Month: October 2019

Nudging, Democratized: A Guide to Applying Behavioral Science

Business

From New York Times bestselling titles to Nobel Prize-winning research, the past decade has been transformative for behavioral science. What was once a mostly academic movement on the fringes of economics and psychology is today a field that fuels government, industry, and philanthropic work at the highest levels. There’s a reason for this quick ascent: unlike many other academic disciplines, research into human behavior has yielded insights that are digestible, and often intuitive, to non-specialists — and can help us inform and improve decisions in both our personal and professional lives.

Behavioral science, democratized

We make 35,000 decisions each day, often in environments that aren’t conducive to making sound choices.

At TDL, we work with organizations in the public and private sectors—from new startups, to governments, to established players like the Gates Foundation—to debias decision-making and create better outcomes for everyone.

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Spreading these insights to a broader audience has been at the core of our mission since founding The Decision Lab in 2013. It is our firm belief that knowledge should be an equitably distributed resource — and that we should all learn about the forces shaping our behavior. To realize this goal, we aim to publish authors who can use everyday experiences and language to translate complexity into common sense, and make it interesting, too. Each of our articles has a simple formula: take a lesson or two from peer-reviewed behavioral research and explain it in a way that an unfamiliar reader can find not just understandable, but useful. Over the years, we’ve taken to calling this effort democratization — or simply, spreading information beyond its traditional boundaries and audiences.

As we’ve grown, it is in this spirit we’ve begun providing consulting work for organizations in need of behavioral and experimental expertise. These projects are driven by the belief that all organizations can benefit from understanding the behavior of their constituents or clients, their leaders or laborers. At its core, behavioral science is just a way for organizations to think critically about how their actions (e.g., marketing strategy or store layout) affect behaviors they are interested in (e.g., purchases or program enrollments), and to test the efficacy of different approaches empirically. We know that small tweaks in our environments can have large, consequential effects on our actions, and as such no organization is too small to incorporate behavioral insights into its operations.

It is with these goals in mind that we are thrilled to announce the release of Nudging Democratized: A Guide to Applying Behavioral Science. The book, co-authored by the brilliant Steve Shu and TDL editor-in-chief Andrew Lewis, provides a practical blueprint for organizations to start using behavioral science at low-cost and with relative ease. Aggregating lessons from his three-decade career as a management consultant, Shu provides a framework of application that will empower businesses of any size to benefit from the principles of behavioral science and human-centered design.

The book’s main contribution is in spelling out the process of Behavioral GRIT TM, which stands for business functions related to Goals, Research, Innovation, and Testing. By setting these priorities ex-ante, Shu marshals examples of how organizations have integrated behavioral science into their business practices, including the incubation of innovation centers and development of behavioral science overlay capabilities. Throughout the book, case studies provide a view of how real organizations have incorporated behavioral insights to achieve a wide range of desired outcomes. For each case study, Shu highlights an element of the GRIT framework to give the reader hands-on examples of its implementation. For Goals, we see a large financial services firm implement an in-house nudge unit to create and encourage behaviorally-healthy retirement plans. For Research, Shu explains the impetus for and practice of incorporating behavioral and experimental research into business practices — a concept he concedes is likely somewhat foreign to the average manager. In explaining Innovation, Shu walks the reader through a private company’s experience of designing an app that leverages behavioral insights to encourage individuals to think holistically about life planning. In the section on Testing, we see the evaluation of a successful effort to reframe information and nudge individuals from different income groups to save money.

Taken together, Shu’s recollections of past work with businesses of diverse size and purpose offers a rich narrative on the flexibility and practicality of applied behavioral science. The purpose of the book — in line with our efforts toward democratization — is to lower the barriers to entry, and provide managers with a toolkit for making use of behavioral insights in their organizations. For any reader uncertain of how they might translate broad behavioral concepts into actionable business strategies — or for any aspiring behavioral scientist seeking a glimpse into the types of problems and solutions they might expect to face in the field — this book is the place to begin. Pick up your copy here, and let us know what you think!

About The Author

Andrew Lewis

Behavioral Economics

Andrew is a writer and behavioral scientist focused on belief construction and how people evaluate new information. He is a PhD candidate in Politics at the University of Oxford, and a doctoral researcher at its Centre for Experimental Social Science (CESS). He was previously at Carnegie Mellon University where he worked at the BEDR Policy Lab and Center for Behavioral and Decision Research (CBDR), and was a research and teaching assistant to George Loewenstein. Andrew is editor-in-chief at The Decision Lab.

Why Are Many Americans Checked Out At Work?

Business Society

There’s a crisis in the American workforce: 66% of workers are checked out at their jobs [4]. At best, these employees clock in and out, putting time but zero passion into their work. At worst, they resent feeling their needs aren’t being met, and are missing deadlines or work days altogether. The result? An estimated $480-$600 billion a year in lost productivity [4].

Behavioral science, democratized

We make 35,000 decisions each day, often in environments that aren’t conducive to making sound choices.

At TDL, we work with organizations in the public and private sectors—from new startups, to governments, to established players like the Gates Foundation—to debias decision-making and create better outcomes for everyone.

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How can companies create a more engaged workforce? The answer goes beyond salary increases, job flexibility, and higher 401(k) matches (though, to be sure, those help). Research in organizational behavior suggests that having “transformational leaders” — or in other words, very effective managers — can induce employees to be more engaged, motivated, and productive. By cultivating effective leadership, companies become more successful. 

Although “transformational leadership” may sound like academic jargon, it encapsulates the qualities and behaviors of the ideal people manager. This type of leadership has four key components:

  • Instilling pride in employees, while gaining trust and respect and communicating the organization’s value and mission.
  • Helping employees set goals, communicating optimism about future goals, and providing meaning to everyday tasks.
  • Challenging ideas, taking risks, soliciting new ideas, and thinking outside the box.
  • Giving employees personal attention, empathy, and support, while celebrating each person’s contribution [2].

Unprepared Managers

Managers have a profound impact on the day-to-day engagement of their employees, accounting for 70% of the variance in engagement levels [1]. The more effective the manager, the more engaged employees will be. Unfortunately, companies frequently fail to hire quality managers — in fact, Gallup estimates this happens about 80% of the time — and many managers are ill-equipped to manage individual employees, let alone a team [1]. 

Why are so many managers ineffective? Part of the reason has to do with the manager selection process. When Gallup asked managers why they believed they were hired for their current role, the most common answers were they were either successful in a previous non-managerial role or had vast experience in their company or field [1]. The first – and most critical – step to increasing employee engagement is for companies to disrupt the typical hiring practices and demand hiring more effective managers who have a track record of transformational leadership qualities. Or, at the very least, companies should invest in training existing managers to develop these behaviors.

Creating Engaged Workers

Research shows that truly effective managers – ones who demonstrate transformational leadership behaviors – create healthier, more productive workers. A 2014 study by Walsh, Dupré, and Arnold examines how this leadership style affected employees’ psychological health [5]. Results show that transformational leaders are more likely to empower employees in a way that helped them feel self-determination, confidence, and competence, which directly impacts their psychological health. Empowered employees are also more likely to go above and beyond at work, which helps gain trust and respect from colleagues and increase overall job satisfaction. In a country where wages are stagnant and anxiety disorders are prevalent, companies should prioritize improving employee psychological health. In turn, this will help employees’ well-being and reduce unexpected costs—like turnover—from staff burnout. 

Additional research on highly effective leaders investigates how transformational leadership affects employee motivation, an important component of feeling engaged at work. The researchers find that transformational leaders are more likely to set concrete, challenging goals for employees, which energize employees and increase overall motivation [2]. Consider the fact that 79% of employees feel that they have little to no guidance from their manager [4]. This research suggests that by setting challenging goals for employees, leaders can increase motivation and help them feel more guided and supported.

Finally, other research explores how stressed leaders affect employees’ burnout levels. This study finds that the more emotionally strained leaders are, the fewer transformational leadership behaviors they demonstrate, such as communicating optimism, setting employee goals, and giving employees personal attention and feedback [3]. The results also support previous research showing stress can be transferred from managers to employees through dwelling on negative emotions and demanding work challenges. This research underlines what most people have felt before either as an employee or manager, or both: the more strained leaders are, the more likely they are to be poor managers and transfer their stress and negativity to staff, sapping motivation and causing employees to disengage. 

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What if most employees felt optimistic about their workloads, received personal attention and guidance, and felt that their everyday tasks – ones often ignored yet extremely time-consuming – were appreciated? What if they looked forward to going to work? At present, the facts paint a bleak picture of how the average American feels about their job: 79% feel unmotivated to do outstanding work, 51% are actively searching for a new job, and just 15% feel their company’s leadership makes them feel enthusiastic about the future [4].

Everyone deserves to feel motivated, respected, and inspired at work. Far too many Americans across industries and levels of work feel undervalued, micro-managed, or left behind at organizations that often ignore their most valuable assets. If companies begin to disrupt typical hiring practices and, instead, cultivate leaders who demonstrate transformational leadership behaviors described above, both employees and companies will reap the benefits.

About The Author

Stacy Post

Johns Hopkins University Behavior Change Communication

Stacy uses applied behavioral science, social marketing, and behavior change models to communicate social issues ranging from environmental to public health to youth development. With a knack for translating complex, scientific findings into audience-friendly messaging to enact behavior change, she strives to use behavioral science to create a more productive and healthy society. Stacy completed an MA in Communication (social and behavior change communication) from Johns Hopkins University.

How to Protect An Aging Mind From Financial Fraud

Finance Health Technology

Although aging is inevitable, financial fraud in old age isn’t. Elderly individuals in the US alone lose an estimated 3 billion dollars a year to financial scams. Our research offers insights into how we can prevent this troubling reality.

Behavioral science, democratized

We make 35,000 decisions each day, often in environments that aren’t conducive to making sound choices.

At TDL, we work with organizations in the public and private sectors—from new startups, to governments, to established players like the Gates Foundation—to debias decision-making and create better outcomes for everyone.

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The simple use of the language ‘grandma scam’ or ‘grandparent scam’ attests to the fact that elder financial abuse has become normalized, even unsurprising, in our increasingly digital world.

Older populations are not more susceptible to financial fraud simply because of naivité or their limited technological literacy. More accurately, older populations are victims of cognitive decline far before they are victims of financial scams.

Financial decisions are already some of the most stressful we make. These complex decisions become increasingly difficult to navigate as we age. Our research team wanted to understand: why do older adults tend to be more susceptible to fraudulent situations and how can we prevent this phenomenon?

Step 1: Why are older populations more susceptible to financial fraud?

The behavioral science literature offers some key insights into why we become more susceptible to financial fraud as we age.

  1. Older adults tend to rely more on system 1 thinking That is, fast, automatic and unconscious – and less on System 2 – which leverages fluid intelligence to reason and think through problems deliberately (Peters et al., 2000). Our crystallized intelligence (which comes with knowledge and experience) does increase with age, which compensates for decreases in fluid intelligence. However, crystallized intelligence starts to decline around 70, which leading to an overall reduction in decision-making quality in the later years (Tymula et al., 2013).
  2. Older adults are more affected by choice overload They find it more difficult to navigate a proliferation of choice and may lead them to suboptimal decision-making when overwhelmed. Specifically, they find it more challenging to ignore and sift through irrelevant information when placed in a situation to do so (Besedeš et al., 2010).
  3. Older adults have reduced numeracy and are less apt at assessing risk Cognitive decline is closely associated with increased difficulty in using reason when evaluating numbers (e.g. about a 1% vs 0.1% risk) (Best & Charness, 2015).

Step 2: How can we alter the decision-making environment to reverse the cognitive effects of aging?

The behavioral science literature suggests that one of the reasons that older populations may be more susceptible within financial decision-making environments is because they are prone to paying close attention to details in the present while ignoring the bigger picture, a phenomenon that is also known as low-level construal’. This predisposition to think about details in the present (see the availability heuristic and salience bias) can increase vulnerability in financial decision-making environments. This is particularly troubling when many fraudulent emails leverage the urgency to ‘act now’. For example, a foreign lottery scam including the message: “Send a deposit of $200 within the next 24 hours to claim your lottery earnings”, brings the present front and center. Biases towards present actions are amplified when the consequences of certain behaviors will be felt much later into the future.

Perhaps then, prompting abstract thinking, or ‘high-level construal’ would promote critical thinking about financial decisions in older populations. Our hypothesis was that incorporating personal financial risk assessment questionnaires into investment decision-making environments would effectively promote abstract thinking, ultimately reducing financial fraud susceptibility amongst older adults (aged 60+).

Testing our hypothesis

Our experiment involved 102 North American respondents divided into equally sized younger (18-25) and older (60+) cohorts. The participants were randomly assigned to a treatment or control group. Both groups were shown an email about an investment opportunity, which incorporated many of the common red-flags of fraudulent pitches. After reviewing the email, the respondents assessed the pitch along several dimensions including appeal, willingness to invest, and perceived risk. The intervention for the treatment group was a Personal Financial Risk Assessment, which the respondents completed before viewing and assessing the email.

Fraudulent investment opportunity provided to participants in the experiment. According to the US Federal Trade Commission, financial scams are increasingly occurring online.

How a simple mind hack points to the potential of reducing susceptibility

When comparing the treatment and control groups we found a significant effect of the intervention on susceptibility scores in those aged 60 and over. The control group who did not complete the personal financial risk assessment was much more likely to consider the financial opportunity to be appealing, trustworthy, and they expressed a greater willingness to invest. Furthermore, there was no effect of the intervention on the 18-25-year-old group, suggesting the intervention specifically targeted the cognitive deficits associated with old age.


This graph reports the effects of a Personal Financial Risk Assessment intervention on susceptibility to financial scamming in 18-25-year-olds versus 60+-year-olds. This intervention was effective in reducing susceptibility (p < .05), but only in the 60+-year-old group, suggesting that it may specifically target decision deficits linked to cognitive decline.

Key Takeaways

As the world becomes increasingly digital, and populations age, financial scams may become more common. The more tools we can provide to vulnerable populations to protect themselves from “falling for it”, the fewer victims there will be to face the negative consequences.

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Overall, the key things to take away from this article are the following:

  • Although people of any age can fall victim to financial fraud, older individuals are at the greatest risk due to changes in cognitive functioning.
  • Biases towards “detail-oriented” thinking vs “big-picture thinking” in older populations increase overall susceptibility to financial fraud.
  • Interventions, such as personal risk assessments which prompt “big picture thinking” encourages critical thinking, and can, in turn, reduce susceptibility to financial fraud.
  • Our findings support existing literature, which demonstrates that older adults strategically change their preferred decision modes from being deliberative to more heuristic-based in order to compensate for cognitive declines in everyday functioning (Mutter and Pliske, 1994; Yates and Patalano, 1999).

References

Best, R., & Charness, N. (2015). Age differences in the effect of framing on risky choice: A meta-analysis. Psychology and Aging, 30(3), 688–698. https://doi.org/10.1037/a0039447

Denburg, N. L., Tranel, D., & Bechara, A. (2005). The ability to decide advantageously declines prematurely in some normal older persons. Neuropsychologia, 43(7), 1099–1106. https://doi.org/10.1016/j.neuropsychologia.2004.09.012

Grable, J. E., McGill, S., & Britt, S. (2011). Risk Tolerance Estimation Bias: The Age Effect. Journal of Business & Economics Research (JBER), 7(7). https://doi.org/10.19030/jber.v7i7.2308

Kannadhasan, M. (2015). Retail investors’ financial risk tolerance and their risk-taking behaviour: The role of demographics as differentiating and classifying factors. IIMB Management Review, 27(3), 175–184. https://doi.org/10.1016/j.iimb.2015.06.004

Perez, A. M., Spence, J. S., Kiel, L. D., Venza, E. E., & Chapman, S. B. (2018). Influential Cognitive Processes on Framing Biases in Aging. Frontiers in Psychology, 9, 661. https://doi.org/10.3389/fpsyg.2018.00661

Reed, A. E., & Carstensen, L. L. (2012). The Theory Behind the Age-Related Positivity Effect. Frontiers in Psychology, 3. https://doi.org/10.3389/fpsyg.2012.00339

Roalf, D. R., Mitchell, S. H., Harbaugh, W. T., & Janowsky, J. S. (2012). Risk, Reward, and Economic Decision Making in Aging. The Journals of Gerontology: Series B, 67B(3), 289–298. https://doi.org/10.1093/geronb/gbr099

Sumit Agarwal, John C. Driscoll, Xavier Gabaix, & David Laibson. (2009). The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation. Brookings Papers on Economic Activity, 2009(2), 51–117. https://doi.org/10.1353/eca.0.0067

Weller, J. A., Levin, I. P., & Denburg, N. L. (2011). Trajectory of risky decision making for potential gains and losses from ages 5 to 85. Journal of Behavioral Decision Making, 24(4), 331–344. https://doi.org/10.1002/bdm.690

About The Author

Jayden Rae

McGill University Public Policy

Jayden has a particular interest in studying how public policy can be used as a tool to help individuals and organizations make decisions to protect the environment. She has previously worked in the domain of environmental policy at the Ontario Ministry of the Environment. She is a founding director of the environmental non-profit Climatable, which focuses on engaging Canadians in climate change action. Jayden received her bachelor’s degree from McGill University in environment and political science.

Optimism Is Good For Many Things, But Not Pension Savings

Finance

I will live longer than average, social security will enable me decent living in retirement and if I will need more income, I will just take up a part-time job or delay my retirement for a few years. These are just some optimistic thoughts that many of us think about our retirement. The culprit? Optimism bias, or our tendency to overestimate the probability of positive future events and underestimate the probability of negative ones.

Behavioral science, democratized

We make 35,000 decisions each day, often in environments that aren’t conducive to making sound choices.

At TDL, we work with organizations in the public and private sectors—from new startups, to governments, to established players like the Gates Foundation—to debias decision-making and create better outcomes for everyone.

More about our services Icon arrow right white color

Optimism bias is considered to be one of the most prevalent and robust cognitive biases observed in behavioral economics that transcends gender, race, nationality, and age [1]. But like most things in life, even optimism has its negative sides that can have huge impact on our lives. According to the FED 40% of Americans, today can’t cover an unexpected $400 expense and the majority approaching retirement have no or inadequate savings bringing the nation to a retirement saving crisis [3].

Mortgage and student debt are at record heights and mounting studies suggest our over-optimistic outlook of the future is partly to blame, making further research in this field crucial for the financial wellbeing of future generations.

Why is the glass half full?

Tali Sharot, one of the leading neuroscientists in this field, describes optimism bias as a cognitive illusion to which we are blind to and live with, though without realizing its impact on our behavior. She provides a chilling explanation for its development. Since humans possess, as one of the few species, a unique ability of conscious foresight (mental time travel) this also means we are aware that somewhere in the future death and other bad things await us. Without developing positive biases during our evolution, we could not function normally every day knowing death is around the corner [4].

Biologist Ajit Varki argues that the awareness of mortality on its own, would for humans have led evolution to a stop, thus making our biggest evolutionary advantage – self-awareness, also our greatest weakness [5]. Haselton et al explain that cognitive biases like optimism are not necessarily design flaws as most perceive them—instead, they could be design features that evolved because they positively impact our health [6].

Sharot argues further that a brain that could consciously travel through time would be an evolutionary barrier and not an asset and that it is this combination of conscious prospection and optimism that made most of humanity’s achievements possible. Our brain’s ability to underestimate the likely hood of negative future events reduces our levels of stress and anxiety which is good for our health and without it, we would be grounded to a halt by all the worries of life [4]. From our childhood into our adulthood, we constantly simplify in our minds how the future will unfold and overestimate how successful we will be, and by that the optimism bias gives us certainty [1].

What the research says

The latter theory is confirmed by recent neuroscientific research that suggests optimism bias has deep cognitive roots. We encode undesirable information in a distorted manner, which leads to the other side to the relative amplification of desirable information [7]. We exhibit selective attention to incoming positive information concerning the future and our beliefs are then selectively updated in favour of this preferred positive information [8].

Sharot et al (2012) call this selective updating. It occurs in the brain regions known as the frontal cortex which is involved in monitoring prediction errors. Signals to code prediction errors for negative updates have been discovered to be much weaker than for positive ones, thus enabling selective updating for positive information [9]. Because of these findings, researchers focused on the brain’s reward system which involves the caudate nucleus and limbic system and discovered that the neurotransmitter dopamine has a central role in the reward stimuli processing [4]. But what does this mean in a wider context?

Why optimism is good for many things, but not pension savings

As the above theories suggest, optimism bias seems to be, from an evolutionary point, one of the keys behind human success that is driving us to pursue various goals. However, as Puri and Robinson nicely put it, “optimism is like red wine, a glass a day is good for you, but a bottle a day can be hazardous [13].”

The same optimism that drove us to explore the oceans also fuels our belief that nothing bad will happen to us, meaning we often fail to act in our best interest, such as putting some money aside for an unexpected expense and our retirement. We are inclined to see ourselves moving happily toward professional success, financial security, and stable health. Unemployment, divorce, debt, Alzheimer’s, and other common misfortunes are rarely factored into our projections [4].

One of the reasons 40% of Americans today can’t cover an unexpected $400 expense is that they think they won’t have to. Similarly, in our rosy-eyed view of retirement saving, we believe that social security in the future will not be so low and that we will just work a bit longer to bridge the gap between retirement needs and resources, although the Health and Retirement Study reveals roughly 37% of those working at age 58, in the end, retired earlier than they were planning [14]. The gap between when active workers expect to retire and retirees say they actually did is also clear from the latest Retirement Confidence Survey where workers continue to report an expected median retirement age of 65, while retirees report they retired at 62.

Prudential’s latest study also reveals the gap in optimistic outlooks of employees and reality as 51% of retirees in reality retired earlier than planned confirming the large gap between the age when workers plan to retire and the age when they actually do. Only 23% retired earlier than planned voluntarily, meaning they had enough money saved or wanted to retire, or were just tired of working. The majority of those who retired earlier than expected did so involuntarily. 46% because of health problems, 30% were laid off or offered an early retirement package, and 11% left work to take care for a loved one.

Retiring early has a substantial negative impact on retirement income – lower social security and lower private savings because of shorter saving period and retiring just 5 years early can reduce income in retirement by 36% which can be the difference between income that enables us decent living or not. The last few years before retirement are especially important to building our nest egg as they are on average also our top-earning years and loosing just one will reduce our retirement income substantially thus bringing a high price on our optimistic predictions about how long we will work.

Similar over-optimistic outlook is revealed regarding expected costs in retirement. 37% of retirees say their overall cost estimates turned out to be low. Healthcare costs seem to be the most underestimated, as 44% said they faced higher-than-expected costs [15]. Combine that with other behavioral biases (procrastination, loss aversion, herd behavior, etc.) researchers identified in the last decades related to pension saving and we end up with an overlooked crisis: the majority of Americans approaching retirement have no or inadequate savings to provide for decent living [3]. Retirement outlooks are not much better in Europe, where according to the latest ING International report 61% of Europeans, who have not yet retired, worry about having enough money in retirement and 54% expect they will need to keep earning in retirement.

Outside of retirement

Optimism also kicks in when we are buying our cars and homes or taking on student loans. Research has found most students taking on student debt underestimate the time they will need to pay back the lone and overestimate their future incomes. One of the reasons more than 40 million Americans currently owe $1.2 trillion in outstanding student loan debt [16]. In housing markets, over-optimistic beliefs have often been cited as major contributors to the run up in house prices prior to the recent financial crisis [7]. We see our dream home which is usually more expensive than planned, but we just take a bigger mortgage.

Of the $13.21 trillion of household debt in the U.S. in the first quarter of 2018, a staggering $8.94 trillion is comprised of mortgages according to the latest FED report. Why worry, as surely in the future we will get that promotion at work and our salary will increase, prices of real estate will rise. What if we don’t get that promotion or even lose our job? But that’s just being pessimistic, most would say and the last financial crisis has revealed the full extent of what happens, when our over optimistic beliefs don’t realize.

How can we avoid the dark side of optimism?

First and foremost, we need to acknowledge and accept that our predictions of the future are in most cases overly optimistic. That’s why we need to rely on facts and figures even if we don’t like them. Check the latest statistics on how high social security or public pensions are in your country and if the average public pension replacement rate is 50%, apply that to your current salary and ask yourself one simple question, can you live off that? And then ignore the optimistic voice in your head that is telling you it`s somehow all going to be OK and take some time to reflect on your judgement.

For our pension saving, we can take some advice from construction work. If you have ever built or renovated a house or an apartment, you probably experienced cost overruns. That’s why all experienced builders budget a bit more to be on the safe side and the British government published special guidelines for construction appraisers on how to make adjustments to estimates of project costs, benefits and duration, to counter optimism bias in planning.

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Adjustments to counter optimism bias are now factored in budgets of most government projects [4]. The same logic can be applied to our predictions on how long we will work. If we estimate to retire at 67, rather take 3 years off and then base your calculations on that. According to Aegon, even a simple written saving plan goes a long way toward increasing our savings and those with a written retirement strategy are more likely to turn their intentions into actions. The research also establishes that the ones with a written saving strategy have on average much higher saving rates than those without it.

The role of technology

For the more tech-savvy, there is now an abundance of new mobile apps that help us save and manage our money by combining behavioral economics and the latest technology to reach our optimistic life goals without breaking the bank.

Acorns app has some smart behavioral science behind it – one feature known as “round-ups” automatically saves and invests your spare change by rounding up purchases to the next dollar and putting the extra change into an investment account. By doing that automatically without any mental effort people save and invest their spare change. Shlomo Benartzi, who is professor at the UCLA Anderson School of Management and co-author with Richard Thaler of the famous retirement savings program Save More Tomorrow, joined Acorns late last year as a senior academic advisor and behavioral economics committee chair. He now runs behavioral experiments to incentivize Acorns more than 4 million users to save and invest more.

His first experiment focused on whether framing savings in more granular formats – saving daily versus monthly, can encourage increased saving behavior. He asked one simple question in three different ways: Would you like to save $5 every day, $35 a week or $150 a month? Even though the total amount set aside is the same, only 7% opted to save $150 a month, compared to 30% who decided to save $5 a day.

The experiment revealed the power of framing, which is a well-known concept in behavioral economics, and in the experiment framing deposits in daily amounts as opposed to monthly, quadrupled the number of savers thus showing how a small tweak in language can convince users to save more. The reason behind it is according to Benartzi that smaller, more granular amounts, seem psychologically less painful and more feasible than larger, less granular amounts, so framing recurring deposits in terms of smaller, daily deposits should be more appealing to users across the income spectrum [17].

Qapital app also has some smart features that explore our behavioral biases to increase saving instead of reducing it. The app, which brought on Dan Ariely, a professor of psychology and behavioral economics at Duke, as its chief behavioral officer, gamifies spending behavior by creating fun saving rules and giving users positive visual feedback along the way. The apps goal, is according to it`s Swedish founder and CEO George Friedman, to make saving more automated and personalized.

By making saving more visual and connected to our daily life it increases our commitment towards saving goals and they found users who integrated custom saving rules, i.e. you could save a set amount every time the temperature dips below freezing, and put it towards a goal for a warm vacation, which is represented in your app by a nice picture of your future trip, saved many times more than users without custom saving rules.

Behavioral science also backs this up and as mentioned earlier in this article on the case of optimism bias, it has been demonstrated in numerous studies that our brain encodes future desirable information in a more amplified way [7] and we tend to experience more intense emotions about future events than those in the past. That is because in general, we have an expectation that future events will make us feel more emotional than already passed events. Additionally, we are also more likely to talk about how excited we are about something we have planned in the future compared to something we have already done [18]. Positive future events according to a recent fMRI Study activate part of our prefrontal cortex that give us a general sense of well-being thus confirming the theory that the mere anticipation of future holiday or some other positive event make us feel good, which brings great benefits to our well-being and mental health [9].

The future self as a stranger

Research by Hal Hershfield and his colleagues also provides interesting insight on how we can use advanced visualizations—digital avatars of ourselves at older ages to increase connection with one`s future self and by doing that increasing our willingness to save for our pension. In a study they ran fMRI scans on participants and found that the neural patterns seen, when people described themselves 10 years in the future, were different from those when they described their current selves.

In fact they were more similar to when people described strangers, showing a disconnect people feel with their future selves. That has a negative impact on their willingness to save because their brain does not feel that they will in fact be the ones receiving the rewards of those savings, but a stranger.

Would you save money for a stranger? The answer is likely to be no. To change this behavior they experimented by showing participants digital avatars of themselves at older ages and then asked them to allocate $1,000 between four options: buying something nice for someone special, investing in a retirement fund, planning a fun event, or putting money into a checking account. The ones exposed to aged avatars put almost twice as much money into the retirement fund as the other participants.

Concluding thoughts

To get ourselves out of this retirement savings crisis, we have to harness our optimism for the future towards clear visual goals that motivate and drive us (buying our dream home or travelling to Tuscany in retirement) and then let technology help us reach those goals as effortlessly as possible. In this way we should encourage people to focus on their future goals, write them down on paper or in a saving app, and provide simple tools, like the before mentioned apps, to automatically follow through on them, harnessing our optimism for the future for our own benefit. This way the glass will really be half full in the end.

References:       

[1] O`Sullivan, P. Owen. The neural basis of always looking on the bright side (Dialogues in philosophy, mental and neuro sciences), 2015.

[2] Vižintin, Žiga. Pretirani optimizem lahko tudi škoduje (How optimism bias can have a negative impact on our personal finance). Dnevnik newspaper, Volume April, 2018. Retrieved from: https://www.dnevnik.si/1042767739/posel/novice/oglasno-sporocilo-pretirani-optimizem-lahko-tudi-skoduje

[3] Rhee, Nari & Boivie, Ilana. The Continuing Retirement Savings Crisis. 2015. Retrieved from: https://laborcenter.berkeley.edu/pdf/2015/RetirementSavingsCrisis.pdf

[4] dodan med linke[4] Sharot, Tali. The optimism Bias – A Tour of the Irrationally Positive Brain. New York, NY, US: Pantheon/Random House, 2012.

[5] Varki, Ajit. Human Uniqueness and the denial of death. Nature 460, No. 7256, 2009.

[6] Haselton, Martie G., Nettle, Daniel & Murray, Damian R.. The Evolution of Cognitive Bias. Part VII. Interfaces with Traditional Psychology Disciplines. 2015.

[7] Sharot, Tali, Riccardi, Alison M., Raio, Candance M., & Phelps, Elizabeth. A. Neural mechanisms mediating optimism bias. Nature, vol. 450, 102–105. 2007

[8] Eil, David and Justin M. Rao. The Good News-Bad News Effect: Asymmetric Processing of Objective Information about Yourself. American Economic Journal: Microeconomics, 3 (2): 114-38, 2011.

[9] Sharot, Tali, Guitart-Masip, Marc, Korn, Christoph W., Chowdhury, Rumana, Dolan & Raymond J.. How dopamine enhances an optimism bias in humans. Curr Biol, 22:1477-1481, 2012.

[10] Sharot, Tali, Shiner, Tamara., Brown, Annemarie. C., Fan, Judy., & Dolan, Raymond. J. Dopamine enhances expectation of pleasure in humans. Current biology : CB, 19(24), 2077-80, 2009.

[11] Nettle, Daniel. Adaptive illusions: Optimism, control and human rationality (In Evans, D.  & Cruse, P., Emotion, evolution and rationality – pp. 193–208). Oxford University Press, 2004.

[12] Lefebvre, Germain, Lebreton, Maël, Meyniel, Florent, Bourgeois-Gironde, Sacha & Palminteri, Stefano. Behavioural and neural characterization of optimistic reinforcement learning. Nature Human Behaviour. 1. 0067. 10.1038/s41562-017-0067, 2017.

[13] Puri, Manju & Robinson, T. David. Optimism and economic choice. Journal of financial ecnonomics. 86, No 1, 71-99, 2007.

[14] Munnell, Alicia H., Sanzenbacher, Geoffrey T. & Rutledge, Matthew S. What causes workers to retire before they plan? Center for Retirement Research at Boston College, 2015. Retrieved from:  https://crr.bc.edu/wp-content/uploads/2015/09/wp_2015-22.pdf

[15] Employee Benefit Research Institute (EBRI) & Greenwald & Associates. Retirement Confidence Survey 2018. Retrieved from https://www.ebri.org/pdf/surveys/rcs/2018/2018RCS_Report_V5MGAchecked.pdf

[16] Perna, Laura W., Kvaal, James. & Ruiz, Roman. An Updated Look at Student Loan DebtRepayment and Default. Penn Wharton Public Policy Initiative, Volume 46, 2017. Retrieved from: https://repository.upenn.edu/pennwhartonppi/46

[17] Hershfield, Hal E. H., Shu, Stephen., Benartzi, Shlomo). Temporal Reframing and Savings: A Field Experiment (Working Paper). January 2018.

[18] Roberts, Martha. The joy of anticipation. 2014. Retrieved from: https://www.psychologies.co.uk/self/life-lab-experiment-mind-2.html

[19] Mazar, Nina, Mochon, Daniel & Ariely, Dan. If You Are Going to Pay Within the Next 24 Hours, Press 1: Automatic Planning Prompt Reduces Credit Card Delinquency. Journal of Consumer Psychology. 2018. Retrieved from: https://onlinelibrary.wiley.com/journal/15327663

About The Author

Žiga Vižintin

Pokojninska družba A

Žiga Vižintin is an advisor to the Management Board at Pokojninska družba A in Slovenia. He has a M.Sc. in economics from the University of Ljubljana and is interested in behavioral biases related to pension saving. He is particularly interested in applying behavioral economics to help people save more for retirement.

The Halo Effect in Consumer Perception: Why Small Details Can Make a Big Difference

Consumer Insights Business

Many of us have experienced a situation where people discounted something worthwhile that we’ve worked on, simply because one part of it was flawed, even if we didn’t think that that part was particularly important.

For example, imagine the following scenario:

You and your team have been developing a product, and after months of hard work it’s finally ready. Excitedly, you send it out, and then sit back and wait to receive what you’re sure will be glowing user reviews.

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But soon the reviews start coming in — and you’re disappointed to see that they’re nothing like what you’d hoped.

“I didn’t like the aesthetic” seems to be the common theme, though it comes in many forms, from the “the design looks bad” to “the color scheme is ugly”.

You understand this to some degree: your focus was on functionality, not looks. Yet, even when users offer feedback on other aspects of the product, it is all much more negative than you expected. It’s as if their entire perception of the product has been influenced by their initial dislike of its appearance.

This scenario can take many similar forms. For example, maybe instead of discovering this issue during testing, you encounter it during the launch of your product. Or maybe instead of a product, it’s a presentation you’re giving to interested buyers. It doesn’t matter much, since regardless of the exact scenario, the problem is the same: a single attribute, such as the aesthetics of something that you’ve created, can substantially affect people’s overall perception of it, even when it comes to other attributes that have nothing to do with it.

The culprit in such situations is a cognitive bias known as the ‘halo effect’, which can cause people’s opinion of something in one domain to influence their opinion of it in other domains [1][2]. A commonly used example of the halo effect is the fact that when we meet other people, we often let one of their traits influence our opinion of their other traits. For example, research shows that physical attractiveness plays a significant role in how people perceive others, even when it comes to judging traits that have nothing to do with looks. This means, for instance, that people rate attractive people as having a better personality and as being more knowledgeable than unattractive people [3][4].

However, as we saw above, the halo effect plays a crucial role not only in how we perceive people, but also in how we perceive other things, such as products. This is important for business and organizations to understand, since it means that consumers’ perception can often be meaningfully affected by the halo effect. This usually occurs at two main levels — the product level and the brand level —and in the sections below we will review examples of both, together with their implications.

The halo effect at the product level

In this context, the halo effect means any attribute of a product can affect how people perceive its other attributes, as well as how they perceive the product as a whole [5][6]. For example, an unappealing visual design can cause people to perceive the reliability of the product in a negative manner, even if there’s no direct connection between these attributes. Similarly, an appealing visual design can cause people to view a product in a more positive light, even when it comes to attributes that aren’t related to its design.

To illustrate how the halo effect can influence consumer perception at the product level, I worked with the researchers at The Decision Lab to run an experiment on the topic. In this experiment, people were shown one of the two following versions of what they were told is the login page for an app:

The participants in the experiment were then asked to rate several aspects of the app’s expected attributes, as well as its aesthetics. The main findings of this test are summarized in the following infographic:

For more information about this experiment, both in terms of its results and in terms of methodology, see this complementary case study.

In short, the results of the experiment suggest the halo effect played a noteworthy role in how people rated their expectations of an app after looking at its login page. Specifically, when people liked the aesthetics of the login page, they tended to rate the app as being substantially more likely to be intuitive, reliable, and secure. That is, people extrapolated from the design to form expectations of the product as a whole — despite not having any direct information regarding these attributes, and despite having had no more than a brief look at the login page.

These findings have two important implications: first, that a single attribute of a product, such as its aesthetics, can greatly affect people’s overall perception thereof; second, that people can form impressions based on very little information. In this case, a single look at an image of a login page was enough to substantially influence people’s perception of its aesthetics, and their expectations regarding its other attributes. Of course, as more information about the product becomes available, people’s overall judgments may change — but the importance of first impressions (and salient features) should not be underestimated. 

Overall, the key lesson here is that consumers almost never fully disentangle the different attributes of a product from one another — meaning it can be costly to cut corners, even on features seen as unimportant. Moreover, first impressions count, whether it comes to a package for a gadget, a landing page for a website, or anything else associated with your product. Finally, we should note that the same forces at play in our example can equally operate in inverse, meaning the halo effect can positively affect consumers’ perceptions of a product. When developing a product, consider how this knowledge might be leveraged; a simple improvement to the color palette, or the spacing of text, can meaningfully affect how your product is perceived, and in turn your bottom line. Pick the low hanging fruit.

The halo effect at the brand level

It will be no surprise by this point that the halo effect is also present in our perceptions of brands [7][8]. For example, well-executed corporate social responsibility programs have been shown to lend a positive halo effect, which can reduce people’s propensity to take action against a company in light of negative news about it [9]. Furthermore, social responsibility programs in a domain that is visible to consumers, such as recycling, can cause consumers to form a positive perception of other aspects of the company, about which they have little or no direct information, such as its production process [10].

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Of course, as we saw above, this effect can also be negative. This means, for example, that poor communication with your community or poor customer support can cause consumers to form a negative perception of the reliability of your products, even if the two things aren’t necessarily related to one another, since consumers will not always disentangle their perceptions of your brand. Accordingly, anything from how one of your employees behaves on camera to how your support department deals with a request for a refund may shape, for instance, the perceived functionality of your products. As such, when it comes to ensuring that you have a strong brand, give proper consideration to every aspect of your operations — especially those that you might otherwise neglect.

The halo effect in a broader context

In this article, we focused on how the halo effect plays a role when it comes to products and brands. However, the halo effect can also play a role when it comes to other entities that have to do with consumer perception, such as specific store locations or public figures within organizations. 

It’s also important to note that, as with all elements of behavior, there will always be some variability in the manner in and degree to which individuals are affected by the halo effect [11]. For example, research has shown that in some situations, while aesthetics first influence perceived usability, over time this relationship can flip — meaning that usability affects whether people like the aesthetics [12]. As such, while it’s important to account for the halo effect, and remember that it can play a role in any situation where human assessment is involved, it’s also important to remember that our ability to understand and predict its influence is imperfect, and should be treated as such.

Conclusion

Overall, the key points for you to take from this article are the following:

  • The halo effect is a cognitive bias that causes people’s opinion of something in one domain to influence their opinion of it in other domains.
  • The halo effect can apply when it comes to the perception of both positive and negative factors.
  • The halo effect can play an important role at the product level, where a certain attribute of a product, such as its aesthetics, can influence how people perceive its other attributes, such as its reliability — even if those attributes are unrelated.
  • Similarly, the halo effect can play an important role at the brand level, where people’s perception of one aspect of an organization, such as its customer service, can influence how people perceive the rest of its operations and the company as a whole.
  • There is variability involved in the halo effect, so it may be difficult to predict the exact degree or manner in which it will affect people in any given situation.

Itamar Shatz is a PhD candidate at Cambridge University. He writes about psychology and philosophy that have practical applications at Effectiviology.com

About The Author

Itamar Shatz

Cambridge

Itamar Shatz is a PhD candidate at Cambridge University. He writes about psychology and philosophy that have practical applications at Effectiviology.com