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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!).

...

A friend of mine posted on Facebook that she’d taken a web quiz to tell her which presidential candidate best lined up with her stand on the issues. She was outraged that the web site thought she would vote the way it did. I’m not surprised (by the outrage, not her choice)…it is a case of a badly applied choice technique.

Basically the quiz worked by asking a series of questions to see where she stood on the issues. It then aligns her choices against the stand taken by the candidate (if you want to try one, here is one from the GOP Primaries this year). In essence it is a Configurator. Instead of building the perfect product for you (as you would with a Configurator) you build the perfect candidate. There are a couple of problems with this application.

First, Configurators allow you to build the ideal but generally don’t give a clear idea of what choices you might make if that ideal were not available (our proprietary Texo™ helps overcome that issue). In politics it is not unusual for voting decisions to hinge on a single issue and unlike products you can’t decide to add or subtract an important feature.  

When we dropped my daughter off for her first year of college a few weeks back my parting words were “Be true to yourself”. I thought this reflected both my accepting that my influence on her was now very limited and my hope that whatever good I’ve done should be put into practice. It strikes me that researchers too should heed the advice.

Our industry has changed and continues to change. Many of the old rules either no longer work or can’t be easily applied to the new tools at our disposal. So how can we apply what we know? A philosophy like “be true to yourself” allows us to do just that.

Personally it has allowed me to accept that representative sampling is no longer the most critical rule (it can’t be in a world where truly representative sampling is too slow and costly). It doesn’t mean I take any respondents I can get…care in trying to get as representative a sample as we can remains important. It just isn’t a stone cold requirement of quantitative research.  

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  • Ed Olesky
    Ed Olesky says #
    Nice article, thanks for the information.

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).

Segmenting Movie Goers

Posted by on in New Product Research

A few months ago I posted that we researched 18 factors in deciding which movie to see and where to see it. We reported that “It’s in 3D” was at the bottom of the list, and concluded that 3-D was unlikely to save the American movie box office.  

What made the top of the list was “I like the plot or story,” followed by “It is in my favorite movie genre” and “It has my favorite stars.”  

But surely the plot isn’t the critical decision-maker for every movie-goer; there must be groups of viewers whose decisions revolve around some of the other items on that list. We took their ratings and ran a segmentation analysis. While this type of analysis is done on a much grander scale by researchers in the movie industry, we thought it would be interesting to do some analysis of our own.

new years resolution market researchWe had a notion here at TRC that by the middle of March most New Year’s Resolutions would have been tossed by the wayside, either in favor of giving up something meaningful for Lent, or the simple acknowledgement that this just isn’t the year to lose 25 pounds. Would folks who made a resolution at the beginning of the year still be keeping that resolution 3 months later?

We kicked around a few hypotheses, and then went about testing them using our online panel of consumers:

  • Younger consumers would be more likely to make resolutions than older ones (we figured they hadn’t become jaded by their resolutions not working out over time)
  •  People would be more focused on issues relating to their health (losing weight, exercising more) than other types of resolutions.
  • Most folks who made a resolution would have dropped it by the 3-month mark

So how did our predictions fare?

The Outside View that Daniel Kahneman talks about in his book Thinking, Fast & Slow, is a specific remedy to a problem known as the planning fallacy (i.e.) the inability of people to make predictions. The planning fallacy is part of a larger problem of optimism bias. What is optimism bias? Simply put, people are generally more optimistic than they should be. For example, it is well known that most people think they are better than average drivers, an impossibility. It stems from a general dose of overconfidence not warranted by the situation on hand.

The best example of overconfidence is a study that Kahneman cites of CFOs of large corporations. They were asked to estimate the returns of the S&P Index over the following year. The data were collected over a number of years and hence there was ample opportunity to correlate it with the actual performance of the Index in the following year. Any guesses as to this correlation, given that the respondents should have been expected to have special insight in this matter? It was almost exactly zero, slightly less, in fact! And they seemed to have no idea their forecast was that bad.

Tagged in: Psychology

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.

...

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.

How to Be Happy by Spending Money Wisely

Posted by on in Consumer Behavior

It is that time of year when many people's thoughts turn towards buying gifts for loved ones. More generally it is a time when thoughts related to money and happiness occupy our attention. When thinking of ways to spend money either on oneself, for loved ones or even for complete strangers wouldn't it be nice if there was some actual research to provide data-based guidance on the topic? As it happens, there is. Researchers Elizabeth Dunn of the University of British Columbia, Daniel Gilbert of Harvard and Timothy Wilson of the University of Virginia have identified, through their research, eight principles designed to help consumers get more happiness for their money. Follow them as you will to enhance your life.

Tagged in: Psychology

Unknown Unknowns

Posted by on in Rajan Sambandam

Let’s pick a topic. Any topic. How much would you say you know on that topic? More than average? How much do you think you need to learn in order to become well-versed on that topic? Not a whole lot? You just may be experiencing what is known as the Dunning-Kruger Effect. It is a mental bias that seems to afflict people who are unskilled or not very knowledgeable. They routinely make poor decisions because their lack of competence itself denies them the ability to realize their lack of competence. It happens to a lot of us in certain areas like personal financial planning.

Tagged in: Psychology

Up North and Down South

Posted by on in Rajan Sambandam

In casual conversation do you use terms like “Up North” and “Down South”? Why? Is north vertically higher than south? Of course not. It is just a common usage of language that we are used to, right? But does it have any consequences for behavior? Research has shown that people often make mistakes in travel related judgment, especially when estimating time and distance. Research has also shown that people associate vertical position with meaning. For example, people are faster to identify the relationship between words like “basement” and “attic” when the word presentation is consistent with their spatial relationship (“attic” above “basement”). Given all that, is it possible that people may consider traveling north to be longer or costlier or more difficult than south bound travel simply because we think of it as being “up”? That is the research question.

Tagged in: Psychology

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