How Clothes and Uniforms Influence our Judgment and Behavior

One of many typical games children play is dress up. They pick some clothes, many of which belong to the parents, and play different roles. Probably doctor and fireman are the most common choices. However, dress up is not reserved only for children; grownups do it too, but usually are unaware. Each time we go to a black tie party we dress up; each time we put on the work around the house clothes we dress up. The clothes we wear influence how we think and how we behave. The same person who in one instance is dressed up for a black tie party will behave significantly different when she is dressed in the work around the house clothes. In order to better understand how the clothes we wear influence our judgment and behavior, let’s talk about a particular type of clothing, namely uniforms.

Uniforms are something that we encounter several times each day and they are very diverse. However, when we think about uniforms the first thing that comes into mind is not the McDonalds or KLM uniforms, but rather it is the Police, Military or School uniforms. This is easily explicable because long before corporations started using uniforms they were used by state organizations such as the Military. The use of uniforms has several implications that will be briefly presented in the following paragraphs.

The first implication of uniforms is identification. Imagine a very bloody and heated battle between two tribes. In the heat of the battle it would be possible for members of the same tribe to harm or even kill each-other because they confused the other for an enemy. This is highly plausible. Nowadays this is called friendly fire that is a nice term for we killed our own.  In order to avoid the possibility of two warriors from the same tribe to slaughter each other, identification features were introduced. These evolved into military uniforms. The primordial role of uniforms is for the individual to be identified as a member of a certain group.

The second implication of uniforms is to enhance the feeling of belonging to a certain group. Whereas the primary role was to identify another individual as a member of a group, the second implication refers to the individual’s feeling of belonging to the group. When dressed up in, let’s say, a military uniform the individual has an increased sense of belonging to the group, in this case the army.

There is a limitation to increasing the sense of belonging through the use of uniforms, namely that in order to enhance the sense of membership, the group must have a well-defined identity. In the case of the army this is not an issue since the institution has a very well defined identity. However, if at a new organization uniforms are introduced, they will not help much in increasing the sense of belonging if the organization has a weak identity. In simpler words, in order to increase an individual’s feeling of membership, first there must be something to belong to.

The third implication of uniforms is that they create anonymity. Once in a uniform the individual is less himself and more of just another member of a group. In the case of the army things are quite straight forward. The new recruit Hans is not any more the young man who lived in a quiet peaceful town with his working class parents. He is now a soldier; he is now just another soldier in the army. In other cases anonymity is slightly smaller than in the case of the army, but still exists. For example most shoppers in an Albert Heijn supermarket notice mainly the uniforms of the employees and significantly less the individuals who are wearing them.

The sense of anonymity leads to increased aggression. For example warriors who wear masks are more brutal than similar warriors who do not use masks. A much closer example of increased aggression due to anonymity is in the on-line environment. Behind nicknames or avatars a lot of people are brave, rude and aggressive. However, the same people would behave like pussy-cats when they are stripped of their disguises. The increased aggression of individuals who perceive themselves as anonymous is attributed to a lack of accountability. This implies that organizations that use uniforms should make sure that their members are aware of their accountability for their acts.

The fourth and, in my view, the most important implication of uniforms is that they induce prototypical judgment. In an earlier post on priming you have learned that exposure to a certain piece of information makes a mental construct more salient in the mind, thus influencing subsequent judgment and behavior. You have also learned that asking people to think like a trader influences judgment. Simply put, when we ask somebody to think like a prototypical character we are asking them to put themselves in the shoes of the character.

In the case of uniforms things go even further. By dressing up an individual in a uniform that is prototypical for a category, the person is in the shoes of the prototype.  For example dressing a regular person in a military uniform will make that person act in a more militaristic way. Similarly if someone would dress up in a doctor’s uniform she would speak using more medical terms and overall would behave more like she thinks and knows a doctor behaves.

The process behind these changes is the following. We have stored in our minds prototypes and their specific behaviors. When dressed as a prototypical character, say police people, all the mental constructs related to the police are salient in the mind. Moreover, the person is now like the prototype of a police person. Subsequently the individual will exhibit behavior specific for the prototypical character.

This post began with a discussion about clothes and how they make us think and behave differently. Uniforms are the best illustration of this phenomenon, but by far most people are not using uniforms. However, most people have different types of clothes. We have office clothes, pajamas, work around the house clothes, party outfits and so on. Each of these types of clothes is associated with a specific context and when we wear them information related to the context becomes salient in our minds. This in turn influences how we think and how we behave. Usually we use clothes that are appropriate for each specific situation. For example we don’t go to business receptions dressed in pajamas and we don’t vacuum the house in our party outfits. However, there are a few instances when we might not bother to change into more appropriate clothes. I’ll illustrate this with an example soon, but before that, there is another effect of clothes that should be mentioned.

In an earlier post you have learned that the furniture we use influences our body posture which in turn influences judgment and behavior. Clothes have a similar effect, especially when it comes to the position of shoulders. The shape and the cut of a shirt, coat or T-shirt influences the position of one’s shoulders. Some cuts favor an up-right position, while other cuts favor a round-shouldered position. This might not seem much, but the two shoulder positions are specific for very different internal states. The up-right is associated with increased confidence, while the round-shouldered is specific for very low confidence.

I would like to conclude this chapter with an anecdotic example from my own experience. When my wife finished her Master program she had to give a presentation on her thesis. Since it was something very important, at least at the time, she practiced a lot. At one point she decided that it is time to have some rehearsals in front of an audience and the audience was me. She asked me to help her in any way I can. I said that I would like to see the full presentation once and after I will give her some tips. So we placed the beamer on the table, the laptop next to it, Cornelia, my wife, was standing  next to them and I was sitting on the couch. She began the presentation and not before long some stuttering occurred.

I knew how much she had prepared and I was a bit surprised by these mishaps. Moreover, I was surprised by the lack of confidence she had while giving the presentation. This was not justified by anything since the thesis was good and she had worked on it for many months. Then I realized that both Cornelia and I were still wearing our staying in the house clothes. As you can imagine the clothes were quite loose and comfortable, maybe too comfortable. I noticed especially how her comfortable blouse was making her shoulders to not be up-right.

Realizing all these, I asked Cornelia to go and change into the clothes she plans to use for the actual presentation. She did so and in addition put on her elegant shoes. She started again the rehearsal and this time it went very well and very smooth. There were only a few fine tunings to be done and after three rehearsals everything was close to perfect. The actual presentation went very well, too.

Learn more on my book: It Makes (No) Sense: Between the Joy of Gaining and the Fear of Losing

The Secret Behind Complicated Application Procedures

Take for example all the complicated and time consuming application procedures for getting admitted into a good university. Apart from having high scores on standardized tests, an applicant must fill in endless forms, upload a lot of documents, write motivational essays etc. Presumably universities want many students because it is one of the ways in which they make money. So, why is it that universities make it hard for people to apply for their programs? Is it because they want to not have too many applicants?

The answer to the questions above is that the complicated application procedure is in itself a part of the selection for admission process. One obvious element that is verified by asking applicants to go through a complicated procedure is motivation. Many people who would apply just for fun or to simply see what happens are discouraged to apply. This leads to avoiding an overload of the admissions office with applications from people who would no follow through.   

However, the motivation part is only one side of the advantages of having complicated application procedures. In order to better understand the other sides, let’s think a moment about the admission criteria and the profile of a good candidate. Although universities want many students, they also want good students who will be able to go through the education programs without too many troubles. Universities don’t want to have students who constantly fail exams and who need four years to finish a one year program.  This means that the education institutions want to admit candidates who have a good academic performance potential.

Recruiting and selection are mostly focused on assessing the personality of each candidate and making a decision on how well each personality fits with the ideal candidate profile. When it comes to academic, as well as job, performance there are two personality traits that are very good predictors, namely intelligence and conscientiousness. Intelligence can be defined in a nutshell as capacity of processing information and we have to admit that for academic performance the overall rule of the more the better applies. Conscientiousness can be defined briefly as ability to work hard, to work thorough on a task. Again, when it comes to reading textbooks, doing homework and other typical academic work tasks, the higher the level of conscientiousness a candidate has, the better the candidate.

Intelligence and conscientiousness are not the only predictors of academic or job performance, but out of the wide array of personality traits, they are the best predictors. So, universities want to get students who are highly intelligent and score high on conscientiousness. Although everyone seems to have an idea of what intelligence is, the reality is that this particular personality trait is not very easy to measure. In order to measure someone’s IQ, the person has to take an IQ test. Universities don’t explicitly ask for IQ test scores, since that would create endless controversies; what they do, is ask candidates to provide their scores on standardized tests such as the GMAT, in the case of business schools, or SAT. All these standardized tests are disguises for IQ tests. This is not to say that the GMAT is an IQ test, but rather to say that a candidate’s score on the GMAT is highly correlated with that candidate’s IQ score. To conclude on how universities assess candidates’ IQs is not by giving them actual IQ tests which would lead to controversies, but by using a proxy of intelligence scores, namely scores on standardized tests such as GMAT, GRE and SAT which are not subject to controversy.

Having clarified the way in which universities assess the intelligence levels of their candidates, it is time to look a bit on how they assess the conscientiousness levels of people who apply for education programs. The first way to assess conscientiousness is through the same standardized tests. If you have taken such a test, you probably noticed that they are completely unappealing and, in my humble opinion, really boring. In preparing for and actually taking such a test there is no intrinsic task motivation. The test has to be taken for the sake of taking it and with the only goal of scoring high.

A byproduct of the introduction and wide use of standardized tests is the development of a real industry of learning test taking. A quick search on amazon.co.uk with the key-word GMAT returned over one thousand results. This is only one standardized test and the search was done only on one website. The reliance on standardized tests led to a need of learning how to take the test. From a certain point of view, this is not exactly great, but from another point of view the difficulty of test taking is one of the key elements of standardized tests. By making a test difficult to take and by making people work a lot and prepare for taking a standardized test, the test actually measures conscientiousness. The higher the level of conscientiousness one has, the more she will work on the mostly pointless tasks of test taking and subsequently the higher the score on the test will be. In a nutshell, standardized test measure both intelligence and conscientiousness.

When it comes to assessing a candidate’s level of conscientiousness, universities go beyond relying only on the scores on the standardized tests. They also make the application procedure lengthy, complicated and somehow boring. By asking candidates to fill in endless forms, to write essays and to upload many documents, universities, in fact, assess the level of conscientiousness of each candidate. People who have a low level of this trait simply fail to complete the application procedure.

Before concluding this example of the up-side of making things harder, I have to make a final point regarding the predictive value of intelligence and conscientiousness on academic performance. Their predictive value is real, but applies mostly for average levels of the two traits. In other words, at the extremes of each trait, the differences are insignificant. For example, if one candidate has an IQ of 160 and another has an IQ of 163, the three points difference will not predict too much. However, a difference of three points between an IQ of 99 and an IQ of 102 will predict better academic performance. Extremes on these traits are very rare; there are very few people in the world with extremely high IQs and with very high scores on conscientiousness. Universities know this and act accordingly. In selecting future students who will perform well, the primary goal is not to get the exceptionally good ones, but rather to make sure that the not so good ones are not admitted. The complicated and time consuming application procedure will not distinguish between the people with very high and exceptionally high levels of conscientiousness. Rather, it will distinguish between the people with low and average levels of conscientiousness. 

Learn more on my book: It Makes (No) Sense: Between the Joy of Gaining and the Fear of Losing

How to Buy Pasta in a Foreign Country - Social Proof

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

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

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

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

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

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

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

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

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

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

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

  

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

Learn more on my book: It Makes (No) Sense: Between the Joy of Gaining and the Fear of Losing

www.naumof.com 

The Similarity between a Colonoscopy and a Holiday

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

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

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

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

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

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

As Daniel Kahneman puts it, we have two “selves”:  (1) the “experiencing Self” – the one that actually lives the experience in the present and (2) the “remembering Self” – the one that remembers the experiences lived by the “experiencing self”.  

Each of these two selves has its own evaluation of an experience. Surprisingly or not, the two evaluations are different.

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

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

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

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

However, the “remembering self” is distinct from the “experiencing self” and what the “remembering self” thinks about your “trip to the mountains” experience is very different from the average of the 96 evaluations your “experiencing self” made.

   

What the scholars of happiness have found about the differences between the memory of an experience (“remembering self”) and the actual experience (“experiencing self”) can be summarized in two main principles.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Note: This post is documented from:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Beautiful People are Smart and Kind – The Halo Effect

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Did you come up with an answer?

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

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

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

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

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

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

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

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

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

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

“Prices starting from X00 Euros”

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

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

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

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

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

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

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This post is documented from:

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

http://en.wikipedia.org/wiki/Fall_of_the_Western_Roman_Empire