26 January 2015

When Home Delivery Meets Self Service

Home delivery and Self Service definitely are trends in retail.

(Some) The Dutch managed to combine them wonderfully...

Yes, that is a shopping cart from Albert Heijn conveniently "parked" in front of a door on the second (or third) floor...

Salt & Pepper Choice Architecture

Last year (2014) I had the largest number of flights in my life. Alongside the convenience of fast traveling, flights come with several inconveniences, one of them being in-flight food.

In-flight food can range from (almost) terrible – KLM – to quite good – Tarom – to surprisingly good (for flight food) – Turkish Airlines.

One of the reasons for in-flight food being not exactly a treat is the airlines’ need to cut costs. And this post is a free advice on how airlines can cut costs when it comes to food without damaging the clients’ experience.

Usually, the in-flight food comes with Salt and Pepper in small envelop-like packaging as in the picture below.

While, in our minds, salt and pepper go together very well and are seen more or less as equals, there are some serious differences between them when it comes to prices and use.

You might not realize, but (black, grinded) pepper is more than 79 times more expensive than (white, regular) salt.

According to prices in Albert Heijn (the largest supermarkets chain in The Netherlands), a kilogram of black grinded pepper of the cheapest kind is € 23.80, while a kilogram of regular table salt of the cheapest kind is  € 0.30.

When it comes to using salt and pepper, I believe there is a considerable difference. There are a lot more people adding salt to their food than are people who add pepper. It might be just my biased view, but I believe a lot (the huge majority) of the pepper packs are never opened and end up in the trash.

At first glance, this might not look like an issue, but every 200 packs of 5g of pepper thrown in the garbage, are equivalent to throwing 23 euros in the trash. Scale this to millions of passengers each year and things will look very different.  
Just as a note, it would be nice to have some garbology data on this – looking in airplane trash bags and see exactly how much of the pepper ends up unopened in the garbage.

In this light, airlines could simply eliminate pepper from their meals, thus avoiding unwanted waste. But this would damage the experience for the passengers who want pepper in their food.

The solution comes from Choice Architecture.

Instead of providing pepper by default, airlines could make pepper a (free) additional option.  

Here’s a rough prototype on how I see things being solved.

The envelope-like pack of pepper can be replaced by a small piece of paper with the message:

Please ask a flight attendant for pepper.

This change would bring some considerable cost cuts to airlines.

Of course, it would bring some headaches to pepper producers… more on the side-effects of applied behavioural science in a future post.

If you’re curious on how choice architecture can help improve your business, take a look at Designing Decisions.

21 January 2015

The Black Swan of the Swiss Franc

In the past week there has been tremendous unrest linked to the evolution of the Swiss Franc (CHF) and its value against the Euro and, subsequently, to other EU currencies (Polish Zlot, Romanian Leu etc.).

In a nutshell, the Swiss Franc skyrocketed in about two weeks. According to the European Central Bank (ECB), on Jan 2nd 2015, 1 Euro was equivalent to 1.2 Swiss Francs. On the 20th of Jan 2015 there was (almost) equality between the Euro and the CHF.

For some hundreds of thousands of people in the EU this meant a surge of their payments for returning bank loans. Poland, Romania and Croatia being hit very hard. In these countries the effect is amplified because they do not use the Euro and whenever there is a shock on the financial markets, the national currencies loose value against the Euro. In turn, all other exchange rates are computed using the Euro as a reference. For example, the Romanian Leu (Lion in English) also known as RON uses the Euro as a reference. Thus the exchange rate between the CHF and the RON is computed as: CHF exchange rate to the EURO – EURO exchange rate to the RON.

But enough with the background information.

The evolution of the CHF is what Nasim Taleb calls a Black Swan – a High-Impact event that was fully unpredictable.

Yes, many financial analysts will (do) come forward and explain what has already happened. Though they didn’t predict it….

Naturally, the people having loans in Swiss Francs feel cheated and demand action from the governments and national (central) banks to protect them from the outrageous loan conditions that they face now.

Some governments (e.g. Croatia) decided to impose a fixed exchange rate between the Swiss Franc and their local currency, thus softening some of the pressure the citizens deal with. Though this measure is temporary (1 year).

Other governments (e.g. Hungary) automatically converted the loans in CHF to loans in the local currency … and that was done about one year ago…
Other government (Romania) are still mumbling and debating, arguing whose responsibility it is and who should bear the costs.

Yet, none of these measures and debates focus on the real problem and its solution.

In very abstract terms, the problem is the massive exposure to Black Swans. Rare, High-Impact and completely unpredictable events will happen always. 2014 provided several such events (e.g. Ukrainian-Russian conflict and its economic implications). We know that some Black Swans will happen in the future and we know that we cannot predict them. What we can do is to minimize massive exposure to such events.

Let’s look a bit in recent history and understand the back-workings of the problems generated by the Swiss Franc. I’ll use the example of Romania because it is closer to me, and I believe the situations in other countries (Poland, Hungary, Croatia) was more or less similar.

In 2006-2008 there was a frenzy in taking loans, buying cars, houses etc. The banking sector was booming and there was a gold-rush in getting market share (handing out as many loans as possible).    

Due to the high interest rates for loans in the local currency, the majority of loans was in Euros. Surprisingly or not, the prices for houses, cars etc. were also in Euros. The local currency was at a good level against the Euro and loans in Euros were cheaper than the ones in the national currency.

Unrelated to central and eastern Europe, the Libor (interest rate for inter-banks loans) for the Swiss Franc was very low (approx. 1.8%). Remember that in those days the reference interest rates set by central banks were much higher than they are nowadays. The Libor for Euros was approximately 2.8% and higher.

To put things simply, on the inter-banks market Swiss Francs were cheaper than Euros. For us mere mortals, a difference of one percentage point might not seem like a lot, but in the financial sector it means a great deal.

Since the CHF was cheaper than the Euro banks could hand out larger loans if they did so in Swiss Francs than they could if they used Euros.

For example, if someone needed 100.000 Euros to buy a house, there was a good chance that they would not qualify to get the loan in Euros. The local regulations and the interest rates for Euros would prevent the wannabe clients from taking a loan of 100.000 Euros in Euros.

Some banks used the following artifice: They converted the 100.000 Euros in Swiss Francs (approx. 155.000 CHF at 2006 exchange rate) and because the CHF was cheaper than the Euro (interest rates were smaller), they gave the loan in CHF.

Moreover, since the Swiss Franc was cheaper than the Euro, banks had an incentive to use it in the loans they handed out since they could acquire the capital at lower costs.

At first glance, this was in the clients’ advantage because it allowed them to buy whatever they wanted, say a house, and it provided better loan conditions (smaller interest rate).

In more depth, this was a time-bomb for clients. Switching from Euros to Swiss Francs completely changed the game (not only the rules of the game).

To a regular bank client, the change between CHF and EUR might have looked like some mumbo-jumbo financial bullshit that didn’t change too much what they wanted – buying a house / car. After all, it’s just a difference in some letters.

And here is where all things went bad.

I believe that many regulators have no idea on how decision-making works. They believe that people are well informed, understand risks, think hard before signing anything, make tremendously complicated calculations to see all possible scenarios.

Banks hid behind the fact that their contracts were very clear… Which is more or less true. But what is not said is that the contracts were often signed on the spot, often without being read. OK… this might be the client’s fault, but not entirely.

When signing a contract for a bank loan, the client usually doesn’t give a damn about the loan conditions. The client wants the thing she wants to buy with the money from the loan.

Scarcity, cognitive overload, fatigue, emotional load - finally having you own house etc. make the future financial consequences seem insignificant at the moment of signing the documents.

Add to this present bias the fact that the banks were not providing working scenarios with how much one will have to pay depending on fluctuations of the exchange rate and of the interest rate.

The true poison was (is) that the banks took zero responsibility (risk) during the execution of the loan contract.

The interest rate for the loan was not fixed… this is not necessarily surprizing for a 20-30 years loan. The problem was that there was no clear formula for computing the interest rate for the loan such as Libor+2 percentage points. It was the banks privilege to set the interest rate for the loan during the contract (20 years!!!!).

The client had to return the loan in the currency in which it was given, in this case the Swiss Franc. This means that the exchange-rate risk is entirely in the client’s backyard.

So, a client who wanted to buy a 100.000 Euros house, took a loan in Swiss Francs of 155.000 CHF. The client had to take the risks associated with the Libor level for CHF plus the banks (arbitrary) margin. The client had to take the risks associated with the exchange rate between the CHF and the Euro and the exchange rate between the Euro and the national currency (since their income was in the national currency).

On the other hand, the banks took no risks, except that of people not being able to pay their loans… but, in Romania, even if you lose everything you have to the bank and this doesn’t cover the debt, you still have to repay the remainder of the debt.

So, on one hand the banks gained market share and their employees were incentivized to do so. On the other hand, the clients took on huge risks that were conveniently not shown clearly.  

So, what is the solution?

The solution, too, comes from the same Nasim Taleb: Skin in the Game or Neck in the Line.

In a nutshell, when dealing with risk, especially compound risk – having more risk factors combined – both (all) parties have to share the responsibility and outcomes (consequences).

Indeed, clients who signed loan contracts without understanding what they involve are responsible.

At the same time, Banks who promoted – encouraged loans in Swiss Francs are equally responsible.

I believe that banking regulations should introduce the Skin in the Game principle in all contracts (past, present and future).

If an institution has an incentive to expose their clients to compound risk, then the same institution should take responsibility for the consequences of those risks.

It is easy (and fun) to play Russian Roulette when you are pointing the gun to someone else’s head.

This is what happened with the poisonous Swiss Francs loans and with other toxic financial products.


16 January 2015

The Shortcoming with Liking (other people)

It's only natural to like people who tell you what you want to hear.

Yet, these people are not the ones who will help / make you develop - progress.

If anything, they are the people who will hold you back.

Nonetheless, you will be happy and (firmly) believe, even congratulate yourself, that you chose the right crowd.

(Apologies for the blunt honesty) 

11 January 2015

Reason to Believe or Reason to Not Doubt?: A Behavioural Science Perspective on Branding

In branding and, more specifically, brand communication there is the concept (element) called reason to believe.

In a nutshell, reason to believe is the argument supporting a (the) claim made by a brand.

For example, a product line from the cosmetics brand Nivea claims to help women to prevent / reduce wrinkles. This sub-brand is Nivea Q10 or Nivea Q10 Plus.

The claim of helping with wrinkles is supported by the argument (reason to believe) that these cosmetic products have the Coenzyme Q10.

If we see people (consumers) as rational agents, the marketing / branding communication endeavour should go as follows:

The brand makes a claim – promises a benefit for the consumer. In the example above this is dealing with wrinkles.

Next, the brand backs this claim with a very strong rational argument:

The brand helps you with wrinkles because it contains the Coenzyme Q10.

It is (more or less) assumed that the target audience – the consumers – know what Coenzyme Q10 does and acknowledges its benefits.

In behavioural science jargon, this communication endeavour is focused on convincing System 2 that the brand claim (promise) is genuine and backed by strong arguments.

At first glance and holding in mind an idealistic view of human nature, this logic makes sense. Our consumers are rational agents and we (the marketers) need to convince them that what we promise will actually happen to them.

Nonetheless, this is (almost) completely wrong.

We know that people have two systems of judgment, quite unappealingly named System 1 and System 2.  We also know that the default way of reasoning is System 1 which is based on relatively simplistic rules of judgment (heuristics). System 2 is the number crunching, rational arguments and effortful reasoning way in which we process information. And System 2 is called “2” because it is the secondary judgment system. To put things simply, it needs to be activated.

What is often ignored in presentations, talks, books etc. on System 1 and System 2 thinking is how these judgment modes interact. I will not develop the topic here (I did it in my first book It Makes (No) Sense). What is relevant for this post, is that System 1 and 2 work together in detecting serious anomalies in the information processed. They work like a smoke (fire)-detector. If things are within tolerable boundaries, nothing special happens. However, when there is smoke, the alarm is activated and System 2 starts checking for problems.

Going back to branding communication, talking to System 2 by presenting solid arguments to back-up a claim (promise), is deeply flawed for two (major) reasons. First, System 2 might very well not be activated, thus the communication effort might very well fall on deaf years. Second, more often than not (and more often than we like to admit) marketing communication should not talk to System 2. This is because System 2 might wake up and start looking for problems in the claim and its backing… and most often it will find enough of them.

So, what about reason to believe?

If we are to adopt a behaviourally informed marketing approach, we should see the Reason to Believe as Reason to Not Doubt.

I know, it sounds a bit awkward, but give it another few minutes.

While on the surface reason to believe and reason to not doubt might take the same form (shape), in depth they are significantly different.

Reason to not doubt is that plausible (enough) argument that makes you (the client) not doubt what the brand is claiming. In other words, it is that piece of information that keeps System 2 sleeping.

Sometimes (too often, if you ask me), Reason to Not Doubt is more of a smoke screen or as we say in Romanian Dust in the eyes, that makes the bull-shit detector (System 2 in a critical mode) not activate.

I will come back to the Nivea and the Coenzyme Q10 example and explain how reason to believe is, in fact, Reason to Not Doubt. But, first, I’ll explain the point with an example from the dating world.

Let’s assume that He and She had some initial (social) contact. He calls Her to ask her out on a date. She is not very impressed by Him and wants to reject Him.

Knowing this, let’s assume that He calls Her to ask her out.

“Hi (a lot of bla bla) … Would you like to go out on Thursday?”

She answers: “No”

Now, in His mind the alarm system is activated. Why isn’t she willing to go out on a date? Did I make a bad impression? Doesn’t She like me? You can figure out the rest.

But, as we know, ladies want (usually) to reject gentlemen in a rather soft manner.

Now, let’s assume that She answers with:
“Sorry, I can’t. I’m busy”

The “I’m busy” part is (sort-of) a Reason to Believe. But as most of us know, the “I’m busy” is not a very plausible reason why She is not willing to go on a date.

O.K.  Now, let’s assume that She answers with:
“I can’t go out because I’ll be with my boyfriend and he’ll not be very happy if I would cancel and go out with you instead”

In this case, the thought going through His mind will be: I’m barking at the wrong tree. There will be no doubt that she is not an available mating partner.

But here’s the thing / beauty of Reason to Not Doubt.

He doesn’t know if She really has a boyfriend, or even if She does, there is no certainty that She will be with her boyfriend at the suggested time of the date. Nonetheless, 99.999% of Hes will not actually investigate whether She said the truth. He will simply back-off because there isn’t any reason to doubt her claim …

Things are relatively similar in the marketing communication endeavours. If a brand simply makes a claim such as It helps you with the wrinkles, the immediate reaction might very well be: Yeah! Sure… I have never heard that before.

When backing a claim such as It helps you with the wrinkles with a Reason to Believe such as because it contains the Coenzyme Q10, the consumer should know or search what the Coenzyme Q10 is and does – what are its effects.

Just as a note, I tried reading about the Coenzyme Q10 here, but I couldn’t understand a thing and I guess that the huge majority of people in the target audience do not understand too much… though I might be an exception since I was a very bad student in organic chemistry.

But more often than not, the people in the target audience will behave like the guy asking for a date when faced with I’ll be with my boyfriend. It is plausible enough to not doubt the claim.

On the surface, the fact that we should not give Reasons to Believe, but give Reasons to Not Doubt might seem like a nuance. However, there are profound differences and huge implications for marketing communication.

I hope I gave enough reasons to not doubt my claim ;)  

You should visit my website www.naumof.com because you liked what you read ;)

9 January 2015

Re-Design Banking & Insurance

At the end of November in 2014, I gave a session of Re-Design Banking & Insurance seminar to a group of intellectually curious bankers.

It was a very pleasurable experience and I was happy that the participants were open to my (a bit wacky, for banking standards) approach.

One participant said after the seminar:
Nicolae made us think about things we always take for granted.

Another participant said something that made me feel very happy and very proud.  

Nice how he got to the point without bullshitting around it. With every point.

The organizer of the event said about the Re-Design Banking & Insurance seminar I gave:

Nicolae delivered more than promised: content to reflect on, presentation to learn from and takeaways that the group took home to work on right away.
Jeroen Nas

You can take a look at the presentation of Re-Design Banking & Insurance seminar enjoyed by more than 20 intellectually curious bankers here: Re-Design Banking & Insurance seminar.

5 January 2015

Applied Behavioural Science the Istanbul Way

At the end of 2014, my beloved wife and I spent six days in Istanbul. Apart from the traditional touristic attractions, which are truly astonishing, I was amazed by the high level of applied behavioural science techniques used by businesses, at least in the touristic area of the city.

Most likely the people who use these techniques have not studied behavioural science. I seriously doubt that many of them even finished high school. Yet, when it comes to deploying sales and marketing techniques rooted in behavioural science, the merchants in Istanbul are better than many people who have studied this beautiful branch of science at Master or PhD level.

Personally, I realized that I could have learned most of what I know by working six months in Istanbul: 2 months in a restaurant, 2 months in a shop and 2 months at the Grand Bazar.

Here are some examples I encountered:

1. Establishing liking and similarity and the use of the Representativeness Heuristic.

Many merchants, including street vendors and restaurants, use the representativeness heuristic in order to choose the language in which they approach people on the street. In my case, I heard lots of people approaching me in Russian. Yes, I do quite look like a prototypical Russian, but I am not.

In addition, a lot of the people whose job is to bring clients from the street, approach passers-by with “My friend”. 

As Cornelia (my wife) said, We never knew how many friends we have there …

Moreover, the majority of merchants speak some very, very basic level of most languages that tourists speak. Not seldom, I was greeted in Romanian and once, we even spoke in Romanian with the seller who was quite fluent.

Another way of establishing liking used by merchants in Istanbul is the universal language of football (soccer for readers who wrongly believe that football is a different game). Usually, tourists are asked by vendors where they are from. 

The moment one answers the question, the merchant replies with names of footballers from the country the tourist is from.

In the case of Romanian football players, the Turks know quite a large number of names, but this is mainly because many Romanian footballers played in Turkey. Usually I got: “Hagi, Popescu, Filipescu, Ilie” (all played at Galatasaray).

Once I said that I am from The Netherlands and the only name I got was “Dirk Kuyt” … kind of thin considering the large number of famous Dutch footballers.

2.  Making things easier and simple.

I could write a lot on how the merchants of Istanbul make it simpler for tourists to spend money, but the one thing that impressed me the most was that in many restaurants and shops had especially employed people to open the door once a passer-by stops even for one second in front of a shop or a restaurant.

3.  Choice architecture and leaving a tip twice.

In restaurants, I noticed that the staff was well versed in encouraging customers to leave a tip twice. The custom in Istanbul is to leave a tip of about 5-10%. Some restaurants include the tip in the bill. For example, if the food and drinks amount to 64 Turkish Lira (TLR) there is another 6 Lira added for service and the total is written in large fonts 70 Lira.

Since the bill is written, usually, in Turkish and most tourist customers look only at the total, sometimes they leave another 5-10 Liras as tip, even if the service was included in the initial bill.

What I found fascinating was that at one restaurant which included the service in the bill, the change came in a particularly interesting denomination. For example, if the bill was 64 Lira, the total was 70 with 6 Liras for service. If the client paid with a 100 Liras banknote, the 30 Liras in change was brought as one banknote of 20 Liras, one banknote of 5 Liras and five coins of 1 Lira. This encourages customers to leave 2-3 Liras (in coins) as a tip, even if the service was included.

4.  Endowment effect

Quite a few times I was approached by people working at restaurants with the following phrase:

“Sir, your table is right here on the terrace”.

Now, who would want to lose their table?

5.  Physical environment influences and apparent reciprocity.

After the first night spent in the hotel, we came back from our sight-seeing and noticed that on the night stand there was an envelope with “Tip Box” written on it.

Subsequently we noticed that virtually everywhere there were tip boxes.  

Another interesting use of environmental influences was that in all restaurants and shops the temperature was quite high. It was December when we visited Istanbul, but the weather was quite OK and it is nice to eat or shop in a warm environment, but I don’t think that sweating is necessary. Nonetheless, a higher room temperature is always good for spending money.

In some restaurants and shops the customers are offered tea or a small desert (Turkish delight or baklava). This is not exactly free, but the staff gives the impression that they do it especially for you. Subsequently the likelihoods of purchasing and / or leaving a larger tip increase.

6.  Anchoring and mocked bargaining.

Yes, Bargaining is part of the touristic experience in Istanbul. And the Grand bazar is the most appropriate place to do so.

The thing is that the merchants in the Grand Bazar and, in fact everywhere in Istanbul, are more versed in sales and bargaining than all the tourists put together.

We looked at an artisanal coffee set as a gift for my parents and I asked how much it was in Euros. The merchant said:

“Normally it is 80 Euros, but now because it is winter and there aren’t many customers in the bazar it is only 50 Euros”.

The Grand Bazar was not packed with tourists, but it wasn’t empty either. We managed to get the coffee set for 46 Euros, but when we arrived home we realized that it only looked like copper … it wasn’t real copper... it was painted with a copper like paint...

7.  The honest cheater (?)

It was quite late and after a 4 hours flight, 3 hours delay and a crazy half an hour taxi ride on the streets of Istanbul, we were quite exhausted and happy that we finally arrived at the hotel.  

The gentleman at the reception was very welcoming and gave us a 5 minutes crash course on how we will be cheated by merchants, taxi drivers etc. Personally, I knew that we will be cheated, which is part of the tourist experience in Istanbul.

What I found very interesting, was that at the end of the micro-lecture the gentleman said, with the aura of a concierge, that if we want to buy anything – leather, gold, carpets etc. – we should ask him and he will recommend some honest shops…

This got me wondering about the commission system that I believe works very well in Istanbul. Although I have no proof to doubt his honesty, I had a feeling that everything he said could be reframed as:

“We don’t want others to cheat you. We will cheat you and you will have the impression that you got a good deal.”

Well, we weren’t there for shopping and we knew that we will be cheated, at least a little.

Everyone has their limits

On the last full day in Istanbul, we were approached for the zillionth time by a street vendor who was trying to sell us a tourist guide of Istanbul.

He employed the use of the representativeness heuristic: and immediately offered an Istanbul guide in Russian. (I do look like a Russian, but really I am not). I answered that we are not Russians. The vendor, immediately found the next best assumptions:

“Aaa! Ukrainians. I have in Ukrainian”
“We are not Ukrainians”, I answered

And then, the traditional: “Where are you from?” followed.

I was already annoyed enough by the quite aggressive sales techniques, of being mistaken for a Russian for the zillionth time and being asked 30 times a day “Where are you from”… So I said:


The very prompt answer was: “Hai Sictir” which I immediately understood since it is used in (old) Romanian for “Go F*ck yourself”. I guess in Turkish it has the same meaning…

All in all, Istanbul is a great place to visit. We were particularly fortunate that our friend Nejla is living there and we got some local insight. Thank you Nejla!

I wish you all a good 2015!

And visit Istanbul if you want to see Behavioural Science applied in merchant practice… 

Though, don’t bring too much money. The local merchants are very skilled in taking it from you! 

Take a look at my new website www.naumof.com