So, today is my birthday and this year it is also the wedding day of prince William and Kate.

How do I feel about this?  Well, there is some interesting research showing that when kids have their birthday on a special day (Christmas, new year etc), they are likely to feel less special and suffer in terms of their confidence and social fit.

I was wondering if this would also happen to me, but then one of my friends made me realize that I need to be less selfish and also consider how this joint celebration might affect the well-being of prince William and Kate.

I do hope that they will continue to feel special despite the selection of their wedding day.

P.S I met the Duke of York earlier in the year and I asked him if the timing of this wedding means that I should be invited – but surprisingly he said “no.”

There’s been plenty of talk lately –in these pages and elsewhere– about a new kind of capitalism. About creating things because they’re good for society. About understanding, as Michael Porter and Mark Kramer suggest (“Creating Shared Value,” HBR January-February 2011), that not all profits are created equal: Profits derived from making the world better are superior to those derived from the consumption of useless, or even harmful, junk.

At the risk of touching the third rail, I propose that getting people to want things they don’t really need may be far more valuable to society than we think.

Imagine that I started a business selling beautiful bottles of air for $10. I’d call them Respirer (res-pir-AY– it’s French!). My advertisements would laud Respirer’s purity, evoking bracing mountain air. (Fewer than 10 parts per trillion of particulate in every bottle!) Celebrities would endorse Respirer’s rejuvenating effects. (Kate Winslet starts every day with Respirer!) In a matter of months, department stores would be selling out, and spas would brag that their saunas piped in pure Respirer air.

Respirer would be a runaway hit. Of course, it would be just air, and in most places you could get all the reasonably high-quality air you wanted free. So how could this clearly useless product have a beneficial effect on the economy? It would motivate people. By hyping Respirer, I’d give consumers something to want, and in order to be able to afford it, they’d have to work. They’d have to be productive.

We often talk about how marketing’s job is to get us to want things and spend our money, sometimes foolishly. But that reflects only marketing’s output. Marketing also creates input: It spurs us to work to earn the money to buy the things we want.

Consider for a moment a world without marketing hype. One in which there’s nothing you really desire beyond what you need to live. There’s nothing your kids want; they don’t bug you every time you’re in the supermarket. How hard would you work in such a world? What would motivate you to work harder?

Now consider our current consumer environment: Multiply the desire for Respirer by thousands of products of varying levels of utility: iPads, leather couches, crystal martini glasses, cars, garden gnomes. It’s like having thousands of little motivational speakers hovering around us.

Suppose I’m a surgeon. Could it be that my desire for Respirer, and all this other stuff, would spur me to work harder? To innovate new procedures that would save lives and also enrich me personally? I suspect it’s very likely.

Let’s be clear. I don’t mean to say that marketing will save our economy. Or that marketing things we don’t need is the key to a prosperous planet. The line is narrow, indeed, between being motivated to work and mortgaging the future (both your own and society’s) to get stuff like bottled air.

Still, as we continue to redefine capitalism, let’s not discount the role of aspiration and the desire for incremental luxuries–things we want but don’t necessarily need. They can fuel productivity and thus have a valuable function in our economy.

Originally published in Harvard Business Review, May 2011.

The concept of opportunity cost can be seen in the emergent societal dilemma presented by Rebecca Black through her insightful lyrics:

“Kickin’ in the front seat
Sittin’ in the back seat
Gotta make my mind up
Which seat can I take?”

As we can see, Rebecca must choose between kicking in the front seat and sitting in the back seat – two mutually exclusive options where her choice of either eliminates the opportunity to choose the other.

The same evaluation of opportunity cost can be seen in monetary exchanges that we make every day. In my dissertation work, I’ve focused on when consumers are more or less likely to reframe purchase decisions (like “Do I buy Rebecca Black’s ‘Friday’ or not?”) as allocation decisions (like “Do I buy Rebecca Black’s ‘Friday,’ or do I spend my money on something else instead?”).

Two important drivers are:
1) how constrained consumers feel
2) how much their resources bring other purchases to mind

First, I find that when consumers face more constraints, they are more likely to incorporate other purchases into their decisions. This constraint can be driven by cash on hand, annual income, or even the cycle on which you are paid. People paid weekly face less constraints on average (at least until the end of the month) than those paid monthly. As a result, those paid monthly are more likely to think “Do I buy this CD or not?” whereas those paid weekly are more likely to think “Do I buy this CD or do I spend my money on something else instead?”

Second, consumers can actually be more likely to fixate on their opportunity costs when they use resources with specific associations. Think about spending a Starbucks gift card versus a Visa gift card to buy Rebecca Black’s CD (imagining that it could be on the eclectic menu of CDs at Starbucks). The Starbucks gift card immediately makes you think about the coffee you could buy, so the decision changes from “Do I buy the CD or not?” to “Do I buy the CD or coffee?” The Visa gift card could be used to buy nearly anything but it doesn’t make you think about something else in particular, so the decision remains “Do I buy the CD or not?” What does this mean in practice? Starbucks coffee lovers are actually more likely to spend the Visa gift card than the Starbucks gift card even though the Visa gift card could be used to buy anything – including a Starbucks gift card!

Here at the Center for Advanced Hindsight, we see these factors at play constantly — and not just when spending money. At the beginning of the day, I have plenty of time (or convince myself of that at least), so the decision to write a blog post is “Do I write it or not?” but at the end of the day, the decision is “Do I write it now, or do I work on my paper, or do I watch the ‘Friday’ video, or do I go to sleep?” Some times of day have specific associations, so at 10:00am, the question may be “Do I write the blog post or not?” whereas as at 12:00pm, the question is “Do I write the blog post or do I eat lunch?” Take a guess when I finally got around to writing this… But our discussion of procrastination will have to wait for another day.

For more details, see “Opportunity Cost Consideration,” forthcoming in the December 2011 issue of the Journal of Consumer Research.

~Stephen Spiller~

Our recent studies of medications labeled “natural” have yielded some interesting findings. First, most people prefer medications that are natural to medications that aren’t natural. Secondly, and perhaps most surprisingly, people do not see natural medications as being more effective than non-natural medications at attacking the disease at hand. So why do they prefer natural? It turns out that many people believe that natural medications have fewer unintended consequences in both short time and long term side effects. This stems from popular belief, sometimes called “caveman theory,” that our bodies are attuned for diets that were common thousands of years ago and thus might not react well to newer, synthetic products. Hopefully new, exciting research will shed light on the consequences, both positive and negative, of these beliefs.

The realization of how relative happiness is became very apparent to me some years ago when I was in the burn department.

One day a new patient came to the burn department — Miri, a teenage girl.  Miri was 17 and her boyfriend just informed her that he was leaving her for someone else.  As passionate as only teenagers can be, she went to the bathroom, slashed her wrists and poured bleach on them.  As luck had it, when she was brought into the emergency room, Dr. Batya Yafe was there, an amazing woman and specialist in both plastic surgery and microsurgery who was able to reconstruct Miri’s blood vessels and take care of the damaged skin on her wrists.

A few weeks later Miri was a functional teenager again, but with second degree burns on her wrists.  Relative to the rest of us, this was a relatively minor injury, but I am sure it was still very painful.  The first few weeks were a serious adjustment for her – switching from being an active teenager in love to a patient in the burn department surrounded by these awful smells and many people in tremendous agony is not easy for anyone and particularly not for an idealistic teenager.  The amazing thing was to see her a few weeks later and in the months to follow when she would come back to visit us.  She seemed like a new and altogether person.  She was happy, energetic, and with an appetite for life.

The scars that Miri carried on her wrists must have made her feel immensely different in the world outside the burn department, a constant reminder of her time spent in the burn department and the events that brought her there.  I also suspect that these scars acted as a permanent reminder of what could have been, and her relative fortune in life.  Was her newfound happiness related to the negative experience in the burn department?  I imagine that Miri’s injury and her weeks in the burn department adjusted her perspective on life.  Both the struggle she had with her burns, and the comparison to the other people in the burn department must have dwarfed her perceptions of her romantic trouble in comparison.

The burns on her wrists really helped Miri, and more generally I think that injuries that “work best” in giving people a new perspective on life are those that continuously act as a reminder of their relative happiness — even once the initial injury is over.  Miri’s wrists, or losing a leg, for example, are promising on these grounds because the loss can act as a permanent reminder. And so are deep burns (the superficial ones are not as good because they can disappear with time).  Lets be clear — I am not advocating burning people who are not very happy with their lives and letting them struggle with the pain and agony of burns, the slow recovery, and the comparison to other less fortunate individuals — but I do think that ironically such negative experiences can actually improve the outlook people have on life and their motivation for living.

So, as we plan for 2011 maybe we can find ways to be happy without any serious injuries.

Happy new year

Dan

I recently had an interesting meeting with a locksmith:

As I mention in the video, what’s really interesting is that this locksmith was penalized for getting better at his profession. He was tipped better when he was an apprentice and it took him longer to pick a lock, even though he would often break the lock! Now that it takes him only a moment, his customers complain that he is overcharging and they don’t tip him. What this reveals is that consumers don’t value goods and services solely by their utility, benefit from the service, but also a sense of fairness relating to how much effort was exerted.

Now imagine how much more people would pay if they knew the effort that goes into all kinds of products and services?

If you practice kicking a soccer ball with your eyes closed, it takes only a few tries to become quite good at predicting where the ball will end up. But when “random noise” is added to the situation — a dog chases the ball, a stiff breeze blows through, a neighbor passes by and kicks the ball — the results become quite unpredictable.

If you had to evaluate the kicker’s performance, would you punish him for not predicting that Fluffy would run off with the ball? Would you switch kickers in an attempt to find someone better able to predict Fluffy’s involvement?

That would be absurd. And yet it’s exactly how we reward and punish managers. Managers attempt to make sense of the environment and predict what will result from their decisions.

The problem is that there’s plenty of random noise in competitive strategic decisions. Predicting where the ball will go is equivalent to deciding whether to open a chain of seafood restaurants on the Gulf Coast. The dog running off with the ball is the BP oil spill. When the board reviews the manager’s performance, they’ll focus on the failed restaurants. The stock is down. The chain lost money. Since the manager’s compensation is tied to results, he’ll incur financial penalties. To save face and appear to be taking action, the board may even fire him—thus giving up on someone who may be a good manager but had bad luck.

The oil spill example is an extreme case. In the real world, the random noise is often more subtle and varied—a hundred little things rather than one big thing. But the effect is the same. Rewarding and penalizing leaders based on outcomes overestimates how much variance people actually control. (This works both ways: Just as good managers can suffer from bad outcomes not of their own making, bad managers can be rewarded for good outcomes that occur in spite of their ineptitude.) In fact, the more unpredictable an environment becomes, the more an outcomes-based approach ends up rewarding or penalizing noise.

In the last year I’ve asked many board members how much of a company’s stock value they think should be attributed to the CEO’s strength, and the answer is surprising. They estimate that you’ll get about 10% more stock value, on average, from a good CEO than from a mediocre one. Implicit in that estimate is the understanding that many outcomes are outside a leader’s control.

We can’t entirely avoid outcome-based decisions. Still, we can reduce our reliance on stochastic outcomes. Here are four ways companies can create more sound reward systems.

1. Change the mindset. Publicly recognize that rewarding outcomes is a bad idea, particularly for companies that deal in complex and unpredictable environments.

2. Document crucial assumptions. Analyze a manager’s assumptions at the time when a decision takes place. If they are valid but circumstances change, don’t punish her, but don’t reward her either.

3. Create a standard for good decision making. Making sound assumptions and being explicit about them should be the basic condition for getting a reward. Good decisions are forward-looking, take available information into account, consider all available options, and do not create conflicts of interests.

4. Reward good decisions at the time they’re made. Reinforce smart habits by breaking the link between rewards and outcomes.

Our focus on outcomes is understandable. When a company loses money, people demand that heads roll, even if the changes are more about assuaging shareholders than sound management. Moreover, measuring outcomes is relatively easy to do; decision-based reward systems will be more complex. But as I’ve I said before, “It’s hard” is a terrible reason not to do something. Especially when that something can help reward and retain the people best able to help you grow your business.

This post is based on my column at HBR

Recent research (1) shows how physical contact can promote trust, even among complete strangers. Paul Zak, a neuroeconomist at Claremont Graduate University (together with Vera Morhenn, Jang Woo Park, and Elisabeth Piper), studies the links between levels of oxytocin (the “bonding” hormone) in relation to economic decision-making. In their study, they looked at participants’ responses in the Trust Game when they were (or were not) given massages. First, let’s take a look at how the classic Trust Game works between two players (who never meet):

• Player 1 gets some money ($10 in this case) and the option to send none, some, or all of it to Player 2, knowing that the money that is sent will be tripled on its way into Player 2’s hands. So, if Player 1 decides to send $4 to Player 2 (and keep $6), Player 2 will receive $12 ($4 x 3).
• Player 2 then has the option of sending none, some, or all of the money back.

Paul and his collaborators found that a mere 15-minute massage increased the amount of oxytocin in the bloodstream, leading participants to be more trusting of their anonymous partners in the game. Those who were massaged (women, especially) were primed to be more empathetic and trusting, ultimately sacrificing more to achieve mutual benefit. When massaged, Player 1 sent more money and when massaged Player 2 gave more money back.

But it’s probably not just oxytocin guiding these trusting gamers. Another study from Cedars-Sinai Medical Center (2) showed that those who received a 45-minute Swedish massage (as compared to a light-touch control group) had decreased levels of the hormones cortisol (released during stress) and vasopressin (linked to aggression and cortisol release). Basically, the Swedish massage relaxed participants, decreasing their physiological stress response.

In addition, An experiment conducted by Jonathan Levav and Jennifer Argo (3) showed that participants who were physically touched by a female experimenter (on the shoulder or with a handshake) made riskier financial decisions like gambling or investing money. Why? The contact made them feel secure and safe from harm. Consequently, like their massaged counterparts, they were more willing to take risks for potentially greater gains.

Being physically touched, whether with a kneading massage or a comforting pat on the shoulder, seems to encourages cooperative behavior. While these decisions may benefit others more than ourselves (at least in terms of immediate monetary gain), they are not necessarily ill-advised. In fact, the decision-makers who gave money to an anonymous partner ultimately felt better about their choices.

With this in mind, we purchased a massage chair in the Center for Advanced Hindsight. Now, we are looking for volunteers to help us test what other benefits we can get from massage.

2: Mark H. Rapaport, Pamela Schettler & Catherine Bresee. “A Preliminary Study of the Effects of a Single Session of Swedish Massage on Hypothalamic–Pituitary–Adrenal and Immune Function in Normal Individuals”. The Journal Of Alternative And Complementary Medicine, 16 (1-10), 2010.

3: Psychological Science (2010), Jonathan Levav and Jennifer J. Argo, Physical Contact and Financial Risk Taking

A few weeks ago we conducted an online study on this question (the link to the survey was the “Click to participate” on the right side of the screen), and I wanted to thank the participants and tell you a bit about what we found.

In this study all the participants viewed a potentially funny video involving an individual who would seem to have “issues.” (http://www.youtube.com/watch?v=-Sd-j0rKeKw) The video clip showed a college student getting upset in an arguably overdramatic fashion after she got in trouble for inadvertently setting off her sorority house’s fire alarm by using the house’s fire extinguisher just for fun. Her friend apparently found it amusing enough to post it on youtube, and the clip has received millions of views since then.

The study had three groups: The first one was not given any additional information regarding the person.  A second group was told that this person had suffered from stress since childhood.  The third group were told that the person student in the clip had suffered from OCD since childhood.

What we found was that participants who were told that the girl had suffered from OCD since childhood found the clip less funny, laughed out loud from it less, and were less likely to recommend it to others than other participants. They also felt worse for the student and thought she deserved a smaller fine for inadvertently setting off the sorority house’s fire alarm than if they were either told beforehand that the student had suffered from stress since childhood (or received no justification at all). Participants who were told she had OCD also thought she seemed more likeable, intelligent, and creative. But they also thought that she seemed like a bigger loner and more antisocial.

What I think this means (and we need more research on this) is that giving individuals a disorder-label causes others viewing them to place the blame on the disorder and not on the person.  Think for example about a parent who is told that their kid has ADHD – would this parent blame themselves less than if they were told that their kid is an active difficult kid?  I think the answer is yes, and maybe this is one of the reasons that we as a society seem to be obsessed with diagnostic labels (other reasons include incentives for psychologists, medical companies etc).

By the way, did I tell you that I have a Restless Hand Syndrome”?

Irrationally yours

Dan

There are a few topics that Mother Teresa and Joseph Stalin agreed on, other than the cause for human apathy. So I suspect that both would be surprised – as I am — about the reaction to the BP oil spill.

If six months ago someone were to describe to me a tremendous oil spill and ask me to predict our collective reaction to it, I would have said that we would be highly interested in this disaster for a week or two and, after that short time, our interest would dwindle to “mildly interested.” After all, we (the public) appear only vaguely interested in a whole slew of environmental issues. The destruction of the Amazon rainforest, for example, has been going on for decades. Since 1970 we’ve managed to destroy about 600,000 square miles (www.mongabay.com/brazil.html), but we’re so used to these kinds of statistics that no one seems to care much.

So, why is it that we care so much about the BP oil spill than what happens on a daily basis in the Amazon? Here’s what we know about human caring and compassion.  First and foremost, it is based on our emotions rather than our reasoning. Joseph Stalin said, “One death is a tragedy, a million is a statistic.”  Mother Teresa said, “If I look at the masses I will never act, but if I look at the one I will.”  In oil spill terms: We see pelicans and turtles mired and dying in oil, and we want to cry. We hear about families who have had their homes ruined and their livelihoods horribly affected or even destroyed, and we sympathize with their helplessness and want to do something to help them recover.  Our compassion isn’t necessarily proportional to the magnitude of the catastrophe. It depends on how much of our emotion is invoked.

Perhaps I’m mistaken about human apathy, but it is also possible that there are particular features of the BP oil spill that influence how much we care, and that if these features were different, we would care substantially less, even if the magnitude of the disaster were the same.

Here are a few characteristics that might differentiate the BP oil spill from the destruction of the Amazon. First, it is a singular event with a precise beginning. Second, while the tragedy was ongoing (and we are not yet sure if it has ended or not) it seemed to become more desperate by the day. Third, we have a single organization that we can villainize. In contrast, in the Amazon, there are many organizations and individuals at fault, both in the countries where deforestation is occurring and abroad. And fourth, the Gulf is so much closer to home (at least for Americans).

The BP oil spill is, of course, a hugely devastating tragedy. At this stage, we don’t fully understand the magnitude of its consequences, which will likely last for decades. At the same time, it might be worthwhile to take this moment in history as an opportunity – when are caring about this tragedy is still high – to reflect on our larger relationship with the oceans, and the apathy with which we generally greet the less dramatic, but perhaps equally devastating, environmental consequences of overfishing and “everyday pollution.”

I suspect that, because our abuse of the oceans is commonly the result of many small steps by many people, we fail to become enraged with either the process or the outcomes. But we should be. And we should do our best to take better care of our oceans, and not only when the pollution is caused by a single large, easily villainized organization.

Maybe this is another case in which we want to make sure that we don’t waste a really good crisis (for a related missed opportunity see financial crisis). Maybe it is time to look more broadly at our interactions with the oceans and make it a better long-term relationship, and maybe we need to do this while we still care, and before our interest in the oceans dissipates.

…