THINKER'S ALMANAC - December 9

How can a simple coin toss reveal our tendency to see the glass of life as half empty instead of half full?

Subject: Loss Aversion - Coin Toss

Event:  Carl Richard pens New York Times article on loss aversion.

If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you'll be miserable. -Daniel Kahneman

On this day in 2013, an article appeared in The New York Times entitled “Overcoming an Aversion to Loss.”  The writer of the article, Carl Richards, begins by quoting Lance Armstrong:  “I like to win, but more than anything, I can’t stand the idea of losing.  Because to me, losing means death.”

Richards argues that Armstrong’s dislike for losing is universal in humans.  It’s called loss aversion, and it basically means that “we feel the pain of loss more acutely than we feel the pleasure of gain.”

To further illustrate the point, Richards turns to the psychological research of Daniel Kahneman and Amos Tversky, who came up with a simple experiment to document the reality of loss aversion in ordinary people.  The researchers offered their subjects a bet on a simple coin toss.  If the coin falls on tails, you lose $10.  He then asked the subjects how much they would have to gain by winning in order to take the bet.  On average, subjects want at least $20 for a win before they will take the bet.  In short, this experiment reveals that the pain we experience from a loss is twice the amount of pleasure we feel from a win.

                                                                                Image by zsunberg from Pixabay 

Loss aversion is a specific phenomenon that’s a subcategory of a larger effect known as negativity bias.  In short, “Bad is stronger than good.” When it comes to the human species, negative experiences have a greater impact on us than positive ones; humans are hardwired to see the glass as half empty rather than half full.

The positive side of loss aversion and negativity bias is that they give us keen insights into human nature, insights we might be able to use for more effective persuasion.  For example, if it is true that losses are perceived as greater than gains, we should not just focus on the advantages of a proposition, we should instead focus on how the proposition might help us to avoid disadvantages.  If we are selling a toothbrush, we might go beyond just showing the bright smile it will give the customer; in addition, we should show how it will help alleviate the terrible tooth decay that the customer might experience without it.  Because we are cognizant of negativity bias, we might see how the bad effect (tooth decay) is more powerful than the good effect (bright smile).

Because loss aversion tells us that the fear of losing money is more motivational than the prospect of gaining money, we might consider framing a sales pitch around this psychology.  For example, instead of focusing on the money a customer will save by buying our toothbrush, it might be smarter to focus on how much the customer will lose if they don’t buy it.

 

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  What is loss aversion, and what insight about human nature does it give us?

Challenge:  The Half Empty Appeal:  Do some research on advertising for specific products.  Look specifically for examples of how marketers appeal to losses or disadvantages in order to capitalize on loss aversion and negativity bias.

ALSO ON THIS DAY:

December 9, 1608:  Today is the birthday of the English poet John Milton, author of the epic poem Paradise Lost (1667).  Milton once said, “The mind is it own place, and in itself can make a heaven of hell, a hell of heaven.”

December 9, 1854:  On this day in 1854, Britain’s Poet Laureate Alfred Lord Tennyson published his poem “The Charge of the Light Brigade.”  The poem recounts a horrific episode at the Battle of Balaclava during the Crimean War.  On October 25, 1854,* the British Light Brigade rode into battle against Russian forces.  Following an ambiguous order to attack, the soldiers of the British cavalry were mowed down by Russian field artillery as they charged across a treeless valley.  Of the 673 British horsemen who made the charge that day only 198 survived (2).  Tennyson is said to have written his famous narrative poem in just a few minutes after reading an account of the battle in the newspaper.  The six-stanza poem immediately became popular, and even today its famous lines capture the plight of common soldiers, nobly and courageously following the orders of their superior:

 

Theirs not to make reply,

Theirs not to reason why,

Theirs but to do and die:

Into the valley of Death

   Rode the six hundred. 

 

Sources:

1-Richards, Carl.  “Overcoming an Aversion to Loss.” The New York Times 9 Dec. 2013.

2-March, W.B. and Bruce Carrick.  366: A Leap Year of Great Stories. Cambridge, UK:  Icon Books, 2007: 342.

THINKER'S ALMANAC - December 9

Subject: Loss Aversion - Coin Toss

Event:  Carl Richard pens New York Times article on loss aversion.

If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you'll be miserable. -Daniel Kahneman

On this day in 2013, an article appeared in The New York Times entitled “Overcoming an Aversion to Loss.”  The writer of the article, Carl Richards, begins by quoting Lance Armstrong:  “I like to win, but more than anything, I can’t stand the idea of losing.  Because to me, losing means death.”

Richards argues that Armstrong’s dislike for losing is universal in humans.  It’s called loss aversion, and it basically means that “we feel the pain of loss more acutely than we feel the pleasure of gain.”

To further illustrate the point, Richards turns to the psychological research of Daniel Kahneman and Amos Tversky, who came up with a simple experiment to document the reality of loss aversion in ordinary people.  The researchers offered their subjects a bet on a simple coin toss.  If the coin falls on tails, you lose $10.  He then asked the subjects how much they would have to gain by winning in order to take the bet.  On average, subjects want at least $20 for a win before they will take the bet.  In short, this experiment reveals that the pain we experience from a loss is twice the amount of pleasure we feel from a win.

Loss aversion is a specific phenomenon that’s a subcategory of a larger effect known as negativity bias.  In short, “Bad is stronger than good.” When it comes to the human species, negative experiences have a greater impact on us than positive ones; humans are hardwired to see the glass as half empty rather than half full.

The positive side of loss aversion and negativity bias is that they give us keen insights into human nature, insights we might be able to use for more effective persuasion.  For example, if it is true that losses are perceived as greater than gains, we should not just focus on the advantages of a proposition, we should instead focus on how the proposition might help us to avoid disadvantages.  If we are selling a toothbrush, we might go beyond just showing the bright smile it will give the customer; in addition, we should show how it will help alleviate the terrible tooth decay that the customer might experience without it.  Because we are cognizant of negativity bias, we might see how the bad effect (tooth decay) is more powerful than the good effect (bright smile).

Because loss aversion tells us that the fear of losing money is more motivational than the prospect of gaining money, we might consider framing a sales pitch around this psychology.  For example, instead of focusing on the money a customer will save by buying our toothbrush, it might be smarter to focus on how much the customer will lose if they don’t buy it.

Challenge:  The Half Empty Appeal:  Do some research on advertising for specific products.  Look specifically for examples of how marketers appeal to losses or disadvantages in order to capitalize on loss aversion and negativity bias.

Sources:

1-Richards, Carl.  “Overcoming an Aversion to Loss.” The New York Times 9 Dec. 2013.

THINKER'S ALMANAC - July 11

 Subject:  Scarcity and Loss Aversion - New Coke

Event:  The Coca-Cola Company discontinues New Coke, 1985

Imagine you are a part of a cookie taste test.  Before you are two jars of cookies.  One of the jars has ten cookies in it, while the other had just two.  Do you think you would be capable of judging the two cookies objectively?  Do you think that the number of cookies in each jar might somehow influence your preference for one over the other?  

An actual psychological experiment was conducted as described above.  What the researchers did not tell the subjects, however, was that all the cookies in the experiment were exactly the same.  The results of the study revealed that subjects consistently preferred the cookies that were in short supply over the cookies that were more plentiful.  This fact illustrates a powerful idea from social psychology called the scarcity principle -- the tendency that humans have to perceive the value of things that are less abundant or rare over things that are viewed as common or abundant (1).

On April 23, 1985, the Coca-Cola company announced that it would be introducing “New Coke,” a sweeter tasting version of its long-successful traditional formula.  Almost immediately there was a backlash from Coke drinkers across America demanding that old Coke be restored to the store shelves.  One Seattle man even organized a group called Old Coke Drinkers of America to lobby and even sue the Coca-Cola Company. 

                                                        Image by Harry Stilianou from Pixabay

Coke executives thought they had done their research, for they had developed the new formula over a four-year period and conducted blind taste tests with thousands of consumers in twenty-five cities.  The results of these taste tests were clear:  55% to 45% of Coke drinkers preferred the new formula over the old.  In addition, in tests where consumers were told they were drinking old and new formulas, 6% preferred New Coke.

What the Coke executives failed to account for was an important phenomena from psychology called the scarcity principle.  In short, it means that when we are told we can’t have something or that something is in short supply, we want that thing even more.  Furthermore, we truly dislike it when we have something and it's taken away from us.

When New Coke was released, Americans had been drinking Coke for nearly 100 years, ever since Dr. John Pemberton sold his first glass of the bubbly beverage on May 8, 1886, in a pharmacy in Atlanta, Georgia.  More than just soda pop, traditional Coke was a part of Americana.  With old Coke no longer available, the scarcity principle kicked in.  In addition, a related notion came into play, loss aversion, which causes people to weigh losses more heavily than gains (2).

If Coke executives would have understood scarcity and loss aversion better, they might have, for example, kept old Coke on the shelves awhile before fully replacing it with New Coke.  Similarly, they might have framed their advertising to account for loss aversion by emphasizing losses over gains.  For example, they might have advertised New Coke, saying, “Don’t miss the opportunity to be the first on your block to taste New Coke.  For a limited time you can buy it at a 20% discount over old Coke.”

Because of their failure to understand the consumer’s psychology, the Coca-Cola Company finally had to admit defeat.  It was on this day in 1985 that New Coke was discontinued and “Classic Coke” was reintroduced.

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  What is the difference between loss aversion and the scarcity principle?

Challenge:  Failed Products - Busts

What are some classic failed products from the past? Do some research into the product, and try to answer the question of why it failed?

Sources:

1-Cialdini, Robert B.  Influence:  The Psychology of Persuasion. New York:  Harper Business, 2021:  268.

2-Goldstein, Noah J., Steve J. Martin, and Robert B. Cialdini. Yes!: 50 Scientifically Proven Ways to Be Persuasive. Free Press, 2009.

THINKER'S ALMANAC - January 21

 What can a supersonic airliner teach us about flawed thinking?

 

January 21

Subject:  Sunk Cost Fallacy-- The Concorde Program 

Event:  The Concorde’s first flight, 1976

 

No matter how far you've gone down the wrong road, turn back.  -Turkish Proverb

On January 21, 1976, the Concorde made its first commercial flight.  This supersonic aircraft that could fly from London to New York in just three and half hours was a joint project by England and France.  Even before the first flight, British and French taxpayers contributed over a billion and a half dollars to the program.  The state-of-the-art appearance and speed of the aircraft were impressive, but the reality was that the plane never turned a profit.  Despite the fact that both England and France were losing large sums of money financing the Concorde program, they continued to operate it at a loss, unwilling to admit that continuing to finance the plane was not financially viable.  Despite the fact the Concorde was a fast aircraft, flying at twice the speed of sound, its financiers were slow to see that it was just too expensive to operate.  They did, however, finally throw in the towel.  The Concorde made its final flight on October 24, 2003, 27 years after its inaugural flight.

                                                                Image by Falko Fröhlich from Pixabay 

Economists call this the Concorde effect, also known as the sunk cost fallacy, the human tendency to resist cutting our losses when we have invested money or time into something.  Nations, companies, and individuals are all susceptible to the sunk cost fallacy.  America’s involvement in Vietnam, for example, continued much longer than it should have.  Instead of ending the futile campaign, government and military leaders used the sacrifice and the loss of blood and treasure as a rationale to continue the fight.

The key to avoiding the sunk cost fallacy is to focus not on past losses but instead on future costs and benefits.  The time, money, or energy you have invested in the past is gone and should be forgotten.  The only reasonable course is to make an honest, realistic look at the likelihood of future gains.  So, for example, if you are having trouble in a relationship with a significant other, focus on the future, not the past.  The length of time that you two have been together, whether it is two weeks or two years, is no reason to stay in the relationship.  Instead, focus on the future; is there a real likelihood that this person is someone who will enrich your life tomorrow and into the long term future?  

For a first hand example of the sunk cost fallacy, try this thought experiment:  Imagine that you have booked a ski vacation in Michigan for a cost of $100.  You then discover a better ski trip at a cost of just $50 in Wisconsin, so you buy a ticket for that trip too.  You then realize that both trips are booked for the exact same weekend.  Neither trip is refundable, so you must decide which one to go on.  Which one would it be?

When researchers conducted this experiment in 1985, they demonstrated the true effect of the sunk cost fallacy.  Over half of the people chose the more expensive trip.  Even though the $100 trip did not promise as much fun as the $50 trip, the potential loss of a greater amount made it harder to give up.  Of course, this makes no sense since the amount spent is $150 regardless of which trip is selected.  This is why the sunk cost error is a “fallacy”: a belief or feeling that masquerades as a reasonable conclusion but that is in reality logically unsound and invalid (1).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  How does the Concorde program illustrate the dangers of the sunk cost fallacy, and how can people avoid making this error in their own lives?

Challenge - Why We Fear Losses:  What is Loss Aversion? A key factor that contributes to the persistence of the sunk cost fallacy, is a related cognitive bias called “loss aversion.”  Do some research on this concept.  What is it, and why should people be warned about it?

Sources:

1-McRaney, David. You Are Now Less Dumb. New York: Gotham Books, 2014.

THINKER'S ALMANAC - January 21

What can a supersonic airliner teach us about flawed thinking?

 

Subject:  Sunk Cost Fallacy-- The Concorde Program 

Event:  The Concorde’s first flight, 1976

 

No matter how far you've gone down the wrong road, turn back.  -Turkish Proverb

On January 21, 1976, the Concorde made its first commercial flight.  This supersonic aircraft that could fly from London to New York in just three and half hours was a joint project by England and France.  Even before the first flight, British and French taxpayers contributed over a billion and a half dollars to the program.  The state of the art appearance and speed of the aircraft were impressive, but the reality was that the plane never turned a profit.  Despite the fact that both England and France were losing large sums of money financing the Concorde program, they continued to operate it at a loss, unwilling to admit that continuing to finance the plane was not financially viable.  Despite the fact the Concorde was a fast aircraft, flying at twice the speed of sound, its financiers were slow to see that it was just too expensive to operate.  They did, however, finally throw in the towel.  The Concorde made its final flight on October 24, 2003, 27 years after its inaugural flight.

Economists call this the Concorde effect, also known as the sunk cost fallacy, the human tendency to resist cutting our losses when we have invested money or time into something.  Nations, companies, and individuals are all susceptible to the sunk cost fallacy.  America’s involvement in Vietnam, for example, continued much longer than it should have.  Instead of ending the futile campaign, government and military leaders used the sacrifice and the loss of blood and treasure as a rationale to continue the fight.

The key to avoiding the sunk cost fallacy is to focus not on past losses but instead on future costs and benefits.  The time, money, or energy you have invested in the past is gone and should be forgotten.  The only reasonable course is to make an honest, realistic look at the likelihood of future gains.  So, for example, if you are having trouble in a relationship with a significant other, focus on the future, not the past.  The length of time that you two have been together, whether it is two weeks or two years, is no reason to stay in the relationship.  Instead, focus on the future; is there a real likelihood that this person is someone who will enrich your life tomorrow and into the long term future?  

For a first hand example of the sunk cost fallacy, try this thought experiment:  Imagine that you have booked a ski vacation in Michigan for a cost of $100.  You then discover a better ski trip at a cost of just $50 in Wisconsin, so you buy a ticket for that trip too.  You then realize that both trips are booked for the exact same weekend.  Neither trip is refundable, so you must decide which one to go on.  Which one would it be?

When researchers conducted this experiment in 1985, they demonstrated the true effect of the sunk cost fallacy.  Over half of the people chose the more expensive trip.  Even though the $100 trip did not promise as much fun as the $50 trip, the potential loss of a greater amount made it harder to give up.  Of course, this makes no sense since the amount spent is $150 regardless of which trip is selected.  This is why the sunk cost error is a “fallacy”: a belief or feeling that masquerades as a reasonable conclusion but that is in reality logically unsound and invalid (1).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  How does the Concorde program illustrate the dangers of the sunk cost fallacy, and how can people avoid making this error in their own lives?

Challenge - Why We Fear Losses:  What is Loss Aversion? A key factor that contributes to the persistence of the sunk cost fallacy, is a related cognitive bias called “loss aversion.”  Do some research on this concept.  What is it, and why should people be warned about it?

Sources:

1-McRaney, David. You Are Now Less Dumb. New York: Gotham Books, 2014.

THINKER'S ALMANAC - November 16

Given a choice, would most people choose a computer-simulated reality over their real life?

Subject: Happiness - The Experience Machine

Event:  Birthday of philosopher Robert Nozick, 1938

On this day in 1938, philosopher Robert Nozick was born in Brooklyn.  In his 1974 book Anarchy, State and Utopia, Robert Nozick presents a famous thought experiment called “The Experience Machine”:

Imagine an experience machine that could simulate any reality you choose.  The machine would be designed by brain experts.  When hooked up to the machine, you would think and feel whatever experience you desired, but in reality would be floating in a tank. The simulation would be so perfect, that you would never know that you are in a tank; instead, you would truly believe that what you are experiencing is reality.  Based on this description, would you choose to be plugged into the experience machine?

Image by nir_design from Pixabay

Most people choose reality over the simulated reality of Nozick’s Experience Machine.  However, another version -- by Felipe De Brigard of Duke University -- reframes Nozick’s thought experiment:

Imagine a man dressed in black knocks on your door one early Saturday morning.  He informs you that you have been mistakenly plugged into an experience machine.  This means every experience you have had up to the present -- both good and bad -- has been a simulation by a computer program.  The man in black is apologetic, saying you were never supposed to be hooked up to the machine.  He then offers you a choice:  

1. You can remain connected to the machine.  If you choose this option, the memory of the visit by the man in black will be erased from your brain.

2. You can be disconnected from the machine.  However, you should know that the real life you have without the machine is entirely different.

Based on this scenario, which of the two options would you select?

Based on the surveys done by De Brigard, he has found that 59 percent of respondents choose option one, to remain connected to the machine.

What is interesting about the two different versions of the experience machine thought experiment, is how they frame the scenario differently related to change and the status quo.  In Nozick’s version, most choose the status quo of reality over change to a simulated reality.  In De Brigard’s version most also choose the status quo; however, in this case the status quo is simulated reality.

These results are consistent with Daniel Kahneman and Amos Tversky’s work on loss aversion, the fact that humans experience more pain by losing something than gaining something.  For example, losing a twenty dollar bill for many would be twice as painful as the pleasure experienced in finding a twenty dollar bill (1).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  How are the two versions of the experience machine thought experiment framed differently, and how does that framing account for the different responses that people have to them?

Challenge - The Wisdom of Change:  A famous joke that says that nobody likes change except for a wet baby.  Do some research on quotations about change.  Select the one you think is the most insightful.  Write it down, and explain why it stands out for you.

Sources:

1-Henderson, Rob.  “How Powerful is Status Quo Bias.” Psychology Today 29 Sept. 2016.

THINKER'S ALMANAC - April 29

How does the marketing of popcorn at movie theaters illustrate the irrational thinking of consumers?

Subject: Persuasion - Decoy Effect

Event:  Psychologist Dan Ariely is born, 1967

Even the most analytical thinkers are predictably irrational; the really smart ones acknowledge and address their irrationalities. -Dan Ariely

Imagine a movie theater concession counter.  Two options are available for popcorn:  a $3 small size or a $7 large size.  In an experiment conducted by National Geographic, the vast majority of movie-goers opt for the small size, perceiving it as the better value.  Next, imagine a slight change in the scenario:  

We add a medium option for $6.50.  Theater-goers now have three options:  The small ($3.00), medium ($6.50), or large ($7.00).  You might predict that the small option would remain the most popular; however, you might base your guess on the assumption that consumers are rational.  The truth is, however, that the large popcorn now becomes by far the most popular of the three options.

Psychologists have a name for what happened in the popcorn experiment; it’s called the decoy effect.  It describes the marketing strategy of adding a third, less attractive and inferior option, as a strategic method of influencing the consumer’s perception.  In the popcorn example, the goal is to get the consumer to purchase the most expensive option; adding the medium size ($6.50) changes the consumer’s perception of the large option ($7); instead of viewing it as much more expensive than the small size, the buyer now perceives it as only slightly more expensive than the medium option.  In presenting the medium size, the theater has nudged the buyer to spend four more dollars because the large size just “feels” like the best deal.

One man who would not be surprised by the irrational behavior of the popcorn buyers is Dan Ariely, a psychologist and behavior economist, who was born on this day in 1967.  Ariely is so certain that humans are predictably irrational that he wrote a book called Predictably Irrational.

In the introduction to his book, Ariely presents some famous lines from Shakespeare (Hamlet Act II, Scene ii) that celebrate the human mind:

What a piece of work is a man! How noble in reason, how infinite in faculty! In form and moving how express and admirable! In action, how like an angel, in apprehension, how like a god! The beauty of the world. The paragon of animals.

Ariely explains that although he does have great respect for the capabilities of the human mind, his research reveals that human thinking is often irrational:

Whether we are acting as consumers, businesspeople, or policy makers, understanding how we are predictably irrational provides a starting point for improving our decision making and changing the way we live for the better.

One illustration of this predictably irrational behavior is explained in a chapter about how ownership of something alters our perception of that thing.  Ariely explains a ticket study that was conducted at Duke University.  The tickets were for entry to a Duke Men’s Basketball game. The tickets are limited and highly prized by all students, so many participate in the lottery in hope of getting their hands on tickets.  The experiment began after the lottery as researchers called both winners and losers in the ticket lottery, asking them how much they would pay to either sell the ticket they had in their possession or purchase a ticket that they were unable to obtain in the lottery.  The results revealed that on average students who were not in possession of a ticket were willing to pay on average $170 for a ticket.  In contrast, those who had a ticket were unwilling to part with it for no less than $2,400 on average.  

Researchers call this drastic difference in value the endowment effect, which explains why the ticket holders placed such a higher value on the tickets.  The endowment effect kicks into action when we add value to an item that we own based on our emotional attachment, irrationally inflating its market value.

Just as the decoy effect makes people irrationally pay more for popcorn, the endowment effect makes ticket owners irrationally overprice their basketball tickets.  Not only is this behavior irrational, it is, as Ariely argues, predictably irrational.  

All of us, not just economists or salespeople, are affected by ownership. Throughout our lives, we acquire things by buying and give up things by selling.  It makes sense then to understand more about why the endowment effect has the impact it does on us.  

As Ariely explains, the first reason is that “we fall in love with what we already have,” either recalling the emotions attached to the thing or -- as in the case of the tickets -- imagining the experiences and emotions we will have in the future.  

Secondly, is loss aversion, the fact that humans experience more pain by losing something than gaining something.  For example, losing a ten dollar bill for many would be twice as painful as the pleasure experienced in finding a ten dollar bill.

Thirdly, we are so wrapped up in our feelings and emotions about a thing to realize that others don’t see that thing the same way.  As Ariely puts it, “It is just difficult for us to imagine that the person on the other side of the transaction, buyer or seller, is not seeing the world as we see it” (1).

Recall, Retrieve, Recite, Ruminate, Reflect, Reason:  How do movie theaters use the decoy effect to get customers to think irrationally?

Challenge - Eradicating the Irrational:  Cognitive biases reveal the ways in which human thinking is predictably irrational.  Research a specific cognitive bias.  Define it, and explain how it causes us to be predictably irrational.  Finally,  prescribe how we might counter this effect to be more rational.

Sources:

1-Ariely, Dan. Predictably Irrational:  The Hidden Forces that Shape Our Decision.  New York:  HarperCollins, 2008.