Author Archives: paulawashington

The Classic ‘Glass Half Full or Half Empty’ Scenario Explained by Behavioural Economics

We all know the common saying, “is the glass half empty or half full?”. Normally we are talking about whether to be optimistic (half full) or pessimistic (half empty) about a certain situation. The answer we choose can reflect our mood, our outlook or even our worldview. It is a test of perception, because we all know that the same amount of liquid is in the glass no matter how we phrase it. So why does our wording or phrasing affect our outlook? Or is it our outlook that affects our word choice?

Here is an experiment:

Imagine you love really good red wine and these two options occur:

Option 1:

Someone places a glass in front of you and pours you half a glass of wine. You feel ok about this since you have some wine to drink. Maybe you even feel good about your glass of wine. The glass appears half full to you.

Option 2:

Now imagine instead the same person places a glass in front of you and pours it completely full. Just as you go to reach for it, the server grabs the glass back and pours out half of your wine and then places the half glass of wine on the table for you. Now  you feel king of upset, a few minutes ago you had a full glass of wine, now you only have half. Suddenly the glass feels half empty.

Even though both examples leave you with the same amount of wine, the emotional response is very different. In the first option you feel pretty good about the amount of wine you have and in the second option you are pretty upset that you didn’t get the full glass of wine. Suddenly you realize that there is a big difference between having a glass that’s half full and a glass that’s half empty.

This is a prime example of a behavioural trait in humans, which Behavioural Economics calls Loss Aversion

Loss Aversion is the term used to explain the theory that humans strongly dislike loosing things. One definition reads, “Loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains”.

Dan Ariely, the author of The Upside of Irrationality, puts it this way, “Loss aversion means our emotional reaction to a loss is about twice as intense as our joy at a comparable gain”. For example if you find $50 on the street versus lose $50 from your pocket, studies would suggest you would be twice as angry at loosing $50 compared to the joy you felt finding it.

This theory helps to explain why people struggle to give away old unused clothing, why people will pay $10 more to save $2, why gamblers become reckless and bid bigger and bigger hands when losing and even why people sometimes stay in unhappy relationships.

In fact it was first discovered in 1979 when psychologists Kahneman and Tversky studied the different effects of gambling on their students. The explanation for this behavioural bias lies in a specific part of our frontal lobe called the amygdala. This area of the brain is mostly associated with negative emotions and behaviors. It is the amygdala that makes us feel loss as a negative emotion.

Another explanation is the idea that humans put greater value on things which we own than things we don’t own. For instance an old tea mug might only be worth $2 on the open market but to the owner of that tea mug it is worth a substantial amount more. We become attached to things we own and the loss of them is more painful to us than gaining a similar item.

 

So how does loss aversion affect marketing and advertising?

Clever advertising has caught onto this human behavioural trait and uses it to better sell products or services.

Example

Grocery shops in the District of Columbia tried to incentivize people to bring in their own reusable grocery bags by offers a 5¢ reward for each bag brought in. This incentive had little to no effect on people behaviour.

Next they tried a different incentive. The grocery store charge 5¢ for each plastic bag a customer required. Although 5¢ represents a small fee, it resulted in a major reduction of plastic bags.

This same effect has been replicated by grocery stores across North America with great success.

The success of this example lies in a simple shift from gain to loss. Again, people hate loosing something, even if it’s only a couple of cents.

 Example

Pet store everywhere have long known that the best way to entice people to get a new pet is to let them take the pet home for a weekend to ‘try it out’. Whether or not pet storeowners know the specifics of loss aversion, they definitely understand that idea that humans will become attached to the pet over the weekend and have a very hard time giving it back.

Adoption rates of new pets are definitely up with this technique.

 This technique also works, to a lesser degree, with trying on clothing at a clothing store, or putting clothing on hold to possibly buy later. Once people have picked something out, tried it on, and put it on hold they begin to feel a sense of ownership over the item and are more likely to purchase it.

 

Conclusions

You can see the similarities here. By framing a situation as loss rather than gain, greater motivation is generated and generally greater results are produced.

Here’s another example that came up during a conversation the other day.

How do we get people to drive more economic cars? Currently the Canadian government offers varying amounts of money in rebates if you buy an economic car. The way the rebates work is you first pay the full value of the car and then apply for rebates. The rebate comes in the mail months later. This incentive has yet to result in a radical shift by the Canadian population.

If we apply loss aversion theory to this problem we would conclude that a better solution is to discount all cars by the eco rebate amount, lets say $1000 and then make anyone who buys an non eco friendly car pay $1000 to the government after they purchase the car. People hate loosing money so this technique might help convince people to be more environmentally friendly with their purchase.

In the end we know it is all the same thing no matter how you frame it, the glass still has the same amount of liquid in it, the shopping bags still cost your 5 and the a car cost the same regardless of if you pay all up front or in two stages but humans are irrational beings, with complicated brain processing units and one this is for sure, we hate loosing things.

 


More reading and resources

http://danariely.com/tag/loss-aversion/

http://scienceblogs.com/cortex/2010/02/10/loss-aversion/

http://www.investorwords.com/16526/loss_aversion.html#ixzz3It5IaMTu

 

Do More Choices Really Make Us Happier? Choice Paradox and Human Decision-Making.

The other day I was out at a greasy spoon for breakfast. I was half asleep and happy to see there were only two items on the menu. Nice and simple, I don’t have to think, just have to choose option 1; standard breakfast, or option 2; omelet. Oh but how wrong I was!

Here is a rough memory of my conversation with the waitress:

Waitress: “What would you like to order?”

Paula: “Standard breakfast please”

Waitress: “How would you like your eggs? Scrambled, over easy, sunny side up, fried, well done, boiled or poached”?

Paula: “ummmmmm, over-easy”

Waitress: “How would you like your toast? White, brown, rye, whole wheat or a bagel?

Paula: “ummmm, brown”

Waitress: “Would you like bacon, sausage, felafel or back-bacon?

Paula: “oh man, I guess bacon”

Waitress: “Would you like coffee, tea or orange juice?”

Paula: “oh um, I think tea”

 Waitress: “Green tea, black tea, mint tea, herbal tee, decaf tea?

Paula: “Black tea”

I don’t even like my eggs over-easy and I much prefer rye toast over brown toast. So why would I order them? The overwhelming number of choices for each aspect of my breakfast made it difficult for me to choose what option I actually wanted. I felt overwhelmed by all the options and felt pressure to choose quickly since I was at a restaurant. The result, I pretty much picked at random just to be finished with the process. And then was unhappy with the result.

Now this abundance of choice is not solely breakfast’s fault. Products are being offered in a huge variety of options across almost every consumer industry. According to my own math Lays offers 39 different flavours of potato chips in the United States. Walmart carries 60 different types of toothpaste, Old Navy offers 206 different types of women’s jeans and Starbucks boasts that they offer over 87,000 different drink combinations.

laysThis constant expansion of choice seems to be based on the idea that more is better and that choice equals freedom. Or companies think the more they make, the happier people will be and therefore, the more they will buy. But does all this choice actually make us any happier? At what point does too much choice actually equal restriction and even stress?

The Jam Study

A study conducted in 2002 by professors at Columbia University and Stanford University tested this relationship between choice and purchase. In a series of high-end groceries stores in the United States the study set up two different gourmet jam tasting stations. The first jam station offered 24 jams to taste while the second offered only 6 jams.

The percentage of people who stopped to taste the jams?

Screen Shot 2014-11-06 at 11.18.44 AM

The percentage of people who actually purchased a jam after trying one?

Screen Shot 2014-11-06 at 11.18.37 AM

Interestingly enough this study seems to suggest people don’t actually like choice, they like the illusion of choice, but ultimately find too many choices difficult to deal with. In fact in the Behavioural Economics’ sphere this is referred to as Choice Paradox (or the Paradox of Choice) since an abundance of choice often renders people unable to choose effectively. Barry Schwarts, author of the Paradox of Choice; Why More is Less, explains that an abundance of choice makes people overwhelmed, stressed and anxious. Schwarts goes as far as to say “Unconstrained freedom leads to paralysis”. Emphasizing that the increase of choice leads to the decrease in ability to make effective decisions.

So what is it in our decision-making that makes choice so stressful for humans? Dr. Russel James from the Texas Tech University explains it best, “Choice and our satisfaction are driven by the comparisons we make”. Basically, as our choices increase we have to make more and more comparisons, and this increase in comparisons leads to lower satisfaction because we can’t tell which option is actually better. Think of this way:

Which ice cream flavour would you choose?

icecreammsimple2

Easy, right? And most likely you eat the ice cream and be happy with your choice.

Now which ice cream flavour would you choose?

Icecream2

Humans just hate making decisions, its stressful, it is hard work and it has consequences. As the number of choices in any situation increases it forces our brain to work harder to evaluate all of the options. We try to compare every option available and recall past decisions for similar situations.

As we have noticed the number of choices available in any one industry is insane. Can you imagine having to evaluate 87,000 different drink combinations at Starbucks before ordering?

So what do humans do when faced with vast choice? How do we survive in a world of over whelming options? It seems as if our coping mechanism for vast choice situations is to choose something familiar to us. We might buy the exact same drink at Starbucks each time or alternate between three we know well. This appears to help our brains because it relieves the need to evaluate all of the options available. As Dr. James explained it also makes us happier because it removes the risk for potential disappointment from a new choice.

There are of course some brands who have figured this out. Even Costco themselves – the Kings of choice – have started to slim their offerings. In an article by the New York Times, Costco CEO explains that the company has tuned into the fact that, “Selling fewer items increases sales volumes…”. One of their newer company philosophies is to sell a limited number of items. While Walmart sells 60 types of toothpaste, Costco only offer 4 toothpaste options.

The most interesting part about Choice Paradox is that it backs up why humans like to choose from three choices, as we discussed in last weeks blog. It is widely believed that the Centre Stage Effect is most effective when 3 options are presented and becomes less effective as the number of choices increases. If we include Barry Schwartz studies, at some point in increases choices people just begin to choose at random and no longer are influenced by a Centre Stage Effect. However my guess is that Social Proof could still play a part in human decision making even when a large number of options are offered.

Which ice cream flavour would you choose?

Icecream

In all of this it is not say choice is important to humanity and that people shouldn’t try new things. It is just to talk about and explain how excessive choice puts stress on our brains and can make us feel as if we are in a Choice Paradox. We seem to like the idea of vast choice but dislike actually having to pick from vast options. Another example of the humans brain irrationality.


More Reading and References

http://www.businessinsider.com/costco-is-the-anti-walmart-2012-11#ixzz3IEDrPrte

http://www.patriotledger.com/article/20140930/BUSINESS/309309952/12335/NEWS?template=printart

http://www.ted.com/talks/barry_schwartz_on_the_paradox_of_choice/transcript?language=en 

http://www.economist.com/node/17723028

http://www.jeremysaid.com/customers-will-choose-middle-offer/

http://www.slideshare.net/rnja8c/paradox-of-choice-2139360

What Does Social Proof Have to do with Human Decision Making?

We all know that when we are put in a new social situation, the best thing to do is to take cues from those around us, especially those with more experience in the situation, in order to fit in. For example, when we start a new job we often look to others to gather social cues on how we are supposed to act, what we are supposed to do and even when we are supposed to laugh. This is nothing new in human behaviour, after all, we are all tribal beings.

Looking for social cues from our peers is part of a much larger condition of human behaviour. As tribal and herd animals, humans feel most comfortable when they are assured they are following the norms of their specific cultural group. In behavioural economics this is called social proof.

Social proof is the psychological occurrence where people assume the actions of others or the actions of the majority is the correct behaviour for a given situation.

Social proofing is a powerful tool for marketing and advertising that has been used for decades. Think of the old McDonald’s signs promoting the number of burgers sold. That is a prime example of Popularity Social Proof.

Mc1

McDonald’s is not the only company doing this. In fact it was a popular marketing technique long before Behavioural Economics ever became mainstream. However now we have a name for it and a much deeper understanding of why humans care about social proof.

With the increasing amount of online marketing, advertising and purchasing, it’s no surprise that social proofing has exploded in the last decade. Here are a few popular ways of using social proof to impact consumer behaviour:

Expert or Celebrity Social Proof

An expert on a specific subject or a celebrity gives their stamp of approval to a product or service. This causes people to actually judge the product or service not on its own merits but on their impression of the expert or celebrity. For instance if you believe the expert to be stylish, cool and hip, you will consider the product they like as also being stylish, cool and hip.

 airjordans

Case in point: Air Jordan’s are still the best selling sneaker in Nike’s history.

 User Social Proof

User social proof occurs when a user openly approves a product or service. It is often found online in the form of customer testimonials, ratings, likes and reviews. Seeing other people believe in a product, talk about it and rate it causes people to feel confident in the product and often persuades them to buy it.

unbounce Unbounce, an online landing page builder, does a great job of using customer testimonials to assure customers of their excellent product.

Wisdom of the Crowds Social Proof

Wisdom of the Crowds Social Proof is when a product or service is so widely adopted or liked that the user has no need to question its validity or quality and easily buys into the idea. This often occurs when a certain threshold is achieved. For example it is easier to convince someone to watch a YouTube video with 1,000,000 views than if the video only had 100 views. The larger number of hits the first video has stands to validate the quality of video. It is also what helps videos go viral.

Gnamstyle

The Gangnam Style video got over 1 billion hits in 5 months.

Wisdom of your friends Social Proof

Wisdom of your friends Social Proof is when our peers or friends like or approve products or services. Since we both like our friends and consider them to be similar to us, we often find it easy to quickly like or adopt this product of service. From a simple recommendation of a product or service by a friend, to seeing a brand liked by a friend on Facebook, what our friends approve impacts our feeling about products and services.

Screen Shot 2014-10-22 at 6.40.59 PM

As you can see, social proof plays a huge role in marketing and advertising. But that’s not all there is to it. The above examples all fit into what is called positive social proof, where the desired behaviour is in line with what is shown. For instance a customer review says they love the product. This is the dominant way of using social proof.

However, with an even greater understanding of the dynamics of social proof it is also possible to use negative social proof. Negative social proof means using examples of behaviour which is not desired, in order to get the outcome that is desired.

This version of social proof is rarely used because it is easy to use it incorrectly. Here is an example of how negative social proof fails.

The Petrified Forest National Park in the USA noticed small pieces of their petrified forsest were being stolen by visitors. This was leading to the erosion of the National Park by visitors. In an attempt to stop people from stealing the petrified wood the park put up sign reading:

“Many past visitors have removed wood from the park, changing the natural state of the Petrified Forest”

This actually led to an increase in destroying trees since people thought it was ok to do since so many others had. They felt they were following the norm and therefore didn’t feel discouraged in stealing the petrified wood.

However, if used correctly, negative social proofing can be amazingly effective. Here is a great example:

The experts over at Draft FCB Institute of Decision Making used negative social proof in an ingenious way. While working to come up with a marketing campaign for Dead Space 2, a violent video game aimed at teenage and young adults guys, the Draft FCB teamed realized that what the users wanted the most was a game their mom’s would hate. Draft FCB then produced a commercial showing how disgusted mothers were by this game. This use of negative social proofing worked to re-enforce the branding of the video game and led to an increase in its sales.

So there you have it, proof that social proof is a great marketing and advertising tool. When understood properly it can be used to help shape decision-making moments for current and future customers.

The Human Brain is Irrational. How Behavioural Economics Explains Our Irrational Behaviour

Imagine right now you are craving chocolate and these are the offers available;

Lindt

A Lindt truffle for 15¢ or a Hershey’s Kiss 1¢. Which would you choose?

My guess is you would pick the 15¢ Lindt; it’s a good deal. You probably realize a 14¢ difference in price is a lot better deal than a supermarket would offer. In your mind it’s worth an extra 14¢ for the better chocolate. Now imagine the price is reduced by 1 cent. There is still a 14¢ difference between the chocolates but now the Lindt is 14¢ and the Hersey Kiss is free. Which would you choose now?

Duh, the free one!

A study at MIT conducted just this experiment and found that people overwhelmingly chose the Lindt in the first example and the free Hershey’s Kiss in the second example. This directly contradicts what economics teaches us. There is no change in the relative cost of two examples, the difference is 14¢ in both examples and therefore people’s preference should not change. But it did.

This study was conducted as part of a larger experiment on human decision-making. For years traditional economics has been the dominant theory regarding financially decision making, informing us that humans always make logical, self-serving, and rational decisions based on carefully reviewing the cost and benefits of each option presented. As advertisers we all intuitively know that this is not true. We all know that “buy one, get one free” works a lot better than “50% off if you buy two”.

Like advertisers, the human brain doesn’t concern itself with the laws of traditional economics. In reality the human brain is irrational. So irrational that at first it is hard to understand and predict. So, as advertisers, what tools exist to help us predict actual human behaviour?

Enter Behavioural Economics. It’s a relatively new field of combining Psychology and Economics to better understand how humans actually make decisions. Part science and part art, Rory Sutherland of Ogilvy Change calls it, “…closer to weather prediction than conventional science”. Behavioral economics is not about what people want to do, or what they tell others they will do. It is about what people actually do when faced with a decision in real life. Behavioural Economics takes into account things that effect behaviour such as mood, surroundings, peer groups, and even level of arousal. Looking at the human brain from this seat one begins to understand why free is infinitely better than 1 cent.

It is no surprise that this deep understanding of human behaviour is starting to make its way into the boardrooms of some of the largest advertising agencies worldwide such as Draft FCB and Ogilvy. I believe Behavioural Economics has a lot to offer advertising, as it is a great way to inject pure strategy into a naturally creative industry.

Follow my discussion of Behavioural Economics, my unorthodox experiments and my curiosity about the human mind in this weekly blog series. We’ll delve into the world of advertising strategy with a specific interest in how it can successfully be informed by Behavioural Economics.

This is the first article of a weekly series.


Sources: Shampan’er, K. & Ariely, D. Zero as a special Price, MIT. http://web.mit.edu/ariely/www/MIT/Papers/zero.pdf Halonen, E. In The Wild: Rory Sutherland, 2013. Indesion. http://indecisionblog.com/2013/03/18/in-the-wild-rory-sutherland/


The Evolution of Thanksgiving Advertising

In attempting to write a blog post about the best thanksgiving ads of 2014 I quickly realized there are no ads worth talking about this year, or for that matter, the last few years. A quick Google search reveals every big brand out there is focusing all of their efforts on pushing their sales. It seems that Black Friday and Thanksgiving sales have taken over the Thanksgiving advertising space.

It was not always this way. Take a look at these ads from the 1940’s, 50’s and 60’s. There was a level of charming festivity to their calls to action. They have smiling people enjoying family time and eating turkey.

1960 Pepse19501942

By the late 80’s and 90’s, the print ads are still quite festive and cheerful. The main message seems to be “enjoy our product with your friends and family this holiday.”

1984 199039dd9de84d67a6195254e59a17bdc976

Fast forward again to 2010 and beyond and the holiday of Thanksgiving is all but an afterthought in advertisements. Black Friday and Doorbuster deals have taken over the holiday advertising sphere and it is evident in every large brand’s communication. Take a look at the holiday advertising from 2013 around Thanksgiving.

blackfriday doorbustersKohls-Happy-Black-Thanksgiving-Thursday-2013

No one is talking about family time, or cheer or anything about being thankful. It’s purely about the specials, and which store can be open earliest in the morning and offer the best deal on an iPad. The entire thing has spun out of control a bit with us trampling each other down to get the most savings possible.

Last year, 2013, brands took it up a notch in the United States as they were allowed to open their doors on the holiday Monday. The weekend sales records hit the 2 billion dollar mark as people flooded into big box stores across the United States to gobble up the endless deals.

As an advertiser, it saddens me that all creativity and brand voice is lost at this time of the year, not only are brands encouraging people to buy, buy, buy instead of hang out with their families, they are doing it in such an uninteresting way. If the brands are going to steal Thanksgiving at least make us laugh while you do it!