MARKETINGTOTHEPREHISTORICMIND

HowTheHotNewScienceofBehavioural EconomicsCanHelpYouIncreaseYourSales

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TableofContents

1. About this book: The Theory That Won a Nobel Prize 2. The Positive Negative Asymmetry Effect: What Vince Vaughn, Bill Clinton and Gordon Ramsay Can Teach You About Marketing 3. Loss Aversion & Framing Effects: When a Glass Half Empty Is More Persuasive Than a Glass Half Full 4. Risk Aversion: If That's True of Entrepreneurs, Think What Your Average Customer Is Like? 5. The Endowment Effect: When a Bird In Hand Is Worth 14 In The Bush 6. Status Quo Bias: What an Outdated Piece of Legislation Can Teach You About The Psychology of Buying 7. From Description to Prescription: Using These Systematic Biases To Increase Your Sales 8. Related Sales & Marketing Articles 9. References

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1.Aboutthisbook:TheTheoryThatWonaNobelPrize
Whatyouhaveinfrontofyouisacondensedandsuccinctsummaryofdecadesofresearch inthefieldsofpsychologyandbehaviouraleconomics.Specifically,itisbasedonDaniel KahnemanandAmosTverskysProspectTheoryofdecisionmaking.Thetheoryhasbeenso insightfulandinfluentialinthedomainofdecisionmakingthatKahnemanwasawardedthe 2002NobelMemorialPrizeinEconomicsforhisworkonprospecttheory. Despitethetheorysvalueandapplicationtothefieldofsalesandmarketing,ithaslargely remainedconfinedtotheworldofacademia.Inplaceswhereithasenteredtheworldof businessithasbeenlimitedtobigbusiness,asonlythosewithlargebudgetscanaffordto spendtensandthousandsofdollarsinhiringexpertsknowledgeableandtrainedinthe applicationoftheprinciples.90%ofmarketershaveneverevenheardof,letalonestudied, anyoftheprinciplesofProspectTheory.Manyhaveaccidentallystumbleduponthem throughtrialanderrorbutveryfewunderstandwhytheseeffectsactuallyexistorhowto maximizetheirpower. Accordingly,thisebookseekstorevealandapplythoseprinciplestotheworldofsalesand marketing.Thelessonscontainedinthisebookareapplicabletoeverybusiness.Regardless oftheindustryyouareinorthedemographicsofyourmarket,theseprinciplesapplyto yourbusinessastheyapplytoallhumandecisionmakingacrosscultures,gendersandage groups.Allyourequireistheimaginationtoapplytheminyourbusiness. Ifyouhavethepatiencetolearntheseprinciplesandthemotivationtoapplytheminyour business,youwillgainaninstantcompetitiveedgeoveryourcompetitors.

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2.TheNegativepositiveAsymmetryEffect: WhatVinceVaughn,BillClintonandGordonRamsayCanTeachYouAbout Marketing

InSeptember2005,VinceVaughn,thefamousHollywoodactorwhostarredinthehit moviesWeddingCrashersandAnchorman,decidedtotakeagroupoffourcomediansona thirtydaycomedytouraroundAmerica.Theyweretotravelsome6000milesthroughthe heartlandofAmericavisitingthirtycitiesinthirtydays.TheideawastobringanAgrade comedyshowtotheremotepartsofAmerica. ItseemslikeyouhavetogotoNewYorkorVegasorCaliforniaorLosAngelestoseea showlikethis,explainedVaughninaradiointerview.Ireallywanttobringagreatlive comedyshowtopeoplesbackyardsandgivethemachancetoseeitintheirowntown. Moreover,itwasachancetoshowcasethenextgenerationofcomicsandhelpthemobtain somevisibilityandexperience.Ihopethattheycomeoutofthisstrongerinwhotheyare, moreknowingofthemselves.Thatsthebiggestthingwithentertaining,istoknowyourself andbehonestaboutwhoyouaresaidVaughn.Anothercommentatoradded,Thirtydays fromtoday,thesepeoplewillbedifferentpeoplewhentheyfinish. Indeed,theyweredifferent.Thecomicsenduredagreatdealoverthenonstop30daytour, cuttheirteethonsometoughaudiences,andlearntsomekeylessonsthatwouldserve themforyearstocome.Intheprocessoflearningtheselessonstheyalsoleftsomeforusto learn.Inparticularthereisonelessonthatisquiterelevanttostudentsofthehuman psyche.

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Severalnightsintothetour,JohnCaparulo,oneofthefeaturedcomics,isonstage performinghissetwhensomethingunexpectedhappens.Aspartofhissetheasksthe audienceaquestion. Anybodyeverworkinafastfoodplace?" Anaudiencememberyellsoutaresponse.Althoughitisnotclearwhatthatpersonhassaid, Caparuloisclearlyupsetbythecomment.Hesuddenlyslipsintoabadmood.Hegets defensiveandverballyattackstheunidentifiedaudiencemember. "Istheresomeshityouneedtoworkoutdog?Whatthef***?Whoisthisdrunkat9? Yet,evenafterventinghisfrustration,heisunabletoshakeoffthenegativeremark.So frustrated,infact,thatheabandonshissetandwalksoffthestage. Ashestormsoutbackstage,shakinghisheadandswearingtohimself,oneofhisfellow comicsinquiresaboutthesituation.Carapulotriestoexplainwhathappened,butisso frustratedbythesituationthatheisunabletoarticulatetheproblem. Whatthef***man?Iwasjustdoingmythingandsomeguyinthebackisjust,gothis f******. Hiscolleaguetriesagaintoelicitsomeinformation. "What'shedoing?"asksthefellowcomic. EventuallyCarapulogathershimselfandexplainsthat,whenheaskedthequestion,oneof theaudiencemembersyelledout"f***me",asiftosaythisisaboringshow.Theremark upsetCarapuloandputhimoffhisgame.Andhoweverhardhetried,hecouldnotseepast it. LaterhediscussesthefiascowithVaughnwho,aswellasbeingthemanagerforthetour,is alsoamentortotheseyoungcomics.VaughnreassuresCarapuloandoffershimadviceon howtodealwithsuchsituations.ItisilluminatingtoseewhatVaughnadvisesCarapulofor itshowsVaughnslackofunderstandingoftherootoftheproblem. Whenpeoplewanttoengageyouwhentheyrecomingfromanangryplace,itusuallyhas moretodowiththemthananythingtodowithyou,especiallyinasetwhenyouhave everyoneintheaudienceapplaudingandlaughingandallthatstuff.Whylistentothatone voice?Whynotlistentoalltheothervoices?" Atfirsttheadvicemakesperfectsense.Whenpeoplearenegativeinsuchcircumstancesit usuallyhastodowiththem.Theguyprobablycamedrunktotheshowwithaviewtoblow offsomesteam.Hencearationalpersonwouldnotconcentrateonthatonevoiceand wouldinsteadlistentoalltheother,morepositive,voices.

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YettheadviceisuselessbecauseitaddsnothingnewtoCarapuloscurrentunderstanding. Carapuloalreadyacknowledgesthathisreactionwasirrationalandillogical.Ashehimself said,thereare1301peopleinthereand1300peoplelovewhatIdo.Andthatoneguyisa f******douche.Youknow,Iforsomereasonfixateonthatoneguy. Hencetheadvicedoesn'taddanythingneworsubstantialtoCarapulo'sunderstandingof hisproblem.That'snottosaytheadvicewasfutile.Itcertainlyhadsomevalue.Butitwas onlyeffectiveinsofarastheprocessoflisteningtoCarapuloandconsolinghimmadehim feelsupported.Asfortheactualcontentoftheadvice,itmissedthemarkcompletely.If anything,itprobablymadeCarapuloquestionhissanity.Itcertainlymakesanoutsider questionhismentalhealth.WasCarapuloanirrationalindividual?Washeaweak individual?Ifotherpeoplewouldreactdifferently,thenwhycouldn'thecontrolhis emotion?Whycouldntheblockoutthenegativevoice?Whatwaswrongwithhim? Yetforthosewhounderstandthephenomenonbehindhisabsurdreaction,theonlything Carapuloissufferingfromisaseriouscaseofbeinghuman,aproblemweallshare.What CarapuloexperiencedthatnightwastheforceofwhatpsychologistscallthePositive NegativeAsymmetryEffect.Yousee,wearefarmoreaffectedbynegativeexperiencesthan wearebypositiveexperiences.Allelsebeingequal,negativeeventscommandgreater attention,elicitadeeperemotionalreaction,andaremorememorablethanpositiveevents. Moreover,theprincipleholdsacrossawiderangeofdomains,innonhumansaswellas humans,andwithonlyafewnotedexceptions.

ClassicExperimentsonthePositiveNegativeAsymmetryEffect
Inonesurvey,researchersaskedhundredsofundergraduatepsychologystudentstolistthe numberofheroicactssomeonemustperform,eachattherisktohisorherownlife,tobe forgivenformurderingoneperson.Themediananswerwas25.Thedamageoftheone negativeactvastlyoutweighedtherebuildingeffortofthepositiveacts. Inanotherexperimentparticipantswereaskedtoimagineeitherlosingorgainingacertain amountofmoney.Whattheexperimenterswantedtoknowwaswhetherweexperienced gainsandlossesinthesameway.Turnedoutwedidnt.Theresearchersfoundthedistress oflosingmoneytobegreaterthanthejoyofgainingtheamountofmoney.Inotherwords, losing$100andfinding$100isnotthesamething.Thepainoflosing$100faroutweighs thehedonisticvalueofgaining$100.Mostpeopleagreedthatitwouldtakeagainof$200 tobalanceoutthepainoflosing$100.

WhattheHinduCasteSystemandthe1685NegroCodeHaveinCommon
Thisprincipleofnegativitybiasplaysoutonavastsocialscaleforover800,000,000Hindus inIndiaeveryday,wherethecastesystemstillpermeatesthroughasignificantpartofthe society.H.N.C.Stevenson,whostudiedthetopicingreatdepthintheearly1950s,noted thatpeopleofhighercasteareeasilycontaminatedandloweredinstatusthroughcontact withalowercasteperson.Thecontaminationcanoccuraseasilyasbyeatingfoodprepared

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byalowercasteindividualorbysharingautensilwithalowercasteindividual.Whatwas mostinterestingwasthattheoppositedoesnotapply.Whenanindividualofalowercaste comesincontactwithahighercasteindividual,heneitherpurifiesnorachieveshigher status.Thusitseasytopolluteandhardtopurify. Thisisnotjustaneasternphenomenon.Inthe1685CodeNoir,betterknownastheNegro Code,onedropofblackbloodwasenoughtocontaminateanindividualandrenderthem blemished.Yetnoamountofwhitebloodwasenoughtopurifysomeone,aswasevidenced bythefactthatnomixedraceindividualwasnaturalisedaswhite.Incontrast,wherebeing blackhasnowbecomebeneficial,insituationswhereaffirmativeactionapplies,thereisno suchthingastheonedroprule.Aconsiderablystrongerconnectionisrequiredtobenefit fromtheprivileges.

WhatBillClintonCanTeachYouaboutHumanMemory
Similarly,inpoliticsithasbeenshownthatshorttermeconomicdownturnsreducethe supportfortheincumbentparty,whereasshorttermeconomicboomshavevirtuallyno impact. Onthesubjectofpolitics,considerthefamousAmericanpresidentBillClinton.Duringhis presidencyhemanagedseveralsignificantvictories.Hetookthelargestbudgetdeficitand turneditintothelargestbudgetsurplusinAmericanhistory.Hereformedwelfareand achievedthelowestteenbirthratein60years.Hereducedthetariffsthatpreventedfree tradeandpassedstrictlawstoprotecttheenvironment. Evenmorestunningwerehisdiplomaticandmilitaryinitiatives,whichbroughtpeaceto Haiti,theBalkans,and,albeitforashorttime,theMiddleEast.Notonlywerehis interventionsclearcutvictories,theywereachievedwithminimallossofUSpersonnel. However,despitethisimpressivelistofachievements,theissueforwhichheismost rememberedandrecognisedishisillicitaffairwithMonicaLewinsky.Hisscandalousaffair withtheyoungWhiteHouseemployeewasfarmorememorableandsalientthananyofhis othercontributions.Butwhywasthisthecase?Whydidntpeoplerememberhispositive contributions?Partofthereasonisthatnegativeeventsaremorememorablethanpositive events. Inarevealingexperiment,researchersaskedpeopletorecallarecentandimportant emotionaleventthattheyhadeithertoldsomeoneaboutorkeptsecret.Theresearchers welcomedbothpositiveandnegativeexperiences.Naturallybothwerereported.However inasurprisingtwist,farmorebadexperienceswerereportedthangoodexperiences.The recallrateforbadexperienceswassohighthatitexceededthepositiveexperiencesbyfour toone.Theresearchersconcludedthateventsinvolvingbademotionsaremorememorable thaneventsinvolvinggoodemotions.Inlightofthesefindings,itsnowonderthatthe LewinskyscandalcontinuestoovershadowClintonscontributionsanddominatesthe publicsmindasthemostmemorableissueoftheClintonera.

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TheRationallyIrrationalSpecies
Animportantpointtonoteaboutthepositivenegativeasymmetryeffectisthatthisisnota culturalphenomenon.Wearenotnecessarilytaughttoreactthisway.Insteadweare biologicallyprogrammedtofeelthepowerofbadmorethanthepowerofgood.Butwhy wouldevolutionselectsuchatrait?Whatistheretobegainedfrombeingexcessively fearfulofloss?Whatisthepositivetoourobsessionwiththenegative?Theansweris survival.Evolutionselectedthistraitbecauseitmadeindividualsmoreadaptabletothe challengesoflifeandaidedthemintheirstruggleforsurvival. Buthowdoesthisirrationalandillogicalbiasimproveourchancesofsurvival?Well,as someleadingscientistsexplainedinarecentarticle,BadIsStrongerThanGood,publishedin ReviewofGeneralPsychology:apersonwhoignoresthepossibilityofapositiveoutcome maylaterexperiencesignificantregretathavingmissedanopportunityforpleasureor advancement,butnothingdirectlyterribleislikelytoresult.Incontrast,apersonwho ignoresdanger(thepossibilityofabadoutcome)evenonce,mayendupmaimedordead. Survivalrequiresurgentattentiontopossiblebadoutcomes,butitislessurgentwithregard togoodones.Hence,itwouldbeadaptivetobepsychologicallydesignedtorespondtobad morestronglythangood.

TheFinalVerdictonCarapulosReaction
Accordingly,Carapulowasneitherweaknorirrational,asitmayhaveappearedfroma strictlylogicalandrationalperspective.Hewasjustexperiencingtheemotionalimpactof thenegativepositiveasymmetryeffect.Itwashisbiologicalpredispositiontonoticeand dwellonthenegativethatpreventedhimfromblockingoutthenegativeremark.Toputit anotherway,itwasnthisfaultthathecouldnthelpbutpayattentiontothatonenegative person,evenwhentherewereotherpositivepeoplepresentatthesametime. Theironyofitallisthattheguywhoyelledoutf***me,neverevensaidthat.Oneof Caparulosfellowcomicswhowasinthecrowdatthetimeandwitnessedthewholeevent, latertoldCaparulothattheguyhadactuallysaidf***Yeh.HenceCaparulohadlosthis coolfornoreason.However,themistakedidntgotowaste.Yearslater,somethousandsof kilometresawayinacompletelydifferentcontext,thatslighthiccuphashelpedrevealan importantprincipleofhumanpsychologythatbadexperiencesarestrongerthangood experiences.

LessonNumberOne
Asalespersononcesaid,Ifyougivebadservice,peoplewilltelltenotherpeople. Fortunatelytheoppositeisalsotrue. Unfortunately,andwithallduerespect,itisnt.Amoreaccurateassessmentis,Ifyougive badservice,peoplewilltelltenotherpeople.Ifyougivegoodservice,atbesttheywilltell five.Why?Becausebadnewsismorebuzzworthythangoodnews.Thatswhyits

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importanttoensurethatunhappycustomersareattendedtoandtakencareof.Else,it couldreallydamageyourbusiness. Thismaysoundobviousbutyou'dbesurprisedhowmanybusinessesgetitwrong.Takethe caseofthefamouschefandbusinessmanGordonRamsay,forexample.

GordonF******Ramsay

Afterthesuccessofhisfirstrestaurant,Aubergine,Ramsaybecamedismissiveofcustomer complaints.Asheputit,"IntheAuberginedays,Ihadbecomeanarrogantlittlefucker,and wheneveraletterofcomplaintarrived,itwentstraightinthebinasanappropriate testimonytothewriter'scredentials.WhenwestartedatRoyalHospitalRoad,thetradition carriedon." Itwasn'tuntiloneofhisadvisorseducatedhimonthedamageunhappycustomerscan causethathechangedhisways. "Itseemednormalenough,untilonedayChrisfoundoutandcamestormingintothe restauranttopointoutacoupleofhometruths...hewentonabouthowonestonethrown inthepondcausesripplesfromthecentretotheedgesandyoucan'tstopthem,andhow importantwordslikehumility,feedback,reputationandwordofmouthareifwewanttobe seriousrestauranteurs." "Andwhatpissedmeoff,ofcourse,wasthathewasbangonthebutton."

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3.LossAversion&FramingEffects: WhenaGlassHalfEmptyIsMorePersuasiveThanaGlassHalfFull
Imaginethefollowingscenario: Supposethatyouarethemayorofasmalltownwithapopulationof600.Thetownisfacing anoutbreakofadeadlyvirusthatislikelytokillmany.Youarepresentedwithtwodifferent solutions.Thefirstwillsaveaguaranteed200people.Thesecondprogramwillsaveall600 withonethirdsprobability.Whichonewouldyouchoose? Ifyouarelikemostpeople,youwouldhavechosenthefirstprogram.Youwouldtakeasure thingoverariskygamble. Nowimaginethefollowingscenario: Supposethatyouarethemayorofasmalltownwithapopulationof600.Thetownisfacing anoutbreakofadeadlyvirusthatislikelytokillmany.Youarepresentedwithtwodifferent solutions.Thefirstwillallow400peopletodie.Thesecondwillletall600livewithone thirdsprobability.Whichonewouldyouchoose? Thistimeyouprobablywentwiththesecondprogram.Yetbothscenariosareexactlythe same.Savingaguaranteed200peopleoutof600isthesameaslosingaguaranteed400 peopleoutof600.Sowhythereversalinchoice?Isitbecauseyouarenotanexpert medicalpractitionerandtrainedinevaluatingmedicalprograms? No,becausewhenthequestionwasputtoalargesampleofphysicians,theytoo overwhelminglychosethefirstprograminscenarioone(72%)andthenreversedtheir choicetothesecondprograminscenario2(78%).

FramingEffects:WhyaGlassHalfEmptyisMorePersuasivethanaGlassHalfFull
Thedifferenceisinwhatpsychologistscallframing.Sincebadexperiencesarestrongerthan goodexperiences,lossesarefeltmorestronglythangains.AstheNobelPrizewinning psychologistswhofirstdiscoveredthiseffect,AmosTverskyandDanielKahneman,famously putit,lossesloomlargerthangains. Thismeanspeoplearemoremotivatedtoavoidalossthantoseekagain.Thusinthe exampleabove,themedicalpractitionersweremorelikelytaketheriskygamblewhenit wasframedintermsofavoidingalossof400people,thanwhenitwasframedintermsof savingthelivesof400people. Whatthismeansforyouasamarketerorasalespersonisthatifyouwanttopersuade someonetodosomething,tellthemnotwhattheywillgainbutwhattheywilllose. Considertheexperimentundertakenbythepsychologists,YoavGanzachandNiliKarsahiof

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theHebrewUniversityofJerusalem,Israel. Collaboratingwithanationalcreditcardcompany,theyrandomlyselectedtwohundredand fortysixcreditcardholderswhohadnotusedtheircardsforthepreviousthreemonths. Thentheysentthemallamessageintheformofaphonecallfollowedbyaletter highlightingthebenefitsofusingtheircreditcardsovercashorcheque.

TheCatchWas
Theonlycatchwas,notallthecustomersreceivedthesamemessage. Halfthecustomersreceivedanegativelyframedmessage(thelossofnotusingtheircredit card)whiletheotherhalfreceivedapositivelyframedmessage(thebenefitofusingtheir creditcard). Thecustomersinthenegativeframingconditionreceivedthefollowingmessage: "...Iunderstand.Itisworthwhileforyoutoknowthatthereare manydisadvantagesinusingcashinsteadofZionCard.Oneis thatinusingcashthereisadangerthatmoneywillbelostor stolen;butifsomeoneusedyourcard,weareresponsible,and themoneywillbereturnedtoyou.Thismeansthatpayingby cashisnotonlylessconvenient,butalsomuchlesssecure.(Emphasisadded) Incomparisonthoseinthepositiveframingconditionreceivedthefollowingmessage: "...Iunderstand.Itisworthwhileforyoutoknowthatthereare manyadvantagesinusingZionCardinsteadofcash.Oneisthat inusingZionCardthereisnodangerthatmoneywillbelost orstolen;thatisifsomeoneusedyourcard,weareresponsible, andthemoneywillbereturnedtoyou.Thismeansthatpaying byZionCardisnotonlymoreconvenient,butalsomuchmoresecure.(Emphasis added) Similarlytheywerealsoinformedofotherreasonsforusingthecreditcardbutwith differentframing: LossFramed GainFramed Additionaldisadvantagesinusingcash AdditionaladvantagesinusingZionCard Nofreecreditforuptoonemonth. Freecreditforuptoonemonth. Nocontinuoustrackingofyour Continuoustrackingofyourexpenses. expenses. Convenienceindailyuse. Inconvenienceindailyuse.

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Asyoucanseeboththemessageswerethesame.Theonlydifferencewasinthewaythey wereframed.Whattheexperimenterswantedtoseewaswhetherframingamessagein termsofalossoragainwouldhaveanimpactonthenumberofcustomerswhowould subsequentlystartusingtheircreditcard. Theresultswereclearcutanddecisive.Lossframinghadastrongereffectoncustomer behaviour.Itwasntasmalldifferenceeither;thosewhohadreceivedthelossframed messagedoubledtheiruseofthecreditcardcomparedtothosewhohadreceiveda positivelyframedmessage.Also,whenquestionedsixmonthslater,66%ofthecustomersin thenegativeframingconditionrecalledthemessagecomparedtoa43%recallratefor thoseinthepositivelyframedcondition.Sometimesitpaystopitchtheglassashalfempty. Cautionshouldbeexercisedininterpretingtheseresults.Whilelossframingismore persuasivethangainframinginmostcases,thereareexceptions.Forexample,prevention sellsbetterusinggainframedmessages.Inastudyonskincancerprevention,forexample, theresearchersfoundthatapositivelyframedmessage(Regularuseofsunscreencan protectyouagainstthesunsharmfulrays)wasmoreeffectiveatpersuadingpeopleto requestsunscreen(71%)comparedtoalossframedmessage(Ifyoudontusesunscreen productsregularly,youwontbeprotectedagainstthesunsharmfulrays)whichonly managedacompliancerateof46%. Theonlywayaroundthisproblemistesting.Youshouldtestthemessageonasmallscale beforegoingallout. Withthatsaid,lossframinghasarobusteffectandcanleadtosignificantlyhigher complianceasisevidencedbythecreditcardstudy.

UsingLossAversionandFramingEffectsinCopywriting
Entrepreneurs/copywriters/marketers/salespeoplegenerallytendtowriteaboutwhatis tobegainedbybuying.Butasbadexperiencesarestronger,thereismuchtobegainedby alsopointingoutwhatcanbeavoidedbybuyingaproductorservice. Forexample,inadditionto: Buythatdreamhouse. Havemoreenergytoplaywithyourkids. Fitintothatbikini. Freecreditforuptoonemonth. Alsopointout: Escapethedrudgeryofmortgagepayments. Avoidtheembarrassmentofnotbeingabletorunaroundwithyourkids. Avoidnotfittingintothatbikini. Nofreecreditforuptoonemonth.

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Sotakealookatyoursalesletters/webpagesandifyounoticethattheyareprimarily focusedonmovingtowardspleasure,thenrewritethemtoincorporatewhatyourproduct allowsthecustomertoescapefrom.

LossAversioninAutoresponders
Youcanalsoincorporatethisintoyourautorespondermessagesequence.Ratherthan having10messagesfocusedonmovingtowardspleasurelookinggreatinabikini,or buyingthatMercedesyouvehadyoureyeonyoucanalsohaveseveralmessagespushing theavoidpainbuttonescapetheembarrassmentofnotfittingintoyourclothes,escape thejobthatyouhate. Thatwayyou(a)havemoremessagesforyourautoresponder(especiallyusefulforpeople whofindithardtocomeupwithcontent)and(b)hitavarietyofuseremotionbuttonsand tapintoalltheusermotivations,thusmaximisingyourchancesofmakingasale. Likethecreditcardusersandthemedicalpractitioners,youmayfindthatyourcustomers tooaremorepersuadedandmotivatedbywhattheycanlosethanbywhattheycangain.

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4.RiskAversion: IfThat'sTrueofEntrepreneurs,ThinkWhatYourAverageCustomerIsLike?
Anotherimplicationofnegativeexperiencesbeingstrongerthanpositiveexperiencesisin thefieldofrisktaking.Notsurprisingly,peopledontliketakingrisks.Whatissurprisingis justhowriskaversemostpeopleactuallyare. InanexperimentondecisionmakingthepsychologistLolaLopespresentedparticipants withtwotypesoflotteryticketsbothofferingprizesbetween$0and$200.Thefirstlottery haditsoddsevenlysplitacrossallamounts,meaningtheparticipantshadanequalchance ofwinning$0,$50,$100,$150and$200.Thesecond,incontrast,concentratedtheodds nearthemiddle,offeringahighchanceofwinningasumaround$100butwithlittlechance ofwinningahighprizelike$200oralowprizelike$0. Logicallytherewasnorightorwronganswer.Onelotterywasntsuperiortotheother becauseifyouhadaveragedthedollaramountsinboththelotteriesyouwouldhaveended upwithanaverageof$100.Thiswasjustaswellbecauseitwasntatestonthe participantsdecisionmakingability.No,itwasatestontheparticipantsdecisionmaking tendency.Lopeswantedtoseewhethermostpeoplewerepotentialseekingorwhether theywere,whatshecalls,securityminded.

TheProverbialCoinNotOneofLogicButof
Sinceboththelotterieswerethesame,Lopesshouldhaveendedupwithparticipants choosingatrandomleadinghalftooptforthehighriskhighrewardoptionandhalftoopt forthelowrisklowrewardoption.Excepttheproverbialcointheparticipantstossed wasntoneoflogicbutofemotion,which,aswehaveseen,isanythingbutimpartialor symmetrical.Withbadbeingstrongerthangood,theparticipantsoverwhelminglychosethe lowrisk,lowpayoutoption.Asoneoftheparticipantsputit,[theevenlysplitlottery offered]toomanychancesofgettingalowerprize.Thestatementisinsightfulasitshows thatpeoplearenotaseuphoricaboutgainingastheyareworriedaboutlosing. Also,itwasntjustthattheparticipantsinLopessexperimentwerewallflowersorpansies. Evenpeoplewhoaretheepitomeofrisktakingandpotentialseekingarentasriskseeking aspopularmythologywouldhaveyoubelieve.Recently,sociologistsHongweiXuof StanfordUniversity,USA,andMartinRuefofPrincetonUniversity,USA,askedanationally representativepopulationofbuddingentrepreneurstochoosefromthreepotential ventures.Ventureonehadapayoffof$5millionwitha20%successrate,venturetwohad a$2millionpayoffwitha50%chanceofsuccessandoptionthreehada$1.25millionpay offwitha80%successrate. Ifentrepreneurswerereallyriskseekingmissilesasthepopularimagesofbusinessmoguls suggest,thentheyshouldhaveoverwhelminglychosenthehighrisk,highpayoffventure. Exceptthatsnotwhattheresearchersfound.Theentrepreneursoverwhelminglywentwith

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thesurething(venturethree).Andifentrepreneurs,theembodimentofriskseeking,are riskaverse,thenwhatdoesthatsayaboutyouraveragecustomer?

WhatRiskAversionMeansForYourBusiness
Whatallthismeansforyourbusinessisthis:whenacustomerismakingabuyingdecision, heorsheismorefocusedonwhattheymightloseiftheyendupmakingabadbuy,orthe purchaseotherwisefailstomeetexpectation,thanwhatistobegainedbyit.Most salespeoplewillbefamiliarwiththisintheformofIneedtothinkaboutit,whichreally justmeansthatthepotentialgainofmakingthepurchasedoesntyetoutweightheriskofa potentialloss. Forexample,whenpurchasingajacket,acustomeristhinkingmoreabouttheriskofbuying thatjacketWhatifIseeanotheroneIlikemoreatadifferentstore?Whatifitsnolonger infashion?WhatifIdontlikethecolourafterawhile?Whatifitdoesntgowithmyother outfits?WhatifIneedthemoneyforsomethingelse?

HowOneSimpleDeviceCanHelpYouOvercomeRiskAversionandDoubleYour Sales
Yourjobasamarketerthenistofigureoutawaytoreducetheriskinherentinpurchasing yourproduct.Thesimplestwaytodothisistoimplementalittledevicecalledaguarantee. Guaranteesrelievetheriskandstressofpurchasingalemonoranotherwiseillsuited product. Intraditionalofflinebusinessesguaranteesdontalwayswork.Notbecausetheydont motivatepeopletobuybutbecausetoooftentheymotivatepeoplewhohavenoreal intentiononbuyingtrialtheproduct.Thismakesthetacticprohibitiveasthecostsof refundingoutstripstheextrabusinessbroughtinbytheguarantees. SupposeyourunapayTVcompanyforexample.Ifyouofferaonemonthtrialatno obligation,thenyouwillgeneratemorebusiness,nodoubtaboutit,upto23timesas much.Butthecostofacquiringandsigningupthatcustomer(payingfortheadverts,the salespeopletopresentandselltheproductandtheadministrativestafftosignthemupon thebooks)andofhavingtosendanelectriciantoinstalltheequipment(technicianstime andcostofequipment)maycostyouover$500hundred.Thentheresthecostof processingtherefunditself(removingtheequipmentandreconcilingtheiraccount). Thus,unlessyoucanretainmostofthenewcustomersyouwillnotbenefitfromtheextra businessgeneratedbytheguarantee(unlessyoucanfindasecondarywaytomonetizethe customers,e.g.adverts).Soyouhavetotestitwithasmallsampleofcustomerstoseeifthe extrabusinessgeneratedbytheuseofguaranteeswilloutstripthecostofpeoplewhotry butdonteventuallybuy. Withthatsaid,inmostcasesguaranteesworkwonders.Especiallyifyoudonthaveawell

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knownandtrustedbrandyouneedtoimplementsomeformofaguarantee.Onewayto decreasecustomerattritionandexploitationofguaranteesistoincorporatecommitment intotheguarantee.Askthemtopayfortheirfirstmonth.Anyformofmonetaryinvestment willquicklyseparatethebuyersfromthepuretrailers.Henceratherthangivingthemafree installation,freefirstmonthand1monthtrial,youmightofferthemfreeinstallationbut theystillmighthavetopayfortheirfirstmonth.Thiswayonlythepeoplewhogenuinely haveaninterestinbuyingtakeyouupontheoffer.Thosewhosimplywantedtotrailit becauseitwasfreewillnotbewillingtopayforthefirstmonthandwillthereforefilter themselvesout. Theonlyplacewhereyoushouldhavenoqualificationsorfiltersorrequirecommitment withguaranteesisonline.Whenitcomestodigitalcontentitcostsnexttonothingto replicate.Thereyoushoulddefinitelygowithanoobligationtrial.Itwillallowyour customerstotrailyourproductsatzerorisk,whileallowingyoutogeneratefarmore businessesthanyouwouldwithouttheguarantee.

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5.TheEndowmentEffect: WhenaBirdInHandIsWorth14InTheBush

Onesunnydayin1994,DanAriely,afamouseconomist,waswalkingthroughthecampus groundsofDukeUniversitywhenhestumbledontothemostincredibleofscenes.ItwasK Ville,Duke'sannualstudentcampoutwherebasketballfanspitchtentsoutsidethe universitystadiuminabidtowinticketstotheDukebasketballgames.YouseeDukehasa smallbasketballstadiumwithonlyalimitednumberofseats.Soinordertoseparatethedie hardfansfromtherestandallocatethescarcetickets,anintricateritualhasdevelopedover theyears. Aspiringfansformgroupsofeighttotenandpitchtentsonthegrassyareaoutsidethe basketballstadium.Itisfirstcome,firstenter.Thosewhopitchfirstgetspotsclosesttothe stadium'sentrancewiththelatecomersprogressivelygettingfurtheraway.Atrandom timesanairhornissounded,atwhichpointatleastonememberfromeachtentmustcheck inwiththeauthorities.Ifatentfailstodosowithin5minutes,theyaremovedtotheback oftheline.Thiscontinuesformostofthespringsemesterbeforeintensifyinginthelast48 hoursbeforeagame.Inthefinal48hourstheairhornblaresatallhoursoftheday,and sometimesevenofthenight.Also,itnolongerremainsagroupcheckin.Itbecomeseach fanforhimselfwithindividualfanshavingtoxcheckinpersonallywhenevertheairhornis sounded. Yetafterallthatwork,thestudentsatthestartofthelinestilldon'tgetaticket.Instead theygointoadrawtowinthetickets.Thisrandomisationnotonlymakesthewhole situationalittlecrazybutalsoexperimentationworthy.Thinkabouthowcloselytheritual resemblesadesignedexperiment.Recruitagroupofparticipants,saystudentsatDuke, promisethemthesameexperience,saythebasketballgame,makethemworkequallyhard towintheprize,saythepainfulcampout,andthenusearandomisationprocess,saythe lottery,tosplitthemintotwogroups,sayticketwinnersandticketlosers.Itisthekindof thingasocialscientistwoulddesign.Andhereitwasoccurringallonitsown,withoutany researchgrants,withoutanyonetryingtocreateartificialfanclubs,justwaitingfor someonetocomealongandasktherightquestion. ThatswhyArielywasfascinatedthatdaybecausehehadtherightquestionforthe accidentalreallifeexperiment.Thatquestionwasthis:"Wouldthestudentswhohadwon ticketswhohadownershipofticketsvaluethoseticketsmorethanthestudentswhohad notwonthemeventhoughtheyhadallworked'equally'hardtoobtainthem?"Thatis,if youaskedoneofthewinnerstoselltheirticketandaskedoneoftheloserstobuythat ticket,wouldtheyagreeontheprice? Now,accordingtoconventionaleconomictheory,thequestionisntevenworthasking.Why wouldthewinnersandlosersvaluetheticketsdifferently?Ifboththepartieswere promisedthesameconditions,expectedthesameexperienceandworkedequallyhardfor thesameprize,whythenwouldtherebeadiscrepancybetweenwhatasellerwouldbe

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willingtoselltheticketatandwhatabuyerwouldbewillingtopayforit.Ofcoursethey wouldvalueitthesame.Itsjustcommonsense. Ariely,however,didn'tseeitthatway.Inwhatmusthaveannoyedtheheckoutofclassical economists,Arielyarguedthesellerswouldvaluetheticketsmorethanthebuyers.Yousee, Arielysnotjustanyoldeconomist.Hesfromtheinsurgentschoolofeconomicscalled behaviouraleconomics.Formostpart,behaviouraleconomistsarenotmuchliked,letalone admired.Why?Becausetheykeepinsistingthathumansareirrational,oratleastnotas rationalastraditionaleconomistsbelievethemtobe.Theyarguethatthehumanpsycheis plaguedwithsystematicglitchesthatblurjudgmentandcolourthedecisionmakingprocess. Whatsmorethesebiasesare,toacertaindegree,predictable.AsArielyputsit,peopleare predictablyirrational.Thisisproblematicforclassicaleconomicsbecausemostneoclassical economictheoryisbasedontheassumptionthatpeoplearerational,thatweknowwhatis inourbestinterests.Soit'sfrustratingforeconomistswhenbehaviouraleconomistslike Arielycomearoundarguingotherwise.

HealthNutsorOwnershipJunkies?
Hisrebelliousness,however,didhavesomescientificbasis.Inthiscase,hisinsistencewas basedonastudydonebyJackKnetsch.Knetschrecruitedagroupofpeopleandgaveeach participantanewcoffeemugbrandedwiththeiruniversitylogo.Thenheofferedeach participantachancetotradetheirmugforapound(450grams)ofappetizingSwiss chocolate.Whathewantedtoseewashowmanywouldmakethetrade. Atrifling11%decidedtoaccepttheoffer.Theother89%decidedtoholdontotheir belovedmugs.Nowthisinitselfdoesnttellusmuch.Allyoucandrawfromthisisthatthe participantswereeithercoffeecuploversorabunchofhealthnutswhodespisedjunkfood. Whereitgetsinterestingisinthesecondpartoftheexperiment.Inphasetwo,the experimentersagainroundedupagroupofparticipantsandrepeatedtheexperiment.Only thistime,theyswitchedthegifts.Wheretheyhadpreviouslygiventhemcoffeemugs,they nowgavetheparticipantsSwisschocolate.Wheretheyhadbeenofferedatradefortheir mugs,theywerenowofferedatradefortheirchocolate.Thechocolatewasexactlythe same.Themugswereexactlythesame.Allthathadchangedwaswhattheparticipants weregivenupfront,bydefault.Thistimetheresultsdidntjustchange,theyreversed.90% oftheparticipantsdecidedtokeepthechocolatewithameasly10%makingthetradefor thepreviouslybelovedmug.Knetschconcludedthatpeoplevaluewhattheyhavemore thanwhatothers,nonownersofthegood,valueit. Theproblemwithlaboratoryexperiments,however,isthattheyoftendonttranslateinto practice.Thingsdontalwaysworkthatwayinreallife.Asthejokegoesthedifference betweenscientifictheoryandrealityislikethedifferencebetweenreadingthemenuand eatingdinner.ThatspreciselywhythesituationatDukeexcitedAriely.Itwasorganic.It wasreallife.Ifhecouldprovehishypothesisthere,hecouldmakeastrongcaseforhisidea.

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Tofindout,Arielyandhiscolleaguedecidedtophonethewinnersandlosersandtrytoset upsomedeals."OurfirstcallwastoWilliam,asenior,majoringinchemistry",recallsAriely. Williamwasoneofthelosers.Afterreachingthefrontoftheline,he'dmissedoutonthe lotteryandthusthetickets. '"Hi,William,"Isaid."Iunderstandyoudidn'tgetoneoftheticketsforthefinalfour." "That'sright." "Wemaybeabletosellyouaticket." "Cool." "Howmuchwouldyoubewillingtopayforone?" "Howaboutahundreddollars?"hereplied. "Toolow,"Ilaughed."You'llhavetogohigher." "Ahundredfifty?"heoffered. "Youhavetodobetter,"Iinsisted."What'sthehighestpriceyou'llpay?" Williamthoughtforamoment."Ahundredseventyfive." "That'sit?" "That'sit.Notapennymore." "Ok,you'reonthelist.I'llletyouknow." AndonebyoneArielyandhiscolleaguecalledsome100studentswho'deitherwonorlost toseeiftheycouldmanageadeal.Theirefforts,however,wereinvain.

WhenaBirdInHandisWorthFourteenintheBush
Notonepersonwaswillingtoselltheirticketatapriceabuyerwaswillingtopay.Losers, onaverage,werewillingtopayaround$170foraticket.Thewinners,ontheotherhand, demanded,onaverage,acrazy$2,400togiveuptheirtickets.Whatwasgoingonhere? Oneminuteeveryonevaluedtheticketsthesameandthenexttheysuddenlysplitintonon ownerswhothoughttheexperiencetobeworth$175andownerswhothoughtitwas worthsome14timesmoreat$2,400. Theanswercomesdowntowhatbehaviouraleconomistsandpsychologistscallthe EndowmentEffect.Yousee,whenyouownsomething,youstarttovalueitalotmorethan

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its'true'worth.Thatis,youvalueitalotmorethanpeoplewhodon'townit.Thewinners valuedtheticketsmorethanthelosersbecausetheyhadclaimedownershipofthetickets. Exactlywhythisissoisacomplexquestionbutitdoeshavealottodowithlossaversion. Sincewehaveanirrationalfearofloss,whensomethingbecomesourownwestarttovalue itmorebecausepartingwithitthenstartstobeviewedasaloss,whichwejustcantstand.

MarketingLessonfromaPetStore
Petstoresusetheendowmenteffecttogreateffect.Whenareluctantparentisunwillingto committopurchasingapuppy,oranyotheranimalforthatmatter,thesalesassistant simplysaysItellyouwhat,takethepuppyhomefortheweekend,andifyoufinditisnta rightfitforyourfamily,bringitbackandwellrefundyourmoney.Noquestionsasked.Not surprisingly,thecustomertakesthepuppyhome,thechildandfamilybondwiththepuppy overtheweekend,andbeforeyouknowit,theycantrememberevernothavingthepuppy. Partofthereasonthetechniqueworkswellisduetotheemotionalbondingthefamilyor childundergowiththepuppy.Butjustaspowerfulisthetechniquesabilitytotriggerthe endowmenteffectandgivethecustomerasenseofownership,becauseasArielys experimentshows,onceweownsomethingwestarttovalueitmorethanwewouldifwe didntownit. Applyingthattoyourbusiness,canyougivesomethingawayfortrial?Whetheritsrugs, vacuumcleaners,treadmills,coffeemakersorsoftwareprograms,bygivingsomethingaway foratrialperiodyouwilltriggertheendowmenteffectandmakethechanceofasaleor purchasemoreprobable.

ConfessionsofaFerrariCarSalesmanandtheArtofInstillingVirtualOwnership
Ifthephenomenonoftheendowmenteffectisn'tstrangeenoughalready,thenconsider this.Fortheeffecttotakehold,theownershipdoesn'tevenhavetobereal.Sheer perceptionofownershipcansufficeintriggeringtheeffect.Thatis,merelygettingsomeone toimaginetheyownsomethingcanmakethemvalueitmore. Soundssimpleenough,buthowexactlydoyouachieveit?MaybeChrisRoutledgecanhelp. Routledgeisacarsalesman.Buthesnotjustanyoldcarsalesman;heisoneofLondons best.YouhavetobeifyouwanttoselltopofthelineclassiccarslikeTheFerrari250GTOor the1953JaguarXK120Dropheadcoupe.Withthesebeautiespricedathundredsand thousandsandevenmillionsofdollars,Routledgehastoknowhissellinggameinsideoutin ordertogetthebestprice. Sowhatcanamanwhosellsrarevintagecarsthatcostmorethanmostpeopleshousestell youaboutselling,andmoreimportantly,aboutinstillingvirtualownership?Well,firstthere istheusualbuttimelessadviceontheimportanceofsalesdiscovery,offindingoutyour prospectswantsanddesires.Theresnopointinsellingthecustomersomethingthey dontwant,saysRoutledge.ButthemostrevealingpieceofadviceRoutledgegivesyouis

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oninstillingvirtualownership.Unlikethepetstores,hedoesntlettheprospecttakethecar homefortheweekendandletthembondwithituntiltheycantrememberwhatitwaslike livingwithoutit.Thoughhedoessomethingverysimilarheletstheprospecttakethecar foratestdrive. Iusuallysavethetestdrivetilltheendoftheprocess,saysRoutledge,butifIknowthe carisreallyreallyhot,Iputthecustomerinitinthebeginning.Astheprospectdrives aroundinthecarfeelingitspowerunderneaththeirfeetandenjoyingtheenviouslooks frompeoplelookingoninawe,hecanthelpbutfeelasenseofownership.Oncethat powerful,albeitimaginary,senseofownershipisinstilled,itsprettyhardtowalkawayfrom thecar.AsRoutledgeputsit,Thattestdriveoftendoesmyjobforme. Atfirsttheideasoundsabsurd.Itsoundsallairyfairy.Butthereisscientificevidenceto provethatthephenomenonexists.Considertheexperimentbyacoupleofmarketing researchers,JoanPeckandSuzzaneBShu,attheUniversityofWisconsin,USA. Theyrecruitedagroupofover200participantsandhadthemtouchandholdaslinkyanda mugforaminute.Excepttheydidntgetalltheparticipantstodoso,askingsometosimply standthereanddonothingfortheminute. Thentheyhadtheparticipantsfilloutaquestionnaireaskingthemtoassesshowmuch,ona scalefrom1to7,IfeellikethisismySlinky/Mug,Ifeelaveryhighdegreeofpersonal ownershipoftheSlinky/Mug,andIfeellikeIownthisSlinky/Mug. Theresearchersfoundthatthosewhodphysicallyinteractedandtouchedtheproductsfelt agreatersenseofownership(3.36)thanthosewhohadnt(2.75). Thus,Routledgehadlearntsomethingabouthumanpsychologythatmostpeoplewillnever realiseintheirlifetime.Whetheritsa$250,000Ferrari,a$250phoneora$25tshirt, lettingpeopletouch,tryandholdaproductmagnifiesdesireandcreatesasenseof ownership.Asthefamousconsumerbehaviourscientist,PacoUnderhill,explains, Possessionisanemotionalandspiritualprocess,notatechnicalone.Itbeginsintheeyes andtheninthetouch.Oncethethingisinyourhand,oronyourback,orinyourmouth,you canbesaidtohavebeguntheprocessoftakingit.Payingforitisameretechnicality.

HowtoUsetheEndowmentEffecttoIncreaseSales
Thelessonthenisclearyourjobistofigureoutawaytoletprospectsandcustomers experienceyourproducts.Theeasieryoumakeittosee,touch,tasteandexperienceyour productthemorequicklyitwillchangeownershipfromyoutothecustomer,whichinturn willincreaseyourchancesoftechnicallysellingthatproductandthereforeincreasingyour sales. TrialPeriods Canyougiveyourcustomersaproducttotryforaday,weekoramonthforfree?

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Howaboutofferinga30daymoneybackguarantee,noquestionsasked? VirtualOwnership Canyouchangeyourshopfrontlayouttoallowcustomerstomoreeasilytouchandfeel yourproducts?Canyouallowthemtotakeyourproductforatestdrive? Stories Canyoutellwickedtalesthatgetthecustomerstoimaginewhatitwouldlikeusingyour productsorservices?See:GettingCustomersto'ImagineThis'WithoutAskingThemto 'ImagineThis'

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6.StatusQuoBias: WhatanOldOutdatedPieceofLegislationCanTeachYouAboutThe PsychologyofBuying

Intheearly1990stheUSstatesofNewJerseyandPennsylvaniaintroducedtortsreformsto helptheircitizensmakebetterchoicesinautomotiveinsurance.Indoingso,they inadvertentlysetupanexperimentthathelpedrevealasystematicglitchintheway consumersthink,decide,andbuy. Aspartofthenewchangesthestatesofferedtheircitizenstwooptionsfortheirautomotive insuranceanexpensiveoneandacheapone.Theexpensiveonegavefullrightstosue, whilethecheaperoneonlyprovidedthecitizenswitharestrictedsetofrightstosue. InNewJersey75%ofthecitizenschosetheexpensiveoption,withonlyamere25%opting forthecheapoption.Thisinitselfwasntremarkable.Atbestallthistoldanyonewasthat peoplearentalwaysafterthecheapestoption.Whatmadethesefiguressignificantwas howtheydifferedfromthoseofthestateofPennsylvania.ThePennsylvaniancitizens,in contrast,overwhelminglychosethecheaperoption.Amassive80%ofcustomerschosethe cheaperoption,withonly20%ofpeoplejoiningtheirNewJerseyfriendsinchoosingthe moreexpensiveoption. Thequestionofcoursewaswhy?Whydidtheygetsuchbipolarresults?Werethe Pennsylvanianslesseducatedorinformedontheimportanceofhavingfullsuingrights?Or werethecitizensofPennsylvaniajustplainoldcheap? Theanswer,astonishingly,turnedouttobemuchmorebanalthanthat.Thestark differenceinconsumerchoicedidnotresultfrombettereducationordifferencesinsocio economicstatusoranyotherkeydifferenceinmarketdemographics.Ratheritstemmed fromthewaythechoiceswerepresentedinthetwostates.InNewJersey,theexpensive optionwasthedefaultoption,whileinPennsylvaniathecheaperoptionwasthedefault. Mostcitizens,foronereasonoranother,justwentwiththedefaultoption.

TheAustriansandtheGermans
Asimilareffecthasbeendiscoveredintherealmoforgandonation.InAustria99%of peopleareregisteredasorgandonors.ComparethattoGermanywhereonly12%are registeredfororgandonation.Againwhythehugedifferenceinthesefigures?AreAustrians morealtruisticthanGermans?Dotheyholddifferentvalueswhenitcomestoorgan donation? Nope.Whataccountsforthisdifferenceissimplythewaythechoicesarepresentedinthe twonations.InAustria,organdonationisthedefaultoption.Youhavetooptoutofthe donorregisterifyoudontwishtodonate.InGermanyitsthereverse,youhavetooptinif youwanttobeadonor.Thissimplechangeinchoicepresentationisthecauseofthe
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significantlydifferentresultsbetweenthetwonations. Thistendencytostickwiththedefaultoptioniswhatpsychologistsandbehavioural economistscalltheStatusQuoBias.Itisasystematicglitchinhumandecisionmakingthat canleadto,asevidencedbytheorgandonationstatistics,significantuptakesofaparticular idea,optionorproduct.Itissoinbuilt,infact,thatevenbeingawareofonespredisposition tostickwiththedefaultoption,peoplestillcanthelpavoiditslure. AtellingexampleisthatoftheAmericanscholarCassSunstein.Sunsteinhasstudiedhuman biasesinjudgmentanddecisionmakingandisoneoftheleadingexpertsinthefield.Hehas alsowrittenabook(Nudge,coauthoredwithRichardThaler),onhowthesebiaseswork, howtofightthem,andhowtousethemtoimprovesociety.Yet,asSunsteinscolleague, RichardThaler,pointsout,Sunsteinhimselfisntsignificantlybetteratresistingthepowerof thestatusquobias. ManyyearsagoAmericanExpresswroteSunsteinacheerfullettertellinghimthathecould receive,forfree,threemonthsubscriptionstofivemagazinesofhischoice,tellsThalerof hiscolleaguessituation.Freesubscriptionsseemedlikeabargain,evenifthemagazines rarelygetread,soSunsteinhappilymadehischoice. WhatSunsteindidntknow,however,wasthathewouldhavetoactivelycancelhis subscription.Otherwisehewouldcontinuetoreceivethemagazines,andmoreimportantly, havetopaynormalpriceforthem.Soforaboutadecade,hehascontinuedtosubscribeto magazinesthatherarelyeverreads(hekeepsintendingtocancelthosesubscriptions,but somehownevergetsaroundtoit).

WhytheStatusQuoBiasissoPowerful
Thatcharminglittleanecdoteisagreatexampleofthepowerofthestatusquobias.But whyarepeoplesopredisposedtostickingwiththedefaultoption?Theanswerseemstobe acombinationofmultiplefactorsandeffects.Firstlypeoplearelossaverse,meaningpeople dontliketolosethingsthattheyalreadyhave.CombinethiswiththeEndowmentEffect, thephenomenonthatoncesomeoneownssomethingtheystarttovalueitmore,andyou haveindividualsnotwantingtogiveupwhattheystartedwith,evenwhenwhatthey startedwithwasntactivelychosen. Third,itrequiresefforttodosomething,likeoptoutofasubscription,andthatseffortthat manyofuswontexpenduntilweabsolutelyhaveto.Inotherwordspeopleprocrastinate. Finally,asThalerandSunsteinhighlight,Inmanycontextsdefaultshavesomeextra nudgingpowerbecause,rightlyorwrongly,thedefaultoptioncomeswithanimplicit endorsementfromthedefaultsetter,beittheemployer,government,orTVscheduler. Fortheworldofsalesandmarketing,thisisapowerfulconcept.Ifconsumershavea tendencytostickwiththedefaultoption,thenyoucansignificantlyincreasetheuptakeofa productorservicebysimplymakingit,thatsright,thedefaultoption.Magazinepublishers,

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asSunsteinsanecdotedemonstratessowonderfully,havecertainlycapitalizedonthe phenomenon.Buttheyarenotalone. Gymsandfitnesscentershavealsostartedtoincorporatethisstrategyintotheirplansand packages.Mostgymsknowthatthecustomerswillpowerandneedtochangearetransient statesofmind.Accordingtoonesource,90%ofpeoplewhojoinagymwillstopgoing withinthefirst90days.However,thecostofacquiringacustomerisincrediblyhighfor mostgyms,andfrankly,threemonthsofsubscriptionissimplynotprofitable.Sohowdo yougetthemostoutofeachcustomer? Simple:byimplementinganautomaticpaymentssystemintheformofaDirectDebitPlan. Whenthecustomerssignup,theyarechargedautomaticallyeverymonthtotheirbank accountorcreditcarduntiltheyactivelycanceltheirplan.Mostpeople,duetothestatus quobias,keepputtingitoff,andthegymgetsanextrafewmonthsworthofsubscriptions outofthecustomers.Nowsupposetheysqueezeanextratwomonthsoutofeach customer.At$60amonththatsroughlyanextra$120percustomer.Multiplythatbysome 200hundredcustomersandthatonesmallchangeresultsinsomethinglike$240,000in extrarevenuesmostofwhichisprofit. Thestrategyworksespeciallywellforbusinessesthatdorepeatbusinessorsella subscriptionbasedproduct.Magazines,bookclubs,gyms,cosmeticcompanies,fruitto yourdoorbusinesses,payTVvendors,internetserviceproviders,andphonecompaniesare justsomeofthesebusinesses.Byincorporatingautomaticpaymentplans,optout subscriptions,andautomaticrenewalsofexpiredservices,anysubscriptionbasedbusiness cansignificantlyaddtoitsbottomline.Andifyoudonthaveasubscriptionbusiness,thenit maybeworthlookingintosettingoneup.

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7.FromDescriptiontoPrescription: UsingTheseSystematicBiasestoIncreaseYourSales
Hereisasummaryofallthetechniquesdiscussedinthechaptersbefore.

Lesson1:LimitandControltheBadNews
Asbadisstrongerthangood,acustomerismorelikelytotellothersaboutabadexperience thanagoodone.Andasbadexperiencesaremorememorableandfeltmorestrongly,the personhearingthenewswillalsobemoreaffectedbyit. Thismeansyoushouldattendtounhappycustomersquicklyandeffectivelyinorderto reducethedamagethattheymaycause.

Lesson2:UseNegativeFraming
Inadditiontopointingoutwhatistobegainedbybuyingyourproductorservice,you shouldalsohighlightwhatistobeavoidedbyusingyourproductorservice. Forexample,inadditionto: Buythatdreamhouse. Havemoreenergytoplaywithyourkids. Fitintothatbikini. Freecreditforuptoonemonth. Alsopointout: Escapethedrudgeryofmortgagepayments. Avoidtheembarrassmentofnotbeingabletorunaroundwithyourkids. Avoidnotfittingintothatbikini. Nofreecreditforuptoonemonth. Thatwayyouarenotonlypushingtheseekpleasurebuttonsofyourcustomers,butalso theavoidpainbuttons.Sincepeoplearemoremotivatedtoavoidpainthanseekpleasure, thiswillmakeyourmessagemorepersuasive.

Lesson3:ReduceRisk
Mostpeoplearenotaseuphoricaboutgainingastheyareworriedaboutlosing.Thus,when acustomerismakingabuyingdecision,heorsheismorefocusedonwhattheymightloseif

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theyendupmakingabadbuy,orthepurchaseotherwisefailstomeetexpectation,than whatistobegainedbyit. Yourjobasamarketerthenistofigureoutawaytoreducetheriskinherentinpurchasing yourproduct.Oneofthemostpowerfulwaystodothisistoimplementaguarantee.Havea 30daymoneybackguaranteenoquestionsasked,forexample.

Lesson4:InstillVirtualOwnership
Peoplevaluewhattheyownmorethanwhattheydontown.Andtheeasieryoumakeitto see,touch,tasteandexperienceyourproductthemorequicklyitwillchangeownership fromyoutothecustomer,whichinturnwillincreaseyourchancesoftechnicallysellingthat productandthereforeincreasingyoursales. 3WaystoInstillingVirtualOwnership 1. TrialPeriods Canyougiveyourcustomersaproducttotryforaday,weekoramonthforfree? Howaboutofferinga30daymoneybackguarantee,noquestionsasked? 2. PromoteCustomerProductInteraction Canyouchangeyourshopfrontlayouttoallowcustomerstomoreeasilytouchand feelyourproducts? 3. Stories Canyoutellwickedtalesthatgetthecustomerstoimaginewhatitwouldlikeusing yourproductsorservices?SeeGettingCustomersto'ImagineThis'withoutAsking ThemtoImagineThis.

Lesson5:UsethePowerofDefaults
Setyourmostdesirableoptionsasdefaults(leftoptionofimagebelow).Ifyoudontwantto betooassumptive,usearecommendedtag(rightoptionofimagebelow). Example:

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8.RelatedArticles
Ifyouenjoyedthisebookthenyouwillalsoenjoythefollowingarticles: TheSecrettoObamasEffortlessStyle Hopkins'FamousClaim&ThePowerofSpecificity WhatMonicaFromFriendsCanTeachYouaboutTheArtofRapport ThePhotocopierEffect:TheSecrettoMakingYourClaimsInstantlyMoreCredible Leventhal'sTetanusExperiments:DoesFearPersuadeorParalyse? GettingCustomersto'ImagineThis'WithoutAskingThemto'ImagineThis'

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9.References
Chapter1AboutThisBook Kahneman,D.,&Tversky,A.(1979).ProspectTheory:AnAnalysisofDecisionunderRisk. Econometrica,XLVII,263291. Chapter2ThePositiveNegativeAsymmetryEffect Baumeister,R.F.,Bratslavsky,E.,Finkenauer,C.,&Vohs,K.D.(2001).Badisstrongerthan good.ReviewofGeneralPsychology,5,323370. BillClintonBiography(n.d.).Retrieved16November,2010,from http://www.thebiographychannel.co.uk/biographies/billclinton.html Kahneman,D.,&Tversky,A.(1979).ProspectTheory:AnAnalysisofDecisionunderRisk. Econometrica,XLVII,263291. Vaughn,Vince(Producer),Sandel,Ari(Director).(2008).VinceVaughn'sWildWestComedy Show:30Days&30NightsHollywoodtotheHeartland.UnitedStates:WildWestPicture ShowProductions. Chapter3LossAversion&FramingEffects Ganzach,Y.,&Karsahi,N.(1995).Messageframingandbuyingbehavior:Afield experiment.JournalofBusinessResearch,32(1),1117. Kahneman,D.,&Tversky,A.(1979).ProspectTheory:AnAnalysisofDecisionUnderRisk. Econometrica,47,263291. Chapter4RiskAversion Tasler,N.(2008).TheImpulseFactor:WhySomeofUsPlayItSafeandOthersRiskItAll(1st Ed.).USA:Fireside Xu,H.&Ruef,M.(2004).Themythoftherisktolerantentrepreneur.StrategicOrganization, 2(4),331335. Chapter5TheEndowmentEffect Ariely,D.(2008).PredictablyIrrational:TheHiddenForcesThatShapeOurDecisions(1stEd.). USA:HarperCollinsPublishers.
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 Kahneman,D.,Knetsch,J.&Thaler,R.(1990).Experimentaltestsoftheendowmenteffect andtheCoasetheorem.JournalofPoliticalEconomy. KingDabbs,Claudine(Producer).(2010).Exposed:Persuaders.UnitedKingdom:BBC Knowledge PeckJ.,Shu,S.(2009).TheEffectofMereTouchonPerceivedOwnership.Journalof ConsumerResearch.36,434447. Underhill,P.,(2008).WhyWeBuy:TheScienceofShoppingUpdatedandRevisedforthe Internet,theGlobalConsumer,andBeyond(UpdRevEd.).USA:Simon&Schuster. Chapter6StatusQuoBias Kahneman,D.,Knetch,J.L.&Thaler,R.H.(1991).Anomalies:TheEndowmentEffect,Loss Aversion,andStatusQuoBias.JournalofEconomicPerspectives,5,1,pp.193206 Statusquobias.(n.d.).RetrievedNovember16,2010,from http://psychology.wikia.com/wiki/Status_quo_bias Thaler,R.,Sunstein,C.(2009).Nudge:ImprovingDecisionsAboutHealth,Wealth,and Happiness(UpdEd.).USA:guin(NonClassics). Wetmore,D.(2010).TimeManagementFactsandFigures.RetrievedNovember16,2010, fromhttp://www.dovico.com/timemanagementfactsandfigures.html

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