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?