Gigerenzer: on money and heuristics

Prof. Gerd Gigerenzer gave a talk at the London School of Economics the other day on the wisdom of decision making. The director of the Max Planck Institute for Human Development in Berlin offered some valuable insights into how to make decisions under risk vs uncertainty

His advice was simple: if there is risk (known options and chances of winning and losing), one should rely on models and Big Data, but if there is uncertainty (unknown risks and chances), one should follow her/his “gut instinct“. As opposed to Kahneman and others, Prof. Gigerenzer thinks it’s good to rely on heuristics. His formula:

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He also gave advice on how to make successful investments: instead of using Pierson Moskowitz’s complex formula, better to “allocate your money equally to each of N funds”.

Simple and easy! How successful? Will have to find out.



The power of personalised messages

Apparently UCL not only preaches, but also uses behavioural insights.

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Well, when the Vice-Provost himself writes to you (wink, wink) and calls you by name, you cannot ignore the message, can you? I answered the call mainly to count for the success of the intervention (if they measure this), because I was happy to read between the lines they have a psychologist in the team.

Individualised messages have a significant impact on the response rate, and it would have been even better to add a social norm: *19,867 students have already completed the survey.

There are a lot of nudges inside this message: from showing empathy for my time and money spent on UCL, to being polite (a peripheral route to persuasion), yet simple – they know we don’t read long emails. I also like how personal it gets: not only I am addressed by my first name, but the email is signed by a real person, and not by a team (or, even worst, no one).

So, my dear readers with customers, this is a good example of a persuasive message.

*educated guess, plus some big numbers as anchors

Choice Architecture: the decoy effect

Also known as the asymmetric dominance effect (1), the decoy effect is a phenomenon noticed when people have to choose an option from a choice set, when a decoy is employed.

The decoy is a high-price, low-value product compared to other items in the set, expected to distort the choice towards a targeted item (1). This low-value choice is not expected to be chosen: its purpose is to be a reference point for another item which has both high-price and high-quality (2).

One of the most known studies (3) is the newspaper subscription experiment. Students were asked to choose from a set of three options a monthly subscription for a newspaper:

web subscription – $59, (chosen by 16 students)
print subscription – $125, (not chosen)
web and print subscription – $125; (chosen by 84 students)

The result is amazing: 84% of the students chose the last option. The highly expensive, low-value print subscription is a decoy that makes the last option look better.

In a second test, the decoy option was removed. The results looked different:
web subscription – $59 (68 students)
web and print subscription – $125 (32 students)

Calculating the newspaper’s revenue in these two conditions seemed to explain the use of a decoy.

Now, imagine what happens if you go in a travel agency to book a vacation. Out of the next options, which one would you choose if prices were equal?

– 10-day trip to Athens, with five dinners included
– 10-day trip to Rome, with breakfast and spa facilities included
– 7-day trip to Rome, spa facilities included

I would choose to see more options, of course.

1. Puto, C. (1982). Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis. The Journal of Consumer Research, 9(1), 90-98.
2. Josiam, B. M., & Hobson, J. P. (1995). Consumer choice in context: the decoy effect in travel and tourism. Journal of Travel Research, 34(1), 45-50.
3. Ariely, D. (2008). Predictably irrational (p. 20). New York: HarperCollins.

A Beginner’s Guide to Irrational Behaviour, by Dan Ariely

I am sometimes surprised to hear people’s reactions to what I study. “Psychology, aha, unrelated to this event. What brings you here?” My honest answer is that exactly psychology brings me wherever I go. It’s hard to speak about business without considering behaviours. Yours or others, be they your clients, colleagues, managers. Whenever you say “people”, you say attitude. You say behaviour. You just said psychology.

One of the most important knowledge I ever came across is Dan Ariely‘s book, Predictably irrational. It’s one of the best works published on Behavioural Economics – psychology married to business.

Dan Ariely just started another series of “A Beginner’s Guide to Irrational Behavior”, an online MOOC on Coursera. He will cover some of the material from his 3 books: Predictably Irrational, The Upside of Irrationality, and The Honest Truth About Dishonesty.

I highly encourage everyone to take this course. It’s free, it’s fun, it’s life-changing, and you will understand why psychology is important.

The Enlightenment: Social Architecture

I always believed that if all the brilliant minds in this world would team up to do good around, the world would be a better place. People called me from dreamer to optimist to idealist to fool.

Yet these days we had a talk given by an UCL alumnus who works for the British Government now, who mentioned “behavioural architecture”. I can’t stop but thinking that this is something I would like to devote my whole psychological knowledge to: changing behaviours. For social good.

From behaviour architecture to social marketing was only a step. I was surprised to see there are a couple of professional bodies who devote their work for social good and there is even a conference on social marketing (set up only last year apparently, this is yet a new field).

To clarify, social marketing is not social media marketing. According to European Social Marketing Association, Social Marketing seeks to develop and integrate marketing concepts with other approaches to influence behaviours that benefit individuals and communities for the greater social good.

Social Marketing practice is guided by ethical principles. It seeks to integrate research, best practice, theory, audience and partnership insight, to inform the delivery of competition sensitive and segmented social change programmes that are effective, efficient, equitable and sustainable.

This is how my new aim in life begins: I am now specialising to become a behavioural architect, aiming to make the world a better place. Yes, you can call me a dreamer.

Kahneman is coming to town!

Just got my ticket for Daniel Kahneman’s talk in London, March 18th. Come join me to listen to one of the most important thinkers of our time, a 2002 Nobel-prize winner. His book, ‘Thinking, fast and slow’, was one of the most influential books I’ve ever read. I might even say I am doing this master’s because at a certain point in life I discovered Kahneman’s work.

*Update: proof from one of the most amazing encounters in my life
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