Putting the ME in DIFM: Insights from Behavioral Economics

Paul Whitmore Sas Jan 12, 2010

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 dont want to make repeated calculations about trade offs

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

Prospect Theory is the most powerful theory of Framing

Avoid a loss

>

Collecting a gain

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)

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.

Subscriptions can support behavioral change

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

Dont Make Me Think

Create a climate of us where trust is supported

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 youve not spent on restaurants & save/invest it?

Mint w/ FinanceWorks can facilitate investing/saving

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Watch out for the Sorcerers Apprentice

Sorcerers Apprentice is the relevant metaphor for computers going wild assisting us.

Example: early Iphone bills Hegels 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

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People are not adept at knowing what they want

Choosing for tonight

Choosing for next Thursday

Choosing for second Thursday

Next week I will want things that are good for me

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

Eliciting Goals that Matter

Recalling past successes just makes it worse Distracting people by asking them to think about irrelevant topics doesnt 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
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Elicited versus Explicit Preferences

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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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 Farmvilles maximum by over 500K

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Achievement Orientation as Motivator

Psychophysical Curve of Response to Increase Stimulus

Diminishing Returns (Weber-Fechner Law)

 Response starts big  Each additional increment gives less & less bang
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Behavioral Economics can explain one way that games hook into motivation

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.

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 Kahneman  Dan Ariely

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

http://danariely.com/the-books/

 Sheena Iyengar

http://www.columbia.edu/~ss957/articles.html

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

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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 26

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

Peak and End Rule -- Pictograph

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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

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.

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Choice Overload shown in 401K participation

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Relevance to Designers
 Ruthlessly simplify: Every choice is a pain point

 If its 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?

In a word, No

Notice: People said they were 100% likely to enroll, yet only 14% actually did

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Relevance to Designers
 Assume that 90+% will use the default set up, so dont 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 Arielys Procrastinator app. If you cant make a choice by the deadline, it chooses for you.  Analogy for portfolio re-allocation:
 Although we cant 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

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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 theyre 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

Designers as Choice Architects have the following techniques available to nudge decisions
iNcentives Understand mappings Defaults Give feedback Expect error Structure complex choices Bend of the payoff curve, both for gains & losses Which mental account? A Peak or an End? The road most taken Support needs to know Fallible predicting future self Streamline, hold hands, create means to feel on track

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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

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

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