Author: Farnam Street

Social Proof: Why We Look to Others For What We Should Think and Do

“Where all think alike, no one thinks very much.”
Walter Lippmann

“The five most dangerous words in business are: ‘Everybody else is doing it.'”
Warren Buffett

***

The Basics

Consider a university freshman, attempting to navigate the adult world for the first time. They are convinced that all the other students around them somehow know more about adulthood. Perhaps they imagine that everyone else was handed a manual they somehow missed. Everyone else seems to know where to go, how to make new friends, what to do. Except, of course, the majority of their peers feel equally unsure and are doing the exact same. We never quite leave behind that tendency to look at others for clues.

When we feel uncertain, we all tend to look to others for answers as to how we should behave, what we should think and what we should do. This psychological concept is known as social proof. It occurs as a result of our natural desire to behave in the correct manner and fit in with others. It can be easy to assume that everyone else has a better grasp of what to do in a given situation. Social proof is especially prevalent in ambiguous or unfamiliar conditions, or in big groups. It affects us both in public and in private.

In The Power of Positive Deviance, Richard Pascale explains social proof:

A well-known principle of chemistry establishes that active ingredients can be mixed together with little effect until a third ingredient- often an innocuous catalyst- triggers a chemical synthesis. Analogously, the social system is the catalyst between all the stuff we know versus what actually alters our behavior and mental maps. Social proof? Simple idea, really: it boils down to ‘seeing is believing.’… We use social proof to decide how to dispose of an empty popcorn box in a movie theater, how fast to drive on a highway, or whether to tackle that fried chicken or corn on the cob with our hands at a dinner party. At the more consequential end of the spectrum, we rely on social proof to inform moral choices- whether to assist an inebriated football enthusiast who falls on the sidewalk or step forward as a whistleblower.

Social proof can be problematic for two main reasons. Firstly, groups of people can reach conclusions which are suboptimal or even outright wrong. This is also known as groupthink or herd behavior. Secondly, social proof can be manipulated to guide us towards choices we would not otherwise make. In extreme cases, it can lead to groups of people becoming violent or antisocial. We will look at one of the worst examples further on in this post.

No one likes to be confused about what to do in a situation where other people are around to witness any blunders. The more uncertain we feel, the more susceptible we are to social proof.
A further key factor is the similarity we see between ourselves and the people around us. When people relate to those around them (due to gender, class, race, shared interests, and other commonalities) they mimic each other’s behavior with greater care. This is known as implicit egotism and linked to the mirror neurons in our brains.

In Private Truths, Public Lies, Timur Kuran writes of the influence on social proof on groups:

A phrase like ‘the American way’ when uttered on behalf of a particular agenda, signals that most Americans, or at least most respectable Americans agree on what is appropriate. Of course, the claim embodied in such a phrase may harbor much exaggeration. Other methods of exaggeration include dwelling on biased polls [e.g. a political poll only completed by white males] and overstating the size of a demonstration. All such methods constitute direct appeals to social proof. ..the softness or hardness of a belief must not be confused with its power, which is its potential influence over behaviour. A belief based solely on social proof -one that is extremely soft- may generate wild passions, as when a student participates fervently in a revolutionary movement whose program she has never read. By the same token, a belief formed through extensive personal experience- one that is very hard may elicit little action. An educator convinced that schools are in decline will not necessarily act on this information fearing objections.

No matter how individual we think we are, we all have an inherent desire to conform. Psychologists call this the bandwagon effect- ideas, beliefs, trends, and concepts are spread between people. The more people adopt them, the more people are influenced to do so.

In The Negotiator’s Fieldbook, an example of how social proof is used by lawyers is provided:

A lawyer… might exhibit certain behaviors at the bargaining table (e.g. she can attempt to frame the negotiation as a search for jointly desirable outcomes) and thereby model the behaviour for her counterpart. This, in turn, could induce her counterpart to conduct herself in a similar manner. Likewise, a lawyer might use evidence from similar cases…showing how often- even perhaps for what amounts- litigants in similar cases have settled. By demonstrating that similarly situated others have settled, the lawyer may be able to persuade her counterpart that settlement is appropriate for her as well.

Robert Cialdini and the Science of Persuasion

According to Robert Cialdini, social proof is one of the six key principles of persuasion. When combined with reciprocity, consistency, authority, liking, and scarcity, it can be used to influence people’s actions.

In one study, researchers from New York City university planted a man on a busy sidewalk. Amongst crowds of people, he stopped and looked upwards for a minute. The experiment by social psychologists Milgram, Bickman, and Berkowitz was designed to test the power of social proof. When just one man gazed at the sky, just 4% of passersby also looked up. When the experiment was repeated with five men looking upwards, 18% of passersby followed suit, and for 15 the figure was 40%. This experiment is cited by Cialdini as an illustration of how social proof persuades people to behave in certain ways.
Another study cited by Cialdini concerned charitable donations, finding that showing people a list of their neighbors who had donated to a charity led to a substantial increase in funds raised. The more names on the list, the more people donated. Cialdini also explains how the use of social proof can backfire. Campaigns to reduce drug and alcohol consumption which cite high rates of abuse can have the opposite effect. People subconsciously seek to comply with the many others who are engaging in this behavior.

Cialdini writes:

The principle of social proof says so: The greater the number of people who find any idea correct, the more the idea will be correct…We will use the actions of others to decide on proper behavior for ourselves, especially when we view those others as similar to ourselves…When we are uncertain, we are willing to place an enormous amount of trust in the collective knowledge of the crowd…First, we seem to assume that if a lot of people are doing the same thing, they must know something we don’t…Social proof is most powerful for those who feel unfamiliar or unsure in a specific situation and who, consequently, must look outside themselves for evidence of how best to behave there… Since 95 percent of the people are imitators and only 5 percent initiators, people are persuaded more by the actions of others than by any proof we can offer.

Examples of social proof

“Lack of skepticism is often the result of our social beliefs. No one would believe such absurd nonsense as a moon made of cheese or a flying teapot when it is proposed in such an unfamiliar way. However, when we encounter equally absurd belief systems in socially or historically-familiar contexts, they seem to have a measure of proof and be established or valid. In other words, a lot of people believing some total bullshit creates a form of social proof.”
— Sia Mohajer

***

An unfortunate fact of life is that some people desperately seek opportunities, while others are bombarded with them. One person struggles to find a job, sending their CV everywhere. Another person has an impressive role already and yet is constantly offered others. One book proposal is fought over by publishers. Another is relegated straight to the bin. One person never manages to find anyone willing to go on a date, while another receives non-stop propositions despite being in a relationship. Why does this happen? The answer is social proof.

When someone is regarded as successful, talented, or attractive that view spreads. When social proof is absent, others are more dismissive and attentive to flaws. Two people could be equally qualified, but the one with a high-ranking job already seems like a fail-safe choice for a key role. Two writers could be equally talented, but the one whose previous book was a bestseller will have much less trouble getting their next published. And so on.

The Arizona Petrified Forest
A classic example of social proof occurred in the Arizona Petrified Forest. The theft of unusual petrified wood by visitors was becoming a serious issue, depleting the ancient woodland. Staff put up a sign stating: ‘Many past visitors have removed the petrified wood from the park, destroying the natural state of the Petrified Forest.’ This was intended to deter theft, but it had the opposite effect. The depletion of the petrified wood tripled. Experts who looked at the case determined that the signs had served as social proof, making people feel the act was justified.

Claquers
Another example of social proof is a claque. A claque is a group of professional applauders, positioned in theaters or opera houses. Claqueurs (members of a claque) have been used since Emperor Nero, whose performances were applauded by five thousand soldiers. In the 16th century, claqueurs became a common part of theater and opera performances. Their job was to applaud a performance, encouraging others to do the same. Social proof meant that once a few people began to applaud, the rest did the same. Audience members saw that others appeared to enjoy the piece and went away with a more positive view of it. Whilst clacquers are now rare, their existence shows how social proof can distort reality.

The Jonestown Massacre
The 1978 Jonestown Massacre is one of the most shocking, terrifying examples of the dark side of social proof. Under the leadership of religious fanatic Jim Jones, 918 people died in a commune in Georgetown. Although the event was technically a mass suicide, the degree of duress and force under which the deaths happened and the fact that 1 in 3 were minors mean that massacre is more accurate. Nearly a thousand members of the cult drank poison, including infants. Within a matter of minutes, all were dead.

In the aftermath of this tragedy (the worst loss of American lives on a single occasion until 9/11), the world struggled to make sense of how it could have happened. One important element which emerged upon study was that of social proof. Isolated from the rest of the world, the commune had no outside influences and no one to emulate save each other. At the head of the cult was the self-appointed messiah Jim Jones who manipulated and controlled his followers. Force was used to squash any dissent, meaning people had no option but to comply. Cult members were encouraged to inform Jones of anyone who felt rebellious, and families were broken up to give him total control. If someone did object, they had no allies to side with and reinforce their change of heart. The few people who survived were mostly couples who managed to stay together and had the social proof provided by each other necessary to retain their opinions. Deborah Blakey, a survivor later said:

Any disagreement with [Jones’] dictates came to be regarded as “treason.” ….Although I felt terrible about what was happening, I was afraid to say anything because I knew that anyone with a differing opinion gained the wrath of Jones and other members.

Jones’ final, harrowing speech which manipulated his followers into committing suicide can be heard here. It provides a clear example of how people succumbed to social proof. Throughout the tape, a number of people are heard dissenting, only to be forced back into submission by their peers.

How marketers use social proof

“Social proof is a flame to the human mind moth,
and it leaves a fire trail of destruction across the path of enough.”
— Will Jelbert (The Happiness Animal)

***

Marketers love using social proof to encourage people to spend more money. If you ever feel the strange urge to buy something you don’t need, this could be down to social proof.

Marketers achieve this in a number of ways:

  • Using influencers and famous people. A phenomenon known by psychologists as the ‘halo and horns effect’ means we see a product/service as more desirable if it is associated with someone we like. On a subconscious level, we imagine their good qualities rubbing off on the item advertised. Likewise, if we wish to be like someone, we may think anything they endorse will make us more like them.
  • Implying popularity. Night clubs and bars often make patrons wait outside, even when the venues are not full. This creates an aura of desirability
  • Reviews/ratings. 70% of people look at these before making a purchase, to see what others think about a product or service. Even though these can be biased, anecdotal or even fake, we judge people ‘like us’ as more trustworthy than the companies. For example, if someone is planning on buying a certain vacuum cleaner, just one negative review can sway them away from it- never mind that said reviewer may have used it incorrectly.
    Social proof is part of the Farnham Street latticework of mental models. To read more on the topic look to Cialdini’s Persuasion, Gladwell’s Tipping Point, or Kuran’s Private Truths, Public Lies.

Social Proof is in the Farnam Street Latticework of Mental Models.

Bruce Pandolfini Teaches Thinking, Not Chess

Bruce Pandolfini Teaches Thinking

Bruce Pandolfini doesn’t have an MBA but he knows more about strategy than most people. Pandolfini is one of the most sought-after chess teachers in the world.

He’s also one of the most widely read chess writers. I have a copy of Pandolfini’s Ultimate Guide to Chess on my bookshelf.

Pandolfini makes it clear to his students that he’s not teaching them how to play chess. He is, instead, teaching them how to think.

“My goal,” he says, “is to help them develop what I consider to be two of the most important forms of intelligence: the ability to read other people, and the ability to understand oneself. Those are the two kinds of intelligence that you need to succeed at chess — and in life.”

On Thinking Ahead

There are lots of misperceptions that influence how people think about — and play — chess. Most people believe that great players strategize by thinking far into the future, by thinking 10 or 15 moves ahead. That’s just not true. Chess players look only as far into the future as they need to, and that usually means thinking just a few moves ahead. Thinking too far ahead is a waste of time: The information is uncertain. The situation is ambiguous. Chess is about controlling the situation at hand. You want to determine your own future. You certainly don’t want your opponent to determine it for you. For that, you need clarity, not clairvoyance.

“You should never play the first good move that comes into your head. Put that move on your list, and then ask yourself if there is an even better move.”

On Attacking

Great players want to build their position and to increase their power — so that, when they strike, there is no defense. Trying to win a game in the fewest number of moves means hoping that your opponent is incompetent. I don’t teach students to base their play on hope. I teach them to play for control.

On Small Advantages

Chess is a game of small advantages. It all goes back to Wilhelm Steinitz, the first great modern chess teacher. Steinitz developed the theory of positional chess, which assumes that, to get an advantage, you have to give up something in return. The question then becomes “How can anyone win? Why isn’t the game always held in dynamic balance?” The answer is that you play for seemingly insignificant advantages — advantages that your opponent doesn’t notice or that he dismisses, thinking, “Big deal, you can have that.” It could be a slightly better development, or a slightly safer king’s position. Slightly, slightly, slightly. None of those “slightlys” mean anything on their own, but add up seven or eight of them, and you have control. Now the only way that your opponent can possibly break your control is by giving up something else. Positional chess teaches that we are responsible for our actions. Every move must have a purpose.

Read More

Yes! 50 Scientifically Proven Ways to Be Persuasive

Noah Goldstein’s, Steve Martin’s and Robert Cialdini’s Yes! 50 Scientifically Proven Ways to Be Persuasive is a pop psych book, where a bunch of research in psychology is distilled into one readable volume.

50 scientifically proven ways constitute 50 chapters of the book, longest of which take 7 pages. The authors take the position that persuasion is a science, not art, hence with the right approach anybody can become the master in the skill of persuasion. So, what are the 50 ways?

  1. Inconvenience the audience by creating an impression of product scarcity. It’s the famous change from “Call now, the operators are standing by” to “If the line is busy, call again”, that greatly improved the call volume by creating the impression that everybody else is trying to buy the same product.
  2. Introduce herd effect in highly personalized form. The hotel sign in the bathroom informed the guests that many prior guests chose to be environmentally friendly by recycling their towels. However, when the message mentioned that majority of the guests who stayed in this specific room chose to be more environmentally conscious and reused their towels, towel recycling jumped 33%, even though the message was largely the same.
  3. Ads quoting negative behavior en masse reinforces negative behavior. Petrified Forest National Park A/B tested two versions of a sign imploring people not to steal pieces of petrified forest from the park. One mentioned large amounts of petrified forest taken away on an annual basis, the other one simply asked the visitors not to remove petrified wood. The first one actually tripled the theft ratio as it showed stealing petrified wood as something commonplace. Same effect was observed after airing an ad that implored women to vote, but mentioned that 22 million single women did not vote last year. That kind of information actually portrays not voting as more socially acceptable.
  4. Avoiding magnetic middle. A California survey measured energy usage of a neighborhood on a week-by-week basis. When the average electricity consumption for the neighborhood was calculated, researchers sent thank-you cards to those using the energy conservatively, and a nice reminder to perhaps conserve to those who used electricity liberally. Net effect? While the liberals tried to cut down on unnecessary energy usage, the conservatives, finding out they’re way below average, suddenly became way more liberal with their energy usage, which actually increased the amount of energy used by the neighborhood. Proposed solution that worked? Sending a smiley face card to conservatives with a request to keep doing what they were doing, instead of pointing out they were at the right end of the bell curve.
  5. Too many options necessitate selection, and hence frustration, when brain decides it’s unnecessary work. The example here is given by a company that manages retirement funds for other companies, and hence has access to retirement information of 800,000 employees. When employees were offered a choice of 2 funds, roughly 75% signed up for a retirement program. When the number of funds was increased to 59%, even though qualitatively this was a better deal for employees, only 60% decided to sign up. When Head & Shoulders brand killed off 11 flavors of the shampoo, leaving only 15 on the market, the sales rose 10%.
  6. Giving away the product makes it less desirable. Researchers gave one group of people a picture of a pearl bracelet and asked to evaluate its desirability. Another group of people was given the same task, but prior to that was shown an ad, where the same bracelet was given away for free, if you bought a bottle of expensive liqueur. The second group considered the bracelet much less desirable, since mentally a lot of potential buyers (35% of them to be exact) shuffled the bracelet onto “trinkets they give away for free” shelf in their brain.
  7. A more expensive product makes the old version look like a value buy. An example here is a Williams-Sonoma bread maker. After an introduction of a newer, better, and pricier version, the sales of the old unit actually increased, as couples viewed the new item as “top of the line”, but old product was all of a sudden reasonably-priced, even though a bunch of features were missing.
  8. If a call to action is motivated by fear, people will block it, unless call to action has specific steps. A group of people received a pamphlet describing the dangers of tetanus infection. It didn’t describe much else. The second group of people got a description of tetanus infection, plus a set of instructions on how to get vaccinated. The second group exhibited much higher sign-up rate for tetanus vaccination than the first one, where many participants tried to block out the high-fear message urging that something as rare as tetanus would never happen to them.
  9. A small gift makes people want to reciprocate. People who received a small no-strings-attached gift from a stranger were twice as likely to buy raffle tickets from him than those who were just pitched on raffle tickets.
  10. Hand-written Post-It note improves response rate on inter-office letters. Researchers distributed three sets of questionnaires around the office. The first set included a hand-written Post-It note requesting completion of the survey. The second set got the same survey, with the request to return it hand-written on Page 1. Third group got the same survey with their name mentioned (in type) on page 1 of the survey. Response rates? 75%, 48%, 36%. People appreciated personalized approach, and somehow a Post-It note even highlighted the extra work that someone did before sending out the survey.
  11. How restaurant mints are a personalized affair. Let’s a say a restaurant provides mints for its customers on the way out. If the amount of tips per week is the baseline for that restaurant, let’s make the waiters include a mint as they give the check to the customer. The tips go up by 3.3%. However, when the waiters offer the mints themselves, prior to signing the check, the tipping amount went up by 14.1%. In yet another experiment, the waiter would present the patrons with 1 mint per guest, then give them the check, then turning around to leave, then, as if remembering something sudden, turning around and giving them yet another mint per guest. Result? 23% increase in tips, as this signaled high amount of personalization.
  12. Attaching no strings increases response to the message. Using the same hotel as the one mentioned in Chapter 2, researchers tried out two different versions of the sign. The first one: if you reuse the towels, a donation will be made to a nonprofit environmental organization.  The second version: the donation has already been made, since the hotel trusted you’d reuse the towels anyways. Recipients of the second message reused their towels 45% more than the recipients of the first one.
  13. As time goes by, the value of a favor increases in the eyes of the favor-giver, and decreases in the eyes of the favor-receiver. Researchers asked a group of people in the random office environment to exchange favors and then rate the value of the given/received favor in their eyes. A few weeks later the same employees were reminded of the favor, and asked to evaluate the favor again. Favor-givers consistently assigned higher value to a given favor, while as the time passed by, favor-receivers tended to assign lower value to the received favor.
  14. Asking for small favors changes self-perception, introducing ways for big favors. Researchers asked a group of homeowners to place a large “Drive Carefully” sign on their front lawn. Only 17% agreed. With the second group of homeowners, 76% of people were ok with road traffic people maintaining the sign on their beautiful lawns. What was the difference between two groups? A few weeks earlier group B was asked to display a small non-intrusive window sign asking drivers to slow down. This mental foot-in-the-door technique made homeowners from the group B view themselves as socially responsible and safety-aware, hence a request for a larger favor few weeks later didn’t startle them.
  15. Labeling people into a social group tends to increase their participation ratio. A group of people was interviewed regarding their voting patterns. Half of them were told that based on their response criteria, they were very likely to vote, since they were deemed to be more politically active. Later on the election day that specific half did indeed turn up a participation rate that was 15% higher than participation of the control group.
  16. Asking people to substantiate their decision will lead to higher commitment rate on that decision. Researchers called a group of people asking them how likely they were to vote in an upcoming election. Those who responded positively were either asked nothing, or asked why they felt they would vote. Any reason would suffice, but when the election day came, the turnout for the control group (who all responded “Yes” to the question of whether they were going to vote) was 61.5%. Turnout for the group that actually gave a reason (any reason)? 86.7%. A restaurant stopped telling customers “Please call to cancel your reservation” and started asking “Will you call and let us know if you need to cancel?” Net result? Number of reservation no-shows dropped from 30% to 10%.
  17. Writing things down improves commitment. Group A was asked to volunteer on AIDS awareness program at local schools, and was asked to commit verbally. Group B was asked for the same kind of volunteer project, but was given a simple form to fill in. 17% of volunteers from Group A actually showed up to their assigned local school. From Group B 49% of volunteers showed up.
  18. The fact that circumstances changed allows people to change their viewpoints without being viewed as inconsistent. People are generally not thrilled to change their viewpoints on something, as they fear they will display lack of consistency and be called a flip-flopper. Convincing people that their old decision (to stick with the old product) was completely 100% correct under old circumstances allows them to be more responsive to the messages that imply a new product/idea is better because the circumstances radically changed since then.
  19. Sometimes asking people for help makes them more open. Group A was given some bogus research that included a sum of prize money. After the experiment, the researcher approached them and asked whether it wouldn’t be inconvenient if they had to give the money back, since the researcher was using his own money. Group B was not approached with such request after their portion of bogus experiment was done, and was allowed to keep the money. After this both groups were asked to rate their impression of the researcher. Even though it was the first group who didn’t get to keep any money, all of them consistently rated the researcher higher on likability scale.
  20. Asking for little goes a long way. Researchers went door-to-door asking for American Cancer Society donations. Group A just asked for a donation, group B ended their spiel with “even a penny would help”. Results? 28.6% response rate for Group A vs. 50% response for Group B.
  21. Lower starting prices attract higher bids. This is a reference to a study of eBay items where people consistently bid items with a lower starting price higher. The explanation seems to focus on the fact that people invest more time into updating bids for a lower-priced item to let it go.
  22. How to impress a potential customer with credentials without being labeled as a show-off? Public speakers have someone else introduce them, a real estate company made a slight improvements to their phone service by directing people to “Jane, who has 10 years of experience with houses in upper price range”, and physicians display their diplomas on the walls.
  23. The danger of being the smartest person in the room. The expert card frequently trumps any other card in the room. The example here is that the scientists who discovered the double-helix of the DNA were never prime DNA experts, which made them “hungrier” for new discoveries, and made them question established rules.
  24. Devil’s advocate example works with large organizations. Leaders who consistently seek out dissenting opinions earn more respect, and generally have better agreement with people in the room than those who rule by laying down the law and persecuting dissenters.
  25. Negative examples are memorized better than positive examples. When one group of firefighters went through the list of real-life mistakes other firefighters have made, and another group just went through the list of positive things to do, the first group demonstrated better judgment when faced with real-life tests. Our brain seems to discount the best practices, but single out bad examples of someone else making a mistake.
  26. Admitting negatives up-front might lead to better communication. When Progressive says that they will compare your rate against their competitors’, and when original VW Bug was introduced in the US, both companies pursued a strategy of highlighting the negative stuff only to open conversation about the true values their product has to offer.
  27. Spinning negative facts as positive allows customers to make a mental link towards the positive. Among the viewers who viewed an ad advertising restaurant’s cozy atmosphere, an ad advertising the restaurant and lack of parking spaces, and an ad mentioning both, the third group made a connection between cozy atmosphere and bad parking situation. The restaurant was so cozy, the customers reasoned, that they didn’t even have enough parking spots, which made them even cozier in the eyes of a customer.
  28. Admitting you’re wrong makes people trust you more. Company A published an investors relations report, contributing slump in sales to overall economic climate. Company B said slump of sales was relevant to a few bad decisions by top management. Net result? Investors viewed company B more positively. You’d think that they’d be viewed as a bunch of screw-ups, but admission of a mistake made investors more confident the situation was under control, while company A investors got the uneasy feeling of the ship floating in the waters with captain losing control.
  29. Similarities raise the response rate. A person named Cindy Johnson received a survey request by mail from someone named Cynthia Johannson. Someone named John Smith received a survey from Gregory Jordan. The name similarity in the first case (note that it’s just phonetic similarity, none of the names are the same) brought up the response rate to 56% vs. regular 30%.
  30. People like the sound of their name, and that defines their vocation. There are three times as many dentists named Dennis as any other names. Number of Florences living in Florida is disproportionately high, same goes for Louises living in Louisiana.
  31. Verbalization helps interaction. Waiters who repeat customers’ order to them make 70% more in tips than waiters who just say “Okay”. Our mind subconsciously appreciates the effort taken to ensure the things are perfectly right.
  32. Just smiling makes for a poorer customer service. Group A was exposed to a hotel clerk smiling, while peppering the customer with questions regarding their preferences and ways to improve their hotel stay. Group B had just a smiling clerk performing her duties. Group B was more likely to rate the smile as fake.
  33. People pay more for the stuff that’s about to disappear. Oldsmobile sales rose after GM announced the end of life for the line. Australian beef purchases rose after customers learned this year’s supply would be severely diminished because of the weather conditions. Concorde sales took off right after British Airways announced the hyper-speed flights would be shut down.
  34. When people feel something is about to go away, they will stick to perception of the product being better than the new one. In majority of blind tests customers chose New Coke over Classic Coke. Yet when New Coke was introduced, massive protests were staged. When the same drink was packaged into Classic Coke and New Coke bottles, customers still claimed they preferred the Classic Coke and could taste the difference, even though labeling was the only thing that differed two drinks.
  35. “Because” makes any explanation rational. In a line to Kinko’s copy machine a researcher asked to jump the line by presenting a reason “Can I jump the line, because I am in a rush?” 94% of people complied. Good reason, right? Okay, let’s change the reason. “Can I jump the line because I need to make copies?” Excuse me? That’s why everybody is in the line to begin with. Yet 93% of people complied. A request without “because” in it (“Can I jump the line, please?”) generated 24% compliance.
  36. Asking people to choose reasons themselves might backfire. Two groups were given an ad by BMW. Group A saw an ad saying “So many reasons to buy a BMW. Can you name 10?” Group B saw an ad saying “So many reasons to buy a BMW. Can you name 1?” After the ad both groups were asked to evaluate their likelihood of buying a BMW. Similar to what’s described in Chapter 5, people who had to name 10 reasons actually named Mercedes-Benz, a competitive brand, as their probable choice, while Group B named BMW as their likely next vehicle, compared to Mercedes-Benz.
  37. People like stocks with more pronounceable names. Research of stock tickers between 1999 and 2004 looked at the relationship between the phonetic fluency of the stock and its rise through IPO, then 12 months later, then throughout its lifetime. The result? Stocks with more pronounceable names produced higher returns, even though nobody yells out the tickers on the exchange floor anymore.
  38. Rhyming makes the phrases more convincing. People were asked to evaluate the practical value of parables “Caution and measure will win you treasure” and “Caution and measure will win you riches”. In general proverb A was considered to be more practical and insightful than proverb B.
  39. Amount of information is context-dependent. A group of people was given an ad for department store A, extolling in great detail the 6 departments that A had. Another group was given a short blurb on store A, presenting mainly abstract information. After that store B was presented to both groups with information on 3 departments given to both groups. The first group thought they preferred A, since A volunteered more information and B seemed shadier in comparison. The second group did exactly the opposite and preferred store B, which volunteered detailed info on 3 departments, while A’s message was an abstract blurb.
  40. Incentive programs need a good start. A car-wash place gave one group of customers a free car wash after 8 washes, and everybody got their first stamp after their visit. Group B got a free car wash after 10 car washes, with 3 stamps on the card. Both groups needed to make 7 more trips to get a free wash. 19% of the Group A returned, while 34% of the Group B did.
  41. Abstract names allow the customers to come up with reasoning. Crayola found out that naming colors Cornflower Yellow and Kermit Green worked better than no adjectives attached to colors. The more abstract the connection, the better it seemed to work, as people spent mental time working out the connection between the abstraction and the product in their mind.
  42. Ad campaigns that do not incorporate brands tend to not be remembered. A good portion of people when asked which company was represented by a bunny and the phrase “going, going, and going” named Duracell as the advertiser. Duracell sales increased with the launch of Energizer Bunny campaign.
  43. Mirrors make people more self-conscious. A group of trick-or-treating kids was told to pick up one candy from the jar in the living room, while the adult was in a different room on some pretense. Group A had a large mirror placed by the candy jar, group B did not have the mirror. 8.9% of kids with the mirror in the room and 33.7% of the kids with no mirror treated themselves to extra candy. Another group of people was brought in for what was advertised as gel research, and was given a hand paper towel to wipe the gel off while heading for the exit. With the mirror in the hallway, 24% of participants littered, dropping the towel on their way out, with no mirror, 46% threw the paper towel on the floor without bothering to find a trash can.
  44. Negative emotions make people pay more. Group A was exposed to an emotional movie about the death of someone close to the main character. Group B saw no such movie. Both groups were asked then to name a fair price at which they’d buy the object presented to them. Group A tended to give prices 30% above Group B’s.
  45. Tired people tend to be more receptive to arguments. No wonder those magic bullet infomercials run so late at night. Both groups were presented to product demo, and then asked to evaluate the possibility of buying it. Group A was tired and a bit sleep-deprived, group B was in good physical condition. Group A was much more prone to buy.
  46. Caffeine increases the argumentativeness of a strong argument. Group A drank regular orange juice, group B drank orange juice infused with caffeine. Both groups were then presented with a statement on controversial issue. Except one statement then made weak and hasty arguments, while the second statement made a strong case. Both groups equally dismissed the weak argument case. As far as strongly argumentative case, group B was 30% more receptive. A faster-working brain under the influence of caffeine seems to appreciate good arguments.
  47. Face time still beats e-mail time. Group A was given time to get to know one another in person, then resolve a conflict via e-mail. Group B got a similar task, except no face-to-face communications. 6% of the Group As failed to come up at a good resolution, while 29% of Group Bs arrived at impasse.
  48. Individualism is perceived differently in many countries. In US and Western Europe a chewing gum campaign that accentuated “you, only better” seemed to get more success, than a similar campaign in Eastern Europe and Asia, with much more collectivism built into the culture. In those countries, emphasizing that chewing gum was much more tolerable for other people who can smell your breath, was perceived better.
  49. Notion of commitment among various cultures differ. A group of American students was asked to complete a short marketing survey. A few weeks later they got invited for the second survey, which was going to take twice as long. No pay for either survey. The same experiment was conducted among Asian students. The response rates among American students was 22%, response rate among Asian students was 10%. Research suggests that while American students relied only on their own experience, Asian students found out that few of their peers responded to the first request to complete the survey, which triggered their negative response.
  50. Response to voice mail differs among Americans and Japanese. When faced with a voicemail message, 50% of Americans, and 85% of Japanese hang up. Respondents from Japanese test group pointed out the personal touch of the conversation (intonation, pauses, volume) was important to them and impossible to reproduce over voicemail.

If you want to become more persuasive, you should read Yes!: 50 Scientifically Proven Ways to be Persuasive and Influence: The Psychology of Persuasion

Mental Model: Anchoring

We often pay attention to irrelevant information. This happens because we develop estimates by starting with an initial anchor that is based on whatever information is provided and adjust from the anchor (sometimes our adjustments are not sufficient). This is called anchoring.

More problematic perhaps is that the existence of an anchor leads people to think of information consistent with that anchor (commitment and consistency) rather than access information that is inconsistent with that anchor.

Anchoring is commonly observed in real estate and the stock market. Many BUYERS tend to negotiate based on the listed price of a house — and many SELLERS tend to determine the list priced based on adjusting their purchase price.

Some interesting points on anchoring: (1) Experts and non-experts are affected similarly by an anchor; (2) Anchoring-adjustment may occur in any task requiring a numerical response, provided an initial estimate is available; and (3) One study of particular importance for investors, by Joyce and Biddle (1981), found support for the presence of the anchoring effect among practicing auditors of major accounting firms.

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Anchoring and adjustment was first theorized by Tversky and Kahneman. The pair demonstrated that when asked to guess the percentage of African nations which are members of the UN, people who were first asked “was it more or less than 35%” guessed lower values than those who had been asked if it was more or less than 65%. Subjects were biased by the number 45 or 65 and this had a meaningful influence on their judgment. Over time this bias has been shown in numerous experiments. Interestingly, paying participants based on their accuracy did not reduce the magnitude of the anchoring effect.

The power of anchoring can be explained by the confirmation heuristic and by the limitations of our own mind. We selectively access hypothesis-consistent information without realizing it. Availability may also play a role in anchoring.

There are numerous examples of anchoring in everyday life:

  • Children are tracked by schools that categorize them by ability at an early age and based on this initial “anchor” teachers derive expectations. Teachers tend to expect children assigned to the lower group to achieve little and have much higher expectations of children in the top group (for more info see Darley and Gross, 1983). Malcolm Gladwell talks more about anchoring in his book outliers.
  • First impressions are a form of anchoring.
  • Minimum payments on credit card bills.
  • Posted interest rates at Banks.
  • Prices on a menu in restaurants.
  • Race can also be an anchor with respect to our expectations (Duncan, 1976)

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Heuristic and Biases: The Psychology of Intuitive Judgment offers:

“To examine this heuristic, Tversky and Kahneman (1974) developed a paradigm in which participants are given an irrelevant number and asked if the answer to the question is greater or less than that value. After this comparative assessment, participants provide an absolute answer. Countless experiments have shown that people’s absolute answers are influenced by initial comparison with the irrelevant anchor. People estimate that Gandhi lived to be roughly 67 years old, for example, if they first decided whether he died before or after the age of 140, but only 50years old if they first decided whether he died before or after the age of 9.

Anchoring effects have traditionally been interpreted as a result of insufficient adjustment from an irrelevant value, but recent evidence casts doubt on this account. Instead, anchoring effects observed in the standard paradigm appear to be produced by the increased accessibility of anchor consistent information.

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In Judgment and Decision Making, David Hardman says:

Anchoring effects have been observed in a variety of domains including pricing, negotiation, legal judgment, lotteries and gambles, probability estimates, and general knowledge. In one of these studies, Northcraft and Neale (1987) demonstrated anchoring effects in the pricing estimates of estate agents…

Despite the robustness of the anchoring effect, there has been little agreement as to the true nature of the underlying processes. One theory that has been proposed is that of selective anchoring (Mussweilier and Strack, 1997). According to this account, the comparative question task activates information into memory that is subsequently more accessible when making an absolute judgment….

Epley (2004) listed four findings that are consistent with the selective memory account: (1) People attend to shared features between the anchor and target more than to unique features; (2) Completion of a standard anchoring task speeds identification of words consistent with implications of an anchor value rather than words inconsistent with it; (3) The size of anchoring effects can be influenced by altering the hypothesis tested in the comparative assessment (for example, asking whether the anchor is less than a target value has a different effect to asking whether it is more than a target value); (4) People with greater domain knowledge are less susceptible to the effects of irrelevant anchors.

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In Fooled by Randomness, Nicholas Taleb writes:

Anchoring to a number is the reason people do not react to their total wealth, but rather to differences of wealth from whatever number they are currently anchored to. This is in major conflict with economic theory, as according to economists, someone with $1 million in the bank would be more satisfied than if he had $500 thousand but this is not necessarily the case.

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Tversky and Kahneman (1974)

In many situations, people make estimates by starting from an initial value that is adjusted to yield the final answer. The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient (Slovic & Lichtenstein, 1971). That is, different starting points yield different estimates, which are biased toward the initial values. We call this phenomenon anchoring.

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Russell Fuller writes:

Psychologists have documented that when people make quantitative estimates, their estimates may be heavily influenced by previous values of the item. For example, it is not an accident that a used car salesman always starts negotiating with a high price and then works down. The salesman is trying to get the consumer anchored on the high price so that when he offers a lower price, the consumer will estimate that the lower price represents a good value. Anchoring can cause investors to under-react to new information.

Anchoring is a Farnam Street Mental Model.

Charlie Munger Explains Why Bureaucracy is not Shareholder Friendly

Charlie Munger, the billionaire partner of Warren Buffett at Berkshire Hathaway, explains why bureaucracy is not shareholder friendly:

The great defect of scale, of course, which makes the game interesting—so that the big people don’t always win—is that as you get big, you get the bureaucracy. And with the bureaucracy comes the territoriality—which is again grounded in human nature.

And the incentives are perverse. For example, if you worked for AT&T in my day, it was a great bureaucracy. Who in the hell was really thinking about the shareholder or anything else? And in a bureaucracy, you think the work is done when it goes out of your in-basket into somebody else’s in-basket. But, of course, it isn’t. It’s not done until AT&T delivers what it’s supposed to deliver. So you get big, fat, dumb, unmotivated bureaucracies.

They also tend to become somewhat corrupt. In other words, if I’ve got a department and you’ve got a department and we kind of share power running this thing, there’s sort of an unwritten rule: “If you won’t bother me, I won’t bother you and we’re both happy.” So you get layers of management and associated costs that nobody needs. Then, while people are justifying all these layers, it takes forever to get anything done. They’re too slow to make decisions and nimbler people run circles around them.

The constant curse of scale is that it leads to big, dumb bureaucracy—which, of course, reaches its highest and worst form in government where the incentives are really awful. That doesn’t mean we don’t need governments—because we do. But it’s a terrible problem to get big bureaucracies to behave.

So people go to stratagems. They create little decentralized units and fancy motivation and training programs. For example, for a big company, General Electric has fought bureaucracy with amazing skill. But that’s because they have a combination of a genius and a fanatic running it. And they put him in young enough so he gets a long run. Of course, that’s Jack Welch.

But bureaucracy is terrible …. And as things get very powerful and very big, you can get some really dysfunctional behavior. Look at Westinghouse. They blew billions of dollars on a bunch of dumb loans to real estate developers. They put some guy who’d come up by some career path—I don’t know exactly what it was, but it could have been refrigerators or something—and all of a sudden, he’s loaning money to real estate developers building hotels. It’s a very unequal contest. And in due time, they lost all those billions of dollars.

Munger is perhaps the only person I know who reads more than we do. In fact, we get a lot of our reading off his book recommendations.

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You can learn a lot from Warren Buffett and Charlie Munger. Reading all of the Berkshire Hathaway Letters to Shareholders was better than my MBA. I’m serious.

Making A Mistake: Fienberg and Buffett

making a mistake

Knowing when you’ve made a mistake and learning from that experience can be a very rewarding and profitable undertaking.

If you can admit your mistake, you can learn from it. However, an inability to learn from mistakes can mean you make the exact same mistake again.

Consider Steve Feinberg, the onetime owner of Chrysler, and CEO of Cerberus Capital Management reflecting on his ‘mistake’

…even now, Mr. Feinberg, a man who can play a decent game of chess while blindfolded, is hard-pressed to pinpoint many mistakes. Sitting in his office on Park Avenue, far away from the detritus that surrounds Detroit, he grows pensive when asked what he has learned from his audacious — and failed — effort to privatize and resurrect the legendary and deeply troubled auto giant. “I don’t know what we could have done differently,” he says, crossing his arms on his chest. “From the day we bought it, we worked hard to improve it.” He pauses, pondering, as the clock ticks away. Then he shakes his head. “We were too optimistic on timing,” he says. “Maybe what we should have done was not bought it.”

Compare that with Warren Buffett talking about his oft-cited U.S. Airways purchase in hindsight:

I liked and admired Ed Colodny, the company’s then-CEO, and I still do. But my analysis of USAir’s business was both superficial and wrong. I was so beguiled by the company’s long history of profitable operations, and by the protection that ownership of a senior security seemingly offered me, that I overlooked the crucial point: USAir’s revenues would increasingly feel the effects of an unregulated, fiercely-competitive market whereas its cost structure was a holdover from the days when regulation protected profits. These costs, if left unchecked, portended disaster, however reassuring the airline’s past record might be.

Words matter. To learn more about decoding CEOs read Investing Between the Lines: How to Make Smarter Decisions By Decoding CEO Communications.