You are currently browsing the tag archive for the ‘behavioral economics’ tag.
Decision making is often skewed by cognitive biases. Among the wide array of such biases is the survivorship bias, which is the tendency to assign qualities of a sample to the full population. For example, prominent lawyers may make millions, giving rise to a widespread belief that all lawyers are dirty rich. In reality, half the lawyers in the US earn less than $100,000.
Take a look at this commercial. Those who switched, saved big, it says.
However, the very same commercial can be adopted by any insurance company. Each company’s rate tables will inevitably favour some groups of drivers and those who switch (because they saw a decent enough saving to do so) do indeed save. In fact, there are likely many more (even 100x or 1000x, it really doesn’t matter) drivers who found the company’s rates unfavourable and did not switch.
The commercial capitalizes on the survivorship basis which pushes viewers to imply superior rates across the board.
Disclaimer: I do not represent interests of Allstate or any other insurance company or their agent. The video used in this posting merely illustrates the main point of the article.
Dan Pink discusses motivation and refers to some of Dan Ariely’s surprising results.
Frederick Herzberg and David McClelland have done a significant amount of work in this area and if motivation is of interest to you, I suggest reading about their work. Herzberg’s hygiene theory, in particular, is absolutely solid
What Pink describes supports my own findings. For a practitioner, the gap between the scientific findings and the regular management practices are both apparent. The lack of volition among the vast majority of managers to change their practices is disconcerting. I am posting this to inspire enough people to reflect on their work and find their way to new exciting heights.
Here are ordinary people making incredibly stupid decisions on behalf of their children. I trust this is not staged and I hope many parents walked away from this.
Decision making is often viewed as a rational process, particularly in traditional economics. I fail to find any rationality in this particular setting.
What goes through these people’s head remains a mystery to me. Take a look.
I am in California enabling an IT company to develop a strategy that will leave their competitors in the dust. It is early in the morning and I am writing this sitting on a patio by the pool.
The hotel in which I am staying placed a little card on my bed (shown below as taken with my phone) in a bid to save the world on labour and laundry.
Every time I help an organization to dramatically improve their decision making, I place a lot of emphasis on the non-rational aspects of decisions, using the most recent research in behavioral economics. In this particular case, there is something that the hotel can do right away to significantly improve the card’s effectiveness. The card should ask the guest to place it on the bed if they want to have the sheets changed.
There is overwhelming evidence that people comply with defaults offered to them. The current default is that the sheets get changed daily… but who would remember to put the card on the bed if they don’t want it? If the default is changed to “sheets changed by request”, far fewer sheets will be changed. The results will be seen immediately.
Now, where do I send my invoice?
Traditionally, decision making in organizations is considered to be entirely rational. Pros and cons are carefully looked at and compared by perceptive minds, probabilities of outcomes and expected values are painstakingly calculated, and, the one and the only perfect decision is made.
Nothing can be further from the truth.
Recently, I spoke in front of 130 professionals on the subject of decision making and business cases. To illustrate the key principles of behavioral economics, I conducted a survey with two groups of 10 participants. Both groups were asked the same question, which went like this: “You are shopping with a friend. You are about to buy an item when your friend tells you that she saw it in a store within a 10 minute walk and it was $7 less than what you are about to pay. Will you go to that store now to take advantage of the lower price?”
The first group was told that they were shopping for a $25 pen. Eight out ot ten said they would take the 10-minute walk. The second group was shopping for a $450 suit. Only two out of ten said they would go.
But the question has nothing to do with the cost of the item, it is really about the cost of your time. Is a 10-minute walk worth $7 or not?
In fact, even most basic of our brain’s functions can be fooled. Take a look at this wicked visual illusion, for example.
Bogorad on Business 