138. The Next Revolution Will Be Psychological Not Technological

32 important lessons from this talk:

00:00:59 While the internet is the 3rd industrial revolution, Tyler Cowen’s book The Great Stagnation and Robert J. Gordon’s white paper Is US economic growth over? Faltering innovation confronts the six headwinds argue that we shouldn’t put all our money on the technological revolution because you can’t create revolutionary inventions like that twice: home plumbing, sanitation, etc. aren’t likely going to undergo any revolutionary changes any time soon. The airplane took humans from walking speed to +700 miles per hour. To do this again, given the earth’s limitations, would be pointless unless it were for long-haul flights from NYC to Australia.

[EDITOR’S NOTE: In July 2015 Airbus patented a jet that could fly from London to NYC in 1 hour as opposed to the current 7-8 hour flight time.]

00:02:56 One thing all ‘the next big things’ have in common is that they come from a place you wouldn’t expect, and when people do try and predict the future they basically take the most visible form of progress they’ve seen in their own lifetime and extrapolate upon it.

[EDITOR’S NOTE: In the documentary Transcendent Man: When Humans Merge With Technology & Transcend Biology, Ray Kurzweil argues that people routinely underestimate what is achievable in long periods of time because they leave out the radical implications of exponential growth. People can see, even in their own lifetime, how much more quickly technology moves today than it did five years ago. The law of accelerating returns argues that the nature of technological progress is exponential. For example, if I count linearly (1, 2, 3, 4…), if I take 30 steps, I get to 30. If I count exponentially (2, 4, 8,16…),  30 steps later I’m at 1.07 billion.]

Could it be that the next improvement in economic growth actually comes from improvements in marketing efficiency; particularly in our understanding of human behavioral economics?

00:04:05 Were the percentage of successful startups to increase by a mere 10% while the % of failed startups decrease significantly because we reached a point where we understand and predict humans well enough that we could just slightly increase the odds of success, the world’s Gross Domestic Product (GDP) could be increased by up to 2.6% .

00:05:01 There are two approaches to happiness:

  • Materialistic – amass physical things which meet your needs, thus diminishing your wants
  • Psychological – redefine your needs

This means you can solve this problem in two ways: create more materialistic ‘stuff,’ or you can make people more content with ‘stuff’ that they already have.

[EDITOR’S NOTE: Recall in Annie Leonard’s documentary The Story Of Stuff: How Our Modern Markets Economy Is Destroying Our Planet that the problem with this system is that humans are currently confined to living on Earth, which is a finite planet; and you cannot run a linear system on a finite planet indefinitely. In every step of this linear process, waste is created which diminishes the system’s efficiency, and subsequently, the Earth’s sustainability.]   

00:06:57 If you give a problem to a bunch of engineers, you’ll get an engineer’s solution, such as spending 6 billion £ renovating the train track line and trains to reduce the journey time between London and Paris by roughly 40 minutes – a perfectly sensible and pragmatic engineering solution that a mere reduction in journey time is the key to happiness. 

If however, you applied a psychological solution to this problem, for roughly 0.01% of that renovation budget you could put wifi on the trains, and for 1 billion £ you could employ top supermodels to walk the length of the train handing out free glasses of Chateau Pétrus to all the passengers, and passengers would actually ask for the trains to be slowed down.

Why? Because the worst part of a train ride isn’t the ride itself, it’s:

  • Hauling your suitcase(s) through public transportation, or
  • Driving to the train station and finding a place to park, or
  • Finding and paying a taxi
  • Standing in line and buying/printing your ticket
  • Going through customs & immigration
  • Finding the right seat
  • etc.

This is where the train company should be focusing its efforts: reducing pain, not duration.

This is the difference of philosophy in believing we can solve humanity’s problems by measuring them making it more efficient versus simply improving the subjective factors that increase the person’s pleasure derived from it.

Further, the train company competition is the airline and the bus industries. In terms of going from the center of town to the center of town, the railway already wins, so why not do all of the things that airlines cannot do on their airplanes – wifi, quality meals, and large tables – rather than trying to beat the airline industry in their one competitive advantage: being fast.

00:09:45 With the goal of decreasing customer complaints about late insurance checks sent via post as well as their budget on maintaining a call center, an insurance claim company wanted to invest a huge amount of money believing that if they reduced the amount of days it took for customers to receive their insurance check, call-in complaints, and thus their call center budget, would decrease. 

The less expensive marketing solution was to address the customer’s perception of ‘late’ insurance checks by telling the customers to expect their check in 12 days, in which case they would be delighted after receiving their check in just 8 days.

Our happiness or anxiety with anything is largely determined by our expectation, not by the reality. Change the expectation, and the actual experience massively improves.

00:11:38 People often respond to the same things in completely different ways: slow is an advantage in certain things and a huge disadvantage in others.

00:12:39 Back in the 50s and 60s psychologists worked alongside advertising agencies. One particular psychologist is attributed to having effectively doubled the sales for Alka-Seltzer by coming up with tagline “Plink Plink, Fizz,” thus very subtly convincing consumers that the social norm was to use two capsules instead of their standard one.

Yet another very subtle social norm definition was De Beers Diamond Jewellery’s tagline “How can you make two months’ salary last forever?”

image

(Photo from here.)

On a related note, the expensive wedding ring has become the standard norm possibly because the size of the man’s financial commitment acts of proof of his long-term commitment to her. Were you to offer your girlfriend a radio-contolled helicopter, there would be a stong suspicion of self-interest on your part involved with this gift.

There are plenty of opportunities for brands to create and redefine social norms in consumption behavior.

Today, however, marketers have an increasingly difficult time in business matters because more and more companies are dominated by people with finance and engineering backgrounds where mathematics and statistics dominate decision-making, believing that consumer spending alone is a sufficient way of predicting consumer behavior.

Tests have shown that humans show a greater tendancy to trust arguments which are based on numbers and statistics, even if those numbers and the mathematical formulas used are wrong. But much of human behavior simply cannot be calculated using mathematical formulas. One of the worst things you can be is 100% rational and logical because that would then make you 100% predictable, and consumers who are 100% predictable are 100% manipulatable, which would lead to brands cheating the formula by selling as minimally viable of a product as they could possibly get away with.

It is the way in which your product relates to the human that makes it, and your brand, so powerful.

00:15:10 In terms of speed of technology, humans place more importance on how quickly a device responds when prompted than the actual time it takes for the application to load or the file to download. Devices which can fake low latency (the amount of time spent waiting) are perceived to be of equal value to devices whose perceived latency is slower. As long as something happens immediately after you give a computer a command, your brain is reassured that the device is working.

So you could spend all your money attempting to improve a system’s backoffice to make it more efficient but that makes absolutely no noticeable effect on your product’s perceived enjoyment, or trick your users by giving them the impression that your product is in the process of loading.

The software loading bar is the greatest psychological trick of all time because people are perfectly content for almost any length of time while ‘their application is loading.’

image

(Above .gif from here.)

The problem is that governments and companies aren’t looking to psychology nearly as much as they should for cheaper, equally viable solutions to common consumer problems.

00:25:35 Ludwig von Mises points out that since marketing is subjective, the value created through marketing is no different than the value created by manufacturers. Considering that customers go out to eat for the ‘overall’ experience, there then is no distinct difference between the value of the person sweeping the floor and the chef in the kitchen preparing the food; to make a distinction between these two would be erroneous.

Regardless of the quality of the wine, by simply telling people that it is an expensive wine will cause them to enjoy it more, both when asked and in scientifically tested brain scans.

00:26:35 The placebo effect is when “a simulated or otherwise medically ineffectual treatment for a disease or other medical condition intended to deceive the recipient.” When administered to the recipient, the anticipated effects of the placebo are actually manifest because the person believe’s the treatment will be effective.

00:26:50 Praxeology is the study of the how and why of human decision making, and that studying individual human interaction action is more productive than studying capital or labor.

There are only two things in business that actually create value and make money: innovation and marketing; everything else is a cost.

00:27:14 Marketing and innovation are cut from the same cloth. In business you can either find out what people want and then figure out how to make it, or find out something you can make and then find out how to convince people they want it.

[EDITOR’S NOTE: Recall in my interview with Paris-based entrepreneur Dominic Dangerfield that if you’re trying to establish a business, find out if there is a market for what you’ve got or be able to successfully create the need.]

That being said, how many technological problems are really marketing problems in disguise? Also, how many technological successes are really marketing successes where the engineers are taking the credit?

00:29:04 In retrospect, humans have a tendency to organize the facts and tell the story in a way that benefits them or their motives, while overlooking, or failing to realize, other factors about the event.

For example, it took 15 years for the general population to finally trade in their horse and buy a car due to the overall level of problems, maintenance and upkeep associated with cars was more inconveniencing than keeping a horse. The only reason the car industry survived those 15 years of financial loss was gobally people were convinced that cars were cool.

The technology of e-cigarettes could save millions of lives every year, the problem is that they have a negative connotation, and people are are embarrassed to be seen using them. The challenge then doesn’t become making a better e-cigarette, the challenge now rests in the hands of the marketers’ ability to make them cool.

The bridge between engineers and economics and marketers will be built when the vocabulary necessary to be understood by each other has been created.

00:33:58 Loss aversion is the behavioral heuristic that when making a purchasing decision consumers are twice as motivated by fear of bad things as they are motivated by hope of good things.

Hyperbolic discounting is the heuristic that humans tend to be much more sensitive to changes in the near or immediate future than they are in the distant, unforseeable future.

Why a psychological revolution now and not before?

00:34:38 In addition to creating better models of understanding people and being in the position of asking better questions which can lead to better answers, namely I would attribute this to the advancement of:

  • Psychophysics, the relationship between physical stimuli and human perceptions.
  • Behavioral economics – for more on this read books by Dan Ariely, Nudge by Richard Thaler and Cass Sunstein, and Thinking Fast & Slow by Daniel Kahneman which explains that much of human decisions actually take place outside of our conscious awareness and that our conscious brain effectively post-rationalizes our unconscious decisions.
  • Game theory, a branch of mathematics which has only recently appeared (1975) and is fundamental to understanding human behavior, effectively revolutionalizing Darwinian psychology and genetic behavior.
  • Heuristics, the idea that human decision-making is based prominently upon ‘rules of thumb’ than through complex mathematical calculations.
  • Neuroscience, the study of the human nervious system, particularly as it relates to linguistics, cognitive science, genetics and psychology.
  • Complexity theory, which investigates the application of complexity to economics, strategic management and organizations.
  • Computer modeling as the potential to one day mathematically quantify, replicate, and then predict human behavior much better than modern economical models.
  • And many, many more.

Studies have shown that consumers irrationally prefer products which are 50% extra free rather than 33% off.

00:37:28 The above is arguably true because a bonus is different to a bribe. If you have to bribe consumers to buy your product, then it’s arguably not unreasonable that your product might be a bit crap. An interesting question is how much of your brand’s economic value has been destroyed by your not increasing your prices?

[EDITOR’S NOTE: In his talk F*ck You, Pay Me: Client-Services Contract Tips For Respectable Businesses for Creative Mornings, Mike Montiero uses the example of a graphic designer who, after years of being in business and inspired by Mike’s talk, doubled his normal quote to a client, and the client agreed without batting an eye.]

00:38:37 Given this, it almost works to your disadvantage by competing with a another brand by offering a similar product that is 30£ cheaper as opposed to offering the product 50% cheaper because merely undercutting another brand by a small price probably sends out a far worse signal than it creates desire: that your product is the poor man’s version of your competitor’s obviously superior product.

Q: What is the danger of market research?

00:39:01 Given what we understand about behavioral economics and how influencial the unconsious is on human behavior, consumers generally have no idea why they do things and why they make the decisions they do. Further, much of our decisions are made in an attempt to avoid cognitive dissonance – we want to feel good about ourselves, and so we construct life stories which justify that we are good.

[EDITOR’S NOTE: For more interesting aspects of conducting consumer testing, refer to my interview with Peter Spear, Brand Listener and check out the books Buy*ology: How Everything We Believe About Why We Buy Is Wrong by Martin Lindstrom and Consumer.ology: The Truth About Consumers And The Psychology Of Shopping by Philip Graves.

For an interesting explanation on how cognitive dissonance plays a role in love and divorce, watch the lecture Sex & Dating: The Psychology of Love & Phases of The Breakup Process.]

00:48:13 Human perception has evolved to be massively relativistic and contextual, measuring contrasts instead of absolutes. 

Contextually, for example, we can reason that a bag of ground coffee costs roughly $5.00 at the store so nobody would be willing to pay $5.00 per cup for drip coffee at their house, yet we gladly pay this much at Starbucks. Nescafé with their Nespresso machine + individual coffee capsules takes advantage of this heuristic by selling individual coffee capsules at a price higher than you would pay if you purchased a bag of ground coffee, but we’re okay with it “because it’s still less expensive than Starbucks.”

Another example of this would be luxury car manufacturers Maserati & Rolls Royce stopped selling their cars at car shows because they looked too expensive compared to the other cars and instead began showing them at yacht and aircraft shows where their $200,000 cars are less expensive but equally as luxurious than the million dollar yachts & aircrafts.

00:51:58 When faced with a choice of products at different price ranges, most people, most of the time, like to buy the middle priced product. “The least expensive is probably not very good, and the most expensive is too expensive,” consumers reason. Therefore, supermarkets and chains offering their own lowest price alternatives tend to skew the market, causing products which once appeared to be moderately priced to now appear too expensive now that there exists cheaper alternatives.

[EDITOR’S NOTE: Recall in Dror Benshetrit’s Integrated Product Design: Building a Generalist/Specialist Business talk and Blair Enns’ How To Start A Startup: 10 Proclamations To Win New Clients Without Pitching, they advise becoming branded as a specialist instead of trying to compete for price.

Also, for more on frame of reference, Sacha Greif outlines 9 different techniques brands take advantage of when convincing you to become a new customer in his talk Psychology & Marketing: How Cognitive Biases Influence Consumers Online.]

00:53:58 A hotel in Memphis discovered the confirmation bias as they assessed their hotel questionnaires, discovering that virtually every customer experience rating correlated directly to how good the customer’s check-in experience was:

  • Customers who had had a good check-in experience were happy and therefore not only noticed more positives about the hotel, they were more forgiving when things didn’t go as expected.
  • Customers who had had a bad check-in experience were unhappy and therefore not only noticed more negatives about the hotel, each time things didn’t go as expected further reinfored their unhappiness.

Therefore deal with customer service by improving expectations at absolutely crucial points more than just trying to improve the overall consumer experience.

[EDITOR’S NOTE: Recall in my interview with Rory Sutherland he advises marketers and businesses spend more time, effort, and money searching for ‘trim tab interventions’ – very small things that have much bigger disproportionate effects.]

00:59:03 In many real world scenarios, heuristics provide better results than complicated mathematical models could. Heuristic target audience is the single variable that best differenciates your target audience from your competitor’s, and use that as the thing to focus on.

Sheba cat food, for example, focus on “anybody who buys their cat a birthday present.” Sheba sent out a questionnaire asking people “Do you spend more on your cat for it’s birthday than you do for christmas?” Anybody who answered this question was Sheba’s heuristic target audence.

Another example would be in 1939-40, Britain, after tons of research chose their fighter pilots by simply asking two questions:

  1. Have you ever owned a motorbike?
  2. Do you own one now.

The people who became fighter pilots were the ones who answered yes to question 1 and no to question 2 because these people were crazy enough to ride a motorbike in the first place, but sane enough to give it up.

Consumers tend to trust more products that are heavily advertised reasoning that they are less likely to be crap than products they’ve never heard of. This is because the act of advertising requires expense, and therefore commitment.

01:05:35 Logically, you can make consumers buy more of your product by making it easier to buy; but sometimes the opposite applies. The effort-reward heuristics states what humans enjoy things more when it requires a little effort up front. University sororities with all their rituals and hazing ceremonies are an example, because after having gone through the suffering to join, you’re not just going to change your mind and abandon your membership.

01:06:08 The ‘IKEA effect’ states that people will buy something/anything during their trip to IKEA because they spent so much time navigating its store that they would feel stupid telling their friends “I spent the day at IKEA and didn’t buy anything.”

The ‘IKEA effect’ also notes that consumers tend to value their household furniture more than its true worth because they went to such length of purchasing and then assembling it.

01:09:09 If your product requires multiple steps, for example patients having to take 24 medicine pills; don’t give them 24 white pills and tell them to take them all. Give them 18 white pills and 6 blue pills and instruct patients to take the blue pills once they’ve finished the white pills. This technique dramatically increases the % of patients who take all of their medicine.

Any path of behavior which has a milestone in it, consumers are more likely to complete the actions.

01:15:40 Drafting or slipstreaming is the principle that the person(s) following closely behind the leader are able to travel as quickly as the leader while expending less energy. Applying this to business, this means that what your competitors are doing is actually very important to you because, managed correctly, your business can benefit from your competitor all while spending less time, energy, and money.

01:15:56 Price reduction is not a business strategy. There is an appropriate level of cost for your product for the specific market niche you seek to fill, and it’s your job to find it.

Consumers don’t care about your businesses’ self-interested return on investment (ROI), consumers notice and appreciate the tiny things you do to make their life easier where you aren’t directly earning any money.

01:21:47 ROI can come in several forms of exchange:

  • Sharing“I give you something of mine with no expectation that you will return the favor.” What happens amongst people who ‘borrow’ cigarettes from other smokers.
  • Barter – “I’ll trade you a knife for three chickens.”
  • Tit-for-tat (TFT) asynchronous – “I’ll give you some of my fish because you’ve had a bad day on the expectation that you’ll return the favor in the future when I’ve had a bad day.”
  • Monetary – “I will give you this amount of money I have earned in exchange for something you are selling.”
  • Religious“I will do good acts unquestionably on the assumption that I will be rewarded ultimately.” 

[EDITOR’S NOTE: Recall in Robert Sapolsky’s lecture Human Behavioral Biology: Where Game Theory & Evolution Collide that the TFT exchange is the optimal strategy for cooperation because:

  • It starts off as friendly and accomodating
  • The rules of the game are clear
  • It rewards pain with pain
  • It allows each party to cheat when necessary, and to be on the lookout for cheating by the other party
  • It’s forgiving, allowing the two to return to a friendly and accomodating relationship.
  • It may lose the battles, but it ultimately wins the war: even if in a 3 round game your opponent stabs you in the back on the final round and you cannot retaliate, tit-for-tat is still mathematically the optimal strategy.]

Big data doesn’t just give your company an advantage over your customers, it gives your customers an expectation from you. 

Collect your customer’s data and then don’t reciprocate, and those who gave you their information will feel taken advantage of and your brand will suffer.

01:24:04 Customers who have become a member or joined your subscription-based rewards program thus giving you permission to know when, how, where and why they use your product as well as aspects of their personal life demands a better, preferred treatment than customers who haven’t. An airline would be expected to give the last seat on a flight to a ‘loyal’ customer over an unloyal customer.

01:27:31 Changing the choice architecture, checkout button and a couple of lines of copy can add increase your revenue, or conversion rate, by +1000s%. Increasing the price of your product may cause demand to go down, but it may cause demande to go up. Constantly test assumptions.

01:30:22 The most effective behavior modification advice is binary. The best way to decrease alcohol consumption isn’t to limit yourself to only one 5-ounce glass of red wine a day because this is difficult to measure and ensure you don’t break. The best way to decrease alcohol consumption is to limit drinking to 3 days a week because it’s easy for someone to tell if you’ve been drinking on a day you said you don’t drink.

4 thoughts on “138. The Next Revolution Will Be Psychological Not Technological

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