Warning: the following e-newsletter contains adult themes: it should not be read by Pollyannas, the easily disaffected, or those with too rosy a view of human nature.

People are biased, myopic, prone to peer pressure, and liable to have their judgement distorted by random factors or manipulation.

No, dear reader, these are not the jaundiced prejudices of a curmudgeonly middle-aged consultant: they are the findings from a large, growing (and frankly, terrifying) body of research over the last 40 years in a discipline known as behavioural economics.

Here is a sampler of those findings. [Those who wish to read more or locate primary sources are encouraged to read chapter 11 of David Brooks' The Social Animal and chapter 12 of Douglas Hubbard's How to Measure Anything, from which the potted summary below has been extracted.]

Peoples' behaviour is primed by a series of unconscious contextual factors. Research in the UK found that when French music was played in a shop, there was an increase in sales of French wine; when German music was played, sales of German wine increased.

In another experiment conducted at San Diego University, subjects were asked to grade a student essay; a photo of the student was attached to the essay. It turned out that the grade given for the essays was found to strongly and positively correlate with the attractiveness of the student ... notwithstanding that all subjects grading the essays received the same essay.

A bank in South Africa worked with a Harvard researcher to conduct an experiment about what loan solicitation letters worked best. They sent out letters with different photographs and loan rates, and found that a letter with a photograph of a smiling woman did particularly well among men: it increased demand for loans by an amount equivalent to a five percentage point reduction in the interest rate.

In other research, Asian American women were reminded of their ethnicity or their gender before undertaking a math test; those who were reminded of their ethnicity performed better on the test, while those reminded of their gender performed worse.

Expectations also prime peoples’ experience: people who were given a prescription pain reliever they were told cost $2.50 a pill experienced more relief than those given what they were told was a 10 cent pill ... even though both pills were placebos.

Anchoring is another, related phenomenon: peoples' estimate of something is influenced by what came before, even if the two sets of things are completely unrelated. In an experiment in the US, subjects were asked to write down the last four digits of their social security number, and then to estimate the number of physicians in New York City. There was a correlation between the two numbers (of 0.4) which was much higher than could be attributed to chance alone.

Other research asked students to write down the last two digits of their Social Security numbers and then bid on a variety of products. Those with high Social Security numbers (between 80 and 99) bid between 216 and 346 percent higher than students with low digit social security numbers (those with numbers between 1 and 20).

Peer pressure and bandwagon bias also impact human judgment. A famous experiment showed how people’s measurement is impacted by others’ estimates: subjects were given what they were told was an eye exam and asked to identify which of three lines was the same length as a test line. Ninety-nine percent of respondents chose the correct line. But the results changed dramatically when students were in a room with other 'plant' respondents who were set up to give an incorrect answer before the real respondents. When there was one plant, the respondent was only 97% likely to choose the right answer; when there were two plants giving the wrong answer only 87 percent chose the right answer, and when there were three plants giving the wrong answer, only 67 percent of respondents chose the correct answer.

Loss aversion is another phenomena showing skewed judgement: people unduly weigh the fear of loss relative to the prospect of gain. In experiments where people were asked if they would accept certain bets, it was found that people needed the chance of winning $40 before they would place a bet that might cost them $20.

Yet other research shows skewing going the other way when it comes to overconfidence: a swathe of research shows that people systematically overestimate their ability in a range of activities: statistically, of course, half of a population must be above average and half below the average (assuming a non-skewed distribution). Yet ninety percent of drivers believe they are above-average drivers; 94 percent of college professors think they are above-average teachers; and 98 percent of students say they have average or above average leadership skills.

The overconfidence seems to be worse among the incompetent, for whom research has shown that not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realise their inflated self-assessments. Across a number of studies authors found that participants scoring in the bottom quartile on tests of grammar, logic and humour grossly over-estimated their performance and ability: although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd percentile.

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Empirical research it seems, has finally caught up with what How to Win Friends and Influence People author Dale Carnegie wrote 80 years ago:

When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bristling with prejudices and motivated by pride and vanity.

So, where does this sobering series of insights into human judgment take us? Although there are many takeaways from this research, I see two sets of strategic management implications for the executive or decision-maker.

The first is the fairly obvious one for commercial businesses, particularly those in the retail sphere, who will simply want to prime their customers for more sales or anchor sales at higher price points to improve their bottom line. Such businesses will pump out French music near their displays of French wine, or insert the idea of a higher quantity of sales in a prospect’s mind with offers such as ‘Limit of 12 per customer’.

The other main direction, which is more my focus, is to harness the forces of priming, anchoring, bandwagon bias and so on as part of a management effort for the accomplishment of organisational goals and higher joint performance. I will elaborate on this on the next e-newsletter, but here are two examples of what I mean.

I contend that a structured, programmed approach by leadership to define and improve performance, while not reducing irrationality, can at least marshal it in productive ways. For example, bandwagon bias can be utilised to build momentum for a change program or the accomplishment of an organisational goal (boost community awareness, reduce operating costs, improve response times, reduce waiting times etc.) among an executive team, staff, stakeholders, customers/clients or the public at large; in short, peer pressure can be used along agreed lines for positive ends.

The other application area is through the use of a solid base of evidence to anchor key decisions and prime managers with a core of facts that are accurate, relevant, and defensible. This use of priming and anchoring pushes for management efforts that are grounded in reality, and away from mere exchanges of opinion and hearsay.

There will be more to say about these applications in the next e-newsletter, but in the meantime I hope this has given you an appreciation both of the shortcomings of human judgement as well as a sense of how those shortcomings might be marshalled to work for us rather than against us.

Warm regards,

Director I Michael Carman Consulting

PO Box 686, Petersham NSW 2049 I M: 0414 383 374

David Brooks (2012) The Social Animal Random House.
Douglas W. Hubbard (2010) How to Measure Anything: Finding the Value of "Intangibles" in Business John Wiley & Sons.

© Michael Carman 2017