The Unrewarded, Despised Heroes? On the Deadly Fire in Bucharest Nightclub

Everyone loves a hero… that woman or man who comes to the rescue in difficult and dangerous situations. We praise heroes… we have (action) heroes fiction movies, stories and legends. Presidents, kings and queens hand out medals to people who saved others in dangerous situations. Sometimes, after a hero’s death we erect statues and monuments honouring them.

Last night (30^th -31^st October 2015) at least 26 people died and more than 100 were injured, many with severe burns in a fire in a night club in the city that was my home for 21 years – Bucharest (capital of Romania).

The tragedy was reported by local media, the BBC, CNN and many other international media organizations.

The local authorities’ response was OK, even good, but, nonetheless the tragedy left behind victims and a city of more than two million people in shock.

The firemen, the first aid responders, doctors and nurses all are, in some ways, heroes. They are the ones who came to the rescue, the ones who came to the hospitals in the middle of the night to take care of the wounded who went out to have fun at a concert and ended up scarred for life.

I can’t predict the future, but it is likely that in the foreseeable future the president of Romania will hand out some medals for bravery in the line of duty… and rightfully so.

In hindsight we will know who the heroes are and they will be rightfully praised.

There is, however, a different group of (anti)heroes and I’ll come back to them really soon.

How did the fire happen? The investigation is now in the early hours, so we don’t fully, definitely know what actually happened. Nonetheless, this is not the first tragedy in the world that involved a fire in a night club. Previous cases fit well with the “Swiss cheese” model for tragedies. In other words, there wasn’t one single factor that led to the tragedy, rather several holes in safety overlapped.

Early reports and eye-witness statements include the use of highly flammable materials for sound-proofing the nightclub (i.e. foam, artificial sponge), overcrowding, one fire-exit door being blocked, fireworks that went bad, narrow streets with lots of cars parked that made it difficult for fire trucks to intervene quickly etc.

In hindsight all of these are obvious danger factors. Nonetheless, these holes in safety are not unique to Bucharest nightclubs and there have been thousands of nights of fun that went on just fine despite the (now) obvious hazards.

Let me get back to the other category of (anti)heroes… they are the fire safety inspectors, the bureaucrats that give out permits for such establishments to go into business. There are lots of people whose daily jobs consist of enforcing boring, annoying safety regulations. These jobs aren’t fun! Particularly because many people including business owners find such regulations at least annoying if not obnoxious.

Indeed, business people and home owners want to get things going and complying with (fire) safety regulation isn’t exactly on top of their agendas.

And here come the unwanted, annoying, obnoxious and, most importantly, invisible heroes. The fire safety inspectors, work-safety inspector, building safety inspector etc.

Although we don’t particularly like these bureaucrats with their checklists and regulations, we have to admit that, when it comes to reducing the incidence and impact of disasters, they do a lot more than the praised heroes in saving lives and property. No! These people don’t get the spotlight or the praise of the community, but we should acknowledge their role, particularly when a tragedy strikes… we should remember that many other tragedies didn’t happen because a small, annoying bureaucratic inspector came in to check the application of safety rules in the restaurants, shops, apartment buildings, nightclubs etc. which we have visited in the past.

So, how come this tragedy in Bucharest happened? Again, I don’t fully know the answer. However, I know a thing or two about how things go there… When it comes to rules and regulations, Romania is doing great. The issue is with applying and enforcing them. Maybe the owners of the nightclub passed the safety inspection and then changed some things; maybe they bribed the safety inspector; maybe the business didn’t have the proper permits… there are lots of maybes…

What is sure is that at least 26 people died and at least another hundred were injured. It is also sure that bad design was involved (you don’t put inflammable foam with fireworks in an indoor space).

Beyond finding who is responsible for this tragedy (Romanians are great at assigning blame), I strongly believe that we need to learn from this unfortunate, though preventable, event.

We need to learn that the unappealing, badly paid, obnoxious and annoying fire inspector is a hero – an unrewarded, almost invisible and completely ignored hero.    

Behavioral Science Explains the Failure of Free Markets

Most of you know me as a behavioral science guy, but I have to make a confession: my initial training is in Economics and business administration. Being born in a country with a communist dictatorship, with a centralized economy and spending much of childhood and teenage years in a chaotic backwards transition to market economy, I firmly believed in the virtues for free markets.

Perhaps because of this experience and seeing what free markets can do in a society unaccustomed to how they work, made me think hard if free markets are as virtuous as I thought them to be. And the answer is ambivalent: on the one hand, yes! It is absolutely obvious that a free market economy is far better than a centralized and corrupt one. On the other hand, however, free markets can be extremely perverse and lead to severely sub-optimal results (equilibrium).

Too often free markets fail to achieve the goal of maximizing consumer benefit.

When thinking about the pros of free markets, there are two prevalent assumptions: (1) people (buyers) fully understand what they are buying and (2) people can punish sellers by not buying from them anymore.

When these two assumptions are met and when there is competition among sellers, free markets work just fine.

Consider the example of fruit and vegetables. Anyone can understand what they are, anyone can quickly assess their quality, even if not necessarily before purchasing. Since they are bought frequently anyone can punish a seller by not buying from him or her next time they are shopping. Moreover, if the product is faulty, the damage to the buyer is minimal.

Another similar example is that of hair-dresser saloons (establishments). Anyone can quickly assess if they are happy with their new haircut, with the service provided etc. Although we don’t usually visit the hairdresser as often as we buy fruit and vegetables, the purchase of such services is frequent enough to allow the buyers to punish the sellers by not going to their establishment next time they get a haircut. Again, the damage caused to the buyer if the service is faulty is relatively low (unless it’s your wedding day).

In such situations free markets work just fine with minimal (common sense) regulation.

When the two assumptions of (1) people (buyers) fully understand what they are buying and (2) people can punish sellers by not buying from them anymore are not met, free markets are disasters waiting to happen.

An obvious example is the banking / credit market. For the huge majority of people a loan is a difficult to understand product and not seldom banks (credit institutions) make them even more complicated than they should be. Understanding the exponential relationship between the cost of the credit and the duration of the loan is extremely difficult even for trained economists. Fully understanding the maze of interest rates and fees requires a chess-master’s mind coupled with lengthy deliberation, computations and spreadsheets. The huge majority of people who take loans do not have these abilities or afford the necessary effort and time. Instead they rely on simple / simplistic rules of thumb (heuristics) such as how much do I like the person selling this or which one has the smallest monthly payment.

Since some loans are by their very nature long term (i.e. mortgages), it is virtually impossible for the buyer (loaner) to punish the seller (bank) if the product is faulty. If you consider the duration of 20-30 years for a typical mortgage, you probably realize that many marriages don’t last that long.

Ad: Create banking services that work with human nature, not against it. 

Moreover, if the product is faulty – a loan has hidden costs or other vices, the impact on the buyer is huge. For example, between 2006 and 2008 in Romania (my country of birth) there was a frenzy of loans in Swiss francs. The people who took out those loans ended up paying more than double what they should have repaid because the exchange rate Swiss Franc to Romanian Leu (local currency) doubled. In other words, when the loan was contracted you needed 2 Romanian currency for every Swiss Franc; a few years later you needed 4 Romanian currency for every Swiss Franc. More on this here: http://naumof.blogspot.com/2015/01/the-black-swan-of-swiss-franc.html

Financial products are not the only ones that make free markets produce failures every other year and disasters every (other) decade.

Take the example of medical services. I don’t like doctors, but I have to admit that getting through medical school isn’t easy and becoming a full medical doctor requires lots of learning and training.

In the case of medical services, the client (patient) is almost always completely incompetent and incapable of evaluating the quality of the service. In some milder cases, of course, the patient can see if she recovers or not after the prescribed treatment or procedure. This, however, is not always the case.

Consider a root-canal treatment and a new “fake” tooth. It is almost like a mortgage. It should work fine for ten-twenty-thirty years, but on the moment it is extremely difficult to evaluate. It is very hard for the buyer to punish the seller if the product is faulty simply because quality is very hard to evaluate and purchasing is infrequent. Moreover, the quality of a good (root-canal) treatment includes the durability of the work.

Naturally, in case of faulty medical products (services) the impact on the buyer’s well-being is huge.

Some might disagree with me on the points made above, particularly on the medical services. Some might say that they are capable of properly evaluating the quality of medical services. In fact, in many countries, patients are asked to evaluate the doctors who treated them.

Patient evaluations are a vicious by-product of free market thinking. It is well intended, it makes some sense and it is absolutely wrong.

Without proper medical training it is extremely difficult to assess if the doctor did a good job or not. As in the case of (long term) complex loans, even people with specialized training find it difficult to properly evaluate the quality of the product or service.

Why do some people believe they can evaluate the quality of medical services?

These people do not evaluate the quality of the actual medical procedure – the medical act. They are evaluating, at best, reasonable proxies.

For example, someone who had a root-canal treatment can evaluate how clean and modern was the dental clinic (i.e. general aspect); she can evaluate how much pain she was in; she can evaluate how the doctor and staff treated her and how much empathy they shown.     

All of these are, at best, correlated with the quality of the actual root canal treatment procedure. It makes sense to assume that doctors who give a lot of attention, put in a lot of effort in the actual medical procedure would have nice looking practices, while those who don’t give a damn on their work would do the same with the aspect of their practice.

But this is, at best, a correlational, not causal relationship.

Behind these (quality) evaluations is a cognitive process called “attribute substitution” in which we answer a difficult question with the answer of an easier one. When asked the difficult question of what was the quality level of the medical procedure you went through, people give the answer to the easier question of how they felt about it (during).

People can evaluate how they felt – the quality of the experience, not the quality of the medical procedure.

Free markets and a free market way of thinking (e.g. incorporating patient evaluations in doctor’s compensation) can create vicious situations that are clearly not maximizing the benefit of the buyer.

Patient evaluation and free markets in the medical services can lead to situations in which a competent, but grumpy doctor is overtaken by an incompetent, but very agreeable one.  

Free markets fail when it is difficult for the buyer to assess quality and it is extremely difficult to punish the seller for faulty quality of the merchandise may it be goods or services. 

Shooting Yourself in the Foot with Focus and Loss Aversion

My wife and I are (re)visiting The Netherlands for a few days and we rented an apartment via booking.com. When we arrived, the owners asked us to pay the city tax in cash since they didn’t want to pay a processing fee to the credit card company. You can imagine how that felt like, particularly after 24+ hours without sleep and a trans-Atlantic flight.

Just to be clear, the city tax is about 15 Euros. I’m not sure how much they would have had to pay for the payment, but even a fee as high as 5% would have resulted in a cost of less than one Euro.

Unfortunately, this is not the only situation I encountered in which (small business) people shoot themselves in the foot because they focus on avoiding (small) losses on narrow mental accounts.

Some restaurant owners want each and every table (seating) to be profitable and, occasionally, become sales-aggressive or impolite.

A print-shop owner stopped handing out candy because someone took a hand-full from the candy jar.

A business owner wants to make a profit on each and every transaction, thus refusing to make some small deliveries.

A small-shop keeper refuses to install a bankcard-payment POS because the bank charges him 3% of every transaction.

Each of these examples makes intuitive sense: nobody likes to lose money.

The focus on making a profit on each and every transaction might sound like good management, but it simply isn’t.

Each such decision is like shooting yourself in the foot and later wonder why you can’t run.

Sure, a restaurateur might squeeze another few dollars or euros from a client, but there’s a good chance that person will never set foot again in the restaurant. A shop keeper will avoid paying the bank the transaction fees, but some existing clients might start avoiding the shop, while potential clients will not even consider it since they can’t pay with their bankcards.

You might think that such problems occur only for small businesses, but this isn’t exactly the case.

Let’s do a thought experiment:

Imagine that a friendly alien comes from the sky and proposes the following gamble: a fair coin will be flipped and if the space-ship side comes up, you will win 150$, while if the other side comes up you will lose 100$. Each side has a 50:50 chance to come up.

Would you take this bet?

I’m not sure what you would do, but I have shown this situation to hundreds of participants in my training programs in applied behavioral economics, many of them in pretty large businesses.

Only about 10% of them say that they would take this bet. For all the others, taking a bet in which you can either win 150$ with 50% probability or lose 100$ with 50% probability is unacceptable.

This holds even after I compute the expected value of the gamble (which is +25$)

One participant asked me if the bet is played only once and I answered yes. He said that if it is only once he doesn’t take it, but if it would have been played several times, he would take it.

Here’s the key: if you play this bet several times, on average your chance of overall gaining money increases, even if you will sometimes lose. If you play ad infinitum it is certain that you will end up gaining money.

Imagine a conference room with 20 people having to decide if each of them would take the above mentioned bet. If all of them are from the same company, it is like the group (company) would play the bet 20 times.

Up to now, no one realized this. Every person makes a decision on their own and, usually, the decision is to not take the bet. Overall the group (company) loses because everyone thinks individually…

I am not criticizing anyone, but it might be a good idea to take a look on the rewards and penalties systems. If, during an evaluation period of one year, an (each) employee has to make one such decision she will most likely not take the risk because there’s a good chance (50%) that she will lose money for the business and her evaluation will be bad, her bonus will disappear and so might her job.

Small businesses shoot themselves in the foot because they focus on avoiding loses on each and every transaction.

Large(r) business shoot themselves in the foot because they focus on evaluating each employee / department / manager etc.   

Behavioral Science Meets Marketing Communication and UX Design

On September 21^st I gave two workshop sessions on how behavioral science can improve marketing communication and UX design, respectively.

I very much enjoyed giving the two half-a-day workshops to the very nice audience at LiveHealthier – a corporate wellness company just North of Washington DC. Both workshops were well received by the audience in both enjoyment of the sessions and usefulness.

Here’s what Amy Troop SVP, Consumer Experience at LiveHealthier said about the training:

Nick Naumof conducted two sessions for our consumer marketing and product development teams on applying the theories of behavioral science to marketing communications and UX design.

Participants found it to be time well spent and came away with immediate applications for the learnings in their day-to-day work.

Thanks, Nick, for all your efforts in crafting a meaningful program for our team!

Thank you Amy, Demetrius and Sasha for the great support in organizing this session! Thank you to all participants who made the day delightful.

Here you can find details on my Learning Programs on how behavioral science and behavioral design can make your products & services work with human nature.

You can take a look at my dedicated programs on behavioral design for banking  and health & wellness.

The Nudge is Not Enough! The Love Story Between Behavioral Science and Practical Applications

A couple of weeks ago I published this post on BehavioralEconomics.com 

Thank you Alain Samson for the invitation.

A romantic relationship goes through various stages from early dating to marriage and, in about half of all cases, divorce. It begins with flirting and continues with that essential first date. If that goes well, it is followed by more dates. If things go OK and the chemistry is good, the relationship will go to the next level: one partner offering the other a shelf in their closet. Sooner than many realize, this leads to the natural question of Why pay two rents? followed by a de-facto living together. After a while, one of the partners pops the BIG question: Will you marry me?

The relationship between academic or theoretical behavioral science (let’s call him THEORY) and applied behavioral science (let’s call her PRACTICE) is not much different from a romantic relationship.

It was quite hard for THEORY to get that first date with PRACTICE, but luckily it happened.

In hindsight, the seminal papers of Kahneman and Tversky on heuristics and biases and on prospect theory published in mid and late 1970s were not enough, at the time, to get PRACTICE to accept the first date.

Fortunately, after about 20 years of flirtation, that first date happened. It was in mid and late 1990s, when Thaler and Benartzi developed and analyzed early implementations of the Save More Tomorrow program which helped (American) employees to save more for retirement by bridging the intention-action gap. In very brief, at every pay raise a person’s savings rate automatically increased (e.g. from 3% to 4%). The automated escalation of savings rates helped most people keep their commitment to save more, while the coupling with pay raises eluded the miserable feeling of losing money out of one’s current paycheck (i.e. loss aversion identified by Tversky and Kahneman).

Occasional dates happened between THEORY and PRACTICE after that, but neither side was taking the relationship too seriously.

The book Nudge (2008) by Cass Sunstein and Richard Thaler showed that THEORY and PRACTICE have a shot at a serious relationship. The establishment of the Behavioral Insights Team (UK Nudge Unit) in 2010 was equivalent to PRACTICE offeringa shelf in its closet to THEORY. As in any romantic relationship, THEORY brought in more and more of its things into PRACTICE’s apartment. Now in 2015, they have (almost) de-facto moved in together.

Throughout their relationship, THEORY and PRACTICE have enjoyed making nudges… those small, relatively inexpensive, supposedly irrelevant changes in choice architecture that lead to potentially large changes in behavior – tax collection, college enrollment rate, savings rate, sales etc. Simply put, nudges are small changes that have a large impact on behavior. The result of THEORY and PRACTICE’s union.

However, the Nudge is Not Enough!

Indeed nudges or behaviorally informed interventions have (considerably) improved several areas of public and private services. Most of the time, these small interventions are more than welcomed. Simplifying and structuring choice related information is great simply because everyone hates filling in endless forms and making complicated choices between things they are clueless about (such as Ethiopian food).

Nudges are, most often, great! Nonetheless they are not enough.

The shortcoming of nudges is that most often they are simply tweaks augmenting a pre-existing service or policy.

While they can be beautiful, intriguing and occasionally elegant, nudges are just augmenting (improving) an existing service / policy regardless of that service’s (policy’s) quality, appropriateness or fitness.

For example, an education institution optimizes the choice architecture of its forms in order to smooth the actual application and enrollment processes, resulting in more students joining the institution’s programs. This nudge does not change the service provided. The additional students will attend the exact same courses, go through the exact same stages (from enrollment to graduation) as before the nudge was applied. While for the additional students who joined because of the improved choice architecture attending more education might be beneficial, it is possible for them to be rather unhappy since the courses might be boring and irrelevant.

Getting more people into schools or other forms of (adult) education is generally beneficial for everyone involved. We can use behavioral science insights to increase enrollment and decrease drop-out rates. But what if we could use the same knowledge to design better education services?

For example, night-school or other forms of evening-learning are rather popular among adults. However, after a full day at work, System 2 is fatigued and self-control resources are almost depleted. Therefore, it might be a good idea to adapt both the content and teaching methodology to this cognitive reality.

Applying nudges to traffic tickets in order to increase payment compliance (i.e. voluntarily paying the fine) will not solve the issue of traffic safety. If anything, it will continue to feed a carrots-and-sticks approach to influencing human behavior. What if we could use existing knowledge in behavioral science to design safer roads? OK. That would cost a lot of money and will take a lot of time. But what if we could (re-)design insurance services that encourage safer driving behavior?

It is time for THEORY and PRACTICE to take their relationship to the next level: from Nudging to Behavioral Design.

In his book “Slim by Design” Brian Wansink says: it is better to work with human nature than against it. The main thesis of his book is that instead of emphasizing on counting calories and self-control reliant diets, it is much better to (re-)design eating spaces, homes and shops. This way, eating better (healthier) is the natural thing to do and not an eternal fight between temptation and self-control.

In the same line of thought, we can design public policies and (private) services that work with human nature and not against it. While nudges add a (thin) layer of human-friendliness, these behaviorally designed policies and services incorporate behavioral science knowledge in their very core.

Car Insurance

Insurance companies truly and deeply hate when their clients have car accidents, leading to expensive repairs, because insurers have to pay the bills. Although this is the very nature of the insurance business, your insurer would love to take your risk of minor accident from 2% to 1.9% and/or have to cover the damage of a broken bumper than that of a full-frontal collision, while at the same time keep on charging you the same $400 / 6 months.

To some extent, behavioral design can create a car-insurance service that promotes safe(r) driving behavior. Part of the risk is purely random, while another part is (to some extent) related to behavior. Behavioral design can address the latter. Car manufacturers are already doing a lot to prevent drivers from not wearing a seat-belt or driving way above the speed limit. Insurance companies, too, can contribute to encouraging preventive behavior.

For example, in Europe cars need to go through regular maintenance and mandatory checks. An insurance company has the possibility of sending out customized reminders (nudges) when the check date is near. Such an approach will decrease the risks associated with unfit vehicles on the roads. Similarly, insurance companies can provide as a default option tracking devices that monitor driving behavior, provide real-time feedback, implement social-benchmarking on risky driving (e.g. 63% of drivers drive safer than you) and offer financial incentives (i.e. lower rates) for safe driving behavior. Moreover, the device can locate the car if it is stolen.

Health and Well-being

Health is a broad area in which nudges are popular — and for very good reasons. There are many examples of nudges for hand-washing, treatment adherence, in-store interventions for purchasing vegetables etc. The major challenge is to design health insurance and health-care services that incorporate behavioral science knowledge in a systemic manner.

As in the car-insurance situation, health-insurance companies (public authorities) hate having to pay large bills on treatments for conditions that could have been prevented or are delivered in a sub-optimal manner (e.g. emergency rooms overcrowded by non-emergencies).

For example, the treatment for diabetes is quite expensive and has to occur for a lifetime. Promoting more appropriate eating behaviors in order to prevent the disease actually makes (economic) sense for health-insurance companies (authorities). Nudges can be useful and are welcomed. However, things are a bit more complicated; simple augmentations of pre-existing frameworks might not do. Rather complex preventive programs that have behavioral science at their core are needed. Texting individuals in high-risk (of diabetes) populations reminding them to eat more fruits might be useful. However, a more direct approach such as fruits for junk-food exchange program might do more. Services that provide regular home-delivery of easy to prepare (eat) healthier food already exist (e.g. Hello Fresh) and can be an inspiration for preventive health services provided by insurance companies.

Another behavioral design approach to decreasing health-related expenses and increasing health well-being is to improve the financial well-being of the most vulnerable population groups. It may seem a bit awkward for a health insurance company (authority) to care about the financial well-being of the poor. However, health and financial wellbeing are inter-related to some extent. Moreover, a critical situation in one will lead (sooner or later) to serious problems in the other.

Unlike middle class or more affluent people, the (very) poor cannot absorb financial shocks such as car-repairs, replacing a broken fridge etc. Short-term money lenders are eager to offer loans for such emergencies, but the interest rates are skyrocketing (e.g. 500% per year). Since most of these individuals live from one pay-check to another it is virtually impossible to repay the loan, leading to a vicious cycle of debt and misery. When caught in such a debt-trap, it is very likely that some will neglect their health, eat cheaper and less healthy food, work 16 hours a day etc. All of these behaviors will, ultimately, result in health problems and high healthcare bills.

Offering financial safety-nets for vulnerable categories might be a good idea for preventing serious health-problems and subsequent large medical bills.  One solution would be to offer emergency small loans (e.g. up to $1000) with zero interest that would be repaid throughout one year in the health-insurance bill.

Applying nudges – augmenting existing service or policy frameworks – constitutes considerable progress similar to that of going from dating to de-facto living together in a romantic relationship.

Since the relationship looks and feels good, there is no reason for not taking it further. Behavioral science is so rich in potential applications that we should not restrict ourselves to highly effective, yet superficial, applications.

Soon the time will come to ask the BIG question:

Will you do Behavioral Design with me?

Check out my new website www.naumof.com 

The Short Bucket List: A tool for making memorable gifts

This week I attended a Design Thinking workshop in Washington DC. The aim was to improve the gift giving experience. As I am quite bad with picking gifts, I had a chance to work on a tool that would help me and others who face the same challenge.

 While gifts are usually material objects, probably the most memorable gifts are the experience ones such as learning to fly an airplane, parachute jump etc.

Many people have “Bucket Lists” – things to do before they die.

So, I created this prototype of a tool for making memorable experience gifts.

The gift giver asks the future recipient of the gift to fill in this short bucket list with up to 5 things they would like to do before passing away. (Each item on the list is written on a post it)

Subsequently, the items on the list are removed from the piece of paper and put into the “Randomizer”

After mixing the options, one is picked at random and that is the gift:

Now the gift giver knows what to offer as a gift, the gift receiver doesn’t know what she will get – surprise element, but she will get for sure something she wants because she picked the options.

The gift giver has the option of sharing the experience with the receiver (e.g. do a parachute jump together).

Of course, the gift giver can cheat and draw again if she doesn’t like what was randomly selected.

Naturally, everything could be done digitally. 

Explicit and Implicit Physical Cues for Social Norms

In many models describing human behaviour, including my own 4D model, social influences and the physical environment are seen distinctly. However, there are situations in which there are physical cues of social norms.

Sometimes these cues can be explicit and prescriptive. They are physical objects that clearly state what the (formal) norm is. In this example, the signs clearly means: 

Your dog shouldn’t poop in my front yard.

Other times, elements of the physical environment represent cues of descriptive social norms. If there’s trash on the street, then it is socially acceptable to throw some more trash. 

The presence of lots of cigarettes buds suggests that

 it is OK to smoke here.

Which one do you think is stronger? The Explicit Prescriptive norm or the Implicit Descriptive Norm?