March 31, 2008
“Build it and they will come.” We hear that mantra a lot. But with innovation, it is often more like, “Solve a pain and they will come.” The ultimate success of the automated teller machine (ATM) is a great example of this.
The other night I was having dinner with someone who in the mid-1970’s worked with Citibank, the second largest bank at the time. He shared with me the story of the birth of the ATM, at least from his perspective.
In 1977, after investing hundreds of millions of dollars in ATM technology research and development, Citibank decided to install machines across all of New York City. But at first, they were not very popular. The technology was confusing to first-time users, the machines were not always accurate (they sometimes dispensed the wrong amount of money), and they were impersonal. I was told that customers who used ATM machines were so frustrated that many closed their accounts.
The ATM may never have been an instant hit if it weren’t for a natural disaster.
January 1978 will always be remembered for a blizzard that dumped as much as 4 feet of snow in the Northeast. In New York City, nearly 2 feet of snow brought the city to a halt. Banks didn’t open. Instead, people got their money from supermarkets. But most of those quickly ran out of money.
This created a massive “pain.”
Where did people turn? The ATMs. It is estimated that during the storms, use of the machines increased by over 20%. Soon after, Citibank started running TV ads showing people trudging through the snow drifts in New York City. That’s when the company introduced their wildly popular slogan, “The Citi Never Sleeps.” This was the real birth of the automated teller machine.
I found an interesting Fortune article that corroborates his story. The article claims that by 1981, Citibank’s market share of New York deposits had doubled. A lot of this growth could be attributed to the ATM.
This story illustrates an innovators dilemma. Brilliant innovations are not necessarily taken up by the masses. Some ideas just need time to incubate and gain acceptance. But can your business survive long enough to see the success? Too many ideas, like Webvan, could not endure the incubation period. Sometimes your innovations need a little boost.
As I have pointed out in previous blog entries, people take massive risks to eliminate their pains, but play is safe when it comes to adding convenience. ATMs were primarily about convenience. What did it take for them to become a success? A pain caused by a natural disaster.
Are your new ideas solving a pain? Or are they just a nice to have? If they are just a convenience, what can you do to create a pain – without having to rely on a natural disaster?
March 6, 2008
Although I rarely write about politics, the current Presidential campaigns are giving us some interesting examples of psychological manipulation.
For example, this morning’s newspaper’s headline was, “(Obama) says Clinton’s attacks paved way for her big night.” It is believed that Hillary’s negative campaign helped her win key states.
Why does mudslinging work? Why do people use it so much?
I believe it is because of two important forces:
People play it safe when it comes to increasing gains: Obama’s platform is about change. Although people claim they want change, in reality (as I wrote in another blog entry), most play it safe when it comes to increasing gains. The status quo wins out most of the time. If change is to prevail, people need a clear picture of the future AND they must believe that that future is achievable. Although Obama is inspiring, he has been criticized for not providing a clear and consistent vision of the future and for lacking a compelling roadmap for getting there. Then again, I’m not sure any candidate has done a good job at this.
People will take risks to minimize their losses: When the feasibility the “gain/change” comes into question, people start focusing on their fears. Hillary has been playing this card consistently. She has challenged Obama’s know-how and suggested that everything will go wrong if we vote in an inexperienced President. As an example, she focused in on Obama’s apparently “two-faced” position on the North American Free Trade Agreement (NAFTA). Voters began to wonder, “Change is good, but is it worth the risk?”
What would I advise Obama and Clinton to do differently?
Stop the mudslinging. Although these negative campaigns may help the individual candidates during the primaries, it will only bolster support for McCain, the de facto Republican candidate. They may win the battle but lose the war in November.
Meet people where they are. As reported in that earlier blog entry, in an obese society, most people will choose “lose your gut fast” over “get six pack abs.” It’s hard for people to envision a Utopian world that seems so far away from the current state of affairs. If you want people to change, three things must be in place:
- People must be uncomfortable with the current situation.
- They must see a better future.
- They must believe that that better future is achievable with a reasonable amount of “investment.”
Point #3 is probably the most important (and overlooked) part of the process. This leads to the last recommendation.
Create a clear, compelling roadmap for the future. Whatever you stand for, make sure you communicate HOW you will get there. Be consistent and stay focused. And don’t shoot for the moon. The candidates can talk about grand aspirations. But they should emphasize smaller, more immediate steps that feel like they can be implemented. A believable future is as important as a desirable future.
These are valuable lessons that can be applied to any professional or personal situation. Organizations should watch the political world to learn more about human behavior and motivation. It is a great public experiment on a large scale.
P.S. I say this with tongue in cheek…but the Obama vs Clinton campaign feels like the Mac vs PC debate. Obama has the cool, trendy and wildly popular feel of a Mac. Clinton has the history of being an active First Lady (with Bill) and yet is less warm and fuzzy. Maybe Obama’s campaign should create a viral Mac vs PC spoof for YouTube. Or maybe one already exists.
January 18, 2008
I wrote a blog entry entitled, “How to Lose a Sale By Charging Too Little.” In it I describe why charging too little reduces the perception of value.
According to a recent Stanford Graduate School of Business study, there are biological reasons why price impacts perception.
Subjects were given a number of wines for tasting and were told their price. Some of the wines were given to tasters more than once, with a different price tag each time.
What did they find?
The same wine, when given a higher price tag, tasted better.
Surprisingly, according to fMRI scans, the pleasure centers of their brains light up more, even though the “taste” centers do not. The body knows the wine tastes the same. Regardless, it is enjoyed more when it is more expensive.
“We have known for a long time that people’s perceptions are affected by marketing, but now we know that the brain itself is modulated by price,” said Baba Shiv, an associate professor at the Stanford Graduate School of Business, and one of the authors of the study.
As the recession looms on the horizon, companies may be tempted to drop their prices to stay competitive. But there may be powerful biological reasons not to do so. Price can drive perception. And perception is reality.
October 24, 2007
Back in the 1980’s, executives used to joke that you would never get fired for buying “Big Blue” (IBM) computers. It’s not that IBM was the best, but you knew they would not screw up.
When I worked for Accenture (then Andersen Consulting), the Economist once called us “The McDonalds of the consulting industry. You know what you will get and it’s not fillet mignon.” People hired us not to get highly creative solutions, but rather to be assured of a successfully implemented solution.
There is a reason why consulting firms are so successful.
People choose safe, tried and true solutions over those which may be better yet have a risk of failure.
This is human nature. People take risks to minimize losses, yet play it safe when it comes to increasing gains.
But how much of a gain must be dangled in front of us before we will risk giving up the sure thing? I’ve been conducting a survey to find the answer.
Here’s the first question posed to respondents:
Which would you choose?
- Option 1: A guaranteed gain of $75K or
- Option 2: An 80% chance of getting $100K and a 20% chance of getting nothing
Our survey found that 75% of the people go for the sure thing, option 1. People play it safe when it comes to increasing gains. But how safe?
What if the upside is increased to an 80% chance of getting $150K? Now, 57% take option 2. Still, 43% play it safe, even though there is an 80% chance of doubling their money.
What if the upside is increased to $225K? 76% choose option 2. This means that, 1 in 4 people still play it safe even when the potential upside is 3 times the original amount. When we increase the upside to $450K – 6 times the original amount – we still have 20% of the people who go for the sure thing.
It appears that people believe the expression, “A bird in the hand is worth two in the bush.” Interestingly, the original Old English expression was, “”Better one byrde in hande than ten in the wood.” That seems even more accurate.
Ok, let’s look at the loss side of things.
Here’s the first question posed to respondents:
Which would you choose?
- Option 3: A guaranteed loss of $75K or
- Option 4: An 80% chance of losing $100K and a 20% chance of losing nothing
This time, when presented with a loss rather than a gain, 71% go for the riskier option 4. People take risks to minimize their losses. [As an aside, when I ask audiences this question, the percentage of risk takers is closer to 90%]
Increase the potential loss to $125K and 44% still go for the riskier option 4. When the potential loss is increased to $250K, 22% of the respondents still opt for option 4.
If you plot these responses (risk-taking probabilities against expected gains), they make a nice “S” curve as depicted in the graphic left.
What does this graph tell us?
It clearly supports the premise that people take risks to minimize losses, yet play it safe when it comes to increasing their gains. The loss of $1,000 hurts more than a gain of $1,000 feels good.
This means that you can sell someone more easily when you focus on losses rather than the gains. This might explain why Al Gore has been so successful with his “Inconvenient Truth.” Instead of focusing on the benefits of a cleaner environment, he focused on the “meltdown” associated with the status quo. Can anyone say Nobel Prize?
The shape of the curve also gives us a bit more insight. First, the gain of $2,000 does not feel twice as good as the gain of $1,000. Equally, the loss of $2,000 does not hurt twice as much as the loss of $1,000. There is a point where we become numb to the increased gain or loss.
Another potentially useful take-away is what I call the “risk/reward tipping point.” This is the point where the “S” curve flattens out on both the loss and gain side. This occurs at the point when 80% of the people take the desired action. And based on my research, this ratio is a little under 3.
What does this mean?
The hoped for win (the upside) must be three times the guaranteed amount in order for most people to risk the sure thing.
There is a reason why the status quo wins out in business, politics, and life. Rarely are we given options where the benefit is three times the sure thing/current situation.
On a final note, there was some interesting research on this topic…but with a twist. Researchers at Duke University, in a paper entitled “Sleep Deprivation Elevates Expectations of Gains and Attenuates Response to Losses Following Risky Decision” (Venkatraman, Chuah, Huettel, Chee), wrote that this risk-taking profile changes when someone does not get enough sleep.
When kept awake for 24 hours, the study (supported by brain scans) showed a double whammy: people became more optimistic about potential gains and they were also numbed to the negative feelings associated with losses. They would act riskier and have less regret (distinct from disappointment) about bad decisions. Their decisions were often bad decisions. If you go to Las Vegas, be sure to get plenty of sleep!
Our ancestors lived in a world of scarcity. Therefore it is not surprising that we do everything in our power to horde what we have. Unfortunately, our desire to play it safe can cause us to miss out on big opportunities. Risk taking is fundamental to innovation. And innovation is critical to long-term success.
If you want to see some of this stuff action, be sure to read my entry on 10½ Ways to Improve Your Life – By Losing. This may give you some tools to enable you to take healthy risks to improve your life and business.
September 14, 2007
Once again we explore the power of language. This one was given to me by Michael Wiederman, Professor of Psychology at Columbia College.
Imagine that you serve on the jury of an only-child custody case following a relatively messy divorce. The facts of the case are complicated by ambiguous economic, social, and emotional considerations. Therefore you need to base your decision entirely on the following few observations:
Parent A has an average income, average health, average working hours, a reasonable rapport with the child, and a relatively stable social life. This parent is essentially average in every way.
Parent B has an above-average income, minor health problems, lots of work-related travel, a very close relationship with the child, and an extremely active social life. This parent has both notable strengths and notable weaknesses.
Here’s the interesting part…
If the jury is asked who should get custody, most people choose Parent B.
If the jury asked who should not get custody, most people choose Parent B.
Adding one word changed people’s responses and beliefs.
When asked who should get custody, people look for the positive attributes and see that Parent B has more positive attributes than the blander Parent A.
Conversely, when asked who should not get custody, people look for the negative attributes and see that Parent B has more negative attributes. Therefore Parent A should be awarded custody.
This is an example of the psychological concept, confirmation bias.
This is important to keep in mind as we get closer to the Presidential elections. Political polls, such as the Gallop Poll, are often biased (unintentionally or other) by the wording of the surveys. Think critically before you make important decisions.
September 4, 2007
In two previous blog entries, (#1 and #2), I discussed the psychology behind risk taking. In particular, I explored why people take risks to minimize losses, yet play it safe when it comes to increasing gains.
In this blog entry, I discuss a number of implications of this mindset. Here are 10½ – potentially irrational – ways in which people do everything in their power to minimize losses, even though the gains that can come from risking the loss can be amazing.
1. CREATIVITY: According to studies, 98% of children age 5 are highly creative, yet only 2% of adults over the age of 25 are. Why? One reason is that children do not worry about looking silly. Adults do. Adults will stifle a potentially great idea in order to avoid losing face. Action: Add some play to your life and work. Stop being so serious. Take improv comedy lessons. This will certainly get you comfortable with looking silly!
2. INNOVATION: Companies continue old business practices, processes, and products because the perceived risk of losing these is too great. Action: Keeping a business or product because of sunk costs is stupid. Ditch anything (including people) that is not working. Ask yourself, “If I were starting my business from scratch, how would I design it?” If it is different than your current model, then maybe you should get rid of a few things. What you stop doing is often more important than what you start doing.
3. INVESTING: Stock owners often hold on to investments that they would not buy if they did not already own them. Or worse, if they own a stock that is tanking, they buy more on the belief that “because I own it, it will recover.” I did this with Webvan stock. I kept buying more stock as the share price plummeted, convinced it would bounce back. Alas, you can’t buy anymore when it is worth nothing. Action: Sell anything in your portfolio that you would not buy if you did not own it. Low transaction costs make holding on to duds irrational (unless tax implications indicate otherwise).
4. CAREER: People often stay in unsatisfying careers because the “devil you know is better than the devil you don’t.” I know what you are thinking. “Why should I give up my crappy job that gives my ulcers and high blood pressure? I worked my entire life to get where I am.” Um, I don’t know. Maybe because there are at least 1,000 better careers for you. Action: If you don’t love your job, quit. Ok, not so fast. But imagine leaving your job. Explore what is possible. When you discover something better, list all of the reasons why you are still not prepared to leave your current situation. Then find ways of addressing each of these concerns.
5. CUSTOMERS: Are all of your customers profitable? Are all of them desirable? The odds are, you have many customers or customer segments that are just not worth the effort. Ironically, companies often spend an inordinate amount of time with customers that provide the least returns. Action: Ditch the least profitable 20% of your customers. Or at least find creative ways to make them more profitable – and less time consuming.
6. DATING: People will do anything to avoid losing face. The fear of rejection stops people from asking others out on a date, even though if they said “yes” it could lead to a new relationship. Action: Stop being a wimp! Rejection never killed anyone. Ask out that person you’ve had your eye on. Go up to a stranger in a bar and say, “I’m thinking of changing my name to Romero. What do you think?” (if you don’t know the Romero story, click here)
7. RELATIONSHIPS: Imagine that you are in a relationship that is going nowhere fast. Your gut tells you it should end, but for some reason you do everything in your power to keep the relationship alive. Action: First, do what you can to bring the relationship up to the standards you deserve. If that does not work, find an equitable way of ending things and moving on. Do you really want to wake up 25 years from now in the same wretched relationship?
8. BELONGINGS: Go through your closets. Look in your bookcases. How much “stuff” do you have that you really need? How much of it would you buy if you did not own it? 20%? 30? Certainly not more than 50%. I often hear people say, “as soon as I throw something out or give it away, that’s when all of a sudden I find a need for it.” Although this phenomenon is not true, it seems real. As a result we hold on to things “in case” we need them, rather than “because” we need them. Action: Go through everything you own. If you haven’t used it in a year, put it in a box. If after a year you haven’t opened the box, give away (or sell) the entire box.
9. HEALTH: People will spend a lot of money on health insurance – a way of reducing losses associated with an illness. But they won’t put much time or energy into increasing their health. Action: For every dollar you spend on health insurance (loss prevention), spend at least 10 cents on things to improve your health. Get a gym membership. Buy vitamins. Get a massage. Take a stress relieving vacation.
10. REQUESTS: People are often afraid to ask for help because they don’t want to seem needy (lose face), or impose upon and risk losing their friends. Action: Identify 10 requests you could make of 10 different people (e.g., a connection with a person who may be able to help your business, feedback on a new business idea, financial support, moving your house). Then, ask these people for help. You may be surprised to find that few people say “no” and that most people are willing – and want – help you.
10½. Why do I blog on a regular basis? One motivator is to avoid losing readers. I currently get 50,000 visitors here a month. I intentionally write for a mass-market to attract as many diverse readers as possible. I have considered writing only for a niche market (e.g., corporate innovation), but I know in doing so I would lose a lot of readers. I realize that having fewer, yet more active readers may actually be a good thing. Alas, for now, I like appealing to a large audience.
Where in your life have you given up something only to find a huge gain? Where have you held onto something knowing it was holding you back?
August 20, 2007
In an earlier blog entry, I discuss the power of language. I want to explore this a bit further today.
Here’s my variation of the “Asian disease problem” mentioned in that earlier blog entry:
Which would you prefer?
- OPTION 1: A guaranteed gain of $75,000?
- OPTION 2: An 80% chance of gaining $100,000 with a 20% chance of getting nothing?
When I give a speech and ask the audience this question, 75% choose Option 1. This percentage is consistent across all groups, regardless of who is in the audience.
Ok, what about the following? Which would you choose?
- Option 3: A certain loss of $75,000?
- Option 4: An 80% chance of losing $100,000 with a 20% chance of not losing anything?
When audiences answer this one, 99% choose option 4.
This once again supports the premise that people will take risks to reduce losses, yet will be more risk averse when it comes to increasing gains.
Interestingly, when you look at these options, even though most people choose options 1 and 4, options 2 and 3 give you better returns. On average, you will gain $80,000 with option 2 and will lose $80,000 with option 4.
Look around and you may begin to see examples of advertisers focusing on losses rather than gains, with stellar results. For example…
How many mattress commercials have you heard that say, “Buy our xyz bed and you will get your best night’s sleep ever.” Yawn. Boring. The commercial may put me to sleep, but it’s not going to get me to buy a bed.
Consider this actual advertisement. “If your mattress is 10 years old, it weighs twice its original weight due to the dust mites that accumulate over the years.” Ouch! This makes me want to replace my mattress now.
Instead of selling customers on how great your product or service is, show them the downside of using a less reliable alternative. As a friend of mine says, “If you need open heart surgery, would you shop for a cardiologist based on price?” She then launches into the risk associated with not getting it (your product/service) right.
What examples have you seen of great sales pitches, advertisements, or anything else that uses this concept?
P.S. One place where this concept apparently does not apply is on TV game shows. I see people on “Deal or No Deal” risk a certain $500,000 for a 50% chance of winning $1 million. Their interviewing process must do a great job at finding the few people who really do take risks to increase their gains.
August 7, 2007
Which magazine do you think men are more likely to buy:
- a men’s health magazine with the cover, “Lose Your Gut Fast” or
- a similar magazine with the cover, “Get Six Pack Abs”?
One study showed that over 80% of men chose the first cover – “Lose Your Gut Fast.” Why?
People are more interested in avoiding (or reducing) pain than they are in increasing pleasure.
The Austrian economist, Ludwig von Mises, once said that three requirements must be present for an individual to change:
- The individual must be dissatisfied with the current state of affairs.
- They must see a better state.
- They must believe that they can reach that better state.
That last point is critical as it relates to the “gut” issue. When someone is 20 pounds overweight, as many Americans are, six pack abs may be desirable but seem inconceivable. I sometimes joke that I would be happy with a “two-pack.” Only when your gut is gone will the idea of six pack abs seem like a possibility.
Tversky and Kahneman demonstrated how people change their perceptions when the same problem is stated in different ways. The classic example is the “Asian disease” problem (1981) where a group of individuals were asked the following question:
Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed.
- Program A, which will save 200 people
- Program B, where there is 1/3 probability that 600 people will be saved, and 2/3 probability that no one will be saved
Which of the two programs would you choose?
Tversky and Kahneman found that 72% of those asked chose the “risk averse” position – Program A. The prospect of saving 200 lives with certainty was more promising than the probability of a one-in-three chance of saving 600 lives.
A second group of respondents were given the same story of the Asian disease problem, but were provided with different options.
- Program C, where 400 people will die.
- Program D, where there is 1/3 probability that nobody will die, and 2/3 probability that all 600 people will die.
Which of the two programs would you choose?
A whopping 78% of respondents in the second problem chose the “risk taking” position – Program D. The certain death of 400 people is less acceptable than the two-in-three chance that 600 people will die.
Of course, options A and options C are identical, as are options B and options D. Yet the different phrasing stimulated completely different responses.
This study again shows that people will take greater risks to minimize (or reduce) their pain, yet they will play it safe when the option is to increase their pleasure.
Barry Schwartz provides some other excellent examples in his Scientific American Mind magazine article (August/September). One example he sites: “Appeals to women to do breast self-exams that emphasize the benefits of early cancer detection (gains) are less effective than those that emphasize the costs of late detection (losses).”
In my article, “How to Tell If Your Intuition Is Good,” I discuss how we get attached to what we have. When taking a test, we remember (painfully) situations where we had an answer correct, changed it, and therefore got it wrong. Surprisingly, we rarely notice the reverse. We are more aware of our losses than our gains.
Many years back I did work for a client. Although I would have been happy to do it for $9,000 (not actual figures) they agreed to pay me $10,000 for my efforts. Unfortunately, due to shoddy work by a subcontractor, I volunteered to refund $1,000 (out of my own pocket) to the client, netting me $9,000. Interestingly, I would have been happy getting paid $9,000 for the job, yet getting $10,000 and losing $1,000 still irks me to this day.
The loss of $1,000 hurts worse than a gain of $1,000 feels good.
When you are trying to get someone to change (or buy your product/service/ideas), do you focus on their gained pleasure or eliminated pain? From my experience, the latter is much more effective.
What are your examples of where you changed your language and got different results?