Cognitive Design

Imagine surfing online and running into a banner that reads “click now to contribute $1 to your nest egg. It will more that triple by your retirement age!”.  A buck and a click now for three bucks when I am old, sounds a bit boring. Would I do it?  I asked that to a group of 20 middle-age surfers (45 - 55) and 85% said yes.  They also wanted a widget to track contributions, projected returns and performance relative to others (friends) that are using from this surf-and-save offering.

Once you used surf-and-save for a while the pull to save impulsively will magnify.  For example, the widget would use historical data (online behavior) and your profile to illustrate the financial impact of saving a $1.5 instead of $1.  This could be big money if you spend considerable time online and don’t plan to retire soon. Plus it would likely let you zoom ahead of your friends!

A prototype of surf-and-save does not require a major investment. It would be interesting to find the online contexts and widget behaviors that produced the greatest conversion rates for saving impulsively.

Why can’t  savings be like experience points in social games? Millions of people spend hours a week in online virtual worlds (e.g. World of Warcraft) earning experience points so they can upgrade their avatar, buy virtual goods or enter a new region of the game. Why not use the same mechanism to save real dollars for retirement?

We are already spending a billion real dollars for virtual goods and sponsors are giving virtual dollars to online citizens willing to do simple tasks such as watching videos and completing quizzes. The virtual and real economies are colliding.   Being online means the cost of doing simple financial transactions approaches zero. This means saving a little impulsive many times can be done cost effectively.

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The McKinsey Quarterly has a good discussion on The Case for Behavioral Strategy. They argue that taking steps to mitigate the effects of known cognitive biases in your strategic decision making process can improve the effectiveness of those decisions (ROI) by 7%.

They reference additional resources for how to take the biases out of meetings and an interactive tool for understanding biases in group decision-making.  Be sure to check out: A Language to Discuss Biases. It offers an executive overview of the types of cognitive biases and their impacts. They offer 17 biases in 5 categories including:

* Action-oriented biases that drive us to take less thoughtful action than we should

* Interest biases that arise in the case of conflicting incentives

* Pattern recognition biases that lead us to see patterns when there are none

* Stability biases that create a tendency toward inertia in times of uncertainty

* Social biases that arise from the preference for harmony over conflict.

This is a great quick reference guide for a cognitive designer working with biases on any project.

The cognitive science behind how and why consumers make the decisions they do has received a great deal of attention over the last 10 years.   Best selling book and several new fields such as neuromarketing and behavioral economics have emerged all of which hold important insights for cognitive designers.  If you have not folded these into your toolkit it is well worth the effort. I have found them useful not only to guide design for consumer decision-making but all manner of decision-making involving value.

For a quick introduction to some of the designable insights from behavioral economics, check out, A Marketer’s Guide to Behavioral Economics, written by Ned Welch in the McKinsey Quarterly.  Here are some of the key ideas:

 * Remove the viscerally pain in parting with money.The emotional pain caused by the thought of giving up something we value now, for some benefit in the future, even if it is a big benefit, is something we are not wired to do.  Ways to mitigate the pain of parting with money today include providng the option of delaying payment, categorize the payment in a more pleasant mental account (spare change, tax rebate or anything windfall-related) and use web/mobile phone based ways to make payment instant. 

* Use the power of default options to have the status quo bias work for you. Having employees opt-out rather than opt-in to a 401k plan or offering a base model with several premium features are typical examples. We tend to keep things as they are especially if it takes a lot of mental work to change them. 

* Avoid choice or other cognitive overloading. Too many decisions, too much to learn, too many open issues all mean I won’t decide to buy. 

* Make the choice to buy meaningful by properly positioning the product. If I can quickly and easily see the relative value of the article then buying it makes meaning for me.

In general, you want to be sure that the mental energy generated by making the decision is much greater than the mental work the consumer has to do to make it. Given a reasonable price and some need or want, tipping the balance of mental energy will make the sale every time!

The NIH and AHRQ are spending $15M to find out.  

Comparative effectiveness research in healthcare, or studies on the relative cost and benefit of specific diagnostics and treatments, is a hot topic. Doing this type of research will empirically determine, for example, if there is any clinical benefit to a more expensive or frequent diagnostic imaging technique.

Doing the research is one thing, getting providers to use it in delivering care is another. And that will be a big problem. To help solve the problem, the National Institute of Health (NIH) and the Agency for Healthcare Research and Quality (AHRQ) are offering $15M in grant money to purse clinical trials on Using Behavioral Economics Research for Nudging Comparative Effectiveness Research.

Here is the purpose of the grant as specified in the executive summary:

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In previous posts we have examined how important fairness and reciprocity are when designing service recovery processes. Indeed, I argued that these psychological effects and the meaning states they create are far more important than the monetary factors involved.

A colleague recently shared material on the field of cognitive economics that provides an interesting scientific footing for this position and other aspects of cognitive design. An excellent reference site can be found here. A specific article on how we trade economic value for fairness and reciprocity can be found in: In Search of Homo Economicus.

The journal article, Age of Reason, is full of interesting data on age-related cognitive decline and performance. The primary focus is on personal financial decision making.  The authors found a “U shaped” relationship between age and the quality of financial decision making involving the cost of credit (e.g. home equity loans and credit cards). Peak performance happens around age 53.

Of special interest to cognitive designers is the section that looks at how various policies can help mitigate sub-optimal decision making.  The article is worth a look by anyone designing to support consumer cognition in the use, purchase or understanding of financial products.

Many have argued that one of the root causes to the recent rout in the global capital markets was overtly simplistic risk models.   Making them more accurate may require factoring in cognition. As pointed out in the New York Times:

“That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.”

This means our new quantitative models of the capital markets will need to take into account how the minds of investors and consumers actually work.   It may be possible to apply core ideas from cognitive design such as, people make decisions and behave to maximize their mental energy, to the development of a 21st century approach to the capital markets.

Speakers from the leading edge of the Science of Decision Making that provide a clear and compelling explanation of what is going on. Certainly worth listening to in the background as you do other tasks, like work on your cognitive design problems.

Time Magazine has an interesting article on how Obama and his staff are using principles from  behavioral science to make change happen on a national level.  For example, using the principle that people want to do what they think others will do shaped a key campaign message “A Record Turn Out is Expected”.  

Although this principle and the other techniques discussed in the article (e.g. Nudges) are nothing new to readers of this blog, what is new is the fact that they are being tested on a national scale. We can expect to see them put to work in healthcare reform, finance reform, education and other aspects of Obama’s change agenda.  

What an opportunity to advance our scientific understanding of behavior change!

According to Dr. Ariely, a professor of behavioral economics at Duke, and author of the interesting book, Predictably Irrational, the offer of a huge bonus does not improve cognitive performance.  He makes his argument in a recent piece in the New York Times, What’s The Value of A Big Bonus?.

In the article he describes several experiments that demonstrate those offered very large bonuses actually do worse on a cognitive task than those offered a medium or even small bonus.

Many have pointed out that money may not motivate those that think for a living.  But this research goes further:

Given in the wrong dose (too much) money may worsen our performance on tasks that require learning, thinking, decision-making, creativity and other forms of cognition.  

We need to be careful to design compensation and reward systems for how minds actually work, not how we think they should work.