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Behavioral economics overview presentation at TGAS


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The following was the presentation that I gave at the TGAS conference in Texas this spring. Highlighting some of the behavioral science principles that can be used to help improve your incentives and sales operations.

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Behavioral economics overview presentation at TGAS

  1. 1. Behavioral Science: tapping into our irrational drives Kurt Nelson, PhD.
  2. 2. Family information Hobbies-Activities Work & Education Describing Me Work ITT Financial (1990) BI Worldwide (1992) Lantern Group (1997) Education BS Economics/Marketing (1989) MBA Marketing (1992) PhD. I/O Psychology (2010) Cabin Travel Rotary Hiking Change Research Skiing I have a scientists’ fascination in trying to understand why people behave the way they do – combined with a business mindset trying to figure out how to apply those insights! Kurt Nelson, PhD
  3. 3. Behavioral Science
  4. 4. Behavioral Science fuses… Psychology, sociology, cognitive science and behavioral economics to gain better a understanding of human behavior and decision making.
  5. 5. Well-defined preferences Decisions are made to maximize utility Makes rational choices that drive behaviors Econ Human Emotional Decisions subject to biases, guilt, fairness, social comparison Gives in to temptation and whims (i.e., eats donuts vs carrots)
  6. 6. Behavioral Science Principles
  7. 7. Goal gradient theory – Goal motivation increases as people move closer to target. The closer you get to the target, the greater the motivation is to achieve it. Behavioral Economic Principles Research: Buy 10 coffees – get one free! 10 coffee punch card Average 15.6 days 12 coffee punch card with 2 pre-punched Average 12.7 days Ran Kivetz, 2006 Illusionary goal progress – Goal motivation increases even when the progress towards the goal is illusionary.
  8. 8. Applying Principles Goal gradient theory Illusionary goal progress
  9. 9. Behavioral Economic Principles Loss aversion: People have a tendency to strongly prefer avoiding losses compared to acquiring equivalent gains. In other words, people tend to be more motivated to avoid losing $100 than they are to win $100. Value Pleasure Pain GainLoss Kahneman & Amos The pain of a loss is 2x the joy of a gain.
  10. 10. Behavioral Science Principles Perceived Fairness – people are highly influenced by a sense of fairness (or really perceived lack of fairness). This impacts both behavior and attitude. “Fairness seems a bit like air – its absence is a lot more noticeable than its presence.” Mathew Liebermann, PhD Research: Ultimatum Game – 2 players split $10. One person makes offer of split, the other decides yes or no to accept. How much do you usually have offer for the 2nd person to accept? ≥$3
  11. 11. 11 If less than $3 shared – most reject offer Frans deWall Behavioral Science Principle
  12. 12. Applying Principles Loss Aversion Fairness
  13. 13. Behavioral Economic Principles Idiosyncratic fit – When we feel we have a unique advantage in a program or that a program is tailored specifically to us we are more motivated. This sense of unique fit to us fuels our desire to perform – even if the requirements to achieve success are more difficult. Low cost entry fee MeanJoiningLikelihood(0-10) 6 5 4 3 2 High cost entry fee Likelihood of Joining Credit Card Program Ran Kivetz
  14. 14. Self Schema’s – Our behavior is impacted by AND impacts our self- schema’s (schema’s are our beliefs about how we should behave and think in certain circumstances). Congruent Behavior – reinforces and is reinforced by self-schema Incongruent Behavior – creates angst to stop behavior or reassess self-schema Behavioral Science Principle
  15. 15. Applying Principles Idiosyncratic Fit Self-Schemas
  16. 16. Behavioral Economic Principles Motivating uncertainty effect – Research shows that in many instances, we are more motivated to reach a goal with an uncertain reward than one with a fixed reward. Existing research suggests that we prefer certainty over uncertainty when deciding if we should opt-in for a goal. However, uncertainty is more powerful in boosting motivation enroute to a goal. Research: Drink a large amount of water in two minutes. Some people were told they’d receive two dollars, guaranteed, if they completed the challenge. Others were told they’d receive either one or two dollars, with outcome dictated by a coin toss. $2 43% Completed $2 or $1 70% Completed Shen, Fisbach & Hsee
  17. 17. Behavioral Economic Principles Anchoring – People use any information as a reference for evaluating or estimating an unknown value or new information. When anchoring, people base decisions on events or values known to them (or that have been primed), even though these facts may have no bearing on the actual event or value. Research: Estimate the price of a wireless keyboard after writing down the last two digits of your social security number – expressed as dollars (i.e., if your SSN ended in 74, you would write down $74). The top 20% bid an average of $56 for the cordless keyboard; the bottom 20% bid an average of $16. $56 $16 Top 20% Bottom 20% Dan Ariely
  18. 18. Behavioral Economic Principles Reference Point – What you expect to pay for something changes the value that you receive - based on the price you pay. If you expect to pay a higher amount than you do, the actual pleasure you receive from the purchase goes up. The corollary is also true. Research: How much would you pay for a beer on a hot day at the beach? Two options were presented as the only place to get beer: fancy hotel or run down convenient store. Same beer, same desire, but willing to pay two different prices. NOTE – friend was going to get beer – so no value is associated with location. $7.25 $4.10 Fancy Hotel Convenient Store $ $ Richard Thaler
  19. 19. Applying Principles Motivating Uncertainty Anchoring Reference Point
  20. 20. Behavioral Economic Principles Say/Do problem – What we say motivates us and what actually motivates us are often different. When we “say” what motivates us – we rationalize and need to ensure alignment with social norms and self identity (e.g., injunctive vs descriptive norms). “Choice and the decision to take action are separate psychological transactions.” Scott Jeffrey, Ph.D. Group Survey “I would prefer to receive the cash value of the prize rather than the prize itself” Strongly Disagree Strongly Agree 9% 9% 18% 13% 13% 36% Cash Non-Monetary 14% 39% Actual Performance Lift
  21. 21. Behavioral Science Principles Hedonic motivation – hedonic (luxurious) awards are more motivating than equivalent cash or other rewards. These types of awards do not result in “indulgence guilt”, they fulfill our desire for pleasure, and are perceived as being more valuable than their economic cost.
  22. 22. Applying Principles Say/Do Problem Hedonic Motivation vs
  23. 23. Behavioral Economic Principles Decoy effect – Preferences for items change when a third option that is asymmetrically dominated (closer to one option than the other) is presented. Research: Economist magazine subscription costs? $59 Digital Only 16% 0% 84% 68% 32% 3 Options $125 Print Only $125 Print & Digital $59 Digital Only $125 Print & Digital 2 Options Dan Ariely
  24. 24. Behavioral Economic Principles Percent that registered before deadline Framing – People react differently to a particular choice or option based on how it is presented (e.g., loss or gain, certainty or uncertain, etc…). Penalty 93% 67% Discount Research: Framing of early registration discount as a penalty or discount?
  25. 25. Behavioral Economic Principles Choice Architecture – the design of different ways that choices can be made to people and the impact that design has on decisions and subsequent behavior (e.g., opt-in vs. default behavior / easy vs. hard). A more subtle way of choice architecture? Blue versus Grey.
  26. 26. Applying Principles Decoy Effect Framing Choice Architecture
  27. 27. Behavioral Economic Principles Social proof (the bandwagon effect) – Tendency of people to assume the actions of others reflect the correct behavior in a given situation. People are more likely to take action or behave in a specific manner if they see others doing the same thing. A B C Research: Which line matches the test line? 75% of participants conformed to the majority view at least once, even when it was clearly incorrect. Solomon Asch Test Line
  28. 28. Behavioral Science Principles Cognitive Overload – Our short-term memory can only process a limited amount of information. Too much information in too short of period results in information being discarded and memory/processing shutting down. Research: How information is presented can have significant impact on comprehension, processing and retention.
  29. 29. Applying Principles Social Proof Cognitive Load
  30. 30. Summary of Principles • Goal Gradient Theory • Illusionary Goal Progress • Loss Aversion • Endowment Effect • Fairness Principle • Idiosyncratic Fit • Self-Schema’s • Motivating Uncertainty Effect • Anchoring • Reference Point • Say – Do Gap • Decoy Effect • Hedonic Motivation • Choice Architecture / Framing • Social Proof
  31. 31. Implications for reward professionals Incentive Design • Set milestone goals • Incorporate fast start programs • Leverage loss aversion • Focus on fairness • Customize to individuals • Utilize lotteries (after their enrolled) • Anchor desired performance • Enhance with hedonic motivators Incentive Communication • Frame communications accordingly – Gain vs. Loss – Normative vs. Descriptive – Present vs. Future • Graphically drive behaviors • Use testimonials/numbers to drive social proof • Communicate optimal performance to anchor it in • Add in decoy option
  32. 32. Warning! If people feel that they are being manipulated they will revolt! If you can do something, doesn’t always mean you should.
  33. 33. Motivational Theories
  34. 34. Extrinsic Intrinsic External & Internal Locus of motivation
  35. 35. Maslow Hierarchy of Needs Physiological Needs Air, Water, Food, Sleep, etc. Safety Needs Shelter, Job, Retirement, etc… Love & Belonging Family, Friends, Partners Self Esteem Freedom, Dignity, Achievement
  36. 36. McClelland Needs Based N-Ach - Need for achievement N-Pow - Need for authority and power N-Affil - Need for affiliation People tend to fall into one of three types of personalities – each driven by different needs (but we shift between all of them)
  37. 37. Locke & Latham Goal Setting Model Set Goals - Specific - Measureable - Challenging Goal Commitment - Belief that goal is attainable - Worth the effort Action Planning - Have the skill and knowledge - Timeline Goals drive significant motivation. Effective goals have three main components.
  38. 38. Deci & Ryan Self Determination Theory Autonomy Urge to be causal agents of one's own life and act in harmony with one's integrated self Competence Seek to control the outcome and experience mastery Relatedness Need to interact, be connected to, and experience caring for others SDT
  39. 39. The Four Drive Model of Employee Motivation Lawrence & Nohria, 2002
  40. 40. 4 Drive Model of Employee Motivation Acquire & Achieve Driven to acquire things, resources, pleasures and status Bond & Belong Driven to create positive relationships, engage, and “fit in” Create & Challenge Driven to attain mastery, learn, improve and create Define & Defend Driven to defend status, ideas, relationships and define purpose Based off of Nohria and Lawrence
  41. 41. 4-DRIVE MODEL OF MOTIVATION APPLICATION Acquire & Achieve: Driven to acquire things, resources, pleasures and status.  Establish very clear link between performance and reward; utilize achievement components – such as status, recognition, special privileges  Use hedonic rewards  Ensure timely payout of rewards  Individualize rewards as much as possible
  42. 42. 4-DRIVE MODEL OF MOTIVATION APPLICATION Bond & Belong: Driven to create positive relationships, engage, and “fit in.”  Reward team efforts or performance  Utilize peer-to-peer recognition components  Create team contests  Utilize manager discretionary budgets for team based awards and events  Understand need to bond with others and try not to have other incentive elements that contradict this
  43. 43. 4-DRIVE MODEL OF MOTIVATION APPLICATION Create & Challenge: Driven to attain mastery, learn, improve and create. • Set achievable but realistic stretch goals • Provide opportunities for individuals to choose own goals • Build in learning/educational thresholds for earnings • Create cross-training opportunities
  44. 44. 4-DRIVE MODEL OF MOTIVATION APPLICATION Define & Defend: Driven to defend status, ideas, relationships and define purpose.  Relate incentives to corporate mission and vision  Communication focus on big picture connections and why  Be transparent with information (both good and bad) to foster trust and pride  Provide specific contests/awards that focus on larger purpose goal of company  Include customer testimonials in your communications
  45. 45. THANK YOU! Kurt Nelson, PhD.