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# Harnessing bias

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### Harnessing bias

1. 1. 1<br />Harnessing<br />Bias<br />Andrew Hingston<br />Switch Solutions<br />
2. 2. Name<br />Something most others here don’t know<br />Example of a very silly or biased decision made by a customer (preferably amusing)<br />2<br />
3. 3. 3<br />?<br />Why<br />harness bias<br />
4. 4. Today<br />1. Rational decisions<br />Satisfy needs<br />Consider trade-offs<br />Think at the margin<br />Consider price cost value <br />Respond to incentives<br />Consider relevant costs<br />4<br />2. Biased decisions<br />Gains and losses<br />Framing<br />Ownership<br />Anchoring<br />Costs<br />Negative Comparisons<br />Over-confidence<br />Status-quo<br />Self-serving<br />
5. 5. 5<br />1<br />Rationaldecisions<br />
6. 6. People try to satisfy their needsin a rational way<br />Decisions satisfy needs<br />Physical, safety, belonging, esteem, realising potential<br />Maximise satisfaction<br />Not necessarily selfish<br />6<br />1. Rational thinking<br />
7. 7. ValueorSatisfaction<br />Number of beers<br />More is better … but by less<br />1. Rational thinking<br />Utility TheoryBentham and Mill19th century<br />7<br />
8. 8. 8<br />Consider one of our products.What needs or wants does it satisfy?<br />
9. 9. 1. Rational thinking<br />People face trade-offs<br />Resources are scarce<br />Time, money,equipment, employees<br />Scarcity forces choice<br />9<br />
10. 10. 10<br />Consider one of products.What needs are most easily sacrificed by customers when on a tight budget? <br />
11. 11. 1. Rational thinkingPeople should think at the margin<br />11<br />How much advertising makes the most profit?<br />Can it be worked out without calculating profit?<br />
12. 12. 1. Rational thinkingPeople should think at the margin<br />12<br />Somewhere between \$2,200 and \$2,400since this results in highest profit of \$1,600<br />
13. 13. 1. Rational thinkingPeople should think at the margin<br />13<br />Somewhere between \$2,200 and \$2,400since this is when extra benefits = extra costs<br />
14. 14. On what could you spend an extra hour per week that would yield the most benefit?<br />Where could you save an hour that would have the lowest cost?<br />14<br />
15. 15. 1. Rational thinkingConsider price, cost and value<br />Value<br />Amount buyerwilling to pay<br />Price<br />Amount buyer pays<br />Cost<br />Total costto seller<br />15<br />Value captured by buyer<br />Value captured by us<br />Value captured by oursuppliers<br />
16. 16. 16<br />Value<br />Price<br />Cost<br />Value captured by buyer<br />Value captured by us<br />Value captured by oursuppliers<br />Consider one of our products.What are some ways we create value? How do we capture it?<br />
17. 17. People respond to incentives<br />Buyers Value versus Price<br />SellersPrice versus Cost<br />17<br />1. Rational thinking<br />Value<br />Price<br />Cost<br />Value captured by buyer<br />Value captured by us<br />Value captured by oursuppliers<br />
18. 18. 18<br />Consider two ‘carrot’ or ‘stick’ incentives for salespeople.<br />Which work well?Which could be improved?<br />
19. 19. what’s wrong<br />19<br />with Andy Capp’s thinking?<br />
20. 20. 20<br />Ignore<br />sunk<br />costs<br />(money or resources that can’t be recovered)<br />
21. 21. The real cost of a 1 year holiday?<br />21<br />Consider only relevant costs<br />Costs<br />Original price of caravan* \$20,000<br />Current value of caravan* \$10,000<br />Food \$10,000<br />Petrol \$5,000<br />Other expenses \$5,000<br />After-tax salary lost \$40,000<br />* You already own the caravan<br />
22. 22. Recap<br />Satisfy needsTrade-offs<br />Think at the margin<br />Price, cost, value<br />Incentives<br />Consider relevant costs<br />22<br />
23. 23. 23<br />2<br />Biaseddecisions<br />
24. 24. 24<br />
25. 25. 25<br />
26. 26. ValueorSatisfaction<br />Number of beers<br />How we should think<br />Recap<br />Utility TheoryBentham and Mill19th century<br />26<br />
27. 27. We are biased by and<br />gains<br />losses<br />Value<br />Value ofgain<br />gains<br />losses<br />Value ofloss<br />Prospect TheoryKahneman and TverskyNobel Prize 2002<br />27<br />
28. 28. 28<br />Which do most people prefer?<br />\$25 lottery win\$50 lottery win<br />\$75 lottery win<br />Lesson: If overall gain then separate them (don’t bundle them)<br />
29. 29. 29<br />Which do most people prefer?<br />\$25 fine\$50 fine<br />\$75 fine<br />Lesson: If overall loss then bundle them (don’t separate them)<br />
30. 30. 30<br />Which do most people prefer?<br />\$25 fine\$50 lottery win<br />\$25 lottery win<br />Lesson: If overall gain then combine gains and losses<br />
31. 31. Which do most people prefer?<br />31<br />\$25 lottery win\$50 fine<br />\$25 fine<br />Lesson: If overall loss then separate gains and losses<br />
32. 32. 6 implications from Prospect Theory<br />People value gains and losses not final position<br />Value of loss is twice as big as similar gain<br />Separate gains if overall gain<br />Combine losses if overall loss<br />Combine losses and gains if overall gain<br />Separate losses and gains if overall loss<br />32<br />Applications?<br />
33. 33. We are biased by<br />framing<br />RISKY<br />(Loss)<br />SAFE(Gain)<br />33<br />
34. 34. Biased by ownership<br />34<br />Endowment EffectThaler<br /><<br />Buy price<br />Sell price<br />Applications?<br />
35. 35. Biased by anchoring<br />People anchor on the first numberthat they hear<br />… then adjust too little withany new information<br />35<br />Applications?<br />
36. 36. People are biased with costs<br />People fail to ignore sunk costs<br />Time, money, other resources already spent<br />People fail to consider opportunity costs<br />Time, money, other opportunities if go ahead<br />36<br />Applications?<br />
37. 37. Holidaydestinations<br />50%<br />Culture<br />50%<br />Relaxation<br />37<br />
38. 38. People are biased bycomparisons<br />20%<br />Culture<br />Halo effectThorndike<br />80%<br />0%<br />Relaxation<br />Applications?<br />38<br />
39. 39. “100% certain” is more like 80% certain<br />Poor at estimating best and worst cases<br />39<br />OVER-CONFIDENCE<br />Applications?<br />
40. 40. Biased towards status quo<br />“Status quo, you know, is Latin for ‘the mess we’re in’.”<br />Ronald Reagan<br />People need compelling reason to changefrom established behaviour.<br />40<br />Applications?<br />
41. 41. Self-serving bias<br />Something good happens to us<br />41<br />Skill<br />Luck<br />
42. 42. Self-serving bias<br />Something good happens to them<br />42<br />Skill<br />Luck<br />
43. 43. Self-serving bias<br />Something bad happens to us<br />43<br />Skill<br />Luck<br />
44. 44. Self-serving bias<br />Something bad happens to them<br />44<br />Skill<br />Luck<br />
45. 45. Self-serving bias<br />Something good happens to us GOOD SKILL<br />Something good happens to them GOOD LUCK<br />Something bad happens to us BAD LUCK<br />Something bad happens to them BAD SKILL<br />45<br />Applications?<br />
46. 46. Gains and lossesFraming<br />Ownership<br />Anchoring<br />Costs<br />Negative comparisons<br />Over-confidence<br />Status-quo<br />Self-serving<br />Bias<br />46<br />
47. 47. 47<br />3<br />Application<br />
48. 48. Application<br />1. Rational decisions<br />Satisfy needs<br />Consider trade-offs<br />Think at the margin<br />Consider price cost value <br />Respond to incentives<br />Consider relevant costs<br />48<br />2. Biased decisions<br />Gains and losses<br />Framing<br />Ownership<br />Anchoring<br />Costs<br />Negative Comparisons<br />Over-confidence<br />Status-quo<br />Self-serving<br />
49. 49. THANKS<br />Feedback please!<br />49<br />