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.