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My Evening with Daniel Kahneman

Posted by on in Consumer Behavior

Okay, so it wasn’t really just the two of us – there were a few hundred others involved. Still, it was a very memorable evening that I think is worth sharing.

The day started innocently enough. I was heading out to Yale for a guest lecture in the MBA Marketing Research class taught by Jiwoong Shin as I have done for several Spring semesters now. I like this trip a lot as it allows me to catch up with many of my friends in the Yale Marketing Department. One of those is Shane Frederick and I had emailed him to see if he was around. He replied asking if I was attending Kahneman’s lecture. I had no idea that Daniel Kahneman, Nobel Prize winner and godfather of behavioral economics was giving a lecture there. The day was already getting better! I quickly changed my Amtrak ticket to a later time and told Shane I would come by his office so we could walk over.

My guest lecture went off very well with the students asking plenty of interesting questions. Then I had lunch with Zoe Chance who is doing some very interesting work with leading companies, applying ideas from behavioral economics. After a couple more meetings, I went to see Shane and we walked over early knowing there would be a big crowd. And we were glad we did, as the auditorium was overflowing by the time the lecture started.

Daniel Kahneman (Danny to his friends) was introduced by another notable person from Yale, Professor Robert Shiller (yes, he of the Case-Shiller Index you may have heard about during the housing crisis). Shiller talked about the widespread impact of Kahneman’s work, especially after the publication of his best seller Thinking, Fast & Slow. Trying to find Kahneman’s connections to Yale, Shiller pointed out that two of his coauthors (Shane Frederick and Nathan Novemsky, both in the marketing department) were at Yale.

And then it was time for Kahneman to speak. His humility, thoughtfulness, and eloquence came through pretty much from the first few words. He started by saying that he doesn’t do university speeches anymore since he is not actively doing any research (he is retired), but could not say no to Bob Shiller. Most of his recent speeches have been about his book, and there had been so many that as a consequence he seems to have forgotten everything else he ever did (laughter!). And that, he said, makes sense because as he points out in the book, we like things that are familiar (more laughter!).

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environmentProtecting the environment is in our collective best interest. Certainly, that’s a given, but people individually don’t always act in their long-term best interests (as behavioral economists posit) so why do we think companies would do so?

Turns out, employers are doing a lot to conserve and protect the environment and natural resources – at least according to TRC’s online panelists we surveyed this spring.

Nearly three-quarters of our panelists who are employed full or part-time told us their employer was actively doing at least one of five activities related to conservation and energy preservation. The larger the employer, the greater the participation. While we can't project our findings to corporate America as a whole, this is certainly encouraging news for our planet.

Shane Frederick (Associate Professor at Yale University’s School of Management) did a talk on Behavioral Economics at our recent research conference that got me thinking. But before we tap into the scary place that is my brain, let’s consider what behavioral economics is. Most of us with a formal business education have taken at least one if not several economics classes, during which we were exposed to market theories based on assumptions that sounded reasonable in principle but that really didn’t represent how things worked in real life. Behavioral economics, Shane started, is the study of economics when those assumptions are relaxed, and the relaxation of one of these assumptions, that people act rationally, is what got my attention.

One of the examples Shane used to make his point involved a pivotal point late in a 2009 football game between the New England Patriots and the Indianapolis Colts. Bill Belichick, the coach of the Patriots, decided to go for it on 4th and 2 deep in his own territory. The attempt failed, the Colts scored after the ensuring change of possession and won the game, and nearly everyone in the sports world pointed to Belichicks' seemingly insane decision.  But was it really insane? 

In Thinking, Fast & Slow, Nobel winner Daniel Kahneman (click here previous post about Thinking, Fast & Slow) talks about the two selves people have: the experiencing self and the remembering self. The terms are self-explanatory and vacations are a good way to think about them. The part of us that is enjoying the vacation is the experiencing self, while the part that is reliving it later (sometimes years later) is the remembering self. Neither one may be more important, but the emphasis we place on one or the other could determine our behavior. So, for example, you can enjoy the vacation or take plenty of pictures to relive it later, depending on the self that is more important. A way of finding out which self is more important is to ask ourselves whether we would go on a certain vacation if we could only enjoy it, but not take any pictures (or video, etc).

market research conference 2012Well, another conference is over, perhaps our best ever. A great roster of speakers, a room full of engaged attendees and a great location was a terrific formula for a memorable conference. Some highlights from the various sessions:

Lenny Murphy, Editor-in-Chief of the Greenbook blog opened with a wide sweep discussing the waves of changes rocking the market research world. Pulling from the GRIT survey, his discussion with emerging and established players, as well as his itinerant investigation, he was able to convincingly make the case that change in the MR industry is happening. Now. He talked about emerging technologies such as mobile, social media and text analytics and how academic expertise was a key to unlocking a future of new ideas. It was a perfect set-up for the group of academic presentations that were to follow.

market research conferenceOver the past year I’ve blogged about the things that I think will drive the future of Market Research and I’m pleased to announce that for our Frontiers of Research annual conference (May 8th, in NYC, view full agenda or register) we have assembled speakers who will drive that conversation forward. The conference will cover the full spectrum of buzz-worthy topics (Behavioral Economics, Neuroscience, Gamification, Predictive Analytics). And the focus, as always, will be on ideas presented in an easy to understand way (no math!). With speakers from four Ivy League schools, and presentations that range from poker to motion picture box office, this should be an informative and enjoyable day.

Leonard Murphy will set the table by calling on his extensive knowledge of the industry to illuminate how academia can and is driving us forward. Anyone who follows his blog knows that he is not only one of the most knowledgeable industry leaders around, but that he has a provocative view of where we are heading.

daniel-kahneman-thinking-fast-slowIn his opus Thinking, Fast & Slow, Nobel winner Daniel Kahneman (click here for previous post) relates a story from early in his career when he was leading a team to develop a curriculum and write a textbook on judgment and decision-making in high schools. He had assembled a group of experts and after working diligently for a year they had completed an outline of the syllabus and written two chapters. One fine day when discussing procedures for estimating uncertain quantities, it occurred to him that he should get an estimate from everyone on how long he thought this whole project would take. Being the clever psychologist that he was, rather than ask the group to guess publicly, he asked each person to make a confidential prediction. The mean was about two years and the range was about half a year on either side. In other words, the group was very consistent in its prediction.  

Then Kahneman had the idea of asking the curriculum expert in the group, Seymour Fox, for his specific opinion. Only this time he asked Seymour to think about other teams like theirs and asked how long it had taken them to finish. After a long silence the astonishing answer came out. Nearly half the groups never even finished the project. Among those who did the average time taken was about seven years! Seymour Fox also estimated that this group was slightly below average in terms of the skill set it possessed compared to the other groups. The killer, of course, was how long it actually took Kahneman’s group to complete their project. Eight years!

Effectively what had happened was that a group of experts in judgment and decision-making had somehow fooled themselves into thinking way too optimistically about the future and had made predictions based on it. This included the expert who in spite of having the best information somehow ignored that in favor of an optimism bias. As Kahneman graciously adds, it also included a leader who did not pull the plug on a project that would likely take another six years and was a coin toss as to whether it would even be completed.  

The biggest lesson Kahneman draws from this episode is that there are two approaches to forecasting which he labels the inside view and the outside view. The inside view is when we focus on the specifics of our own situation, try to form a coherent story and somehow convince ourselves that given the “special” nature of our situation success is just around the corner. In some ways this probably explains the enormously high failure rates of new products and the only slightly lower failure rates of new small businesses. The outside view is one that takes into account the general failure rate of the reference class of objects. Assuming the reference class is properly chosen, the outside view should provide a nice ballpark of where the estimate is going to be. In practice it is better to start there and adjust it using the special knowledge of the inside view and thus avoid embarrassing predictions. Not following this kind of procedure is why we routinely read about say, large transportation projects often running over by years and into several times the original projected cost. It is also why kitchen renovations routinely cost twice the initial estimate for the average household.

So are there specific lessons for market researchers? Of course. One is with the likelihood of success of any kind of new technological advance (mobile, neuro, text analytics, social media monitoring, whatever). Without understanding the reference information for how such new technologies can ultimately fare, we can too easily get caught up in the fanciful nature of a specific technology and make prognostications not just about success, but also about time frames within which such things can come true. On the flip side the death of older technologies can be too gleefully forecast (“Surveys will die in a year!”) because of the glamour of newer techniques if the reference cases are not carefully analyzed.

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Discrete Choice in a Police Lineup

Posted by on in New Research Methods

police lineup discrete choiceThe Economist reviewed a study by Dr. Neil Brewer about effective police lineups which I think had implications for Market Research. Like researchers, police typically like to encourage witnesses to take their time to ensure they are making the correct choice. This makes logical sense, more time, means more thinking which naturally should lead to better results. Sadly, Dr. Brewer found otherwise.

He had volunteers view short films which detailed mundane scenes of everyday life and a crime (shoplifting, car theft, etc). Later (some minutes later, some a week), they were asked to identify the criminal from a group of 12 pictures of “suspects”. Half were given 3 seconds to evaluate each picture and asked how confident they were of their choice. The other half were given as much time as they wanted. The results showed that the group that had the limited time was correct 67% of the time. The group with more time was only correct 49% of the time.  

The Nobel Prize winner and the intellectual godfather of behavioral economics, Daniel Kahneman, has summarized a lifetime of research in his recent book Thinking, Fast & Slow. In the next few blog posts I will be drawing upon some concepts that he espouses and link them up to research to see what practitioners can take away from his four decades of work.

This post goes directly to the title of the work; fast and slow thinking. This is the foundation of his work. He and his great collaborator Amos Tversky, (who passed away and therefore could not receive the Nobel) see human thinking in two forms that they call System 1 and System 2. More aptly they could be called “automatic” and “effortful” systems, but Fast and Slow is a good shorthand description. According to Kahneman’s description,

System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control

System 2 allocates attention to the effortful mental activities that demand it, including complex computations”

what am i supposed to doYes, it is a rather important issue and can be approached in a variety of ways. My purpose with this post is not to provide a comprehensive answer, but look at one specific solution based on what I recently read. The book is Thinking, Fast and Slow, the Nobel Prize winner Daniel Kahneman's excellent summary of a lifetime of research. He is perhaps the most accomplished psychologist around and could (among other things) justifiably be called the intellectual godfather of behavioral economics. It is always worth listening to what he says and in this particular case, it seems to me there is a nugget that applies to making quantitative research more actionable.

People Don't Do the Math

Posted by on in Miscellaneous

I was on a call recently working through the details of a complex discrete-choice task. Specifically we were debating how best to apply price prohibitions - restrictions on the design that would prevent certain "monthly" and "one-time" prices from ever appearing together.

Rest assured our thinking was all very logical. We needed to put controls in place because who in their right mind would ever choose an option where a low monthly rate, coupled with a contract, quickly added up to more out of pocket costs than would accrue by skipping the contract and paying a (slightly) higher up-front fee. That's when the client's client chimed in:

"People don't do the math," said the man who spends little to none of his time conducting surveys.

Recent comment in this post - Show all comments
  • Ed Olesky
    Ed Olesky says #
    I've always just simply relied on including whatever prices simulate the actual prices consumers will see. Whether the price opti

A new book attempts to make behavioral economics interesting and approachable by couching it in the world of sports. Personally I try to avoid books on economics, but I did find a review quite interesting. Not only did it help to explain why the Philadelphia Flyers lost the 1980 Stanley Cup, but it also helps to illustrate the limitations of crowd sourcing and the reality of Asymmetry in key driver analysis.

Behavioral economics studies the role of emotion in economic decision making (something marketers need to master). In application it can help to explain the illogical decision making of shoppers. A classic example of this is when someone spends $1000 on a product they don't need thanks to a price cut of say $200. They will often focus on what they saved ("I saved $200!!!) and not on what they spent or the actual need.

Recent Comments - Show all comments
  • Ed Olesky
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Putting Money and Mouth Together

Posted by on in Market Research

Ever heard of a Commitment Contract? No we are not talking about marriage. A commitment contract is one where you commit to doing something and sign a contract. If you don’t do what you committed to, the terms of the contract go into effect. The terms are set up in such a way that you could end up paying a penalty if you fail to honor the contract. In other words the incentives are aligned to elicit a specific behavior. The kicker is that you set up the contract and the penalty.

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