What Plato knew about behavioral economics

Fascinating story in Aeon.

Aeon: What Plato knew about behavioral economics

"Many of Plato’s dialogues dramatise the habits and processes that lead humans to false conclusions. He depicts people believing what they want or what they are predisposed to believe (confirmation bias); asserting whatever comes most readily to mind (availability bias); reversing their opinions about identical propositions based on the language in which the propositions are presented (framing); refusing to relinquish current opinions simply because these happen to be the opinions they currently possess (a cognitive version of loss aversion); making false inferences based on the size and representativeness of a sample of a broader population (representativeness heuristic); and judging new information based on salient current information (a version of anchoring). And this is only a partial inventory of the mental errors that he catalogues and dramatises."

Great article on Human Behavior Hacks

Found an amazing article on ways to use human behavior in your favor.

Build Your User Base with These Human Behavior Hacks

Framed as a discussion on how startup companies can best develop new products or services that can succeed, it provides some clear examples on how to tease out the truth from your target audience.

One of the critical recommendations is to avoid the trap where you believe you know exactly what your customer is looking for. Without data to support your suppositions, you could be dangerously exposed. This could be a fatal error if you bet on a solution and you turn out to be wrong!

Confirmation bias is perhaps the most common obstacle.

Confirmation bias manifests in a few ways:

• Only talking to people we think will agree with us.
• Writing off people who don’t agree with us as idiots or haters.
• Asking questions designed to support our hypothesis.

The author recommends having a neutral party take notes so that the interviewer can concentrate fully on the interview. At the end, they can compare notes. The note taker may be able to point out subtle changes in tone or interpretation.

The PM might say, “I think they really liked our solution.” And the engineer, freed up to really hear the call from a different perspective, might reply, “I’m pretty sure they were just being polite.” That’s how you counteract bias. You start small and take it interaction by interaction.

Other issues are hindsight bias (I knew it would work all along), supportive bias (sunk cost defense) or hyperbolic discounting (more weight to now than the future).

One other surprising method is to avoid asking about the future. Instead, ask about what people have done. They are more likely to be honest.

You want to capture quantitative data about what happened in the past. It won’t lie to you.

This is an area that’s especially sensitive to negative judgment from others. People want to idealize their future selves. They want to believe in their ability to work toward those goals. So when faced with past behavior that runs contrary, they might get defensive. They might be dishonest. You have to phrase your questions to make it acceptable for people to give answers that may not be perfect or socially acceptable.

“Instead of asking someone if they let their kids use an iPad (an assumed negative behavior), ask them how many days in the past week their kids used an iPad,” says Alvarez. “Most people will answer honestly because you already implied that the answer won’t be zero — and that it’s not zero for the other people you’re talking to.”

Overall, I thought it was excellent!

Buy experiences, not things

Original post:  Dec 29, 2014

A recent article in the Atlantic discusses a research paper in behavioral economics that came up with a recommendation for leading a happier life. According to their findings, we would be happier if we would buy experiences instead of material goods. One of the authors of the paper, Matthew Killingsworth, writes that "happiness is in the content of moment-to-moment experiences".

Over the past decade, an abundance of psychology research has shown that experiences bring people more happiness than do possessions. The idea that experiential purchases are more satisfying than material purchases has long been the domain of Cornell psychology professor Thomas Gilovich. Since 2003, he has been trying to figure out exactly how and why experiential purchases are so much better than material purchases. In the journal Psychological Science last month, Gilovich and Killingsworth, along with Cornell doctoral candidate Amit Kumar, expanded on the current understanding that spending money on experiences "provide[s] more enduring happiness." They looked specifically at anticipation as a driver of that happiness; whether the benefit of spending money on an experience accrues before the purchase has been made, in addition to after. And, yes, it does.

Essentially, when you can't live in a moment, they say, it's best to live in anticipation of an experience. Experiential purchases like trips, concerts, movies, et cetera, tend to trump material purchases because the utility of buying anything really starts accruing before you buy it.

Their research seems to point to an explanation for this phenomenon:

Gilovich's prior work has shown that experiences tend to make people happier because they are less likely to measure the value of their experiences by comparing them to those of others. For example, Gilbert and company note in their new paper, many people are unsure if they would rather have a high salary that is lower than that of their peers, or a lower salary that is higher than that of their peers. With an experiential good like vacation, that dilemma doesn't hold. Would you rather have two weeks of vacation when your peers only get one? Or four weeks when your peers get eight? People choose four weeks with little hesitation.

They go on to say that this runs counter to the widespread belief that experiences like vacations are gone once they have been completed while material objects will endure. That wondrous iPhone soon becomes passé and needs to be replaced.

The best explanation for the effect seems to be:

What is it about the nature of imagining experiential purchases that's different from thinking about future material purchases? The most interesting hypothesis is that you can imagine all sort of possibilities for what an experience is going to be. "That's what's fun," Kumar said. "It could turn out a whole host of ways." With a material possession, you kind of know what you're going to get. Instead of whetting your appetite by imagining various outcomes, Kumar put it, people sort of think, Just give it to me now.

It could turn out that to get the maximum utility out of an experiential purchase, it's really best to plan far in advance. Savoring future consumption for days, weeks, years only makes the experience more valuable. It definitely trumps impulse buying, where that anticipation is completely squandered. (Never impulse-buy anything ever.)

Here is the link to the full article:  Buy Experiences, Not Things - The Atlantic