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Excellent article in NYTimes about a study of civil lawsuits.

Must read.

Here are some quick highlights and my take on the biases/behavioral decision making that goes into it:

Note to victims of accidents, medical malpractice, broken contracts and the like: When you sue, make a deal.

Overconfidence bias at work:

“The lesson for plaintiffs is, in the vast majority of cases, they are perceiving the defendant’s offer to be half a loaf when in fact it is an entire loaf or more,” said Randall L. Kiser, a co-author of the study and principal analyst at DecisionSet, a consulting firm that advises clients on litigation decisions.

Defendants made the wrong decision by proceeding to trial far less often, in 24 percent of cases, according to the study; plaintiffs were wrong in 61 percent of cases. In just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.

Prospect theory — Perhaps, the defendants exhibit more risk seeking behavior (to avoid losses):

On average, getting it wrong cost plaintiffs at about $43,000; the total could be more because information on legal costs was not available in every case. For defendants, who were less often wrong about going to trial, the cost was much greater: $1.1 million.

And the classic difference between inside views v/s outside views:

The findings suggest that lawyers may not be explaining the odds to their clients — or that clients are not listening to their lawyers.

“It’s entirely possible that the attorneys are not giving adequate advice,” said Mr. Kiser, who is also a lawyer but is not practicing. “An attorney could advise a client that they have a strong defense to enforcement of a contract, but that is not the same thing as forecasting what the likely outcome at trial would be.”

…

Law schools do not teach how to handicap trials, nor do they help develop the important skill of telling a client that a case is not a winner. Clients do not like to hear such news.

Uniqueness bias (and ignorance of base rates):

“Most clients think they are completely right,” Michael Shepard, a lawyer at Heller Ehrman in San Francisco. A good lawyer has to be able to tell clients that a judge or jury might see them differently, he continued. “Part of it is judgment and part of it is diplomacy.”

And of course, expert bias is pervasive in any field:

Several lawyers were dismissive of the study, noting that the statistics mean nothing when contemplating a particular case, with its specific facts and legal issues, before a specific judge. They stressed the importance of a lawyer’s experience.

But, models do better than experts:

But the study tried to account for that possibility and found that factors like the years of experience, rank of a lawyer’s law school and the size of a law firm were less helpful in predicting the decision to go to trial. More significant was the type of case.

And incentives and frames matter:

For example, poor decisions by plaintiffs to go to trial “are associated with cases in which contingency fee arrangements are common,” according to the report. “On the defense side, high error rates are noted in cases where insurance coverage is generally unavailable.”

Framing matters:

…

psychologists have found that people are more averse to taking a risk when they are expecting to gain something, and more willing to take a risk when they have something to lose.

“If you approach a class of students and say, I’ll either write you a check for $200, or we can flip a coin and I will pay you nothing or $500,” most students will take the $200 rather than risk getting nothing, Mr. Asher said.

But reverse the situation, so that students have to write the check, and they will choose to flip the coin, risking a bigger loss because they hope to pay nothing at all, he continued. “They’ll take the gamble.”

From Thaler’s talk about his book - Nudge

As seen in someone’s email signature:

Success is a lousy teacher. It seduces smart people into thinking they can’t lose.

– Bill Gates

Article in NYtimes about Habit forming, which talks about using availability (with vividness) & representativeness bias (and mindless choosing!) to create habit formation to reduce the spread of diseases.

Warning: Habits May Be Good for You

Somewhat similar to my earlier post on “The Checklist”

Diseases and disorders caused by dirty hands — like diarrhea — kill a child somewhere in the world about every 15 seconds, and about half those deaths could be prevented with the regular use of soap, studies indicate.

But getting people into a soap habit, it turns out, is surprisingly hard.

…

“There are fundamental public health problems, like hand washing with soap, that remain killers only because we can’t figure out how to change people’s habits,” Dr. Curtis said. “We wanted to learn from private industry how to create new behaviors that happen automatically.”

…

If you look hard enough, you’ll find that many of the products we use every day — chewing gums, skin moisturizers, disinfecting wipes, air fresheners, water purifiers, health snacks, antiperspirants, colognes, teeth whiteners, fabric softeners, vitamins — are results of manufactured habits. A century ago, few people regularly brushed their teeth multiple times a day. Today, because of canny advertising and public health campaigns, many Americans habitually give their pearly whites a cavity-preventing scrub twice a day, often with Colgate, Crest or one of the other brands advertising that no morning is complete without a minty-fresh mouth.

…

At about the same time, the company’s staff psychologists were beginning to extend their understanding of how habits are formed.

“For most of our history, we’ve sold newer and better products for habits that already existed,” said Dr. Berning, the P.& G. psychologist. “But about a decade ago, we realized we needed to create new products. So we began thinking about how to create habits for products that had never existed before.”

…

Those and other studies revealed that as much as 45 percent of what we do every day is habitual — that is, performed almost without thinking in the same location or at the same time each day, usually because of subtle cues.

For example, the urge to check e-mail or to grab a cookie is likely a habit with a specific prompt. Researchers found that most cues fall into four broad categories: a specific location or time of day, a certain series of actions, particular moods, or the company of specific people. The e-mail urge, for instance, probably occurs after you’ve finished reading a document or completed a certain kind of task. The cookie grab probably occurs when you’re walking out of the cafeteria, or feeling sluggish or blue.

…

“Habits are formed when the memory associates specific actions with specific places or moods,” said Dr. Wood, a professor of psychology and neuroscience at Duke. “If you regularly eat chips while sitting on the couch, after a while, seeing the couch will automatically prompt you to reach for the Doritos. These associations are sometimes so strong that you have to replace the couch with a wooden chair for a diet to succeed.”

…

Dozens of other companies have also redesigned advertising campaigns around habitual cues. Beer commercials, once filled with busty women in ill-fitting tops, are now more likely to feature groups of buddies, because research shows that groups of friends are one of the strongest habit cues. Candy bar companies, through commercials, have tied their products to low-energy cues, transforming what was once a dessert into a pick-me-up for cubicle dwellers.

…

Almost half of its people were accustomed to washing their hands with water after using the restroom or before eating. And local markets were filled with cheap, colorful soap bars. But only about 4 percent of Ghanaians used soap as part of their post-restroom hand-washing regime, studies showed.

“We could talk about germs until we were blue in the face, and it didn’t change behaviors,” Dr. Curtis said. So she and her colleagues asked Unilever for advice in designing survey techniques that ultimately studied hundreds of mothers and their children.

They discovered that previous health campaigns had failed because mothers often didn’t see symptoms like diarrhea as abnormal, but instead viewed them as a normal aspect of childhood.

However, the studies also revealed an interesting paradox: Ghanaians used soap when they felt that their hands were dirty — after cooking with grease, for example, or after traveling into the city. This hand-washing habit, studies showed, was prompted by feelings of disgust. And surveys also showed that parents felt deep concerns about exposing their children to anything disgusting.

SO the trick, Dr. Curtis and her colleagues realized, was to create a habit wherein people felt a sense of disgust that was cued by the toilet. That queasiness, in turn, could become a cue for soap.

A sense of bathroom disgust may seem natural, but in many places toilets are a symbol of cleanliness because they replaced pit latrines. So Dr. Curtis’s group had to create commercials that taught viewers to feel a habitual sense of unseemliness surrounding toilet use.

Their solution was ads showing mothers and children walking out of bathrooms with a glowing purple pigment on their hands that contaminated everything they touched.

The commercials, which began running in 2003, didn’t really sell soap use. Rather, they sold disgust. Soap was almost an afterthought — in one 55-second television commercial, actual soapy hand washing was shown only for 4 seconds. But the message was clear: The toilet cues worries of contamination, and that disgust, in turn, cues soap.

This is just awesome

As seen on nudges blog and indexed blog.

1. Challenge your assumptions (both implicit and explicit assumptions)
   • Think about why and under what circumstances your assumptions could be wrong
2. Be aware of any heuristics/Rules of thumb (System I thinking) during the decision making process
3. 3 C’s — Communicate, Communicate, Communicate
4. Assemble the most diverse team as possible
   • Be aware of GroupThink
   • Do not tolerate escalation of commitment
5. Reward based on the soundness/cleverness of the decision making process, not on the results!
6. Be Allocentric
   • Why are the buyers buying and the sellers selling? (Think about Incentives — always)
     • Who Chooses?
     • Who Pays?
     • Who Uses?
     • Who Profits?
   • Simulate by role playing
   • PARTS — Players, Actions, Rules, Tactics and Scope
   • Remember the typical games
     • Prisoner’s Dilemma (PD)
     • Entry/Preemption
7. Always reframe from a neutral, positive, and negative context (mentally change your reference state)
8. Expand your domain of analysis (Examine the games in the larger context)
9. Choice architecture matters
10. Consider the outside view (analysis based on the base rates and remember to avoid sample selection bias) versus the inside view

Excelled op-ed in the NYtimes titled “Your Brain Lies to You“

FALSE beliefs are everywhere. Eighteen percent of Americans think the sun revolves around the earth, one poll has found.

…

This phenomenon, known as source amnesia, can also lead people to forget whether a statement is true. Even when a lie is presented with a disclaimer, people often later remember it as true.

…

Adding to this innate tendency to mold information we recall is the way our brains fit facts into established mental frameworks. We tend to remember news that accords with our worldview, and discount statements that contradict it.

…

Psychologists have suggested that legends propagate by striking an emotional chord. In the same way, ideas can spread by emotional selection, rather than by their factual merits, encouraging the persistence of falsehoods about Coke — or about a presidential candidate.

…

Journalists and campaign workers may think they are acting to counter misinformation by pointing out that it is not true. But by repeating a false rumor, they may inadvertently make it stronger. In its concerted effort to “stop the smears,” the Obama campaign may want to keep this in mind. Rather than emphasize that Mr. Obama is not a Muslim, for instance, it may be more effective to stress that he embraced Christianity as a young man.

…

Consumers of news, for their part, are prone to selectively accept and remember statements that reinforce beliefs they already hold.

Thaler and Sunstein make similar arguments in their book: nudge about how voters rely on System I (Automatic, intuitive) brain rather than on the System II (Rational, Reflective) brain.

I plan to write about some frameworks on how to think about new products and innovation.

This is first article in that series.

This post is about the 9x effect in product management and innovation. Prof Gourville has written about this effect:

Gourville, J. T. (2004). “Why consumers don’t buy: The psychology of new product adoption.”

Essentially, product innovation occurs as per one of the 3 scenarios:

The most common scenario is the third one, where the consumers loses some (hence, the increase in cost due to increase in price or loss of some features) and gains some (increased benefits due to new features).

Enter Prospect theory:

1. Customers take reference points as given (status quo matters)
2. Relative reference frame
3. Losses loom larger than gains (~2.5x)

Which implies the “endowment effect”.

In addition, it is likely that the consumers will incur the costs now, but reap the benefits later (lack of salience of the benefits & hyperbolic discounting), further decreasing the consumers willingness to adopt the new product.

On the other side, the product manager/developer is biased towards the new product:

1. Reference frame is the new product — different status quo than the consumers
2. Emotional/unbiased opinion of the new product

This leads to the 9x effect — a mismatch between the consumers and the product developers/managers of about 9 times. Said another way, consumers only tend to adopt products that are at least 9 times superior to the existing products!

Excellent article on the nudge blog on Group deliberation failures

To summarize:

1. Shared information dominates/crowds out unshared (but known) information
2. Predeliberation errors are amplified
3. Cascade effect: Successors tend to not disclose their (unshared) information and conform with the initial speakers

Solomon Asch’s experiments on conformity are classic:

• Replicating the experiments today
• Asch’s conformity experiment

Check out the Solomon Asch Center

Lately, I have been reading some papers and books on Behavioral Economics. I must say that I am quite fascinated with the concept of “bounds of Decision Making”:

• Bounded Rationality: Individual judgements are limited in their rationality due to various reasons (lack of complete information, time and cost issues, self-serving bias, intelligence limits, perceptions, limited recall abilities, etc.)
• Bounded Awareness
• Bounded Ethicality: Our ability to be ethical is limited (System 1 effect).

In addition, there are inter-temporal inconsistencies (hyperbolic discounting: excessive importance to the present at the expense of sacrificing the future or long term interests!), bounds on self-interest (fairness bias).

The book by Max. H. Bazerman develops these concepts and is a great read (although it is a “text” book).