Posts Tagged ‘Loss Aversion’

Apple’s iPad: Great Expectations

Bob Nease, PhD — Chief Scientist; Express Scripts — is a leader in the convergence of behavioral economics and healthcare; at Express Scripts, he is responsible for advancing the understanding of consumer behavior. To this end, he closely follows emerging science around human behavior and decision making, then works to develop tools and communications that help plan sponsors enable better health and value.

Steve Jobs cranked up his technolust juggernaut yesterday by announcing what we Apple freaks have all been waiting for — the iPad tablet.  (Even though I am not planning on buying one straight out of the gate, I am slightly — but only slightly — ashamed to admit that I knew with certainty the day of the big announcement and completely forgot that the State of the Union Address was the same evening.)

CNNMoney reported gyrations in Apple’s stock around the announcement:

chart_apple_stock2top

 
In the 12 hours running up to the event, there were some pretty bold statements being made about how the announcement would be more about content creation than just cool hardware.

To wit, Wired reported the following very early yesterday morning:

Apple’s goal is to offer a new platform for content creators to reinvent books, magazines and online content – in addition to offering a new avenue for content producers to make money. That platform will likely be far broader than just a tablet device, and will extend to every device or computer that iTunes touches.

So what’s the connection?  I think there’s something to be learned about expectations and loss aversion here.  Just a hunch (and looking at these things through the retrospectroscope can be wildly misleading), but here’s where I’m headed.  Just before the party started, people probably expected two things: the announcement would transcend cool hardware and show off an entire mobile content ecosystem, and the device would cost about a thousand bucks (maybe less with a contract).

And here’s how the facts unfolded yesterday.  First, it became clear that this was mostly about a device; a device that could immediately run apps for the iPhone, but certainly not the content creation ecosystem that Wired suggested hours earlier.  Because we were expecting more, this looks like a loss.  Stock price?  Slump-o.

Then Jobs announced the pricing: less than $500 for the entry-level model, a relatively modest $1 a day plan for all-you-can-use 3G data, and the ability to cancel the data service at any time.  These price points were uniformly more attractive than people were expecting; there’s an expected loss avoided.  Stock price? Surge-o.

Expectations matter because they set the reference point for how we evaluate options and opportunities: If reality looks worse than we expected, it’s a loss.  And setting expectations is critical for new products that people have no idea how to value.  One wonders what would have happened had the expectation of that ecosystem not been set.

To Lose It, Add Behavioral Science

Julie Adelsberger — Senior Manager; Express Scripts — As senior manager of knowledge management, Julie Adelsberger is responsible for translating scientific research into accessible communications for plan sponsors and other healthcare stakeholders.

Lose It! is an iPhone app that harnesses a couple psychological principles to increase the chances of successful weight loss.

  

We’ve written before about how tracking personal data can help stave off procrastination.  In an assessment of self-measurement and Nike+, a gadget that tracks personal workout data, Bob wrote:

 

The feedback offered by Nike+ and other self-measurement schemes offers the ability to monitor gains that might otherwise be too far in the future to enjoy.  In a sense, knowing our numbers allows us to get a little taste in the present of benefits that are to come.  And for some of us, that just may be enough to tip the scale toward behavior that benefits us in the longer term.

 

The same holds true here: Lose It! allows users to enter the foods they eat and exercise they complete, then calculates the calories in and out each day based on a few key statistics the user provides (weight, height, and so forth).  There are charts and graphs showing data such as calorie intake, nutrient intake, and calorie budget for the week.  For those who want more details, there are in-depth online reports and exportable data.

 

The application has also recently added in the principle of social persuasion, allowing your friends to track your progress and you to do the same for them.  Those extra eyes are an incentive to stay honest.

 

To top it off, the app is free.  It’s No. 32 on the top free downloads, and the company says it’s been downloaded more than 3 million times.

 

For more on Lose It!, click here.

Missed It By That Much…

Bob Nease, PhD — Chief Scientist; Express Scripts — is a leader in the convergence of behavioral economics and healthcare; at Express Scripts, he is responsible for advancing the understanding of consumer behavior. To this end, he closely follows emerging science around human behavior and decision making, then works to develop tools and communications that help plan sponsors enable better health and value.

Humans are really, really good at imagining a status quo that’s different than the one they’re actually in.  In fact, we’re so good at it that we can consume that imagined state as though we are actually living it.  (Hence, the delicious pleasure that comes with daydreaming.)

When we imagine a state that’s slightly better than where we are and the path to getting there is clear, we may feel regret.  That’s loss aversion doing its thing to us; the imagined state becomes the status quo, and the current state looks like a loss.  Because we work harder to avoid the loss than to pursue gains, we’ll go out of our way to close that gap and make the imagined status quo the real thing.

If this sounds theoretical, think about how you feel when you miss a plane by 5 minutes.  Now compare that to how you feel when you miss it by 30 minutes.  That extra little sting you’re feeling reflects your ability to imagine having made the flight; it’s just easier to imagine that when you barely miss the plane than when you miss it by quite a bit.

This is the same sort of thing that’s in play with the illusion of progress effect.  It’s easier to imagine being in a different status quo when that state looks and feels closer than when it’s far off.  Good marketers can use this to their advantage by giving us the sense that we’re oh-so-close to getting something good.

Here’s a good example from Amazon: 

amazon-iop

The blood pressure monitor sells for $49.93, and Amazon notes that if I spend more than $50, I will get a free subscription to one of two magazines. Darn! Just missed a year of Conde Nast Traveler or Architectural Digest by 7 cents.  Maybe I’ll look for a slightly more expensive monitor…

I’ve no clue as to whether this is intentional (and the offer says that it has to be a single purchase), but it seems mighty close to the actual price.  And because the subscription is noted to have a value of $10, they don’t have a lot of headroom.  Still, it’s easy to imagine meeting that threshold and enjoying the FREE (ha!) magazine.

Haitian Disaster + Behavioral Sciences = Lollapalooza Sized Relief

Bob Nease, PhD — Chief Scientist; Express Scripts — is a leader in the convergence of behavioral economics and healthcare; at Express Scripts, he is responsible for advancing the understanding of consumer behavior. To this end, he closely follows emerging science around human behavior and decision making, then works to develop tools and communications that help plan sponsors enable better health and value.

As noted at LiveScience, the ability to contribute to Haitian relief via text messaging is blowing the doors off previous donations:

Text-message donations, also called SMS donations, are becoming increasing[ly] popular with charities because of their convenience for donors and the ability to spread the word quickly via social media sites like Twitter and Facebook.

This is a nifty way to skirt procrastination (make it super-easy to donate) while leveraging social norms (friends donating publicly and nudging you to do the same push the donation into the future), and loss aversion (bundle the donation into the existing mobile phone bill).

Charles Munger (close associate of Warren Buffet and behavioral economics afficionado) referred to the coupling of psychological principles the “lollapalooza” effect, and if you look at the results it’s easy to see why: The White House reports that as of today, the third day into the Haitian disaster, Americans have raised more than $8 million for the Red Cross through text message donations of $10 each.

For Better Behavior, a HealthyWage

Julie Adelsberger — Senior Manager; Express Scripts — As senior manager of knowledge management, Julie Adelsberger is responsible for translating scientific research into accessible communications for plan sponsors and other healthcare stakeholders.

Much like Stickk, HealthyWage.com is a website designed to effect positive health behaviors.  Unlike Stickk, the basic form of HealthyWage doesn’t rely on loss aversion.  Instead, it pays users (with money from corporate sponsors and advertising) when they achieve healthy behaviors.  It also provides support through social networking and educational materials. 

 

However, users can choose to take advantage of the benefits of loss aversion and “SuperSize” their reward amounts, putting some of their own money at risk.

 

To check out the website, click here.

Groupon Dynamics

Julie Adelsberger — Senior Manager; Express Scripts — As senior manager of knowledge management, Julie Adelsberger is responsible for translating scientific research into accessible communications for plan sponsors and other healthcare stakeholders.

Groupon.com is a website that uses the power of social norms to encourage people to buy, and buy now.  Like some other retail sites, Groupon offers a daily deal.  Here’s the twist: The deal is good only if a minimum number of people sign up to buy the item.  If the minimum isn’t reached, the deal is canceled and those who signed up for the item aren’t charged.

So if you like the deal and sign up, there’s a good chance you’ll forward it on to friends, family, colleagues — maybe even near-strangers — to help meet the minimum.  There’s also a little loss aversion working here.  After you’ve clicked “buy,” you’ve mentally made that item yours, so you’re likely to put some effort into making sure the deal doesn’t fall through.

And if you’ve loved a deal and lost, could it make you more likely to buy future Groupon items you’re on the fence about, just to help a brother (or sister) out?

Holliday Season

As an editor for the Corporate Database team, Eric Ferguson is responsible for writing and editing strategic language for Express Scripts' Sales & Marketing department.

‘Tis the season … for Major League Baseball’s free agency signing period, that is. The Hot Stove League is the time of year when we figure out how much a backup catcher fetches on the open market ($1.5 million?! I’m so in the wrong line of work).

This winter’s must-have item is outfielder and three-time All-Star Matt Holliday, who is represented by uber-agent Scott Boras. Over the course of his first six years in the majors, Holliday has compiled some impressive numbers, including a sterling on-base percentage (OBP)*. The average major leaguer from 2004-2009 compiled a .334 OBP. Holliday has punched up a .387 OBP over the same span.

A 53-point advantage in OBP is nothing to sneeze at, but there’s a simple way Boras could make it even more remarkable when shopping his client: Instead of framing in terms of times on base (gains), why not focus on the outs made (losses)? The average major leaguer makes an out 66.6% of the time. Matt Holliday, on the other hand, makes an out 61.3% of the time.

I’m no mathemagician, but that looks like a 5.3% reduction in waste to me. Just like people respond more to “stop wasting your money” messages than those encouraging them to “start saving money,” it seems to me that reframing to capitalize on the principle of loss aversion could really hammer home the value that Matt Holliday brings to a baseball team.

No need to thank me for the expert advice, Scott. This one’s on the house.

* For those less geeky than me, on-base percentage measures how frequently a hitter’s plate appearances result in a hit, walk, or hit-by-pitch.

Calling Don Redelmeier

Bob Nease, PhD — Chief Scientist; Express Scripts — is a leader in the convergence of behavioral economics and healthcare; at Express Scripts, he is responsible for advancing the understanding of consumer behavior. To this end, he closely follows emerging science around human behavior and decision making, then works to develop tools and communications that help plan sponsors enable better health and value.

I met Don when he was a fellow at Stanford and I was a grad student. He is one of the most intelligent, funny, and interesting people I know.

When he was in high school, he made movies… a couple of which were shown on Saturday Night Live. As a young academic physician, he determined that memories of uncomfortable events (e.g., colonoscopy) are mostly related to peak level of discomfort and how the event ended. (This involved asking patients undergoing a colonoscopy every 30 seconds or so how they were feeling. And if there’s nothing more uncomfortable than having a colonoscopy, it’s got to be having a colonoscopy while an overeager researcher is asking you how it feels twice a minute.) The implication of that study is that you can make a colonoscopy more attractive by — get this — leaving the colonoscope just barely in place at the end (of the procedure, that is) and lengthening the procedure. He then went on to prove this to be the case with a randomized controlled trial. (Isn’t science fun?)

But Don’s work goes beyond discomfort and invasive procedures. He’s shown that winning an Academy Award increases life expectancy if you’re an actor, but shortens it if you’re a writer. He’s discovered that medical school class presidents are more successful professionally than their non-presidential peers, but that they live 2.4 years less on average. He’s cracked the code on why the other lane of traffic always appears to be moving more quickly than the one you’re in. He’s shown that presidential elections kill about two dozen people (due to driving, not arguments over dinner), but that marathons on the whole save lives (i.e., the sudden cardiac deaths caused by the event are more than offset by the reduction in traffic deaths due to roads being closed).

Importantly, Don has also studied the use of cell phones on traffic accidents. (I am a fan of my cell phone — especially when I am driving — and I have to begrudgingly admit that the study was very well done. You might reasonably decide that the benefits of using the cell phone outweigh the risks, but it’s hard to argue that those risks are nonexistent.) Interestingly, the issue seems to be one of distraction rather than mechanics. The human brain has a limited bandwidth, so the whole “hands free” thing may not solve the fundamental problem: Regardless of whether you do the dialing or it’s voice activated, our minds seem to be somewhere else when we’re engaged in a conversation.

So it was with interest that I read the same New York Times piece that Julie highlighted in the previous blog. The original article noted that a handful of companies have services that use GPS and other methods to determine when you’re in a moving car, and turn off your phone for you. (This means you can sign up for an anti-service service, I suppose.)

As I read the piece, I noted several features relating to the application of behavioral economics:

  • Intuition has significant limits, especially when it comes to intuition about thinking. In thinking through a solution to the cell phone problem, we conclude that the risk associated with cell phone use is one of coordination, and that a hands-free approach will solve the problem. When we think about thinking, we engage the part of our brain that’s rarely in use when we’re actually behaving. Driving and engaging in a conversation apparently draw on a common cognitive resource, and one that’s not obvious when we think about it.
  • Self-control is inherently challenging. During planning, the benefits (e.g., getting through a boring commute by talking to a colleague) and costs (e.g., risk of slamming into that car in front of you) are both in the future and therefore weigh equally. While driving, however, the benefits are certain and loom large.
  • Precommitment may help. During the planning phase, new technology (i.e., the companies cited in the article) make it possible to alter set of available options (or the payoffs associated with them) in the future. That is, you can tie yourself to the mast (metaphorically) to avoid bad behavior in the future.
  • Sticks (losses) are more powerful than carrots (gains). The article noted that some insurance companies are offering discounts for people who use the precommitment devices. My guess is that they would get more people to enroll in the services if they imposed a premium increase on those that didn’t sign up for the services than a discount for those who did.

P.S. Don: if you’re out there, give me a call. I’ll be in my car with my cell phone handy.

Trick-or-treat-onomics

As an editor for the Corporate Database team, Eric Ferguson is responsible for writing and editing strategic language for Express Scripts' Sales & Marketing department.

Some thoughts on Halloween before I get fitted for my Zombie Ron Burgundy costume:

On what other day would you willingly and joyfully give away candy to kids – beggars, really – dressed as all manner of ghost, ghoul, and commercially licensed intellectual property? If I trick-or-treated on March 18, would you give me an allegedly “fun size” Snickers bar? Of course not. Not just because I’m an adult, but because no one else would give me candy either. Social norms dictate, however, that you give candy to a kid with a massive head wound if she says the magic words on October 31.

It seems to me that trick-or-treating is the first job that most of us have. Sure, it’s only one day a year, but kids put forth the effort to get dressed, make the commute, and cold call perfect strangers. They get paid (in candy or, cruelly, all manners of non-candy including fruit and pencils) and then experience the indignity of losing some of that income to “the man” – in this case, parents with the misguided notion that they deserve a piece of the action . Some kids are good at saving their candy for later, while others blow through it in one night and then instantly regret it. I fell into the latter group and, in some ways, still do.

For kids and a fair number of adults, candy equals currency*. There are different denominations, but these vary by person. Here’s my personal value structure:

  • Pennies – Smarties, Jolly Ranchers, individually wrapped bubble gum, etc.
  • Nickels – Three Musketeers, Starburst, Tootsie Rolls
  • Dimes – Reese’s Pieces, Twix, M&Ms
  • Quarters – Tootsie Pops, Peanut M&Ms, Milk Duds
  • Dollars – Snickers, Twizzlers, Skittles, Pay Day
  • Priceless – 100 Grand, Reese’s Peanut Butter Cups

When kids negotiate trades, they’re engaging the market. The endowment effect, loss aversion … it’s all there when you debate whether to deal your Jujubes for a Whatchamacallit.  

* Some candy has no value. Almond Joys are the equivalent of a wooden nickel.

A Cure for Writer’s Block?

As an editor for the Corporate Database team, Eric Ferguson is responsible for writing and editing strategic language for Express Scripts' Sales & Marketing department.

Show me a writer who has never stared blankly at a computer screen while waiting for the first bolt of inspiration to strike, and I’ll show you a plagiarist. Writing anything – a poem, a novel, a glib blog* filled with asterisks and digressions – is hard, thankless, ego-crushing work. With so many more enjoyable ways to spend your time, it’s a wonder anyone writes anything. (Even now, I’m fighting the urge to take an impromptu lunchtime trip to Guitar Center.)

So what are writers to do? Well, they can Write or Die. As you might guess, WoD is pretty much the polar opposite of thefuntheory.com (discussed in this space yesterday). Rather than combating hyperbolic discounting with some attempt at amusement, WoD is all about consequences. I’ll turn it over to WoD’s evil genius, Dr. Wicked:

Write or Die is a web application that encourages writing by punishing the tendency to avoid writing. Start typing in the box. As long as you keep typing, you’re fine, but once you stop typing, you have a grace period of a certain number of seconds and then there are consequences.

Many people find themselves unable to write consistently. I believe that this is because their reason to write is intangible. For instance, I want to write and finish a book because I want to be published and make a living as a writer. That goal is a long way away so I often find it difficult to sit down to the task of writing.

To give people a tangible reason to write, WoD features three consequence modes. In the wimpiest mode, a politely worded text box appears and encourages you to keep writing. In the not too hot/not too cold mode, you hear an annoying sound until you resume. In the harshest mode, the words that you already have written disappear.

It’s a twisted application of loss aversion, emphasizing people’s dislike for negative consequences more than their desire for rewards. Writers are a fairly warped lot, so it makes some sense for them … but the healthcare industry probably shouldn’t take its cues from someone named Dr. Wicked.

* Those two words side-by-side don’t look like English, do they?