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Behavioural Economics

I was discussing the importance of marketing data yesterday with Benoit Cacheux, Executive Director of the giant US digital agency Organic, and responsible for UK and Europe. He was emphasising that you do not stand a chance of predicting the future (an essential skill set for data-driven agencies) unless you concentrate ruthlessly on what consumers actually DO, as opposed to what they say.

Fresh from the Rory Spring of Behavioural Economics (that’ll be the comfortably-built curly headed one, not the slim mophead who shot the lights out at Bethesda), I fell to thinking about how consumers can do their best to defy both logic and predictability:

  • Believing image advertising
  • Putting any number of preferences ahead of a price advantage
  • Actively exhibiting negative price elasticity tendencies
  • Buying unhealthy foods
  • Buying products that will shorten life
  • Having a purse full of different loyalty cards
  • Travelling eccentrically just to keep a level of airline card (I know someone who flies every year from LA to Tokyo just to keep his Platinum status on American Airlines).

But this perversity also applies to clients:

  • When they dump a campaign that’s still working well
  • When they call a pitch when the agency’s not done anything wrong
  • When they put together their marcoms budget by cutting and pasting the current one – even when essential investment is crying out to be increased.

And to agencies:

  • When they prioritise pitching over servicing existing business
  • When they move vital staff off accounts
  • When they buy media early and in bursts, even when sense would dictate trading on short term buys and going for a drip strategy.

How strange then that our whole industry (clients, agencies, media owners, consultants, pundits) still uses logic to analyse the market! Deep down we are all headstrong consumers, and we carry through many of those perverse attitudes and behaviour into our professional lives.

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As golf fans and the whole population of Northern Ireland struggle into work this morning (or not) having sat up to all hours watching Rory McIlroy, it is worth asking what lessons there are to be learned from his extraordinary performance at the US Open golf.

Most important must be the vivid demonstration of the strength of his character, finishing off in such style having collapsed from a strong third round position both at the Open last July and the Masters in April. It is axiomatic in decision theory to learn from previous episodes, and feed the learning back into future opportunities.

It will be interesting to see whether Dustin Johnson (US Open 2010) and Nick Watney (US PGA 2010) are capable of emulating McIlroy the next time they are in the lead at a Major, having squandered apparently winning positions. Interviews this weekend with McIlroy, Watney and Johnson were revealing. All three players admitted to ‘speeding up’ under pressure. “It all happened so quickly”, said Johnson, “I was walking faster, playing faster, and didn’t leave myself time to think”.

The interviewer said that all three golfers admitted their mistake was not “staying in the moment”

There is a lesson for all of us there. Pressure can disrupt equilibrium and thought patterns. Decision makers in the ‘reflex / instinctive’ category – soldiers, pilots, firefighters, police, nurses in triage, referees etc – know that their only chance of taking good decisions in a nanosecond is to think straight, breathe deeply and let their training click them into autopilot.

If we don’t stay in the moment, disaster awaits. The language we use says it all:

  • Don’t get ahead of yourself
  • Focus on one thing at a time
  • Concentrate / keep in the zone

Frustration, impatience, annoyance, even panic – these are natural reactions to pressure, crisis or looming disaster. But all emergency service workers and combatants are trained to rely on what their training has taught them. Programmed response is as much a part of short order decision taking, as is weighing up options and factoring in more data when you have time to take a considered decision.

Sport – and particularly individual games like golf – can teach us a lot about pressure and the best way to react to it. McIlroy’s triumph yesterday tells us as much about his mental toughness as his phenomenal ball striking.

Sports fans know that the moment a player gives into pressure, technique will falter, with the result that first consistency and then victory will be lost.

That’s just as true in the day job.

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Every significant decision is a journey, not a single step.

Without getting too metaphysical, a decision journey starts well before you know what decision you are going to take. It starts in the planning stage – usually with a problem. If we define ‘problem’ as the difference between where you are and where you want to be, that problem could actually be an opportunity,

Solving the problem – and considering the options – is the prelude to seeking the preferred way forward. That’s when you are ready to take the decision itself.

The journey doesn’t end there. It continues into implementation, where changes of tack or more serious adjustments may be necessary to navigate towards your goal.

Talking of journeys and navigation, I remember a few years ago when I had a new woman in my life. We travelled together. She led. I followed.

The whole experience gave me a new perspective on life – particularly on the vexed issue of communication between the sexes. You don’t have to be a ‘Women from Venus, Men from Mars’ activist to believe that in business as in personal life, men and women talk to each other in fundamentally different ways. 

Men: how many times have you alienated a female colleague by mistakenly using a male-to-male debating ploy, such as “Which bit of ‘do it my way’ don’t you understand?” Women: can you remember the look on the face of your male colleague when you told him that his breakthrough idea was clearly based on something you painstakingly explained to him six weeks ago? 

My new girlfriend was different. She came up with one word which solved inter-sex communication. When a problem arose, she didn’t go in for womantalk (“I can’t concentrate if you’re shouting at me”), or even mantalk (“Why didn’t you tell me to turn right before we hit the dual carriageway?”).

She simply used the word “Recalculating”. No blame attached. No rancour. No “I told you so”. No “ It’s your fault”. Just “Recalculating”. She didn’t criticise my mistake. She made a positive attempt to find a solution. Pure behavioural economics. 

It works in the car. It would work in the office. Or seeing a decision through. Well done SatNav.

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 Aspiring authors need to understand that the path of true research does not always have a smooth surface. 

Indeed I’m now particularly wary of that well worn and clichéd adjective: seminal (as in seminal work, seminal article etc). The dictionary tells us that the word means “highly influential in an original way; constituting or providing a basis for further development”. I’m convinced it sometimes means “pertaining to semen – not much use unless it’s fertilised”.

Here’s what I mean. My friend Serge Nicholls drew my attention to a really interesting piece by Oliver Burkeman on the Guardian website: http://www.guardian.co.uk/lifeandstyle/2011/may/21/decision-quicksand-burkeman

His piece was about our tendency to assume that the more complex a problem is, the more important it must be. And therefore that hard decisions are more important than easy ones.  

Oliver was writing about a research paper written by Aner Sela and Johan Berger. So I looked up the original paper on the internet. Was it impenetrable, or was it really impenetrable! Then I realised that Oliver had picked up not the original paper, but a highly readable summary of it in Jonah Lehrer’s fascinating neuroscience blog at http://www.wired.com/wiredscience/frontal-cortex/

Lehrer wrote the excellent The Decisive Moment, and to judge from that and his blog, he has the priceless quality of simplifying the complex – rather than the opposite ‘skill’. 

This is a rambling way of telling you that I’m with the Sela and Berger thesis all the way. Even if I needed Lehrer and Burkeman to explain it.

I’m not questioning the findings. All of us have observed friends, colleagues, partners, clients, agencies, those famous “experts”, and even ourselves adding complexity rather than taking it away. What intrigues me is why we are ‘complexity snobs’, and indeed (as other researchers have discovered) why we seem deliberately to want to complicate a problem, even if someone can show how simple it really is.

Possible explanations: 

  • Does it go back to our education where the tasks and exams we were set got harder as we got older?
  • Is it plumbed into us from birth?
  • Is it a jobsworth thing? A yearning for some kind of status badge?
  • Is it basically mercenary? (The more difficult the problem, the more I can earn (in salary or fee) by solving it.). Good old behavioural economics again!

 What do YOU think?

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The central tenet of Behavioural Economics is that people are motivated by a lot more things than just financial considerations. Yet how many decisions are announced with a financial spin, and little else? Closing down a factory will save so many millions. Launching a new product or expanding into a new market will make the company even more millions. Governments are as bad. Every policy announcement (and particularly the ones that have clearly been hastily cobbled together) carries a price tag. 

So yesterday’s announcement by GSK CEO Andrew Witty that they are offering to supply developing countries with an anti-diarrhoea vaccine at a discount of 95% on the market price in the west hit the headlines. Was this, as Mr Witty claimed, an example of CSR (corporate social responsibility) in action? Or is it, as Andrew Hill in the FT’s Business Blog said, CSV (creating shared value – as recommended by Michael Porter and Mark Kramer, the founders of the FSG social impact consultancy)? Hill argues that for drug companies, tiered pricing makes commercial sense as well earning plaudits: 

  • You act philanthropically by supplying impoverished populations at or near cost price
  • You act commercially in mid-income countries by charging enough to build markets, but price competitively to expand volume
  • And you build in big margins in rich countries to fund your voracious R&D budget 

The motivation issue is really important in decision science. As individuals, families and parents we take a broader view than just financial self interest in terms of making decisions driven by considerations like life style, balance, health, education, enjoyment, culture and leisure. Equally the companies and organisations we tend to admire appear to respect employees, communities, and the environment in making their decisions. 

Also on the financial dimension we need to retain a balance sheet view of things (building and nurturing assets for the future), as well as the limiting short term view that annual accounting – or worse quarterly reporting in the US – dictate. 

As a footnote to yesterday’s GSK story, I listened to a radio interview with a heavy duty fund manager, who simply did not buy that any CEO who used the phrase “People before Profit” (as Witty allegedly did)could be taken seriously by their shareholders. “I can possibly understand ‘people as well as profit’ in certain circumstances”, said the fund manager, “but ‘people before profit’? Never.” 

It really is hard to take seriously any commentator saying that in 2011, when they have lived through a last 12 months in which dictatorships and mighty corporations have paid awesome penalties for decisions which put people last.

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There was some heartening news today. The Times reported on a study of the work habits of 94 CEOs of British, European and US companies. The researchers were from the LSE, the European University Institute and the Harvard Business School – so academically the findings should be unimpeachable. 

And the sources were reliable: the PAs of the CEOs. Arguably a PA has far more idea of what a CEO does than the man or woman in question.

So what did the survey reveal? Unsurprisingly that bosses spend 60% of their time in meetings. They clearly haven’t been reading this blog. Otherwise they would have worked out how futile some of these meetings are – particularly if anyone seriously believes that the meeting is going to lead to a decision. 

Conference and other telephone calls and the events and appearances that go with being a CEO accounted for a further 25%.

The remaining 15%? “Working alone”. What wonderful news. Our leadership elite actually carve out thinking time – as advocated on this URL (26th May). That will do far more to help them make better decisions, better than any number of meetings. When you think about it, 15% of your week is quite a lot. 

But before you all succumb to joy unconfined, there is a bit of information about this study that our friends at The Times underplayed, shall we say. All the CEOs were based in Italy! 

Does this study mean that ALL CEOs EVERYWHERE also spend 15% of their time in their offices? No evidence at all – until the researchers spread their wings and check out work patterns in London, Paris, Detroit etc.

A more interesting interpretation of the findings would be that this goes some way to explain why in recent years, Italian corporations have done rather well, and indeed why so many companies have turned to Italians for the top jobs.

What we now need is comparative data from elsewhere. We could even postulate a formula: 15% or more “working alone” is highly positive, while less than 15% is worrying and may lead to poorer performance.

Just one more thing in the piece worried me. Apparently consultants occupied nearly an hour a day of the “meetings” time. Yet the CEOs regarded this activity as largely unproductive. I do hope this seditious thinking doesn’t spread beyond Milan and Rome!

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Do you have to write a lot? Is writing an important part of your life? Or do you just enjoy it? 

I’m sure that like me you try to carve out some time, free of too many other distractions so that the creative juices can flow. But you’ve left a couple of MS Word documents open, waiting to finish them. And there’s that MS PowerPoint presentation for next week…. 

Then another load of emails arrive, demanding your attention. Followed by someone Skyping from New York because they’ve just woken up. How easy is it to concentrate on your precious writing? Impossible. 

Those clever guys at Barcelona digital agency Herraiz Soto have invented something breathtakingly simple that protects you from all these distractions, allowing you to give full attention to finishing your Meisterwerk. It rejoices in the name Ommwriter. ‘Writer’ because it is a text editor, and ‘Omm’ echoing a core creative element of Hindu religion and philosophy. Omm is sometimes written ‘Aum’ and is common to many other religions in the Subcontinent. 

Download Ommwriter (www.ommwriter.com), and you are transported into a protected cocoon. Very few choices of font, background sounds and colour to complicate your creative session. All the other programs on your computer are temporarily shut down.  

Herraiz Soto provide this brilliant tool free, and the latest version is called Ommwriter Dana – the brand name signifying giving in the Sanskrit and Pali languages. 

It’s wonderful to be able to concentrate in such a focused way. You feel at ease, and empowered. The stimuli are spiritual, not the normal day to day stresses. Will you write better? Of course you will. Behavioural economics in action!

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Most books and learned papers on decision making assume that rationality and logic are the main drivers. The theory of evaluating upsides and downsides by applying reward/risk analysis is based on individuals and teams going about their deliberations in a cool and detached fashion. 

Sometimes I wonder how safe this assumption is. A famous paper written in 2002 by a Japanese academic, Manasao Toda from Hokkaido University, challenges it. Toda asserts that emotional decision making was the norm in the earlier period of man’s evolution (Homo Iratus?). 

Toda believes that the wild and primitive environment in which our forbears lived required an emotional approach, because so many decisions were related to life and death. His theory is that a non-emotional, more analytical decision system was the product of a much later period in evolution. But interestingly he felt that this cognitive approach was designed not so much to replace the emotional approach, as to supplement it. 

If he is right, rationality is not meant to be the only organising principle. Rationality and emotion might be often in conflict, but it may be that the cognitive decision system cannot operate without some help from the emotion system. 

Taking this viewpoint into practical application in 2011, I question whether we should automatically elevate the logical approach, and dismiss earthy motivators like love, hate and revenge. Certainly there is massive empirical evidence that ‘ordinary people’ (ie us) make many decisions driven by affection or dislike, and by the desire to avenge wrongs, insults and what we see as unfairness. 

I would argue that when we are in positions of authority, on committees or wearing a uniform, we are quite likely to take illogicality and prejudice with us into our deliberations. Add self-interest to the list of emotions, and there is absolutely no doubt about it. 

It could be that an acceptance that decision making has an emotional content exposes a major difference between decision making and problem solving – which is more likely to be more or less totally rational.   

In Making Better Decisions, Better I am taking a particularly close look at areas like the military, sport and betting, to see whether we might have underestimated the influence of emotion. We already know from the psychology we use in marketing and advertising that making personal choices of partners, careers, houses, cars etc is just as much guided by emotion as logic. 

Maybe behavioural economics looms large in a wider area of decision making than we had believed.

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The meeting looms large in decision science because it is supposed to be the forum for discussion and decision. But so often, the discussion is inconclusive, and no decision is taken. Was it ever thus? Or are we living through an era where the “Meetings, Bloody Meetings” adage holds particularly true? 

One of the advantages of having been around the business world for a while (OK, I admit it, since 1965), is that I can make some comparisons. My impression is definitely that things are much worse now. I’m going to put forward a couple of theories, and sketch in some background to each. Incidentally I have a feeling that both theories come straight out of the Behavioural Economics textbook (negative section). In each case the behaviour driver comes from people under thirty. But sadly it is copied well up the age scale – although interestingly not in all countries and cultures.

Theory One: behaviour and manners have deteriorated to the point where many in the work place have personal styles that are so acerbic and uncooperative that they are unsuited to any recognised form of constructive debate. 

Without going overboard with generalisations, I don’t believe you have to look much further than TV programmes like The Apprentice, Come Dine with Me, or indeed Question Time to see evidence of what I am talking about. Confrontational broadcast journalism has made direct attacks and interruption the default setting. Glorification of naked ambition and abrasiveness on programmes like The Apprentice gives licence to young business people to behave rudely and egotistically. Put Sugar’s babes and lads, or the round robin diners in one room, and the producers make sure the sparks fly. 

A casting director looking for a latter day Genghis Khan would have a field day. I certainly don’t believe Genghis spent a lot of time around an Arthurian Round Table. 

Theory Two: (and this is a more recent development) many people today seem to be happier talking on the phone, texting, e-mailing or social networking than actually meeting anyone in a live show.

The nearly universal ability to keyboard and publish one’s own material has given the class of 2011 more confidence in their opinions and indeed their personal ‘brands’. Remote one to one interface has become the preferred way of interacting with other people. Plenty of opportunity to chat and listen – basically 50% share of airtime in fact. And you can choose compatible chat partners – in terms of personality and interests. By comparison a meeting of, say, 10 people in a conference room is a much less attractive prospect. There are all sorts of disadvantages, compared to the one to one mode:

  • Hierarchy
  • Discipline
  • Diversity (age, culture, education, style etc)
  • No control over time (either the meeting is too long, or it’s too short)
  • Above all the expectation that everyone is supposed to sublimate their opinions in the search for some form of consensus.

Is it surprising so many meetings don’t work out? I am not saying that I started out in a halcyon era where corporate democracy and beautiful manners were always on display. But it was a lot easier to manage meetings then, and to bring groups to some form of (at least interim) conclusion. 

Where do we start putting the meeting into rehab? By recognising the problems above, I would suggest. Also by talking about the need to adjust some personal behaviour in the interests of making meetings more constructive.

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So the consumer is in charge: the paradigm has changed from selling to buying. 

Marketing command and control is dead. 

Politicians cannot rely on the hustings. They either engage with voters, or lose out. 

Problem solving and decision making is no longer the preserve of a clever elite. 

How has this come about? The invention of the World Wide Web in 1989 (incredibly the year after I started Agency Assessments!) was obviously a main driver. Social media, which turned the internet from a referencing and communication system to one largely based on conversation, has been the accelerator. And mobile communication has transformed the way lives are lived across the globe. Mobiles mean that people spend far more time talking to people they are not with, than to people in front of them. That’s a true revolution. 

But my vote for the biggest change-maker of all goes to what I am doing now – keyboarding. When I launched AAI in 1988 I couldn’t type. My first two clients came to my rescue by making secretaries available. Otherwise I would have been incapable of even the most basic written communications. Shocking really, given the fact that I was part of the tiny minority (mainly business people, academics and writers) who had ever seen their words in print. 

Fast forward to today, and almost everybody can publish messages as well as converse remotely. In particular emails and text messages allow everyone not only to get a message across, but record what they have said. Computers, phones and tablets have changed the landscape for ever. 

But it is our ability to use them to transmit the written word, and to read what everyone else has written, that has completely transformed the balance of power between authority and individuals. The industrial revolution created wealth by subjugating individuals. The technological revolution in communications has liberated them. 

We may not see any comparable degree of technology-driven change in the next 20 years (unless voice-activated software improves exponentially). But I am prepared to bet that by 2031, the incremental political, social, commercial and educational effects of universal keyboarding will be absolutely dramatic.

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