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