23 March 2009
Successful Intentions Newsletter
Hi ,
When do you behave irrationally?
The correct answer is, just about all the time!
Here are some insights into the way our decisions are predictably skewed:
It's all relative!
When given a choice between three alternatives, and with little experience to go on, we immediately make a comparison between the two that look most alike, and choose the most attractive option. Which of these subscriptions to the Economist magazine would you choose?
- Internet-only subscription for $59.
- Print-only subscription for $125.
- Print-and internet subscription for $125.
Predictably, you most likely chose option 3. But that's because option 1 was the "decoy". If you only had to choose between options 1 and 2, you'd probably go for the cheaper subscription. Instead you ended up paying more!
Imprint me!
Once we make our first choice for something, our subsequent decisions in the same category will be judged relative to that choice. Much like the way Lorenz's geese imprinted themselves onto him as the first thing they saw after they hatched.
In a 2003 study, Dan Ariely, a professor of behavioural economics at MIT, asked marketing students to write down the last two digits of their credit card. Then he conducted an auction on a range of products from bottles of wine to computer peripherals. When he later analyzed data on what prices the students bid for these items he found those with the highest two digits on their credit cards bid highest while those with the lowest-ending numbers bid lowest!
Of course, these numbers were arbitrary until they became anchored in the auction conditions. And it seems our first decisions can resonate over a long sequence of decisions, whether we have a true preference for the item or not!
The cost of free!
Most transactions have an upside and a downside, but when something is FREE! we forget the downside. Here's an example. Which would you choose - a free $10 Amazon gift certificate, or a $20 gift certificate for seven dollars? Quickly, what's your first response?
Predictably you probably chose the FREE! certificate. But when you look at it, the $20 gift certificate for seven dollars is a net value of $13, and clearly better than the $10 value of the free certificate!
When choosing between two products we often overreact to the free one. So, if you want to sell more products, make part of the purchase FREE!
The price of money!
We live in two worlds - one where social norms prevail, and the other where market forces predominate. Of course, money rules, right? Wrong! We are more likely to volunteer our time, offer (and receive) gifts, and do more for each other when money is not part of the exchange.
When market norms conflict with social norms, social norms win. A good example is the bank or telco that likes to treat you as part of their "family" (social norms), but then treats you impersonally for some administrative oversight on your bill (market norms). How do you respond? Companies can't have it both ways. Either they respect the long-term commitment implied by a social contract, or limit themselves to market norms.
Make up your mind!
, click here to get more information on how to safeguard against your biases and make good decisions.
Register here for a FREE breakfast event at the Observatory Hotel in Sydney on March 25th, 7am-9am: "High-Energy Teams are No Accident! Getting the best from teams in challenging conditions" - theory and practice of how to revitalise a team that's stuck or transform a working group into a high-energy team, including a corporate case study.
And check out my new "Wisdom Circle" blog for musings, research, and applications of practical wisdom!
Keep your intentions clear,
Peter Webb
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