How People Make Decisions and Why They Make Bad Ones
Nowadays, it’s all too easy to discover that your flight, leather sofa, or 42 inch plasma TV is now £100 cheaper. Which means that making a decision is not only tougher than ever, but also comes with more chance of regret.
In fact the digital revolution has changed the way that we make decisions, full stop. Years ago, you could fill in a paper-based application form in any order that took your fancy. Start at the beginning, skip to the end, complete the middle bit with the hard questions later. That’s not the case with web-based forms. You have to complete the task in the order that the company dictates. Plus you’ve only got a certain amount of time before your session times out and you have to start over again. Talk about pressure.
So to test the way that people make decisions, and discover more about how we can influence them, Sheena Iyengar of Columbia Business School convinced a car manufacturer to take part in a study. Evert time a customer ordered a car, they were asked to go online and choose the exact specification for the vehicle, which involved answering 60 multiple choice questions.
Half the respondents were presented with the questions ordered from ‘deep’ to ‘shallow’, and the other half were presented with them from ‘shallow’ to ‘deep’. Here, the terms shallow and deep refer to the number of options for each question. For instance, the ‘deepest’ question would be choosing the colour of the car which had 56 options, whereas, a shallow question would be to choose between a diesel or petrol engine.
Every question had a pre-assigned default option which could be chosen if you didn’t want to make a decision. Sheena was interested to discover which group would tire more quickly and be more likely to choose the ‘default’ option more often. Obviously this is useful to know if you want to influence people to choose a particular option that makes you more money. So what was the outcome?
Well due to an administrative error, Sheena is now the proud owner of seventeen Buicks in a variety of different colours, none of which fit on her driveway. She’s not very popular with the neighbours.
With regard to the survey, she discovered that people were more engaged – i.e. made more personal decisions – when they were presented with options that went from few to many. They simply eased their way into it, choosing the default option less and less as they went along.
The exact opposite was true in the other group. These are the people driving around in orange vehicles with white wall tyres and beige leather trim. They start off quite well, selecting their personal choices, but even though the options get fewer as they go along, they soon become disengaged and choose the default option more and more.
So who were most satisfied with their chosen vehicle? Not surprisingly it was the ones who made more personal choices. They eased themselves into the process and ‘learnt’ how to make decisions.
And as for the others with the crazy cars? Well, they have the option of donning a curly wig and a big red nose and working in a circus.
But here’s the dilemma. If you want your customers to choose more default options (because they are more profitable) give them a choice then reduce their options. If you want them to be happier with what they bought present them with options that go from few to many
Which would you prefer for free? A cafe latte or £3 in £1 coins?
I know what you’re thinking. That latte would look more warm and inviting and it’s always nice when someone takes the time to make you a drink and offers it for nothing in exchange. It has sentiment as well as value. But then again, if you choose the £3, you could spend it on whatever you like. Such as a magazine or sandwich. So the money has got to be the sensible choice, surely? Decisions, decisions.
Luckily we don’t have to guess which one most people would choose, or even rely on our own intuition. As always, the solution is to employ the services of someone like Dan Ariely, a professor of behavioural economics at Duke University in North Carolina. He’s not only an expert in his field but doesn’t mind getting paid in pizza rather than dollars which adds to his appeal if you don’t mind the tomato sauce down his shirt.
Dan and his chums looked at what actually motivates people and his findings proved something of an eye opener. For starters, it didn’t involve any dough-based delicacies. Not even for main. Putting this revelation to one side, Dan continued his study and asked hundreds of pizza-shunning public to sign up for a website or fill out a questionnaire, offering a variety of inducements along the way.
He discovered that when people were offered something tangible, like a pen or a paperweight, they considered its value to be much greater than it actually was. And people wanted it more. Think back to when you were a kid and those plastic toys that sometimes came free with a comic. Fifty years on and I still can’t get my Dennis the Menace gyroscope to fly properly.
All this demonstrates how difficult it is to make decisions. Why would an unbiased football referee not award a team a second penalty when the offence was even more blatant than the first? True, it defies logic, but then logic doesn’t always influence decision. It’s customary for a referee not to award a second spot kick so soon after the first, so, as creatures of habit, we keep doing what we keep doing.
The implication of this can be quite disturbing. It means that if you get somebody to behave in a certain way one time, you can actually go on to influence their decisions long into the future. That’s why banks spend a lot of money getting our business. They know that most people will stick with them, no matter what, for a very long time. And, of course, we all have our favourite consumer product brands that we know and trust. iPhone users may secretly covet other smart phones but can’t bring themselves to desert the Apple brand. Price doesn’t come into it.
Influencing the first decision people make about something is known in psychology as a ‘default’. It represents the path of least resistance and is an incredibly appealing decision for humans to make. It’s actually a decision to not make a decision. Online retailers have cottoned on to this. They design the decision environment in such a way that they influence your choices. Do you really not want more leg room, an onboard meal or priority boarding? Are you sure? Can you be trusted abroad on your own? Sometimes it’s easier to say yes.
Dan also discovered that the perceived value of a product is also increased simply by placing it next to a better quality, more expensive one. For example, this could be a strategy used by jewellers when arranging their window displays. Not that I would know or my wife would ever find out. I’m just saying.
The reality is that a concrete thing is more valuable and people then want it more.
In a study by Southern Methodist University (SMU) on new customers of a Dallas-based dry cleaning chain at two locations over an eight-month period average spend on dry cleaning spending was 27% higher when people were offered a gift versus those people offered an equivalent discount.
The pool was 900 new customers and the customers were randomly assigned to one of three groups. Each received a welcome letter from the management.
One test group received three gifts: a sewing kit and lint brush, an imprinted latex balloon stress reliever and an imprinted notepad dispenser, each valued at $5 every 10 to 12 weeks.
The second test group was offered $5 discounts on dry cleaning orders, also at intervals of 10 to 12 weeks.
The third test group received only the welcome letter.
The purchasing activity of each group was then measured. Over the eight-month period studied, average dry cleaning spending in the ‘Gift’ group was 27% higher than the group offered discounts and 139% more than the group offered no incentive. The ‘Gift’ group spent $66 per active month compared to $52 for the discount group and $39 for the group that received only a welcome letter. After subtracting promotional costs from sales, the ‘Gift’ group was 20% more profitable than the group that received discounts and 123% more profitable than the group that was not exposed to promotions.
And in another experiment (also conducted by SMU) involving a goods delivery service, three customer groups existing residential, new residential and business were given either a $2 coupon, a gift valued at $2, or nothing at all. Each group was then measured on the basis of average number of repeat orders and the average number of days between orders.
In all groups studied, the food-service customers who received gifts ordered more frequently, re-ordered sooner and placed orders significantly higher in dollars than those who received coupons.
So, back to the latte and the three quid. By now the answer should be clear. It is, of course, the latte. Unless, of course, you don’t like coffee. Then you can use the three quid to buy a tea.