29 December 2015

No! You Will Not …

On King Street (main commercial street) in Alexandria VA there was a promotional booth for a (fancy) gym last weekend. The two men promoting the gym’s services approached passers-by and explained how each training program is designed by I don’t know what specialist.

Being in a rather bad mood at the time, my gut-reaction was: You Suckers!

Late December is a fantastic time to sell annual gym memberships at a premium. It is the perfect time to charge a lot for something that will not be used that much. This time of year lots of people make resolutions for the New Year to come, including going to the gym (more often). Coupling this wishful thinking and over-optimism with the large amount of money spent on Christmas festivities, paying 1000$ on a one year gym membership (discounted from 1200$, of course) makes all the sense in the world.

Gyms are full in January and virtually unpopulated starting mid-February.

The filled with optimism final days of any year are a fabulous time to sell, among others, the most expensive clothes racks and dust gatherers. I’m talking about home-gym appliances.

If you wish to get back in shape and restore the look you had in your early 20s, I strongly advise to become realistic. The early 20s look is long gone and will forever be so.

However, the over-inflated optimism can be put to good use for yourself, not for the marketers who sell you things that you’ll probably not use much.

If there’s one useful lesson from behavioral science, that is:

Who controls the context controls the behavior.  

Are you controlling the context? Because for sure the context controls you to a very large extent.

If you want to get in shape, buying 100 gym subscriptions and 10.000 home gym appliances won’t do much good as long as your context is the same as last year. Making changes in your daily context will help you.

Begin by rearranging your kitchen and eating space (Slim by Design by Brian Wansink is a great source of inspiration).

Join a food delivery service such as Hello Fresh and cook!

Walk! And take the long way home, literally! Get one of those activity monitoring devices such as fitbit to motivate you to make a few more steps. You could also try moving to a different home, though that is a bit difficult.

Discover where the stairs are in the building you live or work… use them, they will not bite even if you climb them.

Probably the most effective way of getting back in shape is to go back on the mating market - start dating, fall in love etc. While highly effective, this approach is a bit difficult for people in committed relationships.   

I wish you a good and down to Earth 2016.  

21 December 2015

How to sell a 5¢ product for 1$

You probably know those machines that (allegedly) allow you to win something by grabbing the prize with a mechanical claw. They usually make money by reducing the probability of winning thus for every N plays that cost 1$ they give a prize worth N/Z $ (where Z is always smaller than N).

Last weekend I came across a variant of such a machine that guarantees winning the prize. Only, in this case, the prize is a rubber duck worth probably 5¢ (manufactured in China for probably less than 1¢ per piece).

The nice twist is that the machine charges 1$ and allows the person to play till they win… reframing it, it for 1$ is sells a 5¢ rubber duck + the thrill of winning + making the player work for it, thus making her/ him value the rubber duck more.

Not a bad business idea … 

14 December 2015

How to Overcharge by Giving Discounts Indiscriminately

While Discounts are generally used to increase sales’ volume by decreasing prices and creating “buzz”, I encountered an interesting way in which discounts are used to overcharge one-time-buyers.

Usually promo codes and discounts are used to attract referral clients or in cross-selling. In the pictures above, however, this is clearly not the case. These pictures were taken in a Metro train in Washington DC. Since the promo code is publicly advertised, anyone who buys a ticket can use it to get a 10% discount.

Quite interestingly, anyone can, but not everyone will use the promo code to get the discount. This way, the seller is overcharging some of the buyers.

Assuming you want to sell something for $99, you can say that the price is $110 and then advertise 10% with promo-code XYZ… The bulk of buyers will use the promo code and get 10% of $110 off ($11) discount, thus buying for $99 which was the intended sale price. There will be other (forgetful?) buyers who will not use the promo code and pay the price of $110.

In addition, such spoof discounts might actually increase sales (in volume) because they generate transaction utility. While the term transaction utility might seem too pretentious, it actually means making the purchase seem like a good deal.

Such pricing (marketing) techniques are specific to one time purchases since they strongly rely on people not knowing what the right price is for the item.


7 December 2015

The Self-Defeating Fight against Vaccination Refusal

In reaction to the persisting decrease of vaccination rates in developed countries, public authorities, the media and non-profits counteract with information campaigns. In my opinion, this approach is self-defeating because it ignores the phenomenon’s behavioral realities.

1. Raising awareness is typical for information campaigns.

Articles with headlines such as Wealthy L.A. Schools' Vaccination Rates Are as Low as South Sudan's are well intended, but ignore the effect of social proof. When unsure what to do, people use others’ behaviors as cues for their own behavior. When faced with information on the increasing number of parents who refuse vaccination, others might interpret the message as: it’s OK not to vaccinate your children since others are doing this.

In many developed countries the overall situation is not as dramatic as some headlines indicate. The ideal vaccination rate is 95%+ which ensures herd immunity. The actual vaccination rates are somewhere in the 80-90% range. Healthcare professionals are worried mainly because of the trend and because of the real danger of losing the herd immunity.  As I understand the societal benefits of vaccination are not linear. Simply put, the societal benefit of improving vaccination rates from 80% to 85% is smaller than getting it from 90% to 95% (where heard immunity is achieved).

While from an epidemiological point of view a vaccination rate of 80% is worrisome news, from a behavioral science perspective things aren’t as dramatic. While most news focus on the increasing number of children who are not vaccinated, the upside is that the very large majority of children (in the USA) are vaccinated.

Saying that 20% of children are not vaccinated can be reframed as 80% are getting vaccines!   

In other similar situations, this type of simple reframing proved extremely effective in achieving behavioral change. Just as an example, many people have no problem buying a ham that is 97% fat free, but they would be very reluctant to purchase ham that is 3% pure fat.

Couple this reframing with social proof and you have a nice tool for reaching the goal of increasing vaccination rates.

Whereas headlines need to be dramatic in order to get clicks (or sell newspapers), public information campaigns need to be effective in achieving behavioral change – in this case get more children vaccinated.

Instead of relying on alarmist messages, why not simply say that the great majority (80%) of parents (in USA) do vaccinate their children.

Social proof and reframing of information can be used in even less favorable circumstances. A few months ago, I heard on the radio a commercial aimed at increasing the flu-vaccination rate. Unfortunately, the commercial said something like: “If you are one of the 65% of Americans who don’t get the shot, you can get the flu”.

Beyond the obvious errors in communication (from a behavioral science perspective), the reality of the numbers seems discouraging. When only (approx.) 35% of people get a vaccine, it is hard to leverage social proof – the great majority of people is not doing what is desired.

There is, however, a silver lining: 35% of the US population (311 million) is roughly 100 million people. Very likely, saying that over 100 million people (fellow Americans) get the flu shot is more convincing than 65% of Americans don’t get the flu shot.

2. Doctors are spokespeople in pro-vaccination campaigns.

The use of medical doctors as authority figures (recommenders) in communication has a long history. Doctors (or actors dressed as doctors) have recommended anything from detergent to cigarettes and from pharmaceutic drugs to diets.

While in many commercials using medical doctors as recommenders proved to increase the communication’s effectiveness, in the case of pro-vaccination (or anti anti-vaccination) campaigns is not exactly appropriate.  

Doctors’ presence and messages are reassuring for people who favor vaccination. However, those who are reluctant to vaccination don’t perceive doctors as authority figures, thus the message’s impact is severely diminished.

Simply put, in the eyes of (some) people who refuse vaccination, regular medicine is not trustworthy and so are medical doctors. Maybe herbalists, alternative healers etc. would be more credible.  

3. The rational message favoring vaccination is inadequate for tackling highly-emotional (false) concerns.

Strongly related to using medical doctors as advocates for vaccination is the messaging of pro-vaccination endeavors. Doctors dressed in their uniforms speak about the scientifically proven benefits of vaccination and talk about the serious dangers of not using this simple and effective prevention tool.

Although correct, this rational message is highly ineffective for those who oppose vaccination. Many anti-vaccination arguments have a high emotional load. Nobody (falsely) claims vaccines to cause kidney-failure – a serious condition with a low emotional load / fear-factor. Yet, all anti-vaccination advocates mention that vaccines can cause autism – a condition that has a high emotional component or fear-factor. By the way, vaccines don’t cause autism, but at one point someone made a false claim they did and the research has been proven to rely on faked data and the paper was later retracted. Yet, the legacy of fear left by that paper stands.

4. Vaccination’s benefits are Non-Events & the Availability Heuristic

The benefit of vaccination is very difficult to observe because it is a non-event – something that doesn’t happen. We humans are terrible at understanding non-events and in the case of vaccination things are even worse than in other situations.

Taking a step side-ways, I think we can all agree that a fire-fighter who goes into a burning building and saves a person (or cute puppy) is a hero worthy of public praise.

At the same time, the huge majority ignores other people who (indirectly) save many more lives from fires – the fire-safety inspectors: The bureaucrats who come with checklists and regulations, who generally are grumpy and somehow annoying because they keep insisting on even small features of compliance to fire-safety regulations.

These people save lives not by entering burning buildings, but by ensuring the conditions to prevent fires altogether and / or decrease the damage caused by fires.

The vaccination situation is somehow similar. Preventing a disease is not the same with curing one. A doctor who cured a patient with smallpox will receive many thankyou notes and will be held in high regard, but the nurse who gave thousands of anti-smallpox vaccines, thus preventing the disease, is still anonymous.

Earlier I mentioned that the situation is somehow similar. The high effectiveness of mass vaccination in preventing diseases, in fact, makes it more difficult to see the benefits of vaccination.

Let’s go back to the firefighter – fire-safety inspector illustration. The (paradoxical) reason for complying with fire-safety regulation is that there are enough (?!) fires to make the danger salient in our minds. Either in real life or in movies, fires are frequent enough to remind us that preventive action is needed.

In the case of vaccination things are a bit different. In developed countries recent cases of smallpox, poliomyelitis etc. are extremely rare. Mass vaccination led to having two-three generations free of such diseases and their devastating consequences. While during our (great-) grandparents’ childhood it was common for families to lose one or more children to diseases such as poliomyelitis, nowadays such instances are (almost) inexistent.

This is when the availability heuristic comes into play and distorts decision making on accepting vaccination.

The availability heuristic means that we judge the probability of an event based on the salience and frequency of memories of that event. We know of a lot of killings by firearms and very few suicides by guns, thus we perceive that there are more killings than suicides by firearms. The reality, however, is different: there are more suicides than killings by guns (at least in the US).

Because instances of terrible diseases that are prevented by vaccines are extremely rare and inconspicuous, we erroneously perceive the risk of not vaccinating a lot smaller than it actually is.

Here’s where movie makers can lend a hand. Instead (alongside) of scaring people with terrorist plots, doomsday scenarios etc. they could include more instances of people suffering and dying from poliomyelitis, smallpox etc.

5. Costs are in the present and benefits are in the future
Most people prefer 100$ now over 110$ in one year from now. This is an illustration of a psychological phenomenon called discounting future outcomes.

Vaccinations’ (non-event) benefits occur in the future (1-20 years) and, subsequently, are discounted in the present. The discomforts of vaccination– parents have to take their child to the clinic to get the shot, normal minor side-effects (fever, local swelling etc.) – are in the present.

The false dangers of vaccination allegedly occur very soon after getting the shot (in the present, not in the distant future).  

While it is impossible to change the nature of non-events and to eliminate the discounting of future outcomes, there are several things that can be done.

First, to tackle time discounting we can bring the benefits in the present. Naturally, vaccination’s benefits cannot be brought in the present (more so since they are non-events), but decreasing costs (hassle) in the present could be a great approach. In addition, although it might seem unethical, we could offer incentives in the present for getting vaccinated.

Second, to tackle the issue of non-events, we could try to make the immediate benefit more concrete by offering tangible rewards. As mentioned earlier, we could increase the frequency and salience of the dangers of non-vaccination and movies are the best way (at least in my view).


3 December 2015

Do I Really Need a Financial Incentive to Recommend a Service / Product?

Shortly after my wife and I moved to the USA, I noticed an announcement in the apartment building we live in that said: “recommend a friend to move here and you get 250$ when they sign the rental contract” (citing from memory). From an economic point of view this made perfect sense: you bring a client to a business and you get something in return.

Only later I realized that this type of incentive made sense when I saw it simply because, at the time, we barely knew anyone on this side of the Atlantic. A few months later, two former colleagues from Erasmus University moved from The Netherlands to the Washington DC area and they were looking for a place to live. We wanted to help them and showed them around the neighborhood. They were curious about the place we lived in and they came over to our place. To make a long story short, I got a business card from the leasing office of the building and gave them the information. The leasing officer (a very nice lady) mentioned that the offer of 250$ was still valid, so if our “friends” leased an apartment from them, we would get the incentive.

That was the moment when it struck me that this type of incentive scheme was faulty. Although I wouldn’t mind getting 250$, my motivation for recommending the apartment building wasn’t financial. We can pay the rent and I think, considering market conditions, that we get a reasonably good deal. We wanted our former colleagues to enjoy the same price-quality ratio. Moreover, the prospect of getting some cash out of the whole thing made me feel guilty. I truly, deeply hate the multi-level marketing approach. The relationship with our former university colleagues was social, not economical.  In fact, as someone who recently made the move from The Netherlands to the USA, we knew the costs and inconveniences it involved. If anything I would have preferred for our former colleagues to get the 250$.

Our former colleagues picked an apartment in a different neighborhood and the 250$ never left the real-estate company.

A similar case happened with a meal-delivery service we use. At the recommendation of my friend Arjan Haring (from The Netherlands) we tried Hello Fresh – a meal delivery service. In a nutshell, we pay each week 70$ and we receive a box with ingredients for three meals for two. This (type of) service is fantastic for foodies such as myself and my wife. We enjoy cooking and eating new stuff, but aren’t actively looking for new recipes and ingredients.  For our food experience, Hello Fresh is a blessing.

As we were very excited about this service, we talked about it with our few acquaintances in the US. Most of them seemed intrigued and curious about it.

In the first month(s) of using this service, Hello Fresh had an option for existing clients to “give a box” for free. It was an (a)typical approach for bringing in new business based on (existing) customer recommendations.

A bit later, however, they changed this “give a box for free” approach to a split incentive scheme. Basically, if we recommend the service to a “friend” and she subscribes, we get 30$ discount for our next order and the recipient gets 40$ off their first order.

While there is some economic sense in this split benefit approach, I began feeling uncomfortable recommending Hello Fresh. I wouldn’t mind 30$, but the financial incentive doesn’t match my motivation for recommending the service.

I recommend something because I want others to enjoy the service we think is great, not to make money out of it.

While in the case of Hello Fresh there might be some evidence-based reason for changing the approach to generate leads from existing clients from “give a free box” to split-benefit, there’s a big lesson to learn, particularly for marketers.

If you want to leverage your existing clients’ social relationships for your business, you need to understand their nature: SOCIAL.

Most people make a reasonably good distinction between social norms and market norms. The element that makes multi-level marketing utterly disgusting is that it perverts social relationships into (wannabe) market / business relationships.

Social relationships are based on imitation, reciprocity, status and alliances. Once you understand this, you can properly leverage them for your business’ benefit.

Simply put, if you want me to recommend your service to a friend (acquaintance, colleague etc.) help me enhance my social relationship with her/him. If you allow me to make a gift in the form of a discount, voucher or even allow me to offer them a full experience for FREE, that makes me look good, gain reputation etc. with the person with whom I am having a social relationship. This gain in strengthening my social status or relationship with someone I know (well) is, for me, more valuable than (the relatively small amount of) money you are offering as an incentive.

Marketing & Behavioral Science: www.naumof.com 

2 December 2015

What Is NOT Happening: The Wisdom of the Insect Screen

When we analyze a situation (or simply are awed by it), we look at what is happening and, naturally, try to understand why. When designing something or when working on a new product / service, we focus on what it enables us (people) to do.

This is all perfectly natural, yet it is only (I dare say, small) part of the picture. When analyzing a situation we need to try and see What is not happening. Of course, pigs don’t fly and aliens don’t land in your backyard, but these are extreme examples. Whenever something happens, many (related or not) other things don’t happen. If it is too abstract, it will make lots of sense in a couple of paragraphs.

When designing / working on a new product or service the focus is on what it will enable people to do (better). Very rarely, we focus on what the product or service will prevent people from doing. This is only natural, but, nonetheless, what a product / service prevents from happening is at least (equally) important.

The Wisdom of the Insect Screen

On a personal note: For a long time I had in mind the notion of what isn’t happening and non-events on a very abstract level, but only recently found a great, down to earth, illustration: The Insect Screen.

When my wife and I moved to the Washington DC area (USA), we didn’t fully realize the issue with insects (it was early March and there was snow). Virginia is a warm and humid area – a paradise for bugs. When we picked the apartment in which we now live, we took for granted the insect screens at the windows. For those who don’t know, an insect screen is a fine-metal-wire-grid fixed on the outside of (opening) windows that allows for the circulation of air and prevents insects from entering.

That’s all good and rather simple. It’s not rocket science and makes perfect sense. Moreover, the product – insect screen – does what it is supposed to do: it prevents insects from entering the house. It also enables people to open windows without having to be concerned about flies, mosquitos and other bugs creating nuisance.

The insect screen, however, has further implications. While it was designed to keep insects out, it also makes it difficult for things to get out of the apartment through the windows.

A couple of days ago, a Facebook friend posted that her cat took a dive from the 6th (7th by American standards) floor. While I’m glad that the cat is alive (though a bit shook-up), I have to say that this accident wouldn’t have happened if the windows had (fixed) insect screens.

In my country of birth (Romania), though not only, many people living in apartment buildings have a habit of throwing out trash out the window. While most often this restricts to cigarette buds, shaking out carpets, blankets or table cloths, sometimes it happens to be larger items such as trash bags. Many apartment buildings have small yards around them, but these behaviors happen even in buildings that are facing directly to the sidewalks of large streets and passers-by might get some breadcrumbs on their heads.

These negligent, inconsiderate and even anti-social behaviors would be impossible if windows would have (fixed) insect screens.    

On a more positive note, while insect screens are designed to keep out insects, they also keep out other things such as leaves, flying plastic bags, birds and even large rain drops. Insect screens are impotent when there’s a large rainstorm, but if the rain is mild, you can still keep windows opened without having to worry about moping the floor.

If a banal product such as the insect screen has so many non-event implications, shouldn’t you think creatively on what your product’s non-event implications are?  

23 November 2015

Is Overconfidence Bias All that Bad?

A while back Daniel Kahneman said in an interview that if he would have a Magic Wand he would eliminate overconfidence.

The article further elaborates on what Kahneman means: “Overconfidence: the kind of optimism that leads governments to believe that wars are quickly winnable and capital projects will come in on budget despite statistics predicting exactly the opposite.”

Probably the best known example of overconfidence is that of newlywed couples who, very close to the time of getting married, unanimously say that their chances of getting divorced are zero. This, despite the statistical fact that around 50% of marriages end in divorce. If I’m not mistaken, even people who get married for the second time exhibit a similar overconfidence bias.

Without challenging the great Kahneman, I wonder if there isn’t a good (evolutionary) reason for why we’re all affected by overconfidence.

It goes without saying that the prediction: the war will be over by Christmas was wrong for both World War I and World War II. Naturally overestimating one chances of success when starting a war is detrimental – one starts a war.

However, there are lots of benign cases of overconfidence bias that have some positive impact, at least at a higher societal level.

Coming back to marriages: if, at the time of the wedding, we wouldn’t be overconfident about our marriages’ chances of success, we might never do it… and this includes those whose marriages last.

Having children is another case of overconfidence and is strongly correlated to marriage. Whether married or not, future parents underestimate the hassles they will face.

Overconfidence among (wannabe) entrepreneurs is widely known. Every entrepreneur believes she or he will bring to the world the next major business, paradigm-shifting tech product etc.

The statistical reality, however, is a lot more down to Earth. Most new businesses fail and the chance of creating the next big business is in the same order of magnitude of winning the lottery.

However, trying to start a new business brings some benefits at both societal and individual level. In order for a new business to benefit its owners it doesn’t have to be the Next Big Thing. In order for it to benefit society, it can be even a small business that works reasonably well.

With the risk of using myself as an example, when I started my first business (after successfully setting-up a student non-profit), I was wondering: How can I fail? and I got more than one answer. My first business endeavor was an utter failure. But after a while, I tried again in a different area of business and after about a year I managed to find a business model that worked (at least for a couple of years).

Without starting that first, doomed to fail business, I would have never started the one that finally worked.   

There’s a Romanian saying that would translate to English as:

You entered the game, now play.

I believe overconfidence has the role of Getting us into the Game; of getting our behinds off the couch and doing something. Even if that initial something doesn’t work, we’re in the game and we have to play, so we are forced to figure out how to manage.

I believe many people get married due to love and, of course, overconfidence. Naturally things don’t go as in the ideal scenario, but this makes us figure out ways in which we can make things work.

Many people start a business that doesn’t go as they dreamed (overconfidence strikes again), but at least some will try to figure out what and how can work. Maybe some entrepreneurs start as (delusional) dreamers who believe that they will bring The Next Big Thing, but end up having a reasonable small business that provides them with an income and pays a few employees.

I believe overconfidence plays a huge role in getting us to begin doing things. Some will end up in failure, but others will get done and will be useful. 

20 November 2015

When to Fire a Cannon and When to Use a Precision Knife in Behavioral Design

When designing and testing a behaviorally informed intervention, there are two extreme approaches: (1) Precision Knife Approach and (2) Firing a Cannon.
In the Precision Knife Approach we design a simple intervention that uses only one or two features that vary (independent variables). We subsequently run an experiment (Randomized Control Trial – RCT) to investigate each feature’s effect on the target behavior (Dependent variable).

The Precision Knife Approach is rooted in rigorous academic research. In order to conduct proper (experimental) research, scientists need to investigate the effect on the target behavior (Dependent variable) of each feature that is manipulated (independent variable) and, if more than one, their interaction effect(s).

The advantage of using a Precision Knife Approach is that you get to know how each feature in your intervention works. You know which features used together generate positive interaction effects (i.e. 1+1 > 2) and which features used together generate negative interaction effects (i.e. 1+1 < 2). 

The downside of the Precision Knife Approach is that it faces behavioral designers with a choice between simplistic interventions (i.e. one or two features) that can easily be tested and complex interventions (i.e. 4 and more features) that are incredibly difficult to test.

The difficulty of testing complex interventions (using the Precision Knife Approach) comes from how a correct experimental research design is done. If we have an intervention based on one feature, then we need two experimental conditions (test cells): Control and Intervention. Once we introduce another feature in the intervention the number of test cells doubles. If we introduce a third feature it doubles again (from 4 to 8) and so on.

Having such hyper-complex research designs is impractical for many reasons including costs of designing different variants of the intervention, acquiring a large enough sample to “fill in” all test cells etc.

The other extreme approach is the Firing a Cannon. In a nutshell, this means that when designing the behaviorally informed intervention, you put everything (reasonable) in it and, subsequently, test the entire intervention against a control (do nothing) or / and against the current material used.  

From the point of view of scientific research methodology this is really sloppy. Moreover, it comes with the risk of generating negative interaction effects (1 + 1 < 2).

From a design / practical point of view, the Firing a Cannon Approach is highly useful because behavioral design has the main goal of improving an existing situation through cost-effective and subtle means (interventions). Finding the best – most effective – intervention can be a later goal.

Moreover, the Firing a Cannon Approach requires fewer resources and smaller samples to test the effectiveness of the intervention.

Another reason for which the Firing a Cannon Approach is advantageous is the increased chances of actually getting things done or proving the worth of behavioral design.

Imagine that you go to a (prospective) client or beneficiary with a complex intervention and an extremely complicated RCT design (such as in the Precision Knife Approach). Because most people are scared of complex things, there’s a good chance that the proposition will be rejected.

Imagine that you go to a (prospective) client or beneficiary with a simple intervention using one or two features and the proposition is accepted. You implement the intervention and run the RCT. You find nothing – the intervention doesn’t work. Subsequently you meet with the beneficiary (client) and present the non-results and ask to run another try, this time using different features (tools) in the intervention. Although this is perfectly correct from a methodological perspective, (real) people are not eager to keep investing in things that don’t produce (desired) results.

In the early stages of the behavioral design process (after the research), the Firing a Cannon Approach is superior to the Precision Knife Approach. In the beginning it is important to show that cost-effective behavioral interventions produce results that are equivalent or superior to what is happening at the current stage.

If the project allows for refinement of behavioral interventions, it is possible to use the Precision Knife Approach to fine-tune the materials used.

For more on Behavioral Design take a look at www.naumof.com 

7 November 2015

Emotions in Sequence: A Real Life Case

Contempt & disgust >>> solidarity & fear >>> anger >>> hope.

Some of you might know already about the tragedy that happened one week ago in Bucharest – Romania. There was a fire in a nightclub which resulted in 32 deaths and more than 130 people being injured, at least 20 being in life and death situations. I wrote about it here and international media ( BBC, CNN) covered the event.

Prior to this tragedy, the general feeling among (middle class) Romanians was that of contempt and disgust for politicians, government, most public authorities – in general The System.  For those of you who don’t know much about my country of birth, it is a fantastic place that, unfortunately, is plagued by oligarchy, corruption, imposture and nepotism. This is particularly in public administration and government, though, to be fully fair, the private sector is, one way or another, accomplice or at least involved.

However, for many (young) professionals from the middle class, things were tolerable as long as there wasn’t any major disruption in their daily lives.

After the tragedy in the Collective nightclub, where 32 people died burned alive and more than a hundred were injured, the citizens of Bucharest (capital of Romania) realized that, what used to be an acceptable / tolerable level of corruption, was in fact, one of the causes of the tragedy. Fire safety certificates, public business certificates issued with bribes, general negligence etc. were the causes of this tragedy.

After 3 days of mourning during which there was an unseen expression (attitudes and behaviour) of solidarity, Romanians took to the streets. In an unprecedented show of public anger. More than 25.000 citizens of Bucharest (that is more than 1% of the population of the city) asked for the resignation of the mayor of Bucharest’s fourth district (where the nightclub was established), the resignation of the Minister of internal affairs and the resignation of the Prime Minister (which, by default implies the resignation of the whole Government).

The next day, all three resigned. The outcome was 35.000 people on the streets of Bucharest and 70.000 in the entire country demanding profound change in public governance and manifesting against corruption.

The next day, the President of Romania (the last politician with a good level of trust) invited the political parties for consultations in forming a new government. Moreover, he invited the civic society and representatives of the protestors for talks.

After these consultations and talks, there is some feeling of hope.

Setting aside the factual very recent history (talks with the civic society & protestors’ representatives took place on the same day of writing this post), from a psychology point of view, it is fascinating to see the evolution of public emotions and their recipients.

Before the tragedy there was contempt and disgust towards politicians and politicized public authorities. Immediately after the tragedy there was solidarity (altruism) with the victims, their families and technical public servants (i.e. doctors, first respondents, firemen etc.). There, also, was a natural fear of death and fire. Subsequently there was huge anger with the political establishment. Now there is a glimmer of hope.

Contempt and disgust >>> solidarity & fear >>> anger >>> hope.

P.S. Honour to the first responders and medical staff who treated and treats the wounded. A huge Thank You to the citizens and governments of France, Turkey, Belgium, The Netherlands, Israel and Germany (sorry if I missed someone)! These countries and their citizens offered to help with medical services for the care of the wounded.

P.S. 2. Apologies to my fellow Romanians for not being on the streets alongside you.

31 October 2015

The Unrewarded, Despised Heroes? On the Deadly Fire in Bucharest Nightclub

Everyone loves a hero… that woman or man who comes to the rescue in difficult and dangerous situations. We praise heroes… we have (action) heroes fiction movies, stories and legends. Presidents, kings and queens hand out medals to people who saved others in dangerous situations. Sometimes, after a hero’s death we erect statues and monuments honouring them.

Last night (30th -31st October 2015) at least 26 people died and more than 100 were injured, many with severe burns in a fire in a night club in the city that was my home for 21 years – Bucharest (capital of Romania).

The tragedy was reported by local media, the BBC, CNN and many other international media organizations.

The local authorities’ response was OK, even good, but, nonetheless the tragedy left behind victims and a city of more than two million people in shock.

The firemen, the first aid responders, doctors and nurses all are, in some ways, heroes. They are the ones who came to the rescue, the ones who came to the hospitals in the middle of the night to take care of the wounded who went out to have fun at a concert and ended up scarred for life.

I can’t predict the future, but it is likely that in the foreseeable future the president of Romania will hand out some medals for bravery in the line of duty… and rightfully so.

In hindsight we will know who the heroes are and they will be rightfully praised.

There is, however, a different group of (anti)heroes and I’ll come back to them really soon.

How did the fire happen? The investigation is now in the early hours, so we don’t fully, definitely know what actually happened. Nonetheless, this is not the first tragedy in the world that involved a fire in a night club. Previous cases fit well with the “Swiss cheese” model for tragedies. In other words, there wasn’t one single factor that led to the tragedy, rather several holes in safety overlapped.

Early reports and eye-witness statements include the use of highly flammable materials for sound-proofing the nightclub (i.e. foam, artificial sponge), overcrowding, one fire-exit door being blocked, fireworks that went bad, narrow streets with lots of cars parked that made it difficult for fire trucks to intervene quickly etc.

In hindsight all of these are obvious danger factors. Nonetheless, these holes in safety are not unique to Bucharest nightclubs and there have been thousands of nights of fun that went on just fine despite the (now) obvious hazards.

Let me get back to the other category of (anti)heroes… they are the fire safety inspectors, the bureaucrats that give out permits for such establishments to go into business. There are lots of people whose daily jobs consist of enforcing boring, annoying safety regulations. These jobs aren’t fun! Particularly because many people including business owners find such regulations at least annoying if not obnoxious.

Indeed, business people and home owners want to get things going and complying with (fire) safety regulation isn’t exactly on top of their agendas.

And here come the unwanted, annoying, obnoxious and, most importantly, invisible heroes. The fire safety inspectors, work-safety inspector, building safety inspector etc.

Although we don’t particularly like these bureaucrats with their checklists and regulations, we have to admit that, when it comes to reducing the incidence and impact of disasters, they do a lot more than the praised heroes in saving lives and property. No! These people don’t get the spotlight or the praise of the community, but we should acknowledge their role, particularly when a tragedy strikes… we should remember that many other tragedies didn’t happen because a small, annoying bureaucratic inspector came in to check the application of safety rules in the restaurants, shops, apartment buildings, nightclubs etc. which we have visited in the past.

So, how come this tragedy in Bucharest happened? Again, I don’t fully know the answer. However, I know a thing or two about how things go there… When it comes to rules and regulations, Romania is doing great. The issue is with applying and enforcing them. Maybe the owners of the nightclub passed the safety inspection and then changed some things; maybe they bribed the safety inspector; maybe the business didn’t have the proper permits… there are lots of maybes…

What is sure is that at least 26 people died and at least another hundred were injured. It is also sure that bad design was involved (you don’t put inflammable foam with fireworks in an indoor space).

Beyond finding who is responsible for this tragedy (Romanians are great at assigning blame), I strongly believe that we need to learn from this unfortunate, though preventable, event.

We need to learn that the unappealing, badly paid, obnoxious and annoying fire inspector is a hero – an unrewarded, almost invisible and completely ignored hero.    

29 October 2015

Behavioral Science Explains the Failure of Free Markets

Most of you know me as a behavioral science guy, but I have to make a confession: my initial training is in Economics and business administration. Being born in a country with a communist dictatorship, with a centralized economy and spending much of childhood and teenage years in a chaotic backwards transition to market economy, I firmly believed in the virtues for free markets.

Perhaps because of this experience and seeing what free markets can do in a society unaccustomed to how they work, made me think hard if free markets are as virtuous as I thought them to be. And the answer is ambivalent: on the one hand, yes! It is absolutely obvious that a free market economy is far better than a centralized and corrupt one. On the other hand, however, free markets can be extremely perverse and lead to severely sub-optimal results (equilibrium).

Too often free markets fail to achieve the goal of maximizing consumer benefit.

When thinking about the pros of free markets, there are two prevalent assumptions: (1) people (buyers) fully understand what they are buying and (2) people can punish sellers by not buying from them anymore.

When these two assumptions are met and when there is competition among sellers, free markets work just fine.

Consider the example of fruit and vegetables. Anyone can understand what they are, anyone can quickly assess their quality, even if not necessarily before purchasing. Since they are bought frequently anyone can punish a seller by not buying from him or her next time they are shopping. Moreover, if the product is faulty, the damage to the buyer is minimal.

Another similar example is that of hair-dresser saloons (establishments). Anyone can quickly assess if they are happy with their new haircut, with the service provided etc. Although we don’t usually visit the hairdresser as often as we buy fruit and vegetables, the purchase of such services is frequent enough to allow the buyers to punish the sellers by not going to their establishment next time they get a haircut. Again, the damage caused to the buyer if the service is faulty is relatively low (unless it’s your wedding day).

In such situations free markets work just fine with minimal (common sense) regulation.

When the two assumptions of (1) people (buyers) fully understand what they are buying and (2) people can punish sellers by not buying from them anymore are not met, free markets are disasters waiting to happen.

An obvious example is the banking / credit market. For the huge majority of people a loan is a difficult to understand product and not seldom banks (credit institutions) make them even more complicated than they should be. Understanding the exponential relationship between the cost of the credit and the duration of the loan is extremely difficult even for trained economists. Fully understanding the maze of interest rates and fees requires a chess-master’s mind coupled with lengthy deliberation, computations and spreadsheets. The huge majority of people who take loans do not have these abilities or afford the necessary effort and time. Instead they rely on simple / simplistic rules of thumb (heuristics) such as how much do I like the person selling this or which one has the smallest monthly payment.

Since some loans are by their very nature long term (i.e. mortgages), it is virtually impossible for the buyer (loaner) to punish the seller (bank) if the product is faulty. If you consider the duration of 20-30 years for a typical mortgage, you probably realize that many marriages don’t last that long.

Moreover, if the product is faulty – a loan has hidden costs or other vices, the impact on the buyer is huge. For example, between 2006 and 2008 in Romania (my country of birth) there was a frenzy of loans in Swiss francs. The people who took out those loans ended up paying more than double what they should have repaid because the exchange rate Swiss Franc to Romanian Leu (local currency) doubled. In other words, when the loan was contracted you needed 2 Romanian currency for every Swiss Franc; a few years later you needed 4 Romanian currency for every Swiss Franc. More on this here: http://naumof.blogspot.com/2015/01/the-black-swan-of-swiss-franc.html

Financial products are not the only ones that make free markets produce failures every other year and disasters every (other) decade.

Take the example of medical services. I don’t like doctors, but I have to admit that getting through medical school isn’t easy and becoming a full medical doctor requires lots of learning and training.

In the case of medical services, the client (patient) is almost always completely incompetent and incapable of evaluating the quality of the service. In some milder cases, of course, the patient can see if she recovers or not after the prescribed treatment or procedure. This, however, is not always the case.

Consider a root-canal treatment and a new “fake” tooth. It is almost like a mortgage. It should work fine for ten-twenty-thirty years, but on the moment it is extremely difficult to evaluate. It is very hard for the buyer to punish the seller if the product is faulty simply because quality is very hard to evaluate and purchasing is infrequent. Moreover, the quality of a good (root-canal) treatment includes the durability of the work.

Naturally, in case of faulty medical products (services) the impact on the buyer’s well-being is huge.

Some might disagree with me on the points made above, particularly on the medical services. Some might say that they are capable of properly evaluating the quality of medical services. In fact, in many countries, patients are asked to evaluate the doctors who treated them.

Patient evaluations are a vicious by-product of free market thinking. It is well intended, it makes some sense and it is absolutely wrong.

Without proper medical training it is extremely difficult to assess if the doctor did a good job or not. As in the case of (long term) complex loans, even people with specialized training find it difficult to properly evaluate the quality of the product or service.

Why do some people believe they can evaluate the quality of medical services?

These people do not evaluate the quality of the actual medical procedure – the medical act. They are evaluating, at best, reasonable proxies.

For example, someone who had a root-canal treatment can evaluate how clean and modern was the dental clinic (i.e. general aspect); she can evaluate how much pain she was in; she can evaluate how the doctor and staff treated her and how much empathy they shown.     

All of these are, at best, correlated with the quality of the actual root canal treatment procedure. It makes sense to assume that doctors who give a lot of attention, put in a lot of effort in the actual medical procedure would have nice looking practices, while those who don’t give a damn on their work would do the same with the aspect of their practice.

But this is, at best, a correlational, not causal relationship.

Behind these (quality) evaluations is a cognitive process called “attribute substitution” in which we answer a difficult question with the answer of an easier one. When asked the difficult question of what was the quality level of the medical procedure you went through, people give the answer to the easier question of how they felt about it (during).

People can evaluate how they felt – the quality of the experience, not the quality of the medical procedure.

Free markets and a free market way of thinking (e.g. incorporating patient evaluations in doctor’s compensation) can create vicious situations that are clearly not maximizing the benefit of the buyer.

Patient evaluation and free markets in the medical services can lead to situations in which a competent, but grumpy doctor is overtaken by an incompetent, but very agreeable one.  

Free markets fail when it is difficult for the buyer to assess quality and it is extremely difficult to punish the seller for faulty quality of the merchandise may it be goods or services. 

19 October 2015

Shooting Yourself in the Foot with Focus and Loss Aversion

My wife and I are (re)visiting The Netherlands for a few days and we rented an apartment via booking.com. When we arrived, the owners asked us to pay the city tax in cash since they didn’t want to pay a processing fee to the credit card company. You can imagine how that felt like, particularly after 24+ hours without sleep and a trans-Atlantic flight.

Just to be clear, the city tax is about 15 Euros. I’m not sure how much they would have had to pay for the payment, but even a fee as high as 5% would have resulted in a cost of less than one Euro.

Unfortunately, this is not the only situation I encountered in which (small business) people shoot themselves in the foot because they focus on avoiding (small) losses on narrow mental accounts.

Some restaurant owners want each and every table (seating) to be profitable and, occasionally, become sales-aggressive or impolite.

A print-shop owner stopped handing out candy because someone took a hand-full from the candy jar.

A business owner wants to make a profit on each and every transaction, thus refusing to make some small deliveries.

A small-shop keeper refuses to install a bankcard-payment POS because the bank charges him 3% of every transaction.

Each of these examples makes intuitive sense: nobody likes to lose money.

The focus on making a profit on each and every transaction might sound like good management, but it simply isn’t.

Each such decision is like shooting yourself in the foot and later wonder why you can’t run.

Sure, a restaurateur might squeeze another few dollars or euros from a client, but there’s a good chance that person will never set foot again in the restaurant. A shop keeper will avoid paying the bank the transaction fees, but some existing clients might start avoiding the shop, while potential clients will not even consider it since they can’t pay with their bankcards.

You might think that such problems occur only for small businesses, but this isn’t exactly the case.

Let’s do a thought experiment:

Imagine that a friendly alien comes from the sky and proposes the following gamble: a fair coin will be flipped and if the space-ship side comes up, you will win 150$, while if the other side comes up you will lose 100$. Each side has a 50:50 chance to come up.

Would you take this bet?

I’m not sure what you would do, but I have shown this situation to hundreds of participants in my training programs in applied behavioral economics, many of them in pretty large businesses.

Only about 10% of them say that they would take this bet. For all the others, taking a bet in which you can either win 150$ with 50% probability or lose 100$ with 50% probability is unacceptable.

This holds even after I compute the expected value of the gamble (which is +25$)

One participant asked me if the bet is played only once and I answered yes. He said that if it is only once he doesn’t take it, but if it would have been played several times, he would take it.

Here’s the key: if you play this bet several times, on average your chance of overall gaining money increases, even if you will sometimes lose. If you play ad infinitum it is certain that you will end up gaining money.

Imagine a conference room with 20 people having to decide if each of them would take the above mentioned bet. If all of them are from the same company, it is like the group (company) would play the bet 20 times.

Up to now, no one realized this. Every person makes a decision on their own and, usually, the decision is to not take the bet. Overall the group (company) loses because everyone thinks individually…

I am not criticizing anyone, but it might be a good idea to take a look on the rewards and penalties systems. If, during an evaluation period of one year, an (each) employee has to make one such decision she will most likely not take the risk because there’s a good chance (50%) that she will lose money for the business and her evaluation will be bad, her bonus will disappear and so might her job.

Small businesses shoot themselves in the foot because they focus on avoiding loses on each and every transaction.

Large(r) business shoot themselves in the foot because they focus on evaluating each employee / department / manager etc.