On Thursday this week, I delivered a speech as part of the Deakin Boardroom Lunch series. The transcript is reproduced below, or you can click here to download a full .pdf transcript of the speech. Click here to go to a YouTube excerpt from the speech.
* * * * * *
Presentation at Deakin Boardroom Lunch, by Dr Paul Harrison, 16 July 2009
My research and writing is predominantly in the area of consumer behaviour and consumer psychology. My colleague in the School of Management and Marketing, Professor Michael Polonsky once commented that my approach might be phrased as “shining a light on the dark side of marketing”.
Very poetic, but I prefer to think that my research is more about making marketing more responsible. I don’t have a problem with marketing, per se, but I think that there is a tendency of many of the business disciplines to consider the ethical implications of their work through the prism of business, rather than the prism of ethics.
What I mean by that it is, that in many cases, businesses practice ethics as a form of…well… business – for example, in a recent conversation with the head of corporate responsibility at one of our major banks, I came to the conclusion that she believed that she was individually ethical, and that the bank was trying to be ethical, but the reality was that she was located in the corporate communications area, not the executive area. So a conclusion could be drawn that ethics is predominantly a marketing activity, because it has the potential to contribute to brand equity, and thus represents an opportunity for better business performance, such as the incorporation of corporate social responsibility. The major issue that I have found in my travels is the ethics and protecting the vulnerable consumer is done through the prism of economics, rather than the other way around.
So, to some degree, I am, in my own minor way, attempting to incorporate ethics as a critical and consistent component in the business discourse – and not simply as a means of making business and the economy more successful, but also as a means of making business and the economy more responsible.
Many of my points today, then, come from this perspective. Clearly, I have a bias – but to pretend that any researcher, or indeed any individual, can ever be completely objective is naïve. My bias could be summed up simply by saying that, in the main, corporations are massively well-resourced organisations, that have access to the latest research about the market and human behaviour, are able to act (mostly) rationally, are generally aware of what they are doing, and are in the business of selling products. In contrast, consumers are individuals, who are overwhelmed with psychological and social pressures, use shortcuts, such as trust, inertia, and loyalty, and are rarely able to make clear, rational, unbiased judgments.
Again, I’m not for one minute suggesting that people should not take responsibility for their decisions, but I am arguing that, in general, it is not an equal relationship. And if we look at definitions of vulnerability, inequality in a relationship is a key factor.
So, today I’ll summarise some of the ways in which marketing influences our behaviour and persuades us to buy. Not just at the point of purchase, which is where much of the debate around rational decision-making occurs, but throughout the decision-making process.
I want to start to give you some insight into the theory behind many of the techniques that marketers use to get people – you and me – to buy stuff. This is what we teach MBAs, so unless they are just turning up for the fun of it, I think that a strong case can be made that many of the practices and theories I’ll talk about are being used by marketers.
I can also say that in discussions with CEOs, and marketing directors, as well as through my research with consumers, these techniques are indeed being used to persuade consumers to buy.
I also think that it is important that I preface this talk with a qualification. Much of what I will be talking about today, particularly in relation to psychological and sociological theory is complex. This doesn’t mean that I will be dumbing-down anything that I will be telling you. What it means, though, is that at times, I may simplify some of the theory for ease of comprehension.
This may be frustrating for some of you, but as with all things marketing, I am hoping that I have developed a product for the target market – you. I can provide anyone who is interested with a link to a list of the references at the end of this talk.
I want to start by making a few statements that may surprise some of you, while being quite familiar to others. The more cynical of you may even scoff at their simplicity. And some of you may have heard these uttered before, in other contexts. But it might give you some insight into why you, me, and pretty much everybody, sometimes do things that just don’t make sense.
They may also sound strange coming from a person who teaches MBAs how to do marketing. But it is important in this context that I establish these concepts from the start. To some extent, these statements will guide my talk today.
- Human beings would prefer to trust others than to distrust them.
- We have faith in institutions, and in people in positions of authority, that they will do the right thing, and act in our best interests.
- Our brain is vain, deluded, untrustworthy, bigoted, pigheaded, and easily flattered.
- We like to think that we can make rational decisions, based on information provided to us, but our decision making is incredibly flawed, subject to prejudice and stereo-type, and our ego works to filter any information that might challenge our current attitudes.
- We have a tendency to be apathetic and habitual about most of our decisions. Where possible, we take cognitive shortcuts, and use scant and flawed information to make most of our decisions, and
- When we are stressed, upset, or under pressure, we don’t think very well, and make quite poor, and often, irrational decisions.
Hopefully there is some resonance out there with these statements. Although each of them seems to be a pithy summary of complex phenomena, my task today is to show you how these things play out in real life, why they happen, and hopefully, give you some ideas as to how we can learn to understand, and hopefully defend ourselves and others against these attitudes and behaviours.
* * * * * *
I do want to point out that because our society, at present, is based around the ideology of the “individual”, there is a tendency to psychologise all of our problems, and to some extent, blame individuals for their state. This is particularly the case amongst legislators, and sometimes, business. Let me quote, as an example, an interview with former Health Minister, Tony Abbott, in relation to obesity in the Australian community, and whether government should play a role in helping to reduce it.
“Well, if people are overweight they should do something about it. No doubt about that. And it may very well be that one of the best things that overweight people can do is to join Weight Watchers or join the local gym and get themselves on a decent exercise program. In the end, our weight is largely a product of the amount of exercise we do and the amount [sic] of food we put in our mouths. And obviously we are in almost total control of both of those issues.”
I think what is important here is this ideology, or, perhaps, mindset, that says we are all individuals, and thus, we all have control over our behaviour, and if we just tried that little bit harder, or were just given a little bit more information, then we would be able to take responsibility for ourselves more appropriately. In other words, stop complaining, get off your backside, and do something about it – especially single mums and fat kids, if you watch Today Tonight.
This belief system or ideology based around individualism and taking individual responsibility for yourself, hasn’t always been the case. It has its genesis in the birth of secularism and meritocracy; democracies such as the French republic, and more importantly, the republic of the United States of America, and the demise of religion and concepts of community as the guiding force of society.
As Alain de Botton, in his book, Status Anxiety points out in relation to the growth of individualism in the United States, and in particular, the growth of meritocracy, or reward based on merit that occurred with beginning of the US republic:
“If the successful merited their success, it necessarily followed that the failures had to merit their failure. In a meritocratic age, justice appeared to enter in to the distribution of poverty as well as wealth. Low status (in our society) came to seem not merely regrettable, but also deserved. With the rise of an economic (and social) meritocracy the poor moved, in certain quarters, from being described as ‘unfortunate’, the target of charity and guilt of the rich, to being described as ‘failures’, fair targets of contempt in the eyes of (successful) individuals, who were disinclined to feel ashamed about their mansions or shed crocodile tears for those whose company they had escaped.”
I point this out, because this is the ideological framework within which our current instrumental rationalist model of society is premised. This is the approach our governments take, when developing policy and legislation. This is the predominant approach of the market.
I think that there is a tendency, particularly amongst those who are successful (because they can afford to feel superior), to perhaps over-blame the individual for their situation. I’m not arguing that individuals should not have to take responsibility for their actions, but I do believe that many individuals are being victimised by a system that encourages consumption, and, in the context of, for example, personal debt, discourages saving.
Why does this happen?
George Ritzer, a professor of sociology at the University of Maryland, and author of “The McDonaldization of Society” argues that there are three major reasons.
- As I stated a moment ago, western culture strongly emphasises individualism. We tend to trace both success and failure to individual efforts, not larger social and inherently complex conditions.
- Large social and financial systems expend a great deal of time, energy, and financial resources to convince us that they are not responsible for society’s problems. Individuals, on the other hand, lack the ability and the resources to “pass the buck”.
- The fact that individual problems (and this is most obvious in the area of medical algorithms, and is reflected in a managerialist or corporate culture that is strongly built around problem-solving, objectives, and strategic plans) appear, at a broad level, to be amenable to treatment and even seem curable. In contrast, large scale social problems, such as climate change, vulnerability, or poverty, seem far more intractable. Therefore, it is easier, to some degree to place the responsibility for individual success or failure, upon the individual, rather than grappling with an abstract, and perplexing concept such as society.
My talk is not necessarily about individualism, and who is to blame, but I did want to point out, from the beginning, that this area is complicated, and it should never be interpreted that there is a simple solution to all of society’s woes.
The focus of my talk, though, will be about social and individual psychology, and how this is used to market us products. But I thought that it was important to establish an underpinning of this approach. In other words, while I present a framework based predominantly on an individualist approach to behaviour, I fully recognise that there are greater forces at work, beyond psychology, that also need to be considered whenever we look at human attitudes and behaviours.
* * * *
Firstly, let me explain how we make decisions under situations of stress. In psychology, we use a term to describe how people don’t always think through their decision-making in a rational and linear way when placed under situations of stress. It is called ego or cognitive resource depletion, and it is very important in this context, and in contexts where people are put under duress to make decisions.
This ego depletion becomes even more pronounced when – counter intuitively – people are provided with lots of information related to a topic that they don’t have the ability to fully understand, either because it is complex and confusing, or even simply because it is in an area that they have not had any experience in. It is in these situations that they rely on peripheral information to make their choices – things like colours, previous experience with similar situations, even the aesthetic layout of the information, or the way the person giving them the information is dressed. For those of you playing at home, this can partly be explained by a theory encompassed in the elaboration likelihood model, which basically suggests that when we are motivated, wide awake, not under pressure, and able to pay attention, we take a logical, thinking, central route to decision making. However, when we aren’t able to pay attention, we take the peripheral route, and are swayed instead by surface characteristics such as whether we like the speaker.
It is very important in today’s context, because it is well-established in the social psychology field that resource depletion leads to impaired performance on tasks requiring high-level cognitive control, i.e., important decision making. Logical reasoning, the kind that should occur when signing up to a power plan, or buying a house at auction, or signing up to a long-term repayment plan, such as a software program or insurance policy, or committing to a major financial agreement, is relatively inefficient, and has a high psychological cost.
It is generally accepted in psychology that human information processing is most likely to occur at two levels. At one level, logical reasoning is generally reserved for the more limited, inefficient, and costly level of processing – the decisions that we don’t make every day – whereas information processing such as perceiving, categorising, interpreting, and retrieving stored information is relatively automatic, and uses little information processing resources.
Put a person under stressful and unexpected conditions, such as being at a shopping centre with children, surrounded by competing sensory factors, such as noise and light, and our ability to reason or rationally consider all the options is seriously depleted. In addition to the logical reasoning required, the same reasoning is used for a whole range of different tasks, including regulating thoughts, and controlling emotions (such as being confronted with a proposition of “Do you want to save money, and not be the odd one out in your street? OR,
in the case of Maths software, for example, Why should other kids be better at maths than yours? And Maths = Confidence = Success!
Who wouldn’t want this for their kids?
We rely on our unconscious attitudes to help us out in times of difficulty. In other words, we make decisions based on our emotions, and let our ego sort it out later.
If we are feeling vulnerable about our child’s success at school, and we let someone into our home who tells us our child will be okay if they take up this software package, then our emotional brain quickly accepts this evidence, regardless of whether it is rational or not. My research into the selling of in-home educational software is showing that perfectly rational, successful people, sign themselves up for more than $6000 worth of debt, simply because they hope that their children will be okay at school.
Indeed, by inviting a person to come to their home and demonstrate the product (as opposed to unsolicited “door knocking”), the consumer is signalling to others around her, including her family, that they “trust” this person (the sales representative) enough to allow them into their home and introduce them to their family as a person that they trust, and they will seek to show that their actions are consistent with their beliefs, thus making it more difficult for them to ‘disengage’ from the relationship. Similarly, it is arguable that trust is ensured when the consumer invites the sales representative to the home, because there is a belief on the part of the consumer that they have common goals, i.e., helping their children to do better at school.
Interviews with former salespeople, suggest that they explicitly induce the investment model, by talking about the sale process as being a series of gates, to be closed off during the interview. For example, one former sales representative said:
“…the sales routine that we had was often described as a sheep paddock, where you would go around shutting the [metaphorical]gates as you went through your routine. So that at the end, the only gate left open was to buy.”
Similarly, interviews with consumers who have participated in the interviews have talked about the fact that they felt that the salesperson was trustworthy:
“She was really nice – yes, we trusted her, because she talked about her daughter and how her daughter was using the software.”
Others talked about how they believed that the salesperson genuinely wished to help them, and in turn, the consumer “accepted them” into their home, and treated them “like a friend”. For example, one family said that:
“The kids really liked her [the salesperson]. They made her some toast and a drink”
This giving of something personal (such as food), is supported in the psychological literature as a key component of familiarity and a willingness to trust those to whom we offer the “gift”, i.e., by offering them something, the person doing the offering has implicitly signalled to themselves and to those around them, that they trust this person. This is also explained by the consistency principle, in that the actions of the family in offering something to the sales representative, in this case food
* * * * * * * *
So, let me return to my original propositions. My first point was that human beings would prefer to trust others than to distrust them, and my second point was that we have faith in institutions, and in people in positions of authority, that they will do the right thing, and act in our best interests.
It is in our nature to be optimistic about our interactions with others. It is in our interests to trust institutions and big brands, and anyone who seems to know what they are talking about. It is an evolutionary necessity that we trust people around us, otherwise we would never get anything done. Everytime, we walk out of the door, we need to be able to trust that the people around us will behave in a way that we expect – trust is a willingness to accept vulnerability or uncertainty, or to put it another way, trust is not taking a risk, per se, but rather it is a willingness to take a risk. If we didn’t trust others, if we didn’t trust big business and brands, if we didn’t trust people in positions of authority, we would be in a constant state of paranoia and anxiety, and we wouldn’t leave the house.
My next proposition was that our brain is vain, deluded, untrustworthy, bigoted, pigheaded, and easily flattered.
Let me focus on a couple of aspects of this proposition – vanity and delusion. The reason I wanted to talk about this in this context, is that we are often very bad at predicting how successful we might be at completing a particular task. Our brain has a tendency to excuse our faults and failures, and sometimes simply forgets about them. You’ve all heard of the research that suggests that when asked, people will modestly, reluctantly, confess that they are smarter, more ethical, more motivated employees, and better drivers than the average person.
No one, whether you are thinking about your driving, getting married, or deciding to take up a sporting career, believes that they are in the bottom half of the heap or will be a failure. But we know, that this is statistically improbable. It is highly unlikely that the bride and groom are thinking to themselves at their wedding, “Well, this is a 50 – 50 chance”, but somebody has to be at the bottom of the heap – we are most likely to be smack bang in the middle. That is the nature of statistics.
Our ego creates a shield of unrealistic optimism around us, to protect us from failure and help us to make quick decisions. What we do when we are trying to make a decision, is to rely on our extensive memory to help us to gather evidence, so that we can make the right decision. The problem is that our memory is flawed, and we are more likely to look for evidence to reinforce the outcome that we want, rather than actually search for the truth.
Our memory quickly accepts evidence that supports our case, and looks for more opportunities to bolster the case, while evidence that threatens what we want, or think, is subjected to a gruelling cross-examination, and most often, dismissed as not relevant to our decision.
On the whole, then, we tend to over-confident about our abilities, over-estimate our worth, and tend to seek out information that supports our generous beliefs about ourselves. Once we’ve made the decision, the optimism bias kicks in to protect our ego. To some degree, the optimism bias causes many of us to overestimate our degree of control as well as our odds of success.
At times, we will simply just invent supporting evidence (which psychologists call illusory correlation, for those of you playing at home). As Cordelia Fine says in her book, “A Mind of its Own”, your deluded brain sees what it expects to see, not what is actually there.
But it isn’t a bad thing to be optimistic – it helps to protect us against depression – models of depression often include a sense of learned helplessness and loss of predictability and control. If we didn’t make decisions based on emotions and optimism, we would never get out of bed in the morning, and optimism makes us feel like we are in control, which is a good thing. To put it another way, we have evolved to rely on our emotions and optimism is a critical part of this. If we weren’t optimistic, we would never have left the savannah in search of a better life.
People who have clinical depression tend to be more accurate, and less overconfident in their assessments of the probabilities of good and bad events occurring to others, although they tend to overestimate the probability of bad events happening to them, and find it difficult to get out of bed in the morning.
So, next we move on to the proposition about rationality, and whether or not we can trust ourselves to make rational decisions. My proposition was that we like to think that we can make rational decisions, based on information provided to us, but our decision making is incredibly flawed, subject to prejudice and stereo-type, and our ego works to filter any information that might challenge our current attitudes.
The choices we make typically reflect our desires: we choose what, all things considered, we want. Contemporary models of decision-making are derived from rational decision theories that focus on the processes by which people weigh the pros and cons of various options, and draw conclusions designed to maximise their expected utility. According to these models, when we make decisions, we consider the utility of different aspects of each option, and the likelihood of obtaining them. We then compare each potential option on its expected utility by adding the costs and benefits of each option, weighing in their probabilities.
For the most part, it is a process that is carried out in the conscious mind. Pretty straightforward.
The problem is that the only people who think like this on important issues – whether choosing a house, a car, or even a spouse – have serious brain damage or psychopathology. In Descartes’ Error, the neurologist Antonio Damasio describes patients with with damage to regions of the frontal lobes involved in decision-making who look very much like this. In one case, a patient spent over thirty minutes trying to decide which date and time would be optimal for their next appointment. Without an emotional signal to say, “this isn’t worth the effort”, he continued to weigh the utility of every possible alternative.
The reality of the brain is that it is severely limited in its capacity to undertake rational analysis.
When we make a decision, to quote Geoffrey Rush in “Shakespeare in Love”, “it’s a mystery”. We try to proceed in a rational manner, but the analytic process is often a bit of a sham. We might attempt to draw up a mental list of pros and cons, if we can stretch our lazy conscious minds to undertake this process, but the problem with these types of lists is that we habitually cheat in their construction. We rely on information that is easily accessible and fits in with our current worldview.
A number of factors are at work as we move through a decision making process – one way to explain this is through, what psychologists call the availability heuristic, or what someone else might call mental shortcuts. Simply put, we make a judgment based on what we can remember, rather than complete data. In particular, we use this for judging frequency or likelihood of events.
It’s the same with advertising. Research suggests that the more we are exposed to a particular ad, or product, or brand, the more we are likely to believe that it is a good product or brand. Repetition – to a point – has the effect of convincing us that beyond the company having the cash to repeatedly advertise, if they are advertising a whole lot, they must be successful, and therefore, their product must be good.
Repetition increases our familiarity with a claim. In the absence of evidence to the contrary, a feeling of greater likelihood that the claim is true begins to accompany the growing familiarity. This effect of repetition is known as “the truth effect”. The more we are told that something is true, the more it actually becomes true, in our mind.
We tend to think that if something is not true, somewhere, somehow, it would be challenged. If it is repeated constantly and not challenged, our minds seem to regard this as prima facie evidence that perhaps it is true. The effect of repetition is to produce small, but cumulative increments in this ‘truth’ inference. It is hardly rational but we don’t really think about it. We don’t go out of our way to think about it because low involvement, by definition means we don’t care much anyway.
If you have ever wondered why advertisers seem to persist in repeating the same ad — if you have ever wondered why they think this could possibly influence sane, rational people like us — then here is the answer. Ever noticed how an ad break often finishes with a shorter version of the ad that was at the start of the break. It’s all about familiarity.
Much of advertising creates only marginal differences, but small differences can build into larger differences. Even small differences can tip the balance in favour of the advertised brand. And in marketing, it is all about degrees of difference.
My next proposition was that we have a tendency to be apathetic and habitual about most of our decisions. Where possible, we take cognitive shortcuts, and use scant and flawed information to make decisions.
Back in 2007, I wrote an article that appeared in The Age, about the alliance between McDonalds and the Heart Foundation. I would like to read you some key quotes from the article:
“What Macca’s is doing makes sense: psychological research has shown us that humans are notoriously trusting, positive, and generally apathetic when it comes to thinking too much about habitual behaviours. So it takes only a little effort on the part of a big brand, such as McDonald’s, to convince us that everything is OK. By getting the Heart Foundation tick, by publishing the ingredients in its food, by using point of purchase displays highlighting its “healthier options”, by using bright lighting, open fridges, and by presenting an argument against the claims made by the films and books, McDonald’s is using a tried and tested psychological theory — often used by large brands in an abundant marketplace — called bounded rationality.
In some irrational, illogical way, our mind interprets that having the healthier choices at McDonald’s, and having the Heart Foundation tick of approval, means that McDonald’s has nothing to hide. We feel reassured, and better about our choices, whether it is a salad, or a Big Mac and fries.”
So, psychological theory suggests that despite our desire to think that we make good choices, most of the time we rely on a flawed system of utilising the most accessible, and least challenging information to make judgments. Generally speaking, our minds don’t have the capacity to constantly weigh up all the options, and therefore, we look to patterns that won’t challenge our egos or our current belief system.
Another example of how we use seemingly irrational shortcuts, and how marketing exploits this, is explained by the anchoring effect. A few years ago, a group of economists from MIT in the USA demonstrated that meaningless and irrelevant numbers have the effect of influencing what we are willing to pay for an item. In their experiment, the researchers were selling a range of items to their sample group, including French wine, a cordless keyboard, and a box of chocolate truffles. However, this was an auction, and before the purchasers could bid for the products, they had to write down the last two digits of their social security numbers.
If people were perfectly rational agents, then writing down these digits should have no influence on how much they were willing to bid on the auction items. For example, a person whose number is a low value figure, such as 10, should be willing to pay, on average, the same as someone whose number is a high value figure, such as 90.
But that’s not what happened. Those who had written down high numbers, in the range of 80 – 100, were willing to pay 300 per cent more for the products than those with low numbers, despite the social security numbers having no relevance at all to the value of the items.
This anchoring effect has also been demonstrated in credit card repayment amounts. Research conducted by Neil Stewart at the University of Warwick found that many credit card customers become fixated on the level of minimum payments given on credit card bills. Neil’s research showed that the mere presence of a minimum payment was enough to reduce the actual amount many people chose to pay on their bills, leading to further interest payments.
The research showed that anchoring affects the way people repay their credit card bills. For those people who make only partial repayments of the outstanding balance (about 35% of card holders), the suggested minimum payment on the credit card statement acted as an anchor and lowered the actual repayments people choose to make.
We also see this anchoring effect when we buy a car. Nobody actually pays the prices that are listed on the window in the dealership. The price tag on the car, or in the advertising, serves as an anchor from which we make an offer. When the customer is offered a discount – after the salesman talks to their boss, which is an important means of convincing the customer that they can trust the salesman, because he or she is willing to put their job on the line to get you a great deal – we are convinced we are getting a bargain.
The problem is that our brain is unable to dismiss irrelevant information. What we tend to do is take in information that builds upon our need to take shortcuts, and ignore information that requires cognitive effort.
In reality, we can only hold about seven, plus or minus two, bits of new information in our heads at a time, and usually make judgments on three or four basic criteria, usually stuff we have come across recently, easily accessible, and usually at an emotional level. What our mind is good at, though, is rationalising those decisions. That’s when a lot of advertising works well.
Have you ever noticed, that after you have bought a new car – let’s say you just bought yourself a Subaru Liberty – you start to notice all the Subaru Libertys? You might even notice all the silver Subaru Libertys, because that is the colour of the car that you bought. All of this is your minds way of assuring you that you have made the right choice. On one hand, you might be feeling that you are not as individual as you thought you were, but on the other hand, it is reassuring that so many other people have bought the same car. Remember “the truth effect”? If lots of people have bought them, then they must be good. You also start to seek out information that will confirm what a great decision maker you are – you might notice that the Liberty has been voted Car of the Year, or the safest car in its class.
Our mind is also good at filtering out any information that might conflict with our obvious good choice – if we find out that the car is easily broken in to, we reassure yourself by saying that you have installed an alarm, so that bad thing could not possibly apply to you.
Car advertisements also exploit this desire for reassurance. Car ads work best on people who already own their brand of car – if you are reassured that you have made the right choice, then you are most likely going to recommend your car brand to others.
So, our brain is vain – we desperately need to be reassured that we are clever, smart, and make excellent choices.
There are two final propositions that I want to address before I finish. Hopefully, you are still with me, and I assure you that these last two are doozies…
The second last proposition that I put to you is that once we take ownership of something, we find it very difficult to give it up.
Well this can be explained by two theories which are interelated, which, whenever I speak about them, always generates substantial discussion, and recognition.
The first is the endowment effect.
The endowment effect, and its close relative, prospect theory, is another way that our ego protects us. Basically, the endowment effect explains why, once we believe that we own something, or are owed something, we find it hard to give up, and we place a much larger value on it, than a person who doesn’t own it.
The endowment effect explains why we always seem to overvalue how much our house or car is worth. It also explains why we seek to “own” something that we have bought, or have believe that we are owed, even when we know that we don’t really want it.
I highlighted this in my research last year into the credit limit increase programs by banks. An credit limit increase or CLIP is a letter, pamphlet, or document, where current cardholders are offered an increase on their card limit, in circumstances where the cardholder has not sought, or inquired, about an increase. In many cases, these offers claim to be “pre-approved”, and there is little, or no, requirement for the provision of information by the cardholder prior to the increase being granted.
The marketing of the credit limit increase is fundamentally based on, what psychologists call an “endowing” action. What this means is that because the credit increase offer is unsolicited and pre-approved, the customer takes immediate psychological ownership of it, and believe that this is the new status quo. So, because the pre-approval of the credit increase is a bank initiative, it is interpreted by the customer as a “gift” that is given to its more “deserving” customers, often “in recognition of their excellent repayment record”.
In addition, customers are encouraged to feel that they already “own” the credit increase, in that it has been pre-approved and the only thing they have to do is to sign a completed form, that has already had most of the key information completed, and to send it by mail in a pre-paid envelope. Everything in the UCCLIOS is “predicted” and predisposed in order to simplify the process and eliminate both material (e.g., filling out the form, sending it by mail) and immaterial (e.g., psychological, comprehension) barriers.
Generally, then, the UCCLIO letter is framed as a choice involving a loss (if the customer doesn’t accept, he will lose the privilege the bank has conceded to him through the preapproval) and not as a gain. As Nobel Prize Winning Economists, Amos Tversky and Daniel Kahneman have demonstrated, individuals are more likely to be risk-taking for choices involving losses rather than gains. Evidence suggests that people innately tend to develop feelings of psychological ownership for a variety of objects as a consequence of their innate motive to control things. And ownership does not need to be physical, as emotional and psychological possession can sometimes have a stronger influence over behaviour, than physical or material possession.
Our research showed that, in the case of the UCCLIO, an endowment effect is produced as soon as individuals are advised that they have received the credit increase (through the UCCLIO letter) and that surrendering (or losing) what they have just received is made more difficult than it would be if they thought of it as a gain. And, therefore, it can be argued that the UCCLIO, consisting of a giving action (the customer is given a credit increase) has substantial influence over the consumer because it produces a perception of loss that is related to the missed acceptance of the offer.
So, many consumers will take ownership of the limit increase as soon as it offered to them – particularly if they are under some form of financial stress.
Once we’ve taken ownership of the new limit, our ego steps in and, to some degree, doesn’t let us convince ourselves that we made a bad choice – otherwise we would be admitting to ourselves that we can’t make good decisions, and are not to be trusted, and if we got into that cycle, we would be constantly depressed and would never make a decision.
The other interrelated factor is loss aversion. Loss aversion is a concept of Social Psychology as much as economics. It is not the reality of loss that matters but the perception. This is one place where being good at maths or having financial literacy doesn’t give the answer.
Nations have gone to war and “stayed the course” long after they have been defeated, because of loss aversion. It simply means you refuse to admit you made a mistake. As social psychologist, Eliot Aronson writes, “Once we have committed a lot of time or energy to a cause, it is nearly impossible to convince us that it is unworthy” The real question is “How bad do your losses have to be before you change course?” Many people under financial stress, for example, do not have the cognitive room to be able to make this decision, and continue to dig a deeper and deeper hole for themselves.
And, as an aside, I do want to point out that this poor decision making is not confined to people of low socio economic groups, or people who are poorly educated. An example of this is Marcus Einfeld, the former Justice of the Federal Court of Australia and the Supreme Court of NSW – a highly educated man, from a very high socio-economic group, who in August 2006, contested a $77 speeding ticket by claiming he had lent his car to an old friend, Professor Teresa Brennan, at the time it was caught by a speed camera. He gave evidence under oath in the Local Court and he also signed a statutory declaration to that effect. This was the beginning of the end for Justice Einfeld, who simply could not bring himself, at any point during the period leading up to his conviction for knowingly making a false statement under oath and for attempting to pervert the course of justice, to admit that he had made a mistake. He admitted as much in an interview with Four Corners earlier this year.
* * * *
So, how do we defend ourselves against this complicated, psychological mess?
First, we stand our ground with the rationalists, who argue that decision-making is not a simple process of gathering evidence, considering all the options, weighing up utility, and then making a sensible decision. We should banish the term “common-sense” from our language, because there is no such thing as a common perspective, and, as I have demonstrated this morning, most of our decisions don’t really make sense.
Second, we accept that our decision-making is flawed, and not judge ourselves, or others, harshly, when they seem to make irrational decisions, or behave in a way that is counter-intuitive. We need to accept that people are complicated, and that people who make decisions are not making the decision in a rational, straightforward, Platonic way, but simply making a decision that conforms to their emotional state of mind, at that point in time.
And third, we need to educate others, whenever we can, about the nature of decision-making – but we do it in way that won’t challenge their current beliefs and attitudes. Where possible we challenge those simpletons who think the world is black and white, and that their way is the best, and only way, to do things. We should try to accept that they have also come to their conclusions based on flawed and irrational thinking (in the same way that we often do), and therefore, accept that their point of view is worth considering, but, by the same token, it is okay for us to argue against it – there is no such thing as “you are either with us, or against us”.
* * * *
So I want to leave you with a final theory, which is a good conclusion to my talk, and might help you to understand why we often find it hard to remember details of a speech or event, once the event has concluded. It also applies to the sales process. It is called the Peak-End Rule.
According to the peak-end rule, we judge our past experiences almost entirely on how they were at their peak (pleasant or unpleasant) and how they ended. Virtually all other information appears to be discarded, including net pleasantness or unpleasantness and even how long the experience lasted.
This heuristic was first suggested by Nobel prize-winning economists, Daniel Kahneman. He argued that because people seem to perceive not the sum of an experience but its average, they tend to place most emphasis on the moments when the experience was at its peak, as well as the conclusion of the experience.
One everyday example of the peak-end rule is related to how we might remember our holidays. Our memories aren’t linear – we don’t remember our experiences in real time – if we did that we would never get anywhere – nor do we remember our experiences in the order that they occurred. What we will remember about our holidays tend to be highlights – the time when we got stung by a blue-bottle, or the time you and your brother had a swimming race, and you won for the first time. It’s the same with witness accounts. Often, the witness or victim remembers the extreme moments of the crime experience.
And it is also the case with presentations at Board Room lunches.
Hopefully what you’ll remember about my talk was this…