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.
One way to know if a topic is really “in the air” is to see how it is treated in a US Presidential election. Although it is not rolling off Wolf Blitzer’s tongue, I have found at least one solid reference to cognitive-design like thinking that might generate some buzz.
Wired magazine, recently ran a cover story highlighting the views of 15 people the next president should listen to. Fortunately, they included a short piece on David Laibson, a behavioral economist from Harvard entitled, Tweak Human Behavior to Fix the Economy. The basic idea is that we do not need to overhaul the principles of the free market economy to resolve our housing, healthcare, retirement and various economic woes. Instead, small changes in programs and policies that nudge consumer behavior in a different direction is enough to fix the problem. After all, these problems are chiefly rooted in how we make decisions and behave.
The example nudge discussed is something we have covered in this blog several times namely, changing the default on 401k plans so that people are automatically enrolled and have to opt out if they don’t want to participate. Studies show that such a small change can go a long way to addressing the fact that 50% of Americans do not save enough for retirement.
In an earlier post I highlighted American Express’s One Card, a program that lets you save while you spend. Amex contributes 1% of whatever you spend and deposits it in a high-yield savings account. This was rather a clever way of defeating the cognition that blocks our ability to save namely, the overpowering desire to consume and the fact that we tend to under value savings we will have in the future.
Bank of America (BOA) has introduced a related product called keep the change. The idea is when you spend whatever change is left from rounding up to the nearest dollar is automatically put into your savings account.
BOA matches every dollar you save for the first three months and then 5% after that for a total of $250/yr. They even provide a simple calculator to let you estimate your savings.
I heard on the radio the other day that over $1B has been saved by customers. Interestingly, BOA has filed a patent to protect this unique product idea.
This is like a 401(k) plan with a systematic withdrawal of your own money sweetened with someone else making a matching contribution. Feels more like a savings plan than the One Card which feels more like a cash back card.
No matter, both are excellent examples of taking deep cognitive biases and leveraging them to our benefit.
Green Bank offers a CARES (Committed Action to Reduce and End Smoking) savings account. Smokers qualify and they make regular deposits for six months after which time they take a urine test. The test proves if they have smoked or not. Smokers loose their deposits (to a charity of their choice) and those that did not smoke keep the money.
As the recent study, Put Your Money Where Your Butt Is, shows this approach is surprisingly effective even at sustaining the behavior change well after the initial six months.
There is some good cognitive design going on here. The over confidence bias and the impulse to bet/gamble will get me into the program. Initial deposits are small so I can easily overcome my aversion to loss. However, towards the end of the six months I have significant account value (approx 20% of a month’s salary) and so loss aversion now works in favor of making the behavior change. The urine test creates a strong sense of accountability so there is little room for rationalizing or invoking beliefs that self-justify smoking behaviors. Last but not least, participants receive encouragement and feedback when they make deposits.
This is especially clever as it meets two hard behavioral challenges at once – savings and smoking.
Cognitive biases are short-cut ways that we use to perceive the world, make decisions, solve problems and behave in social situations. They are rules of thumb for dealing with complex situations fast and effectively. Turns out that when we use them outside the area they are intended for (and we do this all the time) we make systematic errors. This is why we can look and behave so irrationally.
Researchers have documented a wide array of cognitive biases. Check out the list of 100+ cognitive biases that Wikipedia has complied. In cognitive design, since we are concerned with designing things for how minds work, we must understand which cognitive biases are at work in our application and how we plan to manage or paternalistically leverage them.
A classic example is the Save More Tomorrow pension plan that lets you save some portion of a future raise (rather than your current money) out of respect for our bias to undervalue future resources and over value current resources. Turns out emphasizing what you currently have (a bird in the hand is worth to in the bush) is a great strategy except when it comes to savings. Vanguard Investments has taken this idea even further with their Autopilot 401k savings plan that is designed to accommodate all the latest findings in behavioral finance.
Cognitive biases are hot. Best selling or popular books focus on them – Freakonomics, Blink, Gut and many others. A recent addition to this list that I just finished is Sway: The Irresistible Pull of Irrational Behavior. The authors provide many detailed stories that illustrate three common biases including loss aversion (over valuing current resources), diagnosis bias (inability to rethink our initial assessment of something) and the chameleon effect (taking on the behaviors and properties that others have attributed to us). I am recommending this book to designers as a good way to sharpen your instincts for detecting and dealing with cognitive biases as a constraint and sometimes enabler in the design process.
For many Americans the cognition (or thoughts and emotions) involved in spending money are far more enjoyable than the thoughts and emotions involved in saving for retirement. We have a strong (some say overpowering) cognitive bias towards spending rather than savings. Look at the level of consumer debt and the looming savings crisis and it is safe to say this bias is running us into serious trouble.
For many consumers, telling them not to spend in order to save and avoid trouble down the road is not enough. An alternative strategy is to design savings products that work with the cognitive bias rather than ask them to try and fight it .
A great example of this is the American Express One Card.
As of this writing you get 1% of your purchases deposited in a high-yield (5% APY) savings account with no fees. So you literally automatically save while you spend. Note this is very different than a card that gives you cash back. If you get cash back and you are a spender, you will spend it not save it. This card is linked to an FDIC-insured savings account that you can even make extra deposits to if you want.
There is a powerful cognitive design principle at work here.
When it comes to designing programs or products that require behavior change, make the new behaviors an automatic consequence of something the customer already does (or is very willing to do).
Is this not what lottery tickets do? Consumers hate to pay tax but will gladly do it to buy some hope/excitement of winning big.
According to leaders in behavioral finance (scientific study of how cognitive biases shape our economic decision making) the answer is NOT that we don’t make enough money. Instead, the reason we fail to save is that we are not cognitively wired to do it. I have a number of biases that block savings behaviors including:
These are very powerful (often overwhelming) effects that lead to poor decisions and inaction. And it gets worse- the design of the products makes it very hard (intellectually and emotionally) to consume them:
· The products are complex so I have to do a lot of mental work to understand and use them (very high cognitive load) this decrease the relative motivation to participate, triggers a mental state of procrastination and leads to inaction
· small print and legal jargon can invoke feelings of doubt.
In short, retirement products and services don’t fit the way we think and feel so we tend not to consume them appropriately despite the fact that it is in our best interest to do so.
Actually, they score 1 out of 5 (at the very bottom) in terms of cognitive fit and literally agitate cognition rather that support or enhance it. The design of retirement and saving products and services is an area of big opportunity for cognitive designers. And there has been a lot of action: Pension plans that literally let you save more tomorrow by allocating a portion of future earnings (you avoid having to part with anything today and it plays off of the fact that you undervalue future resources), credit cards that allow you to spend and save for retirement at the same time, pension plans that automatically enroll employees and require them to opt out if they don’t want to participate (having the status quo bias work in our favor), 401k plans that come with services that pick specific funds for you to invest in (lower cognitive load) and so on. We will cover all these products and the research that drives them in this blog.
You might complain that you don’t design financial products or services so what can you learn from this? Look at the list of biases again. They (or very close variants of them) are involved in the customer or employee cognition around almost every type of product or service that involves behavior change. So if you are in the behavior change business the lessons learned should be useful to you.
