Putting the “ME” in DIFM: Insights from Behavioral Economics

Paul Whitmore Sas

Jan 12, 2010

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Automating Choice

Subscription to reduce friction of decision-making

Theater tickets / Gym membership

Amazon: 2 ways – PRIME & 15% off if a purchase is transformed from a one-off purchase to a subscription

Medical insurance –Seems irrational to choose high premium, low deductible, yet many don’t want to make repeated calculations about trade offs

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What can an algorithm do that leaves me feeling as if I myself had done it?

Algorithm does the work, but the self gets to take the credit for it.

Good spam filtering

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“Framing” Links Psychology to Behavioral Economics

Contextual cues, situational aspects, environmental associations shape/structure perception

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Prospect Theory is the most powerful theory of Framing

Avoid a loss Collecting a gain>

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Behavioral economists view Designers/Product Managers as CHOICE ARCHITECTS

“Many features, noticed and unnoticed, can influence decisions. The person who creates that environment is, in our terminology, a choice architect.” (Thaler & Sunstein)

Option A

Option B

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Endowment Effect explains one way subscriptions change framing

Mug Experiment at Cornell in 1985

Every other MBA class was given a $6 mug

Buyer reserve price $2.50 ; Seller reserve $5.25

Expected trades 11; actual number below 2.

Random distribution should not have guessed which people preferred $ to a Cornell mug.

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How do subscriptions change the framing?

How does endowment effect show up in subscription momentum?

Once something is part of ME, letting go of it feels like a loss, even if offered a compensatory gain

I lose part of me, and gain mere $ back.

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Subscriptions can support behavioral change

Set up a policy where I am guaranteed not to have to make a sequence of choices

Don’t Make Me Think

Create a climate of “us” where trust is supported

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Implication for Intuit

Many people set up budget in Mint

Add one extra ingredient: A programmatic reminder to re-direct savings

Once a month prompt: Would you like to take the $75 you’ve not spent on restaurants & save/invest it?

Mint w/ FinanceWorks can facilitate investing/saving

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Watch out for the Sorcerer’s Apprentice

Sorcerer’s Apprentice is the relevant metaphor for computers going wild assisting us.

Example: early Iphone bills

Hegel’s master/slave dialectic

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Understanding Preferences

Building a better Eliza (1966 computer program)

ELIZA mimicked a therapist by returning whatever user typed with a question

> How does that make you feel?

> Tell me more about …

Next week I will want things that are good for me…

Choosing for tonight Choosing for next Thursday

Choosing for second Thursday

People are not adept at knowing what they want

Asking people about their goals is tricky

When asked to describe personal

priorities, people provide more

articulate & explicit goals for lower

priorities

Delmore Effect - http://www-psych.stanford.edu/~wit/PhDraft.pdf

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Eliciting Goals that Matter

Recalling past successes just

makes it worse

Distracting people by asking them

to think about irrelevant topics

doesn’t help either

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To recall a success, not connected to most important goal, can help

Relevance to Intuit for DIFM:

1- Make it possible to accumulate info without deliberate action

2- Enable answers to “quiz” like questions to create small successes to build greater engagement w/o triggering anxiety

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How to get people to talk about themselves?

Hunch is exemplary at playing

“the question

game”

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Illusion of Control (Langer 1975)

Chance can be overcome by Choice

Lottery staged one week before Superbowl

Tickets were 4 x 2 inch football cards Odds were 1:227

Asked to sell card back to someone else:

No choice: $1.96 Choice: $8.67

Knowing more about a person means that the interaction can be more nuanced.

Transition from a modal best guess to a dialog that enables nuance and tuning

Transitional object “My me”

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Elicited versus Explicit Preferences

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Beware that Q&A can just be pesky

Eliza tricked people into thinking that we are talking about me

Microsoft “Clippy” had much more computational intelligence, but it

only directed more attention to Clippy

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Making it fun / addictive

Zynga games appear deliberately designed to incarnate the absinthe/crack cocaine elements of motivation and engagement inside FaceBook.

84.2 Million Cityville players this January outstripped Farmville’s maximum by over 500K

Achievement Orientation as Motivator

Psychophysical Curve of Response to Increase Stimulus

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Diminishing Returns (Weber-Fechner Law)

Response starts big

Each additional increment gives less & less bang

Move from framing where response is flat into framing where the payoff is still increasing.

Games do this by slicing infinite horizon into smaller intervals

The reverse occurs with Subscription, and explains how friction reduces: Move many short, sharp shocks toward one smooth flat perspective.

Behavioral Economics can explain one way that games hook into motivation

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Sources for followup

Best Review book on the subject

Priceless: The Myth of Fair Value (and How to Take Advantage of It) Poundstone (2010)

Delmore Effect (Paul Whitmore Sas)http://www-psych.stanford.edu/~wit/PhDraft.pdf

Daniel Kahnemanhttp://www.nobel.se/economics/laureates/2002/kahneman-lecture.html

Dan Arielyhttp://danariely.com/the-books/

Sheena Iyengarhttp://www.columbia.edu/~ss957/articles.html

Also see http://longnow.org/seminars/02010/jul/27/visions-gamepocalypse/

Additional ideas and resources

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Paradoxes of Hedonics (the study of experience)

Experienced vs. Remembered Utility

Certain dimensions are easy to evaluate:Most intense moment

Last moment

Other dimensions are nearly impossible to guess:

Average height on a roller coaster ride

Average rate of return within a sector, or by a particular trade strategy, or in the past 20 days

Peak and End Rule (Kahneman)

Experienced vs. Remembered Utility

Our mind does not make movies; it takes snapshots

Rather than guess the total amount of suffering, people recall the worst instant, and the last instant.

If you increase the amount of suffering, but arrange for the last minutes to be less intense, people report a longer period as less painful

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Peak and End Rule -- Pictograph

Peak and End Rule for User Design

The last moment of contact makes an inordinate difference to the recalled value of experience

Jared Spool's "Truth About Download Time"

Nielsen concluded that users will be annoyed … by pages that take any longer than about 10 seconds to load. (Since most popular sites take 8 secs, and less popular take an avg of 19 secs to download)

No correlation between download times and perceived speeds. Amazon.com, rated one of fastest, really one of the slowest

Strong correlation between perceived download time and whether successfully completed task on a site

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More choice causes less purchasing (Iyengar)

Every other hour, a set of 24 jams/jellies to sample. On odd hours, only 6 jams available.

Choice of sampling any of 24 jams: 3% redeemed coupon.

Choice of sampling any of 6 jams

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More choice causes less purchasing (Iyengar)

Every other hour, a set of 24 jams/jellies to sample. On odd hours, only 6 jams available.

Choice of sampling any of 24 jams: 3% redeemed coupon.

Choice of sampling any of 6 jams: 30% redeemed coupon.

Choice Overload shown in 401K participation

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Relevance to Designers

Ruthlessly simplify: Every choice is a pain point

If it’s a brochure-ware feature, “provide but hide”

“The great thing about [Apple] omitting a feature that people want is that then they start clamoring for it. When you give it to them in the next version, they're even happier somehow.” -Glenn Reid, creator of iMovie

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Power of Defaults A study of 401K participation, 3 different conditions: Opt-in,

Suggestion, and Automatic enroll

Fact 1. Most investors follow Default Plan

Changes participation

Also contribution level

Fact 2. ‘Suggested choice’ not very attractive unless default

Can education/training overcome default?

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In a word, No

Notice: People said

they were 100% likely

to enroll, yet only

14% actually did

Relevance to Designers

Assume that 90+% will use the default set up, so don’t rely on “customization” to solve problems

Wherever possible, inherit behaviors that people exhibit, so that their slight modifications can carve a path that fits their needs

Suggest fill-ins for many choices, so that if a customer is “lazy” they can have the calculator guess what would fit their profile

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How to manage tendency to procrastinate

People make “bold forecasts” but “timid choices”

Dan Ariely’s Procrastinator app. If you can’t make a choice by the deadline, it chooses for you.

Analogy for portfolio re-allocation:

Although we can’t re-allocate, we could show customers who bail/pause what returns they could have seen if they had done a re-allocation

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Descriptive Choice: Prospect Theory

Some consequences of loss aversion

Extreme risk aversion

Status quo bias (connected to power of defaults)

Disads of change weighted more than the advantages

Reluctance to trade goods held for use

Losses>>opportunity costs (foregone gains)

Customers would be far more motivated if we show them what they’re losing out on, rather than offer them a chance to gain additional benefits

“Fear is your best friend or your worst enemy. It's like fire. If you can control it, it can cook for you; it can heat your house. If you can't control it, it will burn everything around you and destroy you.” Mike Tyson

iNcentives

Understand mappings

Defaults

Give feedback

Expect error

Structure complex choices

Bend of the payoff curve, both for gains & losses

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Designers as Choice Architects have the following techniques available to “nudge” decisions

Which mental account? A Peak or an End?

The road most taken

Support needs to know

Fallible predicting future self

Streamline, hold hands, createmeans to feel on track

Goals in Prospect Theory

Goals divide outcomes into

gains or losses

People approach losses differently

Failure is more painful than success is satisfying,

More motivating than achieving a

success

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Less is More (Hsee)

Music Dictionary A

10,000 entries

condition is like new

Music dictionary B

20,000 entries

cover is torn

When evaluated separately: A $24 B $20

When evaluated jointly: A $19 B $27

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Less is More, again

You are considering one year jobs at two different magazines

At magazine A you are offered a job paying $35K. However, the other workers who have the same training and experience as you do are making 38K

At Magazine B you are offered a job paying $33K, however the other workers have the same training and experience as you do are making $30K

Choice: A > B

Happiness B > A

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Separate v Joint Evaluation (JE)

SE: analogous to purchasing one item from an auction, w/o comparative shopping

JE: Occurs when choosing from a range of items

Lay rationalism: a tendency to overweight attributes that appear rationalistic, such quantity and economic value, and downplay attributes that appear subjective

Features that trigger clear sentiments in separate evaluation sometimes lose their appeal in comparative settings

Features that are hard to assess in separate evaluations are sometimes easier to evaluate in comparative settings

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Primed to feel or Primed to Calculate(Rottenstreich)

Box of Madonna CDs

If evaluated from an affective/emotional valence, then quantity is irrelevant

If viewed as tokens with exchange value, then more equals more

Primed to feel: No more price for box of 10 CDs than for 5 CDs

Primed to calculate: Box of 10 CDs has receives higher valuation than 5

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What does this tell Designers?

Tables of comparative features drive people into Joint Evaluation mind-set, even when they may not value all features in the comparison

Aim to move people toward an emotionally valent sphere where there is no longer simple linear comparisons

Apple is superb at transcending the commodity space of price