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Harnessing bias
 

Harnessing bias

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    Harnessing bias Harnessing bias Presentation Transcript

    • 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
    • 24
    • 25
    • 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 ownership
      34
      Endowment EffectThaler
      <
      Buy price
      Sell price
      Applications?
    • 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?
    • Gains and lossesFraming
      Ownership
      Anchoring
      Costs
      Negative comparisons
      Over-confidence
      Status-quo
      Self-serving
      Bias
      46
    • 47
      3
      Application
    • Application
      1. Rational decisions
      Satisfy needs
      Consider trade-offs
      Think at the margin
      Consider price cost value
      Respond to incentives
      Consider relevant costs
      48
      2. Biased decisions
      Gains and losses
      Framing
      Ownership
      Anchoring
      Costs
      Negative Comparisons
      Over-confidence
      Status-quo
      Self-serving
    • THANKS
      Feedback please!
      49