The Why Axis book introduced me to the term design thinking and reminded me that a persuasive and powerful challenge to the status quo requires us to do a little more than simply try another way of doing things.
Correlation or causality?
Establishing if a relationship between two variables is truly causal or merely a correlation is at the heart of experimental design, and you have learnt something about how the world works.
It is difficult to find true causal relationships because the world is full of complicated relationships. The best way to get at causality is through randomised experiments.
What makes people do what they do?
At the root of human interest lies self-interest, not necessarily selfishness. Discover what people value by framing the right question, and you can gather insights to accurately figure out the required triggers and mechanisms that influence behaviour.
So, what do people really value?
Money? Relationships? Praise?
Types of incentives
A person with intrinsic motivation wants to do a task for the pleasure involved in doing the task itself.
A person with extrinsic motivation wants to do a task to receive a reward or avoid a punishment.
Incentives don’t always work the way you would expect. It is not as simple as negative incentives in the form of fines or punishments, or positive incentives to encourage desirable behaviour.
To understand how incentives work, first you need to know that not all incentives are created equally, because people value different things, and it is not always easy to find what a person truly values and why.
Introducing incentives can change the meaning and may not add weight, but actually devalue the change that you are looking to create. The money offered can crowd out the higher motivation of wanting to do the right thing, intrinsic motivation, and it can change the perception of what you are trying to achieve.
We often rely on a loose agreement, an unsaid expectation to do the right thing. If there is an expectation set, then being clear on what happens when you don’t hit that expectation is important; weighting needs to be significant, as there is a tipping point when using money as the incentive. Raise the bar, pay or charge enough or don’t do it at all.
Getting productive
Kids respond well to immediate rewards. Providing the incentive and then threatening to remove it if the required behaviour is not achieved turns out to be more powerful than providing the incentive post-behaviour. Loss aversion.
Worth noting that high-school kids are comparatively harder to motivate than younger kids. Fourteen appears to be the cut-off. If you have not learnt to focus, solve problems, or stay out of trouble by fourteen, then the odds of success are low.
For factory workers, giving workers a stake in the production and then focusing them on the losses that come when production is not forthcoming, i.e., hitting a productivity measure and you get a bonus, works best.
Gain framing works less well. Here, you get the extra incentive up front, but if your standards drop, it is taken from you.
Are you competitive?
Create a competitive interview process for a highly incentivised role, and you will shift the recruitment bias towards men. Women are less likely to raise their performance to meet competitive conditions or environments. Paradoxically, women compete if the environment in which they were nurtured, matriarchal, dictates that they should.
Change the way children are socialised to react to incentives, and you change their future. Exposing girls to a competitive environment at an early age may help counter gender bias.
What would you do if faced with this challenge?
You have 10 tennis balls and a bucket 3m away from you. You get to choose between £1.50 per ball successfully thrown into the bucket, or £4.50 for each ball that beats your opponent’s score. If it is a draw, then you both get £1.50 per ball that is successfully thrown into the bucket.
Note: Both my little girls (8 and 9 at the time of writing) chose the £1.50 option, and my partner, who by the time she was 14 was training competitively as an athlete, chose the competitive option.
We have some work to do in our house.
Economics of discrimination
When we think of discrimination, we think of it based solely on animus towards colour, religion, or just about anything else that separates “us” from “them”.
To understand discrimination is to understand what is behind our choice, not our action. Economic discrimination is driven by the other party thinking they can gain an advantage in an attempt to boost their profits.
If we feel that we are experiencing economic discrimination, not animus, then it can be countered by our actions. We can find ways to signal that we are just like the people who are not being discriminated against. We can say that we are getting other quotes. We can be prepared and do our research on prices.
Social norms and pricing
People want to keep up with the Joneses. To apply peer pressure, tell them what the Joneses have done.
Once in the game, peer pressure no longer works. Price incentives do.
Your posture matters
Reciprocity. Act unselfishly if you want others to do the same. Treat clients as volunteers.
Offer opt-outs. Provide permission-based marketing.
Smile Train and Wonderwork charities discovered that by introducing an opt-out treatment to their flyers, they raised more money than using the standard treatment. In the opt-out treatment, 39% opted out, and those who remained contributed more to the charity. The charity saved on postage by contacting only those donors who were engaged. A true win-win.
Pay what you want
Selling photos at the end of a theme ride, Disney combined a charity donation with a pay-what-you-want offer.
Using 4 treatments:
Pay what you want
Pay what you want, plus 50% to charity
Fixed price $12.95
Fixed price $12.95 plus 50% to charity
More people (8%) bought the photo on the pay-what-you-want treatment, but most only paid a dollar. Adding in the 50% to charity option saw purchases drop to a 4% purchase rat,e but people paid $5 instead of $1. Since Disney were doing it anyway and the service is automated, Disney upped their profits as a result of applying some simple design thinking.
You are not the only one
People order up if they split the bill at a restaurant, not because we are mean, but because we are responding to the external pressure of others. A negative externality, a spillover, is enjoying the benefit at the expense of others.
People like betting on success
Follow-the-leader effect. If your fundraiser is nearly done, people are more willing to give money compared to a request from a campaign with a seemingly low return.
We get the warm-glow effect by doing the right thing, joining a fight, and feeling good about what we give. But the leader effect trumps it; a donor who backs a successful charity still gets the warm-glow effect with an added bonus, conformity.
People also like to increase their chances of getting something back. Lotteries are good, tontines are better. Enter a lottery, and your chance of winning goes down the more people who are in the draw. With tontines, you have a fixed chance of winning, and the more you put in, the more you can get back out. Used in Europe to fund wars and build government projects like the Richmond Bridge, the tontines work.
Going with your gut can be expensive
Good companies solve problems. Netflix was based on a great question:
Would people pay a monthly subscription fee to have DVDs delivered to their doors? Yes.
A great question is a good start, but it is not enough. Netflix nearly stacked it on several occasions through clumsy broad-brush-stroke changes in policy that changed how they interacted with their customers.
Small-scale experiments to gauge customer reactions remove the risk of taking down the whole company. Insights and unexpected results come from looking at the motives behind real-life decisions. Manipulating various factors in the environment can help companies better understand the causal relationship between a change in strategy and a response in consumer, competitor, employee, or stakeholder behaviour.
Typically, the larger and more successful a company is, the less alive and entrepreneurial it can become. Intuit, an accounting software company, learnt to overcome a large dose of loss-aversion fear by introducing low-fidelity rapid experiments, becoming agile and innovative in the process.
The upside of thinking big but acting small is that insights and results can be scaled and retested until you are sure.
Quality is not objective. Pricing is subjectively biased. The connection between price and quality is assumed. This leaves companies to work with historic data, gut feel, focus groups, and copying as pricing strategy options; you guessed it, in truth, most companies have no clue what people are willing to pay.
Running experiments can turn a business from good into great, provided you follow some basic experimental design principles. The band Radiohead famously sold musical downloads using a pay-what-you-want scheme, but without control, it is hard to say what would have worked best for the band.
If CEOs are willing to forgo the short-term pain of investment for the long-term gain, it pays to apply some design thinking. Here is what you need to consider:
Define the change you seek.
Define your measure of success.
Develop your hypothesis to test.
List your assumptions and constraints.
Think of different ways (treatments) to get what you are measuring to change.
Use treatment options for comparison.
Use a control group.
Find ways to randomise the methods.
Investigating problems, gathering information, and coming up with creative solutions can be the difference between a good company and a great company. Great companies know it’s a numbers game; the more you get wrong, the more likely it is that you will also stumble across the right way to do things.
The alternative is to guess.
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