This One is Clearly Better than That One - The Attraction Effect

If we have to choose between a situation where there is only one option and a situation where we can choose for ourselves out of several options, we will prefer the second situation and for good reasons.

Imagine that you live in a country under a dictatorial regime and in order to keep the appearances the regime organizes elections. At the same time for president there is only one candidate and for parliament there is only one political party participating in the elections. It doesn't take a genius to figure out that you – who are living in this country – will not be very happy with the situation and you would like to have to choose from more than one option.

It goes similarly for other areas of our lives. We like to have to choose from a menu at a restaurant, we like to choose from multiple options for mobile phone plans and we clearly want to have more options for our summer vacation. We like to make choices. I have discussed in previous posts that having more choices is not necessarily good , but it is clear that in most areas we like to make our own choices.

What we are less aware of is that in many instances the options we have to choose from can and do influence our choice. In theory it will be ideal to have virtually an infinite number of choices, but in real life it is not so. For example if you’re going out for dinner at a restaurant, regardless of what you choose from the menu, you’ll end up eating something that that restaurant sells and the cooks at the restaurant know how to cook.  To make this a bit clearer… if you go for dinner at a “Pizza and Pasta” restaurant, you will make your choice out of the generous (or not) menu. What is for sure is that you will have for dinner a type of pizza or a type of pasta and you will not have steak or stew.  

The choice set we are presented with clearly influences our choice. The choice set may only restrict our choice as in the pizza and pasta example or it can in fact guide our choice to a particular option.

One way of guiding choice towards a particular option was presented in the post “Not too… but not too…” 

In this post I’m going to present another influence that the choice set has on our choice. This is called the “Attraction effect”. To better illustrate this I’ll use an example from Dan Ariely’s book “Predictably Irrational”.

A newspaper has the following options for subscription:

Option A: On-line Only (Newsletter + access on-line to the current edition and archive): 49 Euros/year.

Option B: Print and On-Line (Printed Edition + Newsletter + on-line access to the current edition and archive): 100 Euros/year.

What would your option be?

In this scenario about 65% went for the On-line Only option (option A) and about 35% of people went for the Print + Online option (option B).

I guess that most likely the preferences among my readers are roughly the same as in the experiment.

But, now clear your mind and imagine that you are faced with the following choices…

Option A: On-line Only (Newsletter + access on-line to the current edition and archive): 49 Euros/year.

Option B’: Print Only (Printed Edition): 100 Euros/year.

Option B: Print and On-Line (Printed Edition + Newsletter + on-line access to the current edition and archive): 100 Euros/year.

As you can see, options A and B are the same as in the previous case. What is new is option B’, namely Print only for 100 Euros per year.

At first glance this option (B’) has no reason to be chosen since it is clearly inferior to option B. It gives fewer advantages than B (print and on-line) and it costs exactly the same. Most people think about this option in terms like “Who is stupid enough to choose this (B’) when the third option (B) is clearly much better?”

Thankfully, people are not (that) stupid to choose option B’ (print only). But this is rather obvious, right? What is less obvious is how the introduction of a clearly inferior option to the choice set influences the choices for the other two options that were already there. But before I reveal the results, I’d like to take you a bit in the land of Economics.

In the land of Economics there one of the laws is that preferences are stable. So if you prefer A over B in a situation, in any other situation you will prefer A over B regardless of any other options available.

Another law in the land of Economics is that when introducing an additional option in a choice set, the shares of preferences of the options previously in the choice set can decrease or remain constant.

To translate this in normal language, in the previous example where there were only two options: A (on-line only) and B (Print + On-line), the introduction of a new option B’ (Print only) should not lead to an increase of preference share of A or of B.

The reasoning is quite simple. If option B’ is preferred by some people than it will take its preference share form A or B or both. If B’ is not preferred by anyone (which is the case here) there is no reason that the preference shares of A and B should be affected.

Now, I assume you’ve guessed what the results of preferences are in the second situation when the undesired by anyone B’ option is included. The results go something like this: B’ (Print only) had a zero share of preference (no one wanted it); Option A (On-line only) had about 15% preference share and option B (Print and On-line) had about 85% preference share.

If we compare the two scenarios you will see that introducing the clearly inferior option B’ has led to a huge change in preferences. Without it about 65% of people chose the on-line only option (A) and about 35% of people chose the print + on-line option (B). But when the inferior option B’ was introduced, only 15% of people chose the on-line only and about 85% of people chose print and on-line (option B). This is a huge shift…

I would like to point out that this is a huge violation of the economic laws briefly presented above. I will explain what is happening here.  First, we can state that in the first choice set, options A and B can be considered equivalent. If we take the benefits and costs we can say that they are more or less the same and that people can choose what is best for them.

Second, option B’ is clearly worse than option B. It doesn’t take a genius to see that Print only for 100 Euros is worse than Print + On-line for 100 Euros. Even if the on-line option is never used, it is better to have it than not to have it especially that it doesn’t cost more.

What is happening is called the “Attraction effect” (or asymmetric domination). The only real difference between the two choice sets is that in the first one A and B are equivalent while in the second A and B remain equivalent and B is clearly better than B’.  

Since B is better than B’ what is the point of comparing B with A? When comparing A with B it is quite effortful for our brains, but when comparing B’ with B there is no effort, the answer comes quickly and a decision is readily made. Of course it would be rational to still compare B with A but why bother when we know that B is clearly better than B’.

In brief, the “Attraction effect” occurs when in a choice set there is an option that clearly dominates another. Because it is easy to compare a superior and an inferior option we tend to ignore the other options in the choice set. 

The attraction effect becomes stronger when people who make the choices expect to be under the scrutiny of others. Choices of the dominating option are both easy to justify to one’s self and to others and less likely to be criticized by others. In this case the chooser can easily say: “Hey, of course I picked “Print and On-line” since it was for the same price as “Print only””.

A particularity of the “Attraction effect” is that it occurs mainly when the (initial) choices are quite difficult to compare against one-another. If in the previous example options A and B would be easily comparable (such as one is clearly better than the other) there would be no attraction effect.

The key element in the attraction effect is that introducing a dominated option in the choice set makes comparisons easier. Now the chooser doesn’t need to compare against each-other two options that are difficult to compare. Now the chooser can make a simple comparison and not a difficult one, reach a conclusion and subsequently make a choice.

You might think that the Attraction effect is something more of theoretical nature than practical one, but it is not exactly so. On-line shopping is one of the areas where it is used. Imagine that you’re shopping for a laptop computer and you see that there are two roughly equivalent computers that are sold with a laptop bag. It’s hard to decide between, let’s say, Asus and Lenovo with similar configurations. But you see that the Lenovo is also available without a bag for the same price… Should this change anything? In principle you still have to choose between Asus and Lenovo, but now it is clear that to buy a Lenovo with a bag is better than buying the same Lenovo without a bag… and for a couple of seconds the Asus just went out of your mind. Before you know it, you have the Lenovo with a bag in your “shopping cart” and you’re filling in your bank card details.

My dear wife, who works in recruitment, tells me that the Attraction effect is encountered often in her line of work. When they have three candidates invited for an interview (one position available) it happens that one candidate is clearly worse than another, but somehow they can’t figure out what is with the third candidate …

I’ll end with two questions for you. Do you choose what you want? Do you want what you chose? 

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Are You a Jerk? Of Course Not … Character and Situations

If you have a driver’s license and actually drive on public roads you have encountered for sure at least one situation when someone cut you off. Similarly while shopping in a supermarket when approaching slowly the cash register it has happened to you at least once that someone came in a hurry and just went in front of you at the cue. If these things have never happened to you (which makes you an outlier) for sure you were in a situation where a complete stranger had done something that has mildly affected you in a negative way. Someone cutting you off on a street or getting in front of you in line at a supermarket are annoying things, but not really bad.

Most likely your reaction towards the person who caused you this discomfort was something like “this guy is a jerk” or “he’s an idiot / ass h*le”. Your natural reaction is to blame the bad behavior on the person’s character or how psychologists like to call it – personality.

Now let’s make a thought exercise. Imagine that you are on your lunch break and right after you have a very important meeting with your boss (or a client) and it is absolutely vital that you are on time in the office. At the same time you need to get something from the supermarket and you went during the lunch break to buy it. You have 5 minutes to go through the cash register cue and get back to your office. You see that the cue is not long and you are happy that you’ll make it in time. As you approach the cash register you see a middle aged lady approaching the line with a shopping cart full of stuff. Naturally you step your pace and get in line just in front of her. Does this sound plausible? Most likely it does.

Did you do anything wrong? Of course not! The lady throws you an angry look and says simply “JERK”. Now you are surprised because (in your mind) you did nothing wrong. You were in a hurry to get to your very important meeting in time. Plus you know that the lady would have needed at least 15 minutes to place all her stuff on the counter, to complain to the cashier that prices have gone up, to search for her wallet, count the money, count the change twice and so on.

Taking a step back and looking to both situations – someone getting in front of YOU in the line and YOU getting in front of the lady with a lot of stuff in her shopping cart, we will realize that they are extremely similar.  The only real difference is the perspective. In the first situation you would call the person who got in front of you a “jerk” but when you are called a “jerk” you are at least surprised. Are you really a “jerk”? For sure you don’t consider yourself a “jerk”…

What is going on here is two-folded. First, each and every one of us humans needs to feel good about ourselves. We need to live with ourselves and subsequently we need to have a good opinion about us. The bottom-line here is that jerks don’t think about themselves as jerks. Jerks think of themselves as normal or even nice people and “the others” are weird.

Don’t get me wrong, I’m not saying that the person cutting in line is a jerk who has a good opinion about himself. The key idea is that we need to justify our actions. Of course everyone who has received a minimum of education knows that cutting in line is not exactly a nice gesture. At the same time we have a need to justify our actions and the person who got in front of the lady with a lot of stuff in her cart has to justify this action. The immediate and pertinent justification is that he was in a hurry to get back to the office in time for the very important meeting.

The second thing that is happening is that when you are the one doing the unpleasant deed, you become aware of other factors that have influenced your behavior apart from your personality. You KNOW that you are in a hurry. The lady in front of whom you got in line DOESN'T KNOW that you are in a hurry.

When judging someone else’s actions (or behaviors as psychologists like to say) humans infer that the action is a product of the personality (character) and ONLY of the personality of the person who does the action.

When judging our own actions, we become aware of other forces that have influenced our behavior such as contextual factors. What other forces and how they influence human behavior I will present later. The key learning of this post is that someone’s behavior is a product of more factors than just personality (or character). 

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Don't Spend the Rent Money on Shoes - Self-Control and Ego-Depletion

The daily activities of a human can be divided into two broad categories: (1) those which can be done without any significant effort and come quite natural and (2) those which require focusing, are effortful and require self-control.

There are a few activities that belong to the first category for any person. For example each person can walk, sleep, eat, make love, wash dishes etc. without any significant (mental) effort of focusing and exerting self-control. For the other “less trivial” activities there is no clear universal distinction. For example a painter can paint without any effort while an accountant might need a lot of concentration and effort to be able to paint. Similarly, one could be “a natural” on solving complicated mathematical equations, while someone else would need a lot of will-power to only read equations.

I guess you got the picture. There are some activates that come natural for every person, while for other activities some people need self-control and concentration, while other people don’t.  

In order to complete the activities that come less natural, one has to exert self-control which can come in different forms. A severe example is when someone has to deal with annoying (or annoyed) people all day long. That person has to not burst and shout “You’re an idiot and I don’t want to have anything to do with you”. A less severe example is when someone has to perform a repetitive (and boring) task that requires accuracy such as doing the pay-roll in a firm or the inventory in a store.

One particular example of exerting self-control is delaying gratification. In many instances we encounter in life we have to make a choice between a small reward (something pleasant) now and a bigger reward later. Some people are able to delay the immediate gratification and go through something unpleasant in order to get (or hoping to get) the bigger reward later. An example is education. A child could go for the immediate reward of the joy of playing a computer game or go through an unpleasant process of studying in order to get a later bigger reward of a better life as a better learned person.

Exerting self-control is by its nature something that requires mental effort. A very important line of research in psychology has shown that a person’s ability to exert self-control is limited. In essence self-control is a resource and by its very nature is limited. As I have mentioned earlier, there are considerable differences among people with regard to the amount of the self-control resource. In other words, some people have more self-control resources than others. At the same time, this resource is limited for any person… even the people with huge amounts of self-control resources can run out of it.

There is some proof that self-control draws on the body’s energy resources. For example in an experiment people who have run out of the self-control resource were given sugar (glucose for those of you who want to be more accurate) and the self-control ability was restored. Other studies show that “taking a brake” from the task that requires self-control and doing something pleasant (see a funny video) leads to restoration of self-control capabilities.

Another line of research claims that older people are better than younger ones at exhibiting self-control and from my point of view this is not surprising. I believe that it is safe to assume that self-control can be “educated” or “learned” thus leading to a better management of the resources needed to exert it. Other researchers claim that we don’t have a limited amount of self-control, but rather that we shift resources from self-control to gratification.

To sum up how self-control works, the general view is that we can exert a limited amount of self-control given limited energy resources. Whether the cause is that we run out of energy resources or allocate them to other area or simply if we use them faster or slower, the main idea is that a person’s ability to exert self-control is limited. The state when a person is low on self-control resources is called ego-depletion.

When a person is ego-depleted a very interesting thing is happening, namely that the “computer-like” reasoning mechanism is “switched off” and the person functions on the “Bird-brain” mode. When we function on the “Bird-brain” mode, we tend to be impulsive and make judgments based on “rules of thumb” (Heuristics), we tend to go more for the hedonic side and indulge. Another thing that we do when functioning on the “Bird-brain” mode is that we are more likely to cheat and exhibit behavior that is not exactly desired by society.

A nice example of using heuristics when ego-depleted comes from a study of parole hearings in Israel. In this study the only reliable predictor of a prisoner’s chance of getting released on parole was the time of day when he had the parole hearing (when his case was presented to the parole committee).  Prisoners that had their hearings in the early morning and those who had them right after lunch were released on parole more often than prisoners who had their hearings at other times of the day. The interpretation is that early in the morning and right after lunch the members of the parole committee had energy resources available to use the “computer-like” reasoning mechanism and not go with the default option (a common heuristic) of rejecting the application for parole release.

The popular belief is that we have unlimited self-control or will-power or free-will (all different names for the same thing).  Science has challenged this belief and has proven that in fact we have limited capabilities. Now, the interesting thing is that we do not have “accounts” of self-control. But before explaining this, let me give you an image of what having accounts means.

Imagine that your money is all in cash (bills and coins) and that you need to manage it wisely in order to get from one month to another. In order to not “go overboard” with spending you created a management system based on jars. You have a jar for each of your expenses such as rent, groceries, clothes (for the ladies this is a big jar) etc. Whenever you get your monthly income you immediately take the money and place it in the jars. Each jar is an account.

The opposite of this very rudimentary but effective system of managing money, is a bank account and a debit card. There all the money is in the same place and you need to exhibit a lot of self-control to not spend the rent money on clothes or shoes.

For money management we have both mental and physical accounts to help us manage it. For self-control, however, we do not have such accounts. This implies that our self-control resources are more like in a “bank account with debit card” and we risk spending our “rent money” on “shoes”. 

In other words we can use our self-control resources in one area (not telling the client that he’s a complete idiot) and run out of them when we are in a different situation such as renting a car and agreeing with the sales-man’s suggestion to get the 4 wheel-drive one that costs 30 euros more per day than the one we wanted to rent in the first place.

To conclude this post, use your self-control resources wisely and when in need for more self-control have a chocolate. 

The More Choice Options the Better?

Traditional thinking of choices is that the more options one has to choose from the better off the chooser will be. The normative reasoning goes like this: if there are more options then one of them should be in accordance with the needs of the chooser. The chooser is well informed, can process all information available and she knows best what is good for her. In principle this is true that out of many option one is close to the optimal. At the same time, this reasoning ignores the most important part namely the act (process) of making a choice.

What happens when one is faced with choosing out of a very large (let’s say 100) set of options is very important from the perspective of the choice itself and its outcome, namely satisfaction.

The first thing that is happening is that when faced with many options (or with fewer options about which the chooser knows nothing about) is cognitive overload. In simpler language it means that the person who chooses is overwhelmed with information that is difficult to process. When our working memory is overloaded we tend to move to a way of thinking that is associative and un-critical. In easier to understand language our reasoning machine (computer-like brain) is switched off and our “bird-brain” takes over.

Decisions made by this “bird-brain” are very likely to be erroneous if they are not about things that we are super familiar with and or things that we are hard-wired by evolution to be good at such as picking up the best tasting jam.

We might think that we are very good at making decisions about many things and to a certain extent that is true. In modern life, however, we are faced with making decisions about things that are completely unfamiliar with and have nothing to do with our evolutionary hard-wiring. We have to make choices about cars, financial products, central heating and power tools. Apart from a hand-full of people who are highly learned in the features of these items, the rest of us are faced with immense dilemmas.

When using our “bird-brain” we tend to make bad choices and having more options to choose from makes the “bird-brain” to take over. In brief, when we are overloaded with information we tend to use rules of thumb (heuristics in a more sophisticated language) that are very likely to make a suboptimal choice.

Another thing that is happening when faced with (many) choices is the occurrence of regret. Regret comes in two forms: anticipated and experienced regret. Experienced regret is, as the name says, the actual feeling of regret… that feeling that we could have done otherwise and things would have been better. Anticipated regret is when we know that we might experience regret. You have all heard the phrase “You will regret it later”… People are aware of the possibility of experiencing regret at a later time and act in order to avoid the actual miserable experience of regretting something.

The more choices we have in front of us the more we think that other options could be better than the one(s) we are considering and subsequently we think that we might regret our choice. This could lead to making not so good choices but also to not making a choice or postponing the choice.

A very nice example of regret coming into play is the following scenario. A firm decides to reward the best performing employee with a vacation. The firm could simply pick up a destination for the worthy employee and his or her significant other and that would be it. But the HR officer that is handling this project is a believer in the idea that people are better off making their own choices. Unfortunately she can’t set up too many choices, but she is offering two options, namely Paris and Rome. Assuming that a vacation in Paris and one in Rome are overall equally attractive, the hard working employee would be able to choose the thing that best fits his or her needs.

What do you think it is going to happen with the employee that earned his vacation in Paris? The answer is quite simple (assuming that this person has not yet visited Rome) and it is that for the entire vacation there will be thoughts coming through her mind like “I wonder what would have been like if we went to Rome instead?”. Moreover, if something unpleasant happens in Paris, which it does for most tourists, she will think that for sure the unpleasant thing would not have happened in Rome.

In brief, when faced with a choice we will always think how it would have been if we would have chosen one of the other options. Before making the choice we will anticipate regret and after making the choice we would experience regret.

In addition to this if our choice is reversible the amount of regret experienced would be higher. When making a choice and anticipating regret, one option to manage regret is to ensure that the choice you made is reversible. However, if the choice is reversible you will constantly think “should I change the option?” and this will lead to less satisfaction and more worries.

In the case of the worthy employee who chose the vacation to Paris and assuming that at any time during the vacation she could simply “go to Rome” for the remainder of the vacation, this possibility to reverse her decision would be a huge source of unease. She would be thinking “Paris is not exactly what I’ve expected and I’m sure Rome is better… maybe I should go to Rome for the next 3 days, but if I do so, I will have to give up on what I still have to see in Paris and I would not have time to visit Rome properly… oh… what should I do??” Is that something you want to have on your mind during a vacation?

To sum up, having choices is not in itself bad. At the same time having a lot of choices and or having choices that are reversible has downsides for our satisfaction and wellbeing. 

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The Limits of “Carrots and Sticks”

When attempting to influence or guide human behavior in a certain direction the general belief is that there should be rewards for complying, punishments for not complying and a control mechanism aimed at identifying and punishing those who do not comply. In brief it is the “Carrots and Sticks” view. 

In economic terms this “Carrots and Sticks” system is called “The principal and agent problem”. To briefly describe it: there are two actors – the principal and the agent. The principal wants the agent to behave in such a way that the principal’s self-interest is met. At the same time the agent has its own self-interest which is different from the one of the principal. A very common example is the situation of an employee. In this situation the principal is the company (employer) and the agent is the employee. At least in theory, the self-interest of the employer (principal) is for the employee (agent) to work, while the self-interest of the employee (agent) is to not work, but still get the salary.

In order to make the employee (agent) work the company (principal) offers a reward – the salary – and at the same time it threatens the employee with a punishment (penalty) for not working. This penalty is applied if the employee (agent) is caught not working and for this a control mechanism is put in place. Since the control mechanism is not perfect or the employee is cunning there is a probability of getting caught (a probability smaller than 100%).  In some forms of the “principal and agent problem” the agent (employee) has an “outside option” which in our example could be unemployment benefit.

In this economic view the principal has a “production function” which determines what the principal gets if the agent works and the agent has a “utility function” which determines the benefits of the agent. In typical theoretical principal and agent problems these functions are known (don’t ask me how to do that in real life) and the questions are to determine the amount of the reward (salary), the amount of the punishment and the optimal probability of getting caught (calibrating the control mechanism).

I’ve presented this model of carrots and sticks using the example of a working contract, but there are countless examples of it or variants of it being used in day to day life. Take traffic regulations for example. There is no reward for respecting the regulations, but there are punishments for not doing so and there is a control mechanism and inherently probabilities of getting caught that applies these punishments.

From a rational thinking perspective this is the way human behavior should be guided in the desired direction. People as rational agents should be happy with the reward (if any), be afraid of the punishment and comply in order to not get the punishment.

This model is so profoundly embedded in popular culture that every time one hears about something undesirable going on the first reaction is to “Increase penalties (fines and years in jail)”, to “put more police on the street” (which means increase probability of getting caught) and so on. Similarly to encourage certain behaviors (financial) rewards are offered or increased. Just think how much people in top positions in the financial sector receive as bonuses…

The truth is that this model has certain validity in real life, but by far is in no way perfect or even adequate for being used exclusively to guide human behavior. One point of validity of the model is that rewards are useful in stimulating people to behave in a certain way. For example students study harder for an extra point in their final grade and probably would do not do so if there would be no reward - increase in the final grade.  Another point of validity is that fear is a very powerful motivator of human behavior. Fear is deeply rooted in our evolutionary past and we act in certain ways in order to avoid negative consequences.

The week points of the model are four-folded. First, it ignores a vital learning from prospect theory, namely that people underweight average and large probabilities. To put this in easier to understand language people perceive probabilities differently from the objective (numerical) probabilities. For example an objective probability of 40% is perceived (and subsequently used in judgment) as a 30% (subjective) probability. Similarly an objective probability of 90% is perceived as roughly 70% subjective probability. Certainty, namely a probability of 100%, is perceived as 100% subjective probability.

The implications for the principal and agent model are highly significant. The model is based on the agent knowing (or at least guessing) the probability of getting caught. If people underestimate objective probabilities it means that for the agent to perceive for example a (subjective) 60% probability of getting caught the actual (objective) probability has to be around 85%. Moreover, there is research done and or presented by Dan Ariely in his book “The honest truth about dishonesty” that shows that the probability of getting caught plays no real role in cheating behavior. Now, this could be taken with a grain of salt. No one (sane) would commit a crime in front of a police patrol. In front of a police patrol can be translated as probability of getting caught of 100%. Similarly if the getting caught probability is 99% the undesired behavior would be virtually inexistent.

In real life, however, most control mechanisms do not function with 99-100% accuracy, meaning that the probability of getting caught is usually not very high. In my opinion this probability gravitates around 50-60%. Adding to this that people underweight (underestimate) probabilities in human perception the 50-60% chance of getting caught is perceived roughly around 40%.

Second, the principal and agent model makes one major assumption, namely that the control mechanism is costless. In my opinion this is a major mistake for an economic model. In real life control mechanisms cost money and usually a lot of money. Assuming that the current control mechanism costs X Euros and gives an objective probability of getting caught of 40% which is perceived subjectively as about 30%, what would be the cost of increasing the perceived probability to 70%? Remember that the subjective (perceived) probability of 70% means an objective probability of roughly 90%. 

Changing a control mechanism from 40% to 90% accuracy usually involves huge costs. Moreover there is a question of availability of resources. For example “putting more police on the streets” implies that there are people who are trained to be police officers (or agents) available on the labor market… now this is quite hard to believe, right? Doubling the police presence on the streets of a city is not very easy unless one would agree to have police people who are not properly trained.

One might say that the costs of increasing the accuracy of the control mechanism would be covered by the increase in revenues from penalties. Of course, this is a reasonable idea, but there are several limits to it. Increasing the probability of getting caught is meant to make people comply and not actually pay fines. Moreover, penalties should actually be paid by the people who get them and this is not always the case. In addition to this, in some cases fines paid by wrong-doers do not go into the budget of the organism that enforces the control. For example in my home-country traffic fines (when paid) go to the central or local budget of the government and not to the traffic police budget.

Third, the principal and agent model is myopic when it comes to setting the amount (level) of penalty or punishment. The theoretical model takes into account the individual’s “utility function” when setting the level of the penalty. However, in real life this is virtually impossible since regulations are made for everyone and subsequent penalties applied are similar across individuals. For example traffic fines are set based on formulas that have as starting point the minimum wage in the country. This might be a good or adequate formula for countries where the differences between rich and poor are small, but in polarized societies the difference in the “pain” of loss for a “rich” and for a “poor” could be considerable.

It is true that prospect theory states that gains and losses are not relative to one’s wealth (as the normative expected utility theory says), but to one’s expectations. At the same time, paying 100 Euros as a fine has different consequences for a person who earns 600 Euros per month as for a person who earns 8000 Euros per month.

Fourth, the principal and agent model completely ignores other motivations that people have to behave in a certain way. Let’s take the example of a student who is studying hard for a better grade (reward) and that is afraid of failing the exam (punishment). Even if these rewards and punishments are in place, there are other motivations such as liking what she is studying or studying hard because her friends are studying hard and she wants to not be perceived as falling out of the group or she is doing so with the hope of getting the attention of her handsome colleague. Examples of motivations for human behavior are countless and usually they don’t include rewards punishments and probabilities of getting caught.

I would like to end this post in a more philosophical note. Apart from the pros and cons of the Principal and agent model as the proper way of inducing or guiding behavior, there is a deeper question here. Do we actually want to live in a world of carrots and sticks? Would we behave in a way only because we want to get the carrot and avoid the stick?

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How much do we think?

Recently I was in the position to explain what decision making psychology is about and how psychology can give very valuable insights to management and, in the end, to each and every one of us. What I found to be most challenging was that the people with whom I spoke knew virtually nothing about this area of knowledge and I was in the position to start my explanation from zero.

The truth is that anyone who wants to explain human behavior and decision making from the psychology perspective does not start from zero; in fact she starts from a very big minus. The reason for this back-start is that a lot of human culture is based on one major assumption, namely that humans are some sort of perfect intellectual machines with infinite resources available.

Early in life we are taught that we must make good decisions and behave well. Virtually every person who has gone through school has learned basic economics principles and has been subjected to rewards and punishments (or “carrots and sticks”). Everyone who had some religious education has learned about the famous “Free will” that God gave humans and that each human can exercise it. Most people judge other people’s actions as products of their “character” or as psychologists like to call “personality traits”. We all have heard things like “He is a bad person” or “He is virtuous”.

With the risk of repeating myself, we believe that the human is a “super creature with infinite intellectual capabilities and infinite resources available” and that everything one does is only due to his or her character.

Normally I should start challenging these beliefs right about now, but I’ll exercise “free will” and not do that. I have to acknowledge that humans are fantastic creatures and our intellectual capabilities are far beyond those of any other species on this planet. Humans have built superb pieces of architecture that lasted for hundreds or even thousands of years. Humans have built astonishing pieces of infrastructure that defy the powers of nature … after all I live in an area that is below sea level and that is protected by the famous Delta Works.

All these “wonders” of human civilization are the expression of human rationality, our unique intellectual ability to reason or to think (if we equate thinking in the popular sense with reasoning).

What is special about these magnificent expressions of human intellectual capabilities of reasoning is the context in which they were built and the processes of planning and execution. As a general rule, we can accept that the people who have designed and executed these marvels were quite smart, were educated and spent a lot of time and effort on doing their work. Even if we don’t actually realize it, we can all agree that behind these proofs of human rationality there are hundreds of thousands of hard work man-hours. The engineers that have designed the DeltaWorks (for example) have spent many long days of maximum concentration work. Computations assisted by computers or simply done with the old-fashioned pen and paper are the basis of such wonders. Extended information on the natural conditions, knowledge on construction materials, measurements, simulations and critical reviews by other engineers, feed-back and so on have played huge roles in making these wonders come true.

In my view, the process of engineering design is the best expression of human rationality. At the same time, we have to accept that these instances of perfect reasoning are special and rare. Most of our human day to day life is extremely different from the work day of a team of engineers. In general we do not have “full information” either because it is not available or simply we don’t bother to get it. Even if we would bother to get “full information” is it actually possible to hold “All the relevant information”? What is the “relevant” information? Moreover, each day we make countless decisions and holding “full information” about all of them would be overwhelming.

Another characteristic of regular decision making is that we don’t have infinite time resources to be able to (slowly) think it through. How much time do you spend in a supermarket? How much time to you think about what you buy? How much time do you think about what TV program to watch? Probably the answers are “not very much”.

Most of our decisions are fast and we don’t use our cognitive abilities to the maximum when we make them.

Another assumption of popular culture on thinking is that we have infinite resources. If we agree that the brain is the biggest consumer of energy resources, then we realize that thinking (reasoning) is effortful and our energy resources are limited. Probably you have experienced a day when you didn’t get off the chair, but you were exhausted. How much energy you have left for good decisions in the supermarket after such a day? Probably the answer is something close to zero. The main idea is that reasoning is very costly in terms of energy resources and we have “only so much” of them.

The next characteristic of the assumption that humans are some kind of mega-computers is that we have unlimited self-control or as some people call it “Free will”. It is very nice to think about yourself that you can do anything you want by exercising free will, but it is at least inaccurate. Self-control is also energy consuming and again we have “only so much” of it. Self-control is very important in human life and especially in human relations, but we do not have infinite resources of it. You might exert self-control and not say to your boss that he is an “ass …le” and when your working day is done just go to a (Chinese or fast food) restaurant and blow off your diet.

Character is another of popular culture’s presumed causes for human behavior and to a certain extent it actually is. A lot of work in psychology was and is done on personality (traits) and its influences on behavior. Most of human society functions on a basis of selection rutted in personality traits. The most common personality trait is intelligence (IQ) and a huge part of (higher) education admission criteria and job selection is focused on getting the smartest people available. At the same time, we have to agree that even smart people do stupid things.

Indeed personality is important, but it is by far not the only thing that causes human behavior. Environmental factors are even more important than personality. Bodily states are sometimes more powerful than personality traits. Even the most conscientious person might behave sloppy if she is hungry or sexually aroused.

Expanding a bit on bodily states, we like to think that the brain controls the body, but it is not exactly so. The body also influences the brain and in turn this leads to influences on decisions.

To come close to a conclusion, I guess that the most challenging thing is to accept that our rationality is (severely) bounded and most importantly that “reasoning” is not the default functioning way of our brain. The cause of this challenge is that we have an inherent need to “feel good about ourselves”. Because we need to feel good about ourselves we think that the reasoning part of us is in control, that you are in control of your actions and that other people’s actions are under their control.

A nice example of the need of “feeling good about ourselves” is justifying our actions to others and most importantly to ourselves. When someone does something bad such as cheating that someone will cheat only to the extent that she can justify her actions. For example: “I did not steal 10 euros from the company I’m working for, I just brought home a stapler and some printing paper”. If someone would do a survey in a prison she would be surprised (or not) that most people will say that they are in fact innocent.

We need to justify our actions so that we feel good about ourselves and in the end be able to live with ourselves. However, justifiability is one thing; (rational cold) reasoning is another.

I’ll conclude this post with a quote from one of the webinars from brainjuicer: “We think a lot less than we like to think we think”.

Accepting this is a source of unease and (psychological) discomfort. At the same time, those who do not welcome discomfort will not progress. 

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The Failure of Success Stories: Despite Doing Exactly Like in the Success Stories He Failed… It’s not Despite; it’s Because (8)

We’ve all heard “success stories” and felt fascinated about them. In many ways everyone likes to envision themselves as characters of success stories. However, doing as in the success stories is not necessarily a bright idea. In this post I’m going to go through the short comings of “success stories” and explain why it is not good to “do as in the success stories”.

Now, I have to make one thing clear. There are “success recipes” and “success stories”. The “success recipes” are usually invented by charlatans that promise to teach you “how to make one million euros on the stock market in five easy steps” or “how to effectively tie your shoelaces in 10 easy steps”. I’m not referring to these “hear what you want to hear” products. I’m referring to those real stories of people or firms that became successful and that have become part of (western) culture. The idea of this post came when I was writing a project on how to encourage and support entrepreneurship in IT and I could not ignore the “two young men in a garage” stereotype.

Let’s come back to “success stories” and focus first on the “story” part. Stories have been immensely important in human history. Stories and storytelling played a fundamental role in human culture and civilization. Culture, in the broad sense, means information that is transmitted from one generation to the next through non-genetic means. As you might know, language developed earlier than writing in human evolution and stories were the main component of culture. Even after writing appeared, reading and writing were the privileges of the elites for most of human history. Not until the XIX-th century and only in the western world was there a public education system to provide mass learning of reading and writing. Even in our times there are areas in the world where illiteracy is a major issue.

So stories were and still are highly important in transmitting information. What is really interesting is that our brains are adapted to learning through stories. At the same time, stories have a major characteristic, namely they need to be coherent. The coherence of a story is crucial in ensuring its viability as an element of culture. The problem is that coherence is not the same thing as “truth”, validity, reliability etc.  

To better understand the difference between coherence and validity think of “fairy tales”. They are highly coherent, but everyone (at least the ones that passed childhood) knows that they are not true and only fictions. Despite knowing that “fairy tales” are products of imagination with zero validity in the real world they are appealing even for adults. Think only about the huge audiences that movies like Harry Potter, Lord of the Rings and Star Wars have made.

Another example to better understand the difference between coherence and validity is “home shopping”. All the programs that present and invite people to buy the magnificent limited offer unbelievable product are extremely coherent stories but have (close to) zero validity. You don’t believe me? Then think, I repeat THINK about losing weight without any effort … is there any possible physical, chemical, biological way to do that apart from starving?

To make a long story short, humans substitute coherence for truth. A coherent story is perceived as true and valid even if in fact it is not so. Success stories are coherent (and desirable) and people believe them as being true. Moreover, people perceive success stories as reliable models.

Now going to the “success” part of “success stories” there is a bit of a “circle reasoning” in the sense that these stories are “success” stories because the characters in the story became successful. Because the protagonists of success stories have been successful people imply that their story is a story of success. In decision making psychology terms this is called “outcome bias” and it means that people judge the outcome and then infer if the “road” to the outcome was right or not. So people seeing that others have been successful they imply that what those people did is the right way to achieve success. However, this is fundamentally wrong because a huge number of RELEVANT factors are usually discarded.

Let’s start with the first flaw in success stories, namely the “starting low” part of most stories. In your typical “success story” the protagonists start usually at a low level that is quite ordinary and most people can relate to it. In a typical success story the main characters start their business project in a “garage” (e.g. Apple), or in a student dorm room (e.g. Facebook) etc. In other stories the main character starts with a low level job such as “moping the floors” or being a waiter. The appeal of this part of success stories comes from the fact that virtually everyone can relate to this low starting level. Most people had a garage or dorm-room or held low level jobs and this makes it easy to imagine yourself in the shoes of the main character in a success story.

To better understand try to make a comparison between a “success story” of someone who started their business in a “garage” or “dorm room” and a “success story” of someone who started their business in an office building in the city center. Which story is more appealing? With which character can you relate with more? Most likely the first, right?

If we go beyond appeal and identification with a character’s starting situation we will see that this information is perfectly useless in assessing the validity of a success story. What is going on here is what I call “observation bias” or in more scientific terms “availability heuristic”. If you ask anyone if they know a story about someone who started a successful business in a garage, dorm-room, studio etc. for sure people will be able to say about Apple, Google or Facebook. These businesses and the stories behind them are widely known as mass media, books and movies have presented them to the general public. However, this is what we can retrieve from memory about starting a business in a garage, dorm-room etc. It has virtually nothing to do with the overall figures of businesses that started at a low level and their rate of success.

To better understand think about lottery winners. In the media there are stories and news about people who have won the lottery. Everyone has heard at least one or two of these stories and in everyone’s memory there is available information on lottery winners. If one is asked to estimate the chances of winning the lottery he or she will retrieve from memory instances of people that have won the lottery and make an estimate that is for sure wrong. The reason for which it is wrong is that people have never heard stories about people losing the lottery. Assuming that for every lottery winner there are at least a few hundred thousand people who lost the lottery, imagine how a news bulletin that presents people who have lost would look like. Even if for every loser there would be only one second of air-time the news bulletin would have to last for at least 10 hours.  Now, 10 hours of seeing 1 second for each lottery loser is not something that people would watch and TV stations restrict themselves to presenting one winner for one minute.

Going back to “success stories” and applying the same REASONING we will understand that for every business that has started in a garage and was eventually successful there are at least a few thousand businesses that have started in a garage and failed. Similarly for dorm rooms, studios, garden sheds etc. The same goes for the successful people that have started as waiters or floor cleaners. For each one that has started so low and later became some top-manager hot-shot, there are tens or hundreds of thousands of people who started as waiter or floor cleaner and never got to be even “chief waiter” or chief floor cleaner.

To sum up, starting at a low level is appealing for the public because people can relate to this “starting low”. At the same time, starting low has absolutely zero relevance for the success of the business or of the person.

The second flaw of success stories is that they lack information that is highly relevant. The typical “success story” goes something like this: “There were two young men that have started a business in a garage and 20 years later they were multi-millionaires.” The problem with this is that it lacks two major chunks of information. First, what has happened in those 20 years and second, when did they start the business.

People, in general, attribute outcomes to individual traits and generally ignore contextual factors. “If someone else does something good or bad it is because of his or her character, personality etc. If I do something good it is because of my skills, qualities, character etc. If I do something wrong it is because the context made me do it.” This is essentially how most people think and unless there is discomfort (me doing something bad) about one’s self, everything is attributed to the individual’s character, skills, traits etc.

In success stories the success is assumed to be (only) due to the personality, skills, qualities etc. of the characters in the story. Most people ignore completely the contextual factors. The reality is that contextual factors are much more powerful that we would like to think. I don’t want to go into a lengthy argumentation on the power of context, but let’s THINK about one contextual factor extremely relevant for success stories that is ignored and this is the “Market trend” or “Economy trend”.

Everyone knows that a business or a job is not isolated from the rest of the world and is subject to influences from the market in which it “plays” and the overall economic environment. Despite knowing this, somehow people ignore these contextual factors when it comes to success stories.  Ignoring these influences and trying to replicate a success story is not exactly smart.

To go a bit more in detail here, you know that in economy there are cycles and even if there is not a pin-point accurate duration of an economic cycle, there is a pattern, namely that there are approximately 7-10 years of growth followed by 1-3 years of recession. I am aware that it is not very accurate, but for the sake of the argument let’s agree on this broad description of economic cycles. 

Now, which business do you think will be more successful: one that “goes to market” in the second year of a growth cycle and benefits of at least 5 years of economic growth or the one that “goes to market” in the last year of growth and then has to go through 1-3 years of recession?

The answer is obvious, but most people ignore the timing and economic context of the occurrence of a successful business that ends up in a “success story”.

Going even further in analyzing the economic context of success stories, there is a belief that many successful companies are started during recession periods and that in fact these new businesses are the engine of the new growth. Now, I’m not in the position to deny the effects of some new firms on the overall economy, but let’s see things from a different perspective. If a firm is set up sometime in the middle of a 2-3 years recession, then there are two major factors here. First, resources are relatively cheap in a recession period (or at least cheaper than in an economic boom period) and second, if it takes about 1-1.5 years to set up a new firm and its products, then it means that by the time that business “goes to market” the recession period is (almost) over and subsequently it will benefit from a relatively long period of economic growth.

To sum up, success stories ignore almost completely the contextual factors and most importantly ignore the broader economic context in which a success story takes place.

The third flaw of success stories is that they promote behaviors that in general are detrimental. Many of successful entrepreneurs make a big thing about them dropping out of school. Personalities such as Sir Richard Branson, Steve Jobs and even Bill Gates have dropped out of school and they somehow never forget to mention this when telling their stories. Is dropping out of school a general characteristic of successful entrepreneurs? Could be, but is it in any way relevant?

Here, again we have a case of “availability heuristic”. Since high profile personalities say that they have dropped out of school, many people have this available in their memory and subsequently imply that dropping out of school is something good. On a “softer” side, people imply that education is not that important for one to achieve success. Again these are only a few instances and the huge mass of school drop-outs is ignored. In general people who drop out of school are worse off than people who complete their studies and this is a widely accepted truth. Moreover, the more education, the better is the outcome in life quality, income etc. I accept that there are several controversies of the exact impact of an additional year of education in one’s overall well-being  but there is no controversy on the overall positive impact of education.

In a similar line of thought, what is missing from these “success stories” is the fact that even if the “stars” of a business have dropped out of school, the business heavily relies on highly trained professionals. Of course glamorous personalities like Bill Gates and Sir Richard Branson are in the spotlight, but do you actually believe that their businesses have developed to this level without people who were formally trained to do the business? Behind every successful entrepreneur that has dropped out of school, there is an (invisible) army of highly schooled people who are doing the work.

To sum up, following a success story that includes dropping out of school or giving little importance to education is in fact detrimental for the individual.  

The fourth failure of “success stories” is that they ignore the money factor. If you ask a wannabe entrepreneur about her project, sooner or later the topic of money and financing the investment will come up. Even if money is not the most important thing in the success of a business (or person), it is highly important and it is one of those things that if it is lacking then it is a big issue. The typical success story usually ignores this component or it mentions something very briefly about someone mysterious who made an initial (small) investment.

Money issues are somehow taboo in many cultures and people prefer not to talk about them. However, in real life financing an investment or a career is a big thing and in many situations it makes a difference between a success and a failure.   

The fifth failure of “success stories” is that they ignore what has not happened. I’ve left this point at the end because I believe it to be very important and a bit hard to digest. By its very nature a story is a listing of facts – things that have happened. At the same time, for everything that happens there is at least one thing that has not happened.

To better understand this, let’s get back to the lottery example. If you win the lottery this means that, apart from being extremely lucky, many other people that have played the lottery did not win. If you win the lottery then it means that “not playing the lottery” did not happen. If you win the lottery it means that other people that would have picked the same numbers did not play the lottery or changed the numbers.

For everything that happens there are countless things that did not happen. Why they did not happen is a very broad topic of discussion, but overall it’s simply luck.

Not one single “success story” takes this fact into account, but the truth is that in all successes there is a huge amount of luck. For example what would have happened to the great success story of Apple if someone else had invented the technology behind the iPod? What would have happened to Facebook if Mark Z. would have been born a girl (there is a 50:50 chance for a human to be male or female)?

The examples above might be a bit too extreme, but let’s think of some more digestible ones namely the actions of the competition of all these examples of success. All success stories somehow ignore what the competition has done or most importantly what it has not done. One company’s success implies as in the lottery example the lack of success of another company. So in order for some company or person to be successful others (direct competitors) have to not exist or fail somewhere down the road.

In the same line of thought, if the guy that started as a floor cleaner got a promotion that in turn led to another promotion and so on up to top management it means that other people did not get the promotions (or jobs if they were external candidates). He might have got the promotion(s) because he was better than the others, but then there is the question why was he better? If he was better than the other candidates it means that candidates better than him did not apply for the job; it also could mean that the other candidates had a bad day when the interview took place or simply missed the train or got stuck in traffic. Again, for everything that happens there are countless things that do not happen for extremely various reasons.

To sum up the fifth shortcoming of success stories, they focus only on what has happened and somehow infer that the protagonists were the only cause for what has happened. Success stories rule out major factors such as luck and actions of competitors.

In conclusion, it is not despite following the examples of success stories; it is because such examples are followed to the letter that people fail. In the end, success stories are very nice narratives that have the role of inspiring people, but nothing more. Their validity as examples to be followed is virtually zero. There is no “success recipe” (in 10 easy steps).

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