures with European roots). The legacy of the Roman Empire is vivid even today and covers buildings, languages, principles of law and state institutions such as the senate.

Now let’s go to a significantly less important aspect, namely my phone number. The middle digits of my (Romanian) phone number are “668”.

OK. You might not find a connection between the Roman Empire and the “668” digits, but please answer the following questions:

“Did the Western Roman Empire fall before or after the year 668? What is the best approximation you can give (without googleing it) on the year in which the Western Roman Empire fell?”

Come on, make an effort and think. Was it before or after the year 668?

If it was before 668 AD, was it closer to the year 200 or closer to the year 600?

If it was after 668 AD, was it closer to the year 700 or to the year 1000?

Did you come up with an answer?

If you did, I have two things to tell you. First, if you believe it was before 668AD, I guess that your estimation was closer to the year 600 than 200AD. If you think it was after 668AD, then your estimate is closer to the year 700 than the year 1000. I’ll tell you soon how I reached this conclusion, keep on reading.

Second, what does my phone number has to do the fell of the Western Roman Empire? Regardless of your estimate on the date, you (most likely) took “668” as a reference and then adjusted if it was before or after this year, but I told you that “668” are the middle digits of my phone number. What has my phone number to do with history?

Let me tell you how I guessed that any estimation would be close to 600 AD or to 700 AD. As I said, you most likely took 668 as a reference or anchor. If you believed that the Western Roman Empire fell before 668 AD, then you subtracted some years from 668, but not that many to get close to the year 200. Similarly if you believed that the Western Roman Empire fell after 668 AD, you added some years, but not that many to get close to the year 1000.

Before explaining a bit more on how this works, I have to disclose the correct answer. The Western Roman Empire fell in 476 AD. That is the official date and the empire was in decay for about 100 years before this date. The Eastern Roman Empire managed to survive for about 1000 years more, but that’s another story.

Going back to how the middle digits of my phone number influenced your estimation, it is called “Anchoring and adjustment” and it has been introduced by Kahneman and Tversky as a heuristic in their classic paper "Judgment under Uncertainty: Heuristics and Biases".

The mechanism of this heuristic goes like this. Whenever a person is asked to make an estimate and there is a reference (anchor) available, that person will use the reference and adjust in accordance with her beliefs about the issue to be estimated. The anchor can be related to the topic, but the same mechanism works even if the anchor is completely unrelated.

In the Roman Empire example, you were provided with an unrelated anchor – the middle digits of my phone number. Things would have gone similarly if you would have been told that the Roman Empire reached its peak of expansion around 200 AD. You would have known that the fall was after the peak, but how long after, you would still have to estimate and your estimation would be influenced by the “200” anchor.

The main shortcoming of anchoring is that its effect is so powerful that we fail to adjust sufficiently to reach a reasonable estimate.

The skeptics among you will say that this is not that relevant for our daily lives. After all who cares when the Western Roman Empire fell?

OK! I accept that the exact year in which the Western Roman Empire fell is not relevant for life in the XXI-st century. However, here are two classics of marketing communication based on the anchoring and adjustment principle.

“Prices starting from X00 Euros”

This type of information, especially formulated with “starting from” is encountered in virtually advertising environment.

We as consumers are not stupid, so we know that what we want to buy will cost more than X00 Euros. The “trick” is in our estimation of “how much more”.

Imagine that you want to buy a computer and an add says that a certain shop sells computers starting from 500 Euros. Of course you don’t want the basic option computer that costs 500 Euros, but how much is the computer you want is going to cost? Your estimate will be influenced by the 500 Euros anchor. In other words, your estimate on the price of the computer you want to buy will be closer to 500 Euros than to 1500 Euros.

Another “classic” in marketing communication is the “Up to X …”. For sure you encountered the “Discounts up to 70%” or “Bandwidth up to 10 Mbs/s”. The pure rational informational content of such ads is “For sure you will not get more than …”, but our mind perceives the information significantly differently. We know that the discounts for the products we want to buy will most likely be smaller than 70%, but how smaller is influenced by the 70% anchor. In other words, we will believe that the discounts for what we want to buy will be much closer to 70% than to 10%.

Anchoring and adjustments plays a role in negotiation, namely the starting positions in a negotiation function as anchors. For example if you are negotiating your salary and the employer makes an initial offer of X0.000 Euros per year, that value will function as an anchor.

Although anchoring and adjustment is not a heuristic in its proper definition of substituting one attribute with another, it is highly important in understanding how people make judgments.       

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This post is documented from:
Tversky, Amos, and Daniel Kahneman (1974), "Judgment under Uncertainty: Heuristics and Biases," Science, 185, 1124-31.

5 March 2013

The Sun Is Shining, Everything Feels Better and We Think Differently – The Affect Heuristic

Today is one of those days that have to be marked in the calendar. It is the second consecutive day with clear sky and sunshine in The Netherlands. Everything is brighter, millions of Dutch people are on the streets enjoying the sun and for the first time this year we have temperatures with two digits. To make things a bit more clear to non-Dutch readers, in The Netherlands, between November and March, the best way to see the sun is to search for pictures or hope that it will be shown on TV.

But let’s leave the climate and weather patterns in my host country and think of the following questions were asked to college students (dating is both important and common):

“How happy are you these days?”

“How many dates did you have in the last month?”

Do you think that the answers to these questions are related (correlated)?

It turns out that they are not. The correlation coefficient between the answers to the two questions is close to zero. A decent conclusion is that happiness and dating frequency are unrelated.

But, there is a “catch” to this. When the two questions are presented in the following order, things change.

“How many dates did you have in the last month?”

“How happy are you these days?”

When the order of the questions is reversed, the correlation coefficient between the answers goes to an amazing 0.65 (as I remember). This might not seem “very high”, but when it comes to psychology this is a really high value.

What happened? How come, when we ask about happiness first and about dating second there is no correlation and when we ask about dating first and happiness second there is a high correlation? Are people unaware of how happy they are?

The answer for all these questions is “the affect heuristic”. Let’s see how it works. When we ask about happiness first, people simply give an answer to this question. At the same time this question is not that easy to answer. On the other hand, when we ask people about the number of dates they had in the last month, the answer is not a self-evaluation (such as happiness), rather it is a number that can be easily remembered. There is no wonder that the answers for the two questions are unrelated.

However, when we ask people first about their dating frequency in the last month, the easy numeric answer triggers some emotions. For example, if someone answers that she had 15 dates (one every other day), a positive feeling warms her heart. When the more difficult question about general happiness is asked, substitution occurs. As I said, how happy you are these days is not very easy to answer and when searching for the answer, one will feel good of having 15 dates in the last month (or miserable because of zero dates in the last month) and subsequently answer that she is generally happy (unhappy in the zero dates case).

 Similar results emerged from a study conducted over the telephone that asked the following questions:

“How’s the weather there?”

“How happy are you these days?”

As you may have guessed, when asked in this order, the two answers were highly correlated, but when the order of the questions was reversed, there was no correlation.

The affect heuristic has very profound implications in our lives other than just happiness and college students’ dating habits.

Take for example financial investments. If Joe loves, let’s say, Apple products to the extent that he is willing to sleep with his gadgets, then Joe might put all his money into Apple shares. However, this is not necessarily a smart choice. When choosing in which shares to invest money the correct question to answer is “Is the price of company’s X shares going to rise in the foreseeable future?”. However, this is a very hard question to answer and one will be likely to answer the easier question of “Do I like company’s X products?”. The answer to this second question comes immediately to mind because we know if we like or not something.

The affect heuristic goes beyond decisions regarding what kind of investments to make. What we feel or how we feel about something influences our perceptions on more objective aspects.

For example, people who are against nuclear power simply because they feel that it is wrong will overestimate the risks of nuclear power and will underestimate the benefits it brings. If we think with our feet in cold water, in the entire history there have been only two major accidents concerning nuclear power – Chernobyl in 1986 and Fukushima in 2012. Despite their disastrous consequences, none of these accidents led to meltdowns or nuclear explosions. Moreover, there are numerous nuclear power plants that function without problems (see the example of France) and provide power without carbon emissions.

People who are against nuclear power will dismiss my arguments as futile. Moreover, they will ignore the benefits of building a nuclear power plant close to their city (such as economic development, cleaner air, an increase in the higher educated population segment etc.) because they simply have negative feelings towards nuclear power.

It goes similarly for other issues which bear a high emotional load such as abortion and the role of the Church in society. People who are against abortion, for example, will dismiss any rational arguments that go against their beliefs, not because they are stupid or incapable of sound reasoning, but because all rational arguments are close to zero when faced with the powerful emotional load that the topic carries.

In politics things go similar. People who like candidate Y will perceive her as more honest and competent even in the absence of real proof. If someone hates candidate Z, then virtually no reasonable arguments in favor of Z will have any influence on voting intentions. Most interestingly, when candidate Z is deeply disliked and some really hard facts are in favor of Z, then people who hate Z will generate counterarguments or even undermine the hard facts simply to support their feelings towards Z.    

In the previous post on the Availability Heuristic, I mentioned that in many cases what is salient in our minds has some emotional load. For example, people perceive that airplanes are more dangerous than cars, despite the facts that there are more car accidents and victims of them than there are airplane accidents and victims of them.

This is a classic example of the availability heuristic because most people can remember easily examples of airplane accidents, but it is rather hard to recall (all) car accidents.

At the same time, I believe that it is not only about availability in memory of instances. This is not to say that shootings are less available in memory than swimming pool accidents, rather I argue why shootings are more easily stored and retrieved from memory than swimming pool accidents.

A shooting or plane crash has higher emotional load than swimming pool and car accidents do. When we hear about a person dyeing because she was shot in a supermarket, we feel very powerful emotions such as fear, insecurity, injustice etc. At the same time when we hear about a person dyeing because she drowned in a public swimming pool, we feel less of these emotions.

The availability heuristic is real and in some cases emotions play a role.

 In the business area, the affect heuristic plays huge roles in marketing, management and human resources.

Not only do we buy things we like, we also dismiss alternatives and generate arguments in favor of what we like. For example if you like to buy clothes from shop A you will underestimate the quality of clothes from shop B. Very likely you will do so even in the presence of some hard facts or direct comparisons.

We take or reject (if affordable) jobs because we feel good about the office environment. Managers support projects they like and projects proposed by people who they like.

Before ending this post, I’d like to go back a bit to what emotions are and to the ups and downs of trusting our emotions.

Emotions are primitive (in an evolutionary sense) responses to outside stimuli. We feel good about something we like and we feel bad about things we don’t like. What we like and what we dislike has, to a certain extent, an evolutionary role. For example we dislike food that smells bad because “bad smell” is an indicator of potential threats. Similarly we like (prefer) things that are familiar simply because we know that what we know is or is not dangerous. Unfamiliar things are perceived more dangerous than non-dangerous.

To a large extent our emotions provide useful information. Take, for example a potential job. How you feel in the office environment, how you feel about your future colleagues could be valuable indicators of your future job satisfaction and job performance.

The downside of the affect heuristic comes from mismatching the emotions and their source. Putting things a bit differently, the shortcomings of the affect heuristic come from answering one question with the answer of “how do I feel?”.

For example, if you have a good feeling about the work environment in a certain job, you have to be sure that the good feeling actually comes from the work environment and not because you eat a chocolate 15 minutes before. Similarly, if you have a good feeling about an apartment you consider renting such as “it feels like home”, you have to be sure that this feeling comes from the apartment and not because it is a sunny day and you feel good about it.

Being critical and even doubting our own feelings is a hard thing to do. However, most likely it will be beneficial.  

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