Hello, everyone. My name is Sam Vaknin, and I am that rare creature, an economist and a psychologist, kind of like the platypus.
Today we are going to discuss sales, the psychology of sales, what we are learning about sales, about marketing, about advertising, in the newest studies and scholarship in both fields, economics and psychology.
I have long maintained in my writings that economics is not a science, that it is actually a branch of psychology, and there is not a science because it deals with human beings, and human beings are changeable.
Even the same person changes over the day as he or she absorbs information, is influenced by external events, or is exposed to other people.
So, since the raw material of economics is the same as the raw material of psychology, it tends to reason that one is a branch of the other.
Indeed, there is a relatively new field in economics called behavioral economics, and the sister field is behavioral finance.
Today, I am going to try to apply lessons learned from experiments in behavioral economics to sales, marketing and advertising.
But before we do that, perhaps it would be beneficial to elucidate, to study the very notion of sale.
When I say sale or sales, you automatically think about an exchange, usually an exchange of money for something, money for service, money for product.
But sale is a much more general concept. If you go on a date with a beautiful girl, you are trying to sell yourself to your mate, to your potential partner. It's a sale.
When you go to a job interview, you are trying to sell yourself to your potential employer. That's also a sale. No money changes hands and yet it's a sale or an attempted sale.
So, sale is every transaction where value changes hands. The value can be embodied in money, it can be embodied in a good or a product, it can be embodied in a service or it can be embodied in someone's reputation or history or biography or resume or anything.
Any exchange is a sale.
So, the lessons that we are going to learn today apply to any situation where you are trying to get something by giving something, give and take, the very foundation of civilized discourse.
But before we go there, let me tell you a few pretty amazing stories.
In the University of South Brittany, which happens to be in France, they are doing a very French thing. They are studying sex and sexuality.
But before you jump off your seats, they are doing it in a very academic way.
One of the experiments conducted there was the following.
A group of students were dispatched to stop random girls, random women on the street and to ask them for their phone numbers.
Now, majority of women, of course, would refuse to give their phone numbers to a total stranger.
But we have discovered something amazing. If the request was made in front of a florist shop, a shop selling flowers, 25% of the women asked gave their phone number right away.
If the same request was made in front of a bakery, patisserie in French sounds much better. If it was made in front of a bakery, 14% of the women gave their number and all shocks.
If it was made in front of a shoe shop, only 10% of the women gave their phone number.
It seems that where the request was made influenced the outcome of the request, contrary to anything we thought we knew about the dynamics of give and take.
In the same university, I don't know what's going on there, but in the same university there was another experiment. Women were put in rooms with a video, a video machine, and then they were shown a video. The video described a specific man, his history, his profession, this typical day. And then they came out of the room and met a man. And that man asked them for a date. Women who watched the video in a room with flowers reacted positively to the date offer in the overwhelming majority of cases. 81% of the women who watched these videos in rooms with flowers accepted a date with a total stranger. Only 40% of women who watched the same videos in rooms without flowers accepted the date.
So just the fact that there were flowers in the room, the corner of the room, on a small table, doubled the positive response of the women asked for dates by total strangers.
Apropos flowers. You all have heard probably of tulip mania. Tulip mania was an event culminating in February 1637, a bit before my time, in the Netherlands. People were buying and selling tulip bulbs. Now tulips are very beautiful flowers and you can't have a tulip without a bulb. But I think they went a bit too far. The price of a bulb in February 1637 was equal to the price of two tons of butter, 1,000 pounds of meat, or a luxury house in the best location in Amsterdam. Clearly something was out of whack. This was a form of mass psychosis.
Let's proceed. Did you ever consider why you're tipping? Why do you tip a waiter? Why do you tip a taxi driver? You're not likely to see the taxi driver again. Why do you still leave a tip? Why do you tip a waiter in a restaurant in a foreign city which you are never likely to frequent again?
Tipping is highly irrational. The women's reactions to flowers were irrational. Tulip mania was irrational.
Yet all of these are sales events. Tipping involves the exchange of money for services. Tulip mania involved the exchange of money for tulip bulbs.
And women exchanged their phone numbers in return for the presence of flowers, it seems. Something irrational is going on, which cannot be explained by the classic tenets of economics.
Because we are taught in economics 101 that people are rational, that they make decisions based on analysis and information, that they analyze data and then reach learned conclusions, which they implement invariably.
This seems not to be the case. Indeed in tipping, with tipping for example, you would have expected rich people to give more, a higher tip than poor people. But actually the opposite is true. Poor people tip more and with higher amounts than rich people. You would have expected tipping to decrease when you are not likely to visit the same place again.
But actually it remains the same. When we ask people why do you tip, they said because that's the custom or it's my habit or I was trying to impress or it felt good.
There's an economist called Andreoni who calls it the glow effect. Or because it preserves my reputation or because it's as bad as it can be. I feel guilty that I have money and the waiter doesn't. Or because it preserves my identity or because it shows my gratitude. Showing gratitude was actually in the last place as opposed to what we think.
It seems that sales involve a critical component of e-rationality. And to round up this part of the presentation, I will tell you a fact. A fact that I'm sure none of you could ever hope to explain.
If I ask you to do something in prose or if I ask you to do something with a rhyming sentence, a sentence with a rhyme, you are much more likely to react positively if I use the rhyming.
Statements which rhyme are perceived as more truthful, as more trustworthy.
No one knows why. Why if I rhyme, I'm perceived to be more truthful and more trustworthy than if I simply use prose and ask for something?
We don't have a clue why this is. But it's a well established fact. This fact is so well established that about 40 or 50% of the advertising in the United States, for example, includes rhyming. Small, short, poem like statements with rhyming at the end.
One possibility to explain these discrepancies between what we would have expected had people been rational and how they actually behave.
One way to explain this discrepancy is that we have a very, very conflicted attitude to money. And having made this very heavy statement, I will see it. And so we have a conflicting attitude to money.
We have an ambivalent relationship, love-hate. Money we know in psychology represents love, represents acceptance. To many people, money represents justice. They say, I worked so hard, I deserve it. Or if there's any justice in the world, I will end up with my part of the heritage.
So money is an emotional thing. And the reactions to money are largely emotional reactions.
And here we are beginning to have the first clue. Emotions and rationality rarely go well together. They very often contradict each other. And this is the very foundation of behavioral economics and behavioral finance.
If I have to distill behavioral economics to two foundations, two tenets, one would be that people are emotional, not fully rational. And the second foundation would be that people have a limited amount of information and a limited ability to process this information.
So what they do instead, they guess. And this process of guessing is called heuristics. People are heuristic, and they are emotional. They are not, like economics teaches us, they are not rational. And they are not possessed of full information, which they process at the speed of light.
Traditional economics talks about computers, not about people. And so, for example, we know a few facts which defy our common sense. For example, is it true that you would buy less if the price is higher? Because this is what economics teach you. The higher the price, the less you buy. Actually, in reality, people tend to buy more when the price goes up, because they identify the high price with better quality, or as a status symbol, or to compete with the neighbors.
Remember, we have a conflicted emotional relationship with money. Money is also a signal. We use money and what we buy with money to communicate. Any sales process is a process of communication, of signaling. For example, would you work less or more if you were offered a bonus and a higher salary? Well, less, of course.
Studies have shown that workers who are offered incentives, mostly in the form of bonuses, tend to work less, a lot more.
When you are young, should you save for old age, or should you spend all your money? Save, of course, for old age when you will be sick and unable to produce income.
And yet, all young people spend most of their money. Very few of them save.
And now, when you're old, should you spend or should you save? When you're old, you should spend, because you have very limited time left to live, and you should use your money to enjoy yourself and to be happy.
And yet, old people save. They don't spend. Young people spend when they should have saved. Old people save when they should have spent.
Let's consider something else. For example, if I offer you to a transaction where you could lose a dollar, but you could make two, would you go for it?
Well, rationally, of course, you should go for it if the chances are equal. If the probability of losing one dollar is equal to the probability of making two dollars, only a fool would not accept this transaction.
Well, it seems that we are all fools, because the vast majority of people refuse such transactions.
And then, if I offered you to make a hundred dollars on an investment of one thousand dollars, or two hundred dollars on an investment of ten thousand dollars, assuming that you get your money back for sure, what would you prefer? Would you prefer the hundred dollars or would you prefer the two hundred dollars?
Only an idiot would prefer the hundred dollars. Of course, the two hundred dollars, if the return of the money is guaranteed, if there's no risk to the principle.
Well, it seems again that we are all idiots. The overwhelming vast majority of people prefer to make a hundred dollars on a thousand rather than two hundred on ten thousand, even if the two propositions are one hundred percent safe.
Strange, isn't it?
And then there's the issue of relative positioning. What would you prefer? You and your colleague will make twelve thousand dollars or you will make ten thousand dollars and your colleague will make six thousand dollars. What would you prefer?
I repeat, I'm giving you the opportunity to make twelve thousand dollars, but on condition that your colleague sitting next to you will also make twelve thousand dollars. Or I'm giving you the possibility to make ten thousand dollars, not twelve, ten, but on condition that your colleague makes six thousand.
What would you prefer?
Again, of course you should prefer the twelve thousand to the ten thousand.
What do you care what someone else makes?
Overwhelming majority of people would choose the ten thousand dollars. They would give up two thousand dollars just to see that their colleague makes less than they do.
This phenomenon is known as relative positioning. It seems that we are homing in on two principles of conduct.
One, loss aversion, risk aversion and loss aversion. People prefer to give up income, to give up profits, to give up gains, just not to lose money. And they prefer to give up big gains to avoid small losses.
This phenomenon is called loss aversion. It's of course utterly irrational.
And the second thing is you people prefer to get less money, to be less rich, less wealthy, on condition that relative to other people they are better off.
In other words, misery loves company.
We prefer all of us to be miserable than some of us to be richer than we are. Envy, pathological envy. We will come to that.
What if I offer you the following deal? You can lose a thousand dollars or gain one thousand two hundred dollars and it's more or less the same probability.
Of course, by now we know from what I have just said that this type of transaction will be rejected.
So what if I modify my offer? And I'm telling you listen, there's a ninety percent chance that you will make a thousand dollars. Listen well, ninety percent chance that you will make a thousand dollars. Or a hundred percent chance that you will make seven hundred dollars.
What would you choose?
Rationally, mathematically, logically, you should choose ninety percent chance to make a thousand dollars. Because ninety percent multiplied by a thousand dollars is nine hundred dollars. And I'm offering you seven hundred, for sure. Much less.
You know by now, you know the drill. Most people would choose the seven hundred dollars. People always prefer certainty. We say that people prefer certainty to loss. People prefer the certainty of a smaller amount to a potential loss, even if the potential loss has a very low probability.
We need to offset disutility. Disutility is a fancy name in behavioral economics for pain, discomfort.
It seems that loss, uncertainty and risk create such extreme discomfort and pain that we prefer much lower return, much smaller amounts, just not to experience this pain and discomfort. It's irrational.
But it's very human.
Now, let's go even further. Let's make it even more, shall we say, insane.
Essentially I'm telling you the following. I'm going to sell you a ticket. A ticket to a rock concert. The ticket is fifty dollars. You pay me fifty dollars, you give me fifty dollars, I give you the ticket. But I'm endowed with the gift of prophecy. So I'm telling you, listen, you're going to buy the ticket but you're going to lose it. So you're giving me fifty dollars and you're losing the ticket. Essentially you lost fifty dollars. And then you can buy another ticket from me for fifty dollars. That is scenario number one. Scenario number two, you're going to lose fifty dollars in cash. A note falls off your pocket, out of your pocket. So you're going to lose fifty dollars in cash and then you buy a ticket from me for fifty dollars. Now, pay attention.
In both situations, you lost fifty dollars.
In the first case, you lost fifty dollars in the form of the ticket that you had bought.
In the second case, you lost fifty dollars in cash. It fell out of your pocket. But in both cases you lost only fifty dollars. Nothing changed.
And yet, in the first case, majority of people would refuse to buy another ticket. In the second case, most people would buy another ticket. And yet, in both cases, they have lost only fifty dollars.
I'm leading you somewhere, as you will see.
So stay with me and trust me to some extent if you still can.
The example I just gave you is called sunk cost fallacy. It seems that once we have invested in something, we remain stuck in that situation. It's well known, for example, in marriages. The main reason bad marriages or dead marriages don't dissolve is that both partners have sunk costs. They have already invested in the marriage.
So, most people throw bad money after good money and then good money after bad money.
In other words, for example, you buy a stock, a share, and the share goes down ninety percent. The rational thing to do is to get rid of the share. No, most people would buy additional shares of the same type. They would say, I am already invested. If I buy additional shares, the average purchase price will be lower.
So, most people obey the sunk cost fallacy. Once they have invested in something, they are doomed. They are stuck. They never go back. They increase their investment.
The rational thing to do is to get rid of losing assets and to purchase profitable ones.
What we do in reality is exactly the opposite. We sell profitable assets and we continue to invest in losing ones.
So, what if I tell you, listen, if you drive for twenty minutes to that shopping mall, you can save one dollar on a five dollar purchase. You have to drive for twenty minutes to a shopping mall and then you get a discount of one dollar on a five dollar item or you can drive for twenty minutes to another shopping mall and there you can get a ten percent, ten dollar discount but on a hundred and twenty five dollar purchase.
Summary, one dollar discount on five dollars purchase or ten dollar discount on a hundred and twenty five dollar purchase. What would you choose? Rationally, you should choose the ten dollars. Almost all people choose the one dollar. Almost all of them drive for twenty minutes to secure a one dollar discount on five dollars.
Why?
Because it looks bigger. It's twenty percent. The percentage counts, not the absolute amount of money that you are saving.
I could go on and on and on and on about the bizarre ways which we interact with money. The bizarre ways which we relate to money.
You're beginning to see that money represents many things which have nothing to do with money. For example, money represents hope. Money represents expectation. Money represents pain. If you lose it, this comfort at the very least, but usually pain.
Aversion in psychology is usually connected to pain. Loss aversion means that loss creates a lot of pain. And of course this pain is mediated, mediated via the medium of money.
So it is the money that holds the pain, the money that holds the hope, the expectations and so on.
There is nothing more emotional than money. Nothingmore emotional than money. It's a love affair.
And when we part with it, we experience heartbreak. And when we lose it, we're devastated. And when we make it, we are elated.
Money can cause us to go through the entire spectrum of human emotions.
And so because of that, we develop when we think about money, when we analyze money, and when we make decisions based on these analyses.
Remember, these analyses are actually guesstimates. They're based on guesses because we don't have an infinite capacity to process infinite information.
No one does except some supercomputers. We are human. We have a limited brain. Some of us don't have even that.
And we use this brain to process in a limited period of time a limited amount of information so that we can reach a decision somehow within a reasonable horizon.
So because of that, we use guesses. And these guesses are called heuristic.
But since our relationship with money is so crazy, so irrational, so conflicted, so emotional, we develop something called cognitive biases.
Cognitive biases are mistakes, glitches, errors, bugs in the software, where we should have acted one way, even with limited information, even with heuristic processing, but we act completely differently.
They are well over 280 cognitive biases.
And for this video, not to take longer than 26 days, I'm going to cover only a few of them.
I do provide seminars and lectures in which I cover more. But I'm going to give you a taste of some of them.
And let's start with one of the more famous, and it's called anchoring.
Anchoring was first described by Nobel Prize winner Thaler and his collaborator Sustain.
Anchoring is when the way a menu is constructed affects not only choice, but affects preferences.
If there are three options, or four options, and I construct them in a certain way, I start with option number four, and then two, and then one, and then three, you will make a certain choice.
Not only will you make a certain choice, but your preferences will change.
Before you are exposed to the menu, you will have one set of preferences. After you're exposed to the menu, you will have another set of preferences, sometimes diametrically opposed.
And if I design the same four options, if I put them in a different order, again, I will be able to influence your choice and your preferences.
And this is what David G. Gottlieb, the American economist, called preference pollution.
So anchoring is about the design of defaults, the design of menus.
And there is a whole profession. It's called choice architects.
Choice architects are people, usually psychologists, who work for companies like Microsoft and Google and Facebook and Twitter. And they design menus in order to affect your choice, to make you choose in a specific way, and then also to change your preferences so that you can never make another choice.
It's a form of brainwashing, if you wish, or mind control.
Conspiracy is a sight. It's very close to it.
Anchoring is connected to another effect, which is known as recency or primacy effect.
The first thing you see on the menu is usually your choice.
So, for example, if I ask you, would you donate your kidney? 70% of the cases, you would donate your kidney.
But if I ask you, if the first item on the menu is, do you prefer to not donate your kidney? 70% of the cases, you will not donate your kidney.
The first item of information affects cognition, emotion, decision-making, and choice.
We know, for example, that if we ask someone a question which includes a number, the answers will cluster around this number.
There's a famous example where students are asked, what is the population of New Zealand? Is it higher than 2 million or lower than 2 million? And then they have to give numbers.
The majority of the class would give numbers clustered around 2 million. 2.1, 2.3, 1.7, majority would cluster around the 2 million.
But of course the population of New Zealand is a bit over 4 million. So the number in the first choice is of critical importance.
We can therefore, just by phrasing the correct sentence, we can affect choice and we can affect number perception.
For example, if we want to influence a price perception, whether the price is too high, too low, or if we want to funnel and channel people to pay a specific price for a specific product, we can use this price in the opening statement, opening question, opening choice in the menu.
Let's consider another effect. It's called the IKEA effect. IKEA of course is the Scandinavian company which provides disassembled kits for furniture. It's beautiful Scandinavian wooden furniture, but it comes disassembled. You have to put them together.
There was a famous experiment where people were given IKEA kits. Some of these kits were already assembled, so they were in the form of furniture. And other kits were not assembled. And then at the end of the experiment, people were asked to put a money value on the kits. The kits were utterly identical. The people who assembled the kits gave a much higher evaluation of the kit than the people who received ready-made kits, ready-made furniture.
This is called the IKEA effect.
It seems that we value higher, we value higher positions and objects that we put work into.
So if you want to affect a sale, make your client somehow participate in the process of, for example, getting the service or making the product. Make the client, involve the client somehow, even if only by asking the client to put a product into a package.
The minute the client gets involved, even minimally, his valuation of the price will be much higher and you will be able to increase your price unnoticeably.
And so this is connected to another effect and that is the post-purchase bias.
None of us like to feel that we're stupid. We like to feel that we are not stupid. Let's call it mild or healthy narcissism.
So when we buy something, we have two choices. We can say, wow, this product sucks and I've been stupid to buy it. Or we can find ways to justify our purchase, because actually it's a great product or it's a great product compared to the alternatives or I got it at a great price.
We justify purchases after the purchase in order not to feel bad, not to feel ego-distonic, not to feel uncomfortable about the choice we've made.
And this is a little like the IKEA effect.
The minute you get involved by assembling the product, by making a decision together with a service provider, by purchasing, the minute you're involved somehow, this involvement utterly alters your perception, alters your cognition, even changes what you think you know.
The human mind is very malleable and it has very strong defenses against discomfort, against pain and against self-criticism it would seem.
So we discussed the anchoring bias and we discussed the emotional involvement we have. We call it cathexis in psychology, emotional investment we have in various decisions we make.
And one example of this is what we call focalism. Focalism is that setting the price for the first item determines how the other items are perceived. So if I set the price for the first item at a very high level, the next items will be perceived as cheap. If I set the price of the first item at a very low level, all the next items will be perceived as expensive regardless of the truth, regardless of facts.
So if I want to influence a purchase of item number two, I simply have to put the price of item number one higher so that item number two looks cheaper.
For example, you're beginning to see how these lessons from behavioral economics can be directly applied to sales by constructing a choice environment in a learned way based on scholarship and experiments. Choice environment affects directly choices.
Choices are, of course, what sales are made of.
Now let's move to another area and that is the area of tasks.
You remember that I said just now that you should get the client involved somehow. Involvement means action. The action could be physical, as I said, take the product, put in a package, or bring me the product from the shelf, for example. So it could be, and this is what self-service stores are based on.
Self-service stores have very high sales because of that, the involvement of the client.
But the action could be physical, but it could be also mental. Make a choice, evaluate a price, make a decision. So either mental or physical.
And so we try to push the client to fulfill a task, to do something.
So it's very critical to understand how people do things. When they do things, what's happening in their heads? What affects the action?
For example, what could stop the action, or what could perpetuate the action, or what could alter the course of the action, etc.
So one effect was discovered very early on in 1927 by Bela Zygarnik, a Russian psychologist. One effect is calledinevitablythe Zygarnik effect.
We discovered that if we interrupt a task, if we make it impossible to complete the task, it is remembered much longer than a task that had been completed.
So if there's any way to stop the task in the middle, to interrupt it, or to make it difficult for the client to complete it, the client will remain stuck in a loop on the task until he completes it. He will be coming away compulsive. It creates a form of compulsion.
Another thing we discovered is that if you frame the task as an offer, and the client rejects the offer or misses the offer, the client is extremely unlikely to accept another offer from you.
So instead of framing what you propose as an offer, frame it as a task. And of course, this is exactly why if you look at advertisements, especially in the United States, they are the kings of advertising and marketing.
So if you look at advertisements in the United States, for example, you see that advertisements start with the word, buy. Buy this item. Do this.
In other words, it's not an offer. It's a call for action. Tasks are treated differently, psychologically, than offers.
If I tell you, listen, I am offering to you this book for $29.99, and you reject my offer, you will never buy another book for me, or rarely. But if I do the very same thing, and I'm telling you, buy this book for $29.99, and you reject my offer, you will still come back for additional offers, because I've framed it as a task, not as an offer.
And this is known as the inaction inertia effect in behavioral economics.
So we're beginning to see that even how you frame your sales offer has a lot to do with the outcome.
One thing we discovered is that people like to act in groups. This is called herding, the herding effect, like herd. They like to act in groups. And they imitate other people, and that's called the bandwagon effect. They especially imitate people who they perceive as experts. They imitate people whom they perceive as successful. And they imitate people who are successful or famous in other fields. And this is called the hallow effect.
So that's why, for example, actors promote, I don't know, cultural products, or because of the hallow effect. If he's successful as an actor, then he's successful, then I should listen to him about products that have nothing to do with acting. It's the hallow effect, totally rational, of course.
Why would an actor sell me, I don't know, sport shoes, and not an orthopedic doctor?
But still. So experts, celebrities, and people who perceive as successful influence our decisions.
Herding and bandwagon have numerous manifestations in the sales process.
For example, you know loyalty cards. Some coffee shops, for example, give you a loyalty card. And if you drink 10 cups of coffee, they give you the 11th cup of coffee free. That's an example. So they give you this physical card, and every time you drink a cup of coffee, they put a stamp on the card.
Now, if I were to give you a card with 10 spaces, and a card with eight spaces, that means if you drink eight cups, you get one cup free, or if you drink 10 cups, you get one cup free. What would you prefer? Of course, the eight cup card. Your chance for a free coffee is 25% higher than with the 10 card, with the 10 slot card.
But what happens if I give you a 10 slot card with two places already stamped? Which of the two cards will be fulfilled faster? If I give you a card with two of the places stamped, and a card with none of the places stamped, one of them 10, and one of them eight, in both cases you have to purchase eight cups. It seems that you will purchase the eight cups much faster if you get a card with two places already stamped.
This is probably part of the bandwagon effect, an example, manifestation of the bandwagon effect.
When two places are stamped, it's like other people already bought two coffees, and you're just joining them. And because they bought two coffees, it means the coffee is tasty, qualitative, cheap, something. They made a choice, they must have known what they were doing, so let me do it too.
And so you act much faster, the minute you see these two stamps.
On the very contrary, the exact opposite is known as the choice paradox. The more choice we have, the less we're going to buy. The more choice we have, the less satisfied we will be. And the more choice we have, the more we will consider the quality of the products as low.
In a famous experiment, there was a jam shop, a shop selling jams. And the shop started with six jams in the inventory, six types of jams in the inventory, and then increased the choice from six jams to 24 jams. All the jams were manufactured by the same company, they all had the same quality requirements and quality control, they all used the same ingredients from the same farms, identical. All the jams were utterly identical. Only 24 types.
When the shop was selling six jams only, they sold 40% of the inventory in every month. When they increased the choice to 24 jams, they sold only 3% of the inventory. Sales dropped by 90%, 91%, just because the choice was increased from six to 24.
In questionnaires administered to the people, they said that they stopped buying because so many jams, having so many jams means the quality is down. And they were not satisfied with the taste and the texture of the jams. Although nothing changed, these were the same jams.
The choice. Choice can be detrimental, too much choice. It gets people confused, people don't like to be confused. They resent it. They feel somehow inadequate, somehow inapt, somehow they feel like failures.
When you see 24 jams, it's difficult to choose. You're not sure you're making the right choice, even when you do make the choice. You feel that you've missed something. These are unpleasant feelings.
And so the choice paradox and the goal gradient effect that I've mentioned before, these are what we call sales biases.
It seems that following a simple recipe affects sales dramatically.
For example, if you put a human face on your product, a photo of a human being, face, it increases sales by 40%, at least in the publishing industry. It seems that if you round prices, you sell more. Actually, prices which are not round reduce trust in the producer or manufacturer, and also affect the perception of quality.
So it is not true that 399 is better than four. Absolutely not true. Four is better than 399.
Effect sales positively.
And this is known as the rounding effect. It seems that if you conform to social values, you sell more.
I mentioned call to action. It seems that if you cast your product or service for yourself as something new, novelty effect, you sell more.
It seems that if your message is optimistic, you sell more.
It seems that if you frame your product in a specific way, as I mentioned, with defaults, with menus, with specific questions, etc., you sell more.
There is even something called the decoy effect.
Imagine that you want to sell actually product C. So product B, I'm sorry. So what you do, you don't offer product B only, but you offer A, B, and C.
But you make sure that C appears to be inferior to B and to A. So I repeat, you want to sell product B. You offer product A, B, and C.
But you make sure that C appears to be inferior in some way to A and to B. Strangely, people will choose B.
And this is called the decoy effect. They will not choose A for some reason. They will choose B.
There is something called familiarity bias. People will buy things or services or if they feel familiar.
So even if you go on a date, try to make yourself appear familiar. If you go on a job interview, emphasize familiar things. That's why when you go on a job interview, it's good to try to find common ground with the interviewer. Familiarity has massive effect.
We discovered, for example, that people prefer to use the wrong instrument to do something because they know it. Not because it's the right instrument for the job, but because they know it.
And this is called the law of the instrument. We discovered that if people are exposed to the same product or message or service or person repeatedly, they are more likely to make certain choices, positive choices, beneficial choices.
We discovered that people prefer the status quo. For example, people prefer to discuss information that they share, that they have in common, than new information. If you take a group of people and all of them know a certain fact, and then you introduce a new fact to the group, automatically the entire group will discuss the fact that they know, not the new fact.
And this is called the shared information bias.
And of course, what is familiar is also perceived as believable.
My predecessor, Joseph Goebbels, the propaganda minister of the Third Reich, understood that. He understood something called the availability cascade. Goebbels was, although he was an intellectual, he put it more succinctly. He said, if you repeat something often enough, even if it's alive, it's perceived to be true. And that is true. If you repeat something often enough, it will be perceived as true.
But again, we have a very conflicted relationship when it comes ultimately to the money. Even if you concluded the sale, even if you used all these biases that I just mentioned, and you led the person by a clever design of the menu and so on and so forth, to the right choice for you, even then money interferes.
For example, if you asked the person to pay with large bills, they will spend much less money than if you asked the person to pay with small bills. A person who is asked to pay with small bills will spend much more money than the same person asked to pay for the same product with large bills.
This is called the denomination effect. It's true. We don't know why.
But again, money interferes.
At the last moment of clinching the deal, you must remember that people are not rational. Actually, we are beginning to think that the more irrational people are, the better they feel.
It seems that if you are extremely irrational, you belong to an ever smaller group of people. If you are mildly irrational, most people are mildly irrational, but if you are seriously irrational, you belong to a much smaller group of people.
Why do we call it when we belong to a small group of people? We are exclusive.
It seems that irrationality is somehow connected to exclusivity, and exclusivity is connected to intimacy, because the most exclusive club is a club of two, the couple.
So irrationality leads to exclusivity, exclusivity leads to intimacy, and intimacy leads to belonging. Belonging is the most foundational need of every human being.
It seems, therefore, that the more irrational we are, the more we feel that we belong.
This might explain, for example, movements of millions of people who believe that the Earth is ruled by a reptilian alien species. Many members of these groups are doctors, professors, academics. Do they really believe that Queen Elizabeth II is a reptile? Bad example. Do they really believe that Obama is a reptile? And yet they make these claims. Why? These claims are wildly crazy, wildly irrational.
What about conspiracy theories? Many conspiracy theories are insane, and yet tens of millions of people espouse them. Why? Because the more irrational you are, you belong to a smaller group. You have privileged knowledge. You feel privileged. You feel exclusive. Small groups are intimate. Intimacy means belonging. This is the core of loyalty cards, loyalty cards, clubs, belonging to specific purchase plans, cash back, belonging to small groups, enhances sales.
So don't be afraid to be irrational. Sometimes the more irrational you are, the better the outcome will be.
Actually, we discovered that people's memories are heavily influenced by the way they feel. We discovered that when people feel bad, they remember only unpleasant things that happened that day. When they feel good, they remember only good things or pleasant things that happened that day.
And this is called a gut feeling, this is a mood and gut feeling that affects memory.
How is this relevant?
Well, perhaps you should focus not on information, but on changing the mood of the client, making the client feel good. If the client feels good, he will remember only the good things that happened, and this will affect his choice, his decision making.
When we go to sales saloons, beauty clinics, anywhere in the West at least, they are focused on changing your mood. There is ambient music, there is luxury, you are treated as a celebrity or VIP. It's all intended to change your mood.
There is the understanding that mood affects memory and memory affects sales. I may have created the impression that people are irrational, selfish and a bit spiteful or even malevolent. It's not entirely true.
Start from the beginning. I may have created the impression that people are irrational, spiteful, selfish and perhaps a bit, at the edges, malevolent. And that would seem to be true.
But people sacrifice income and reduce their wealth and make purchasing decisions also in order to help others. There is altruism, we don't know why, the mostly rational thing coming to think of it.
And even more importantly, to punish cheaters and free riders. People were willing to sacrifice 20-30% of their income and profits just in order to punish others who were parasitic or who cheated them. Of course, people being who they are, they are against unfairness and against cheating. They resent it, they hate it, they criticize it, except if they get to get the money.
So if the outcome of the cheating and the parasitic behavior and the unfairness is an increased profit to themselves, most people are okay with it.
We are beginning to see the human animal in its complexity. To reduce it to a program, a computer program or to an operation in logic would be seriously mistaken. People do not act this way.
Also the brain, albeit a complex machine, is far from glitch free. For example, people remember most the last sentence.
So in a job interview, you could screw up the entire interview, but if your last few sentences are impressive, this is what the interviewer will remember.
The last speaker in a political debate is remembered much more than all the previous speakers. And of course, that's why women insist to have the last word. They are right. So this is called the end point bias or the end point fallacy.
Remembered utility is not the same as experienced utility.
And so we have mentioned before the endowment effect, the fact that we appreciate what we possess, we give it a higher value than what we don't possess, even if it's the same object. A car that we possess, we would value it much higher than the same car in the salon, the same car in a car show, just because we possess it.
So here's an example of how you can increase sales. Make the client possess something. For example, give the client a gift.
The client enters the room, give the client a gift, not at the end of the sales process, not as part of the sales process, not as an embodiment of a discount, but give the client an unconditional gift the minute the client enters the room.
This creates, psychologically, an endowment effect. This creates possession.
That minute, the entire valuation of the deal goes up.
So here's an example of how to use these biases to a good effect.
And of course, another very famous effect is the snob effect. All the major brands in the world work on the basis of the snob effect.
Snob effect says that we tend to purchase objects that signify, reify, and symbolize success, status, or righteousness, self-righteousness, moral righteousness.
So that's why we buy, for example, free-range chickens, why we buy union labor clothing, why we buy free-trade goods, local businesses, green products. We buy these things because they symbolize morality, moral righteousness.
So brands are constructed on these three elements. Success, if I own the brand, I'm a success. Status, relative positioning, and moral righteousness, doing the right thing.
And this is called the snob effect. Snob effect is part of a much bigger phenomenon, much bigger group of behaviors and cognitions that is called signaling. It's a signal. The brand is a signal. It's actually a mode of communication. It's a kind of text. If I wear certain shoes, if I drive a certain car, it's not the car. It's not the shoes. It's what the car and the shoes say, what they say about me, about my position in society, about my prospects, and so on and so forth. So it's a message. Brands are messages and it's part of a signaling theory.
For example, consider advertising. Why companies advertise? Do you sincerely remember the content of any advertisement that you saw? Very few people do. What do you remember? Do you remember that you saw an ad by Apple? That you saw an ad by Microsoft? Or by General Motors? You remember who made the ad? Why do you remember that? What is the purpose of the ad if you don't remember the content?
The purpose of the ad is to tell you, listen, we are financially robust. We have enough money to throw away on advertising. We are financially healthy. You can trust us. You can trust us because we have enough money to spend on advertising. And we care enough about our products and we care enough about our clients to make an advertisement, to make a marketing campaign, to have a sales crew.
So advertising is not about the product and it's not about the content. Content is irrelevant.
A lot of advertising is just jingles and nothing much. But advertising is a signal. It's a message.
In sales, when you are in the sales process, focus not necessarily on the product or the service you are selling, or even on yourself if you are on a date or a job interview. Focus on what message you want to convey. What is your message? And focus on the signaling process. Make sure that your counterpart realizes that you care about them, that you want to communicate. The wish to communicate is more important than the communication itself. The vehicle, the container is more important than the content.
Indeed, Gary Becker, the Nobel Prize winner, economist, discovered that the first and main component that affects purchase is packaging, not the features of the product, not the price of the product, not the location of the shop, nothing, not the ambience, not peer pressure, not recommendations by buyers, none of these things.
The first, most important determinant of a sale is the packaging. Why? What does the packaging tell you?
Packaging tells you that the manufacturer cares about his product. If he invested so much in the packaging, imagine how much he invested in the product.
It's a message. Messaging and signaling are critical. They are forms of positive framing.
When we deal with snob effect, packaging is a part of it, of course.
Look at the packaging of an iPhone, a typical iPhone, and compare it to the packaging of a ZTE phone. There's a massive difference. Actually, 82% of the cost of an iPhone go into advertising and marketing. The components are less than 10%.
This is part of the snob effect.
The snob effect is founded on a psychological policy, a psychological cognitive deficit, cognitive distortion, known as the Dunning-Kruger effect.
They discovered that people overestimate their capabilities, their skills, their talents, their attractiveness, and especially their intelligence. They overestimate themselves, and so they are willing to take risks because they believe they're going to do well. They believe they're going to do well way beyond what reality justifies. In other words, their belief in themselves is incommensurate with reality.
Let's put it bluntly. Stupid people are too stupid to realize they're stupid. That's the best version of Dunning-Kruger that I'm aware of.
Now, you could safely assume that the vast majority of people are subject to Dunning-Kruger.
Let us not say that the vast majority of people are stupid. So nice. Not politically correct.
But perhaps in the age of Trump, we can say that.
Assume that the vast majority of people will make decisions based on an overestimation of themselves.
Cater to vanity. Cater to narcissism. Cater to delusions.
The more you do, the more people will buy.
Not pleasant to say, but absolutely the truth.
Indeed, there is something called confirmation bias. Confirmation bias is when people listen only to information that supports their self-image, their grandiosity, and previous views and opinions they have.
And they reject all other forms of information. They accept only conforming information and reject countervailing or contradictory information.
This phenomenon is known as siloing. They isolate themselves in silos.
If you go online to any forum, you will see that mysteriously all the members of the forum tend to agree on everything all the time.
Why is that?
Because the forum is a silo.
So when you try to sell anything, yourself, your products, your services, your ideas, as an innovator, you're looking for investments, for example. That's also a sale. When you try to sell anything, make sure to work with a confirmation bias.
A confirmation bias simply means do not contradict, do not provide information that contradicts the opinions, judgments, biases, preconceived notions, prejudices of your counterparty.
Go along, play along with what your counterparty is telling you. Do not educate, sell.
It seems that people gather information before they make a decision, but only up to a certain point. And that point is called the stopping rule.
People compare products. That part is true. But they compare products only up to the minute that they found the first advantage, the first feature that separates one product from another.
So it is not true that people will analyze all the features of identical or similar products and then decide.
What happens is they, for example, they want to buy a car. So they begin to read the list of features of the first car, and then the second car, and then the third car. And then they find the fourth car, which has a feature, a single feature, which is an advantage over the first three.
They will then stop and buy the fourth car. And it is called the stopping rule. It's very useful. It means that you should emphasize the attribute, the feature, the element, the part of your history that distinguishes you in an advantageous way from others.
That's all you have to do, one thing. Identify this one thing, work on it, repeat it, remember, the cascade, gabbles, repeat it, and you conclude the sale.
One mistake salespersons do, advertisers and marketers, they provide too much information.
Too much information, remember the choice paradox, is counterproductive. It is therefore a mistake to provide all the data pertaining to a car, or to a clinic, a medical clinic, or to your biography. Be selective and emphasize the advantages, usually only one, focus.
Indeed, there is something called the recognition heuristic.
The less we know, the more accurate our guesses are. Exactly opposite what you believe. Exactly opposite, counterintuitive, against our intuition.
If I were to ask you, listen, you have to make a guess. If you have more information, will your guess be more accurate?
You would say, of course, the more information I have, the more accurate my guesses are.
Wrong. The more information you have, the less accurate your guesses will be.
So, there was a famous experiment where they took a group of Americans and a group of Germans, and they asked both of them, which city is bigger, San Jose or San Bernardino?
The Germans never heard of San Bernardino. They heard only of San Jose.
So, they said San Jose. True. That's the correct answer.
The Americans visited, most of them visited both San Bernardino and San Jose. And because they're very close in terms of population, the Americans were confused. And most of the Americans gave the wrong answer.
Why did the Americans give the wrong answer?
Because they had too much information. The Germans had less information, and they were right.
So, this is the recognition heuristic.
Simple things. Simple things that you have to learn from behavioral economics.
For example, we discovered that if a person's gaze, if his eyes are focused on something, he is likely to make a purchase decision much more than if his eyes are all over the place.
So, you remember the florist example? Women seem to be, unexplainably, influenced massively by flowers and, by the way, faces of babies. So, if you're selling to women, make sure that somewhere in your office, somewhere in your salon, somewhere in your office, make sure you have photo of a baby and photo of flowers. And make sure that the client, the female client, sits in a way that she cannot avoid the baby and cannot avoid the flower.
According to experiments, this will double, double sales.
This simple thing alone. We are, to a large extent, machines.
And we judge according to context.
Consider, for example, I will ask now Marion, the cameraman, consider, for example, these two lines.
What do you see?
Majority of people would say 1, 2, 13, 49, and 5.
Right? So, first line. 1, 2, 13, 49, and 5.
And then what's in the second line? A, D, B, C, and Q. Right?
But look at these two. They're the same. This one and this one are exactly the same.
Why did we conclude that this is the number 13 and this is the letter B?
Because of the context. The number 13 appears among numbers. 1, 2, 49, 5. When it is among numbers, when it is in the company of numbers, it is perceived as a number. And when it is in the company of letters, the same thing exactly is perceived as a letter.
Context matters.
Let's look at another example of context.
Look at these lines. Which one is longer?
Majority of people would say that this line, the first one, is the longest. Of course it's not. It's identical to the other two.
But in the context of the other two, together with the other two, in the company of the other two, it looks longer.
And finally, look at this. This is the Edgar Rubin vase.
Well, at least my rendition of the Edgar Rubin vase.
One career I've decided to forego is a painter.
So if you look at it carefully, and you try very hard, you can see two faces. Right? You see two faces.
But if you look at it a bit differently, you see a vase.
So what is it? Two faces or a vase?
In experiments we discovered that if we place this in a room full of photos of human beings, most people would think it's two faces. And if we put it in a room with flowers, most people would think it's a vase.
Context matters. Context matters very much.
When there is a beautiful woman next to a car, sales go up by at least 30%.
Why?
What's the connection between a beautiful woman and a car?
Well, if you have a car, you can get a beautiful woman. That's clear.
But it's not rational. The beautiful woman does not add anything to the car. She's not even part of the deal.
So why the mere presence of a beautiful woman next to a car increases sales by 30%?
We don't know, really. We just have heuristics. We know what works. Context works.
We all know that if we sit in a group of peers, people like us, these peers affect our decision.
There are very famous, many very famous experiments where someone is asked to leave the room, and then there's a conspiracy among the remaining people. And when it comes back, they say something really, really crazy. And the person who re-entered the room after some pressure, conforms, he accepts the group's position. And this is called groupthink.
Peer pressure affects decisions, affects sales.
Position your client among other clients who already made a decision, who already made a purchase. Position your client in an environment where peers will exert pressure on him or her. Position your product among equal products, but a bit inferior.
Create context all the time. Context is crucial even when you're trying to make policy choices or when you're trying to push people to make certain choices.
As early as 1981, Nobel Prize-winning economist Daniel Kahneman, together with his collaborator, the late Tversky, they conducted a series of experiments where they have shown conclusively that the way you say things affects decisions, affects them radically, just the way you phrase a choice.
So the experiment in 1981 was the following.
Kahneman and Tversky took groups of students and told them, listen, there's going to be an epidemic. And in this epidemic, 600 people are at risk of dying. So it's going to be an epidemic, 600 people are going to die.
Now there are two public health programs.
In the first program, 200 people are saved. In the second problem, there is a one-third chance that 600 people will be saved and two-third chance that no one will be saved.
What do you prefer?
Program A, 200 people are saved. Program B, one-third chance that 600 people will be saved, plus two-third chance that no one will be saved.
Everyone chose program A, although in both programs, the chances for 200 people to be saved are identical. In both programs, 200 people are saved.
But program A is phrased positively, remember optimism?
Because program A, 200 people will be saved. Program A is phrased optimistically and with certainty. It conveys optimism and certainty.
You can say the very same thing, but if you use the biases that I mentioned, the very same thing, the very same message, the very same calculation, the very same content will be perceived utterly differently.
72% of the students chose option A, although all of them have graduated statistics. They were all students of economics.
Then Kahneman and Versky changed the language to check whether the language is the parameter that affects the students.
Now they came up with two different public health policy programs.
Program C, 400 people will die. Program D, one-third chance for zero people to die, for no one to die. Two-third chance that 600 people will die.
Program C, 400 people will die. Program D, there's a one-third chance that no one will die and two-third chance that 600 people will die.
Again, if you know the most basic statistics, the statistics of expectations and expectancy, you know that the two are identical. In both cases, 400 people die.
C and D are also identical to A and B. In all four programs, 200 people are saved.
But people chose Program D because Program C says 400 people will die. It's pessimistic and it is certain.
Program D says, well, there's a chance that some people will survive. It's more optimistic and it's less certain.
You can say the same thing, even legally, even taking into account legal considerations. You can say the same things, but you can phrase it in a way that affects choice.
Very important thing is to take into account the gender and the age of your clients.
Classical economics and classical theory of marketing, sales and advertising talk about a client, a customer, a purchaser, an agent, a rational agent, depending on the discipline.
None of them makes a distinction, for example, between men and women. But men and women make radically different purchasing decisions.
Their processes of thinking, analyzing and decision making and sales choices are completely different.
For example, women, whichever product they buy, if they have children, they have their children in mind. Whichever product they buy, even if they buy lingerie, if they buy clothing, fashion, whatever they buy, they have their children in mind.
Women, shockingly, prefer saving to spending as opposed to men. Women are risk averse and they're much less competitive than men, but only when they are in mixed society, only when they are with men. When they are with women only, most women are more competitive and more risky, display more risky behavior than men.
So, if you want women to buy a risky product or a product which has the snob effect, which enhances competitiveness, you should never try to sell these products and services to a woman when she is in a mixed company. Because in a mixed company, she's less competitive and less risky. You should sell it to a woman when she is in a group with other women only.
When you're trying to sell something to a woman, it's critical if she's childless or has children.
So demographics are very critical in the sale process.
For example, couples in a bad relationship behave completely differently to couples in a good relationship. They buy completely different products.
Couples, harmonious couples, buy products which are expensive and indivisible. They buy harmonious couples, couples who like each other in the honeymoon phase, still in good relation. They buy products which they cannot divide or are very difficult to divide, like cars, houses, and they buy products which are very expensive.
The minute the relationship of the couple deteriorates, they start to buy much cheaper products, and they always buy products which they can break up and divide.
Again, two different markets, completely.
And how would you know if a couple is in a bad relationship or not?
Well, after the seventh year, majority of couples are not harmonious, psychology tells us.
So if you are marketing or selling to an older couple, you should put emphasis on cheaper, divisible products. If you are selling and marketing to a younger couple, you should put an emphasis on expensive, indivisible products.
Again, demographics count. Men donate more, but only when they are solicited by a beautiful woman. Women donate much more than men, much more often than men, but much, much smaller amounts.
So all in all, women are much less generous than men. Men are much more generous in donation and charity.
But strangely, women are more empathic. We can't reconcile these two. They are more empathic and they are guilt-driven. Women feel more guilty. And yet, they donate much less than men in terms of absolute money. So we should know these things.
And here's a shocking fact. Both men and women volunteer to pay more taxes if the tax man is nice to them.
And this is called the reciprocity effect. We discovered that well over 60% of the decision regarding a purchase is made according to the impression that the salesperson makes.
If you like the salesperson, and if you have a good feeling about the salesperson, and especially, if the salesperson is nice to you, you are far more likely to purchase the product or service even if you do not need it.
Taxes are an example. The tax is a sales transaction. The state is selling you something and you should pay. The payment is called taxes. The state is selling you health, selling you education, selling you something, and you are paying with your taxes.
So if the salesperson of the state, the tax man, is nice to you, you are paying more voluntarily.
We know that the brain is a complex machinery. And the fact is that we don't know as much about the brain as we pretend.
But we already tend to notice a few biases and a few cognitive deficits that are connected somehow to brain processes.
For example, people find patterns. They discover patterns even where there are no patterns. Even when we have random series of numbers or facts, random objects, we tend to discover patterns. We look at the sky and we say the big bear and the small bear. These are stars. They are not bears, but we find patterns.
So this phenomenon is called pareidolia. It's a form of apophania. Apophania and pareidolia are finding patterns in randomness, finding significance in randomness.
This is very important because you can construct, you can provide random facts, random numbers, random objects, and not worry because the client will find some pattern and will impose it on the information that you are providing.
We know, for example, that when we propose, when we suggest options, when we give options to the client, when we provide a set of similar products or when we offer similar services and so on, when we provide a series of options, if we provide these options simultaneously, for example, if we say you have A or B, A or B or C, these options are perceived to be not similar. Actually, we discovered in experiments that when we provided three options which were identical options, utterly identical, but they were offered simultaneously, people perceived these options to be not similar, different, even though they were identical.
However, if you provide the same options, not simultaneously, they are perceived to be identical. So if you take identical options, A, B and C, and you say you have A, you wait a minute and then you say, and also, by the way, you have B. And now I remember that in another shop we have, you have C. The person will perceive A, B and C as similar.
We don't know why. It's a pattern recognition thing. The person finds patterns, but we don't know why.
We don't know why simultaneity will create identity. We don't know why, but we know that it exists.
And this is not a lecture about psychology. It's a lecture about sales.
So you should use these things even if you don't understand why, why, why they're working.
We know, for example, that if you go to a fortune teller, an astrologer, a soothsayer, they will make a series of very general statements, but you will feel that they are talking about you. You will interpret the general vague ambiguous statements as though they are highly specific, highly concrete, and discuss your situation in great detail. Of course it's not true. It's a fallacy. We even have computers or machines that produce astrological charts and all kinds of charms and so on. And people claim that the computer got it right, that yes, it's exactly what happened to them and so on. But of course it's nonsense. These are patterns imposed by the people on random, essentially, information. And this is called the Bownoom Effect.
When you go to a casino and you talk to gamblers, they also see patterns where there are no patterns. For example, a gambler will tell you, oh, I'm going to bet, I'm going to bet on red, on black in the roulette. I'm going to put money on black now, in the roulette, because the previous six times it was red. The number was red. So it was six red, now probably it will be black.
But of course we know that each rolling of the roulette is totally independent. The fact that there were six reds doesn't mean it's going to be black. It could be theoretically six billion times red. It's each roll of the dice, each rolling of the roulette is utterly independent.
But gamblers find patterns. We all find patterns.
The more you provide randomness, and this is against our intuition, if you look at classic marketing, classic advertising, if you talk to sales persons who have been trained classically, what they're trying to do is they're trying to provide you with logic, with reason, with structure. That actually is counterproductive. The more randomness you provide, the more the client will do the job for you. The more the client will introduce patterns into the randomness.
So be random, not structured.
There is something called sub-additivity effect. People judge because of this patterning, because of this clustering effect, clustering illusion, Pareidolia and Apophenia, people judge the probability of the whole is lower than the probability of each element of the whole.
So if I tell you, for example, this product is made of A, B and C. There are three ingredients. It's made of three ingredients, A, B and C. And I will ask you, what's the probability that I will take these three ingredients and make a cake? So you will say, I don't know, 70%.
But if I ask you separately for each of the ingredients and add these probabilities, they will come to 90%.
In other words, do not talk about the whole. If you talk about the whole, the client will assign lower probability of sale. The choice will be on a lower level.
Talk about the components, the ingredients. The client will put them together in his mind and will assign a higher probability.
These are examples of brain, essentially, malfunctions, if you wish.
Of course, one of the most famous cases of such glitches is the money illusion.
We judge money in absolute terms. $100 today and $150 in 10 years. What would you prefer? $150?
But of course, $150 in 10 years because of inflation is much less than $100 today.
So there's a money illusion. It's another example.
There was a famous case after World War I. Airplanes were coming back. Airplanes, airplanes, combat airplanes were a novelty in First World War, just beginning to be used. They came back and they were shot at. There were bullet holes in the fuselage of most of these airplanes.
So engineers were called in and engineers were thinking, how should I armor the airplane, put protection on the airplane so that the airplanes will not be shot down? What they did, they took armored plates and they put them where the bullet holes were. The bullets hit these locations. So they put the armor so that bullets will not penetrate the fuselage.
But of course it's a mistake. Why is it a mistake?
Because these airplanes survived. These are not the airplanes that fell down. These are not the airplanes that were shot down. If they survived, these bullets were not very important, did not hit the right spot. There was no need to armor the part of the airplane that had the bullet holes because these bullet holes caused no damage. The airplane came back.
And so we first shoot the arrow and then we paint the target.
This is called the survivor ship bias. And it's everywhere.
For example, we interview successful entrepreneurs. We ask successful entrepreneurs, what did you do wrong? What did you do right?
But of course it's wrong to interview successful entrepreneurs. Successful entrepreneurs survived. If we want to know how to become successful entrepreneur, we should interview entrepreneurs who failed so that we learn what they did wrong and not repeat it.
It's another example of shooting an arrow and painting the bull's eye.
And of course the most famous example is Sigmund Freud. Sigmund Freud interviewed mentally ill people. And based exclusively on mentally ill people, Sigmund Freud wrote a psychology of healthy people.
But you can't learn from mentally ill people about healthy people.
But Freud had only mentally ill patients. So he said that's it. He painted the target around the arrow.
All clients do that. You provide them with the arrow, not with the target. Let the client decide what is his target. You just give them the arrow.
A huge mistake in sales, marketing and advertising, is telling the client what they want, telling them where is the target, instead of giving them an arrow and letting them decide what is the target.
So for example, give them the product, give them the service, and let them decide why they need the product.
And of course, the absolute genius in this was Steven Jobs. Steven Jobs invented utterly unnecessary products. iPhone was an utterly unnecessary product.
Long before the iPhones, there were other smartphones. Long before the iPad, there were tablets by Microsoft, for example. And yet he came up with the iPhone and the iPad. And he didn't tell people you need the iPhone because you need this, you need this. He just sold them the iPhone. And then people bought the iPhone. And they said, well, there are two options. Either I'm a complete idiot that I bought this thing, or I probably bought it because I had a good reason. Now let me find the reason.
So he gave them the arrow. They painted the target. And they are painting the target to this very day. iPhone and iPad are still the best-selling products in human history, utterly unnecessary products.
Some things we know intuitively. We know that pictures are much more effective than words. We know that if you write something, you remember it much better than if you read it. We know that we judge people differently to how we judge ourselves, and so on and so forth.
I will finish this presentation by discussing how we perceive other people compared to how we perceive ourselves. It's very critical if you are a salesperson. Because even salespersons, or majority of them, are human. And when you're interacting with another human being, inevitably you're bringing to the game your prejudices, your biases, and your limitations in perceiving and judging other people.
If you're not aware of these, the sales process will be impeded and will not reach its natural conclusion and culmination, which is a sale.
So you must be aware of this.
And this is the last topic I will discuss.
But remember, there are hundreds literally, hundreds of other biases, glitches, deficits, and discoveries in behavioral economics based on thousands of experiments over the last 35 years.
It behooves every salesperson, every advertiser, and every marketer to go into this arcane field and study deeply.
Mysteriously, behavioral economics did not make it into the mainstream.
For example, it is not taught in marketing and advertising schools. Very few marketing and advertising agencies even mention it. And it's a pretty unique case, because all other fields that I'm aware of, like psychology, even philosophy, translated into money, were converted into money, except behavioral economics, which should have been the main thing, the mainstay, because it deals directly with human psychology and human decision making and human choices.
I said that we judge ourselves differently to how we judge others. We explain other people's behaviors by attributing these behaviors to their personalities. We say, he behaves this way because he's a very difficult person, or he behaves this way because he's stingy, or he behaves this way because he's stupid, because he's narcissistic, or whatever. We attribute other people's behaviors to their personalities, constitution, mental health, psychology, brain, not to their circumstances.
We would never say, for example, he didn't pay for the coffee because he doesn't have money. Very rarely. We would usually say, he didn't pay for the coffee because he's stingy. Usually.
So, personality versus circumstances.
And this is called the fundamental attribution error in technical terms.
Exactly opposite with ourselves.
When we don't pay for the coffee, it's because we've had a very difficult year. We didn't make enough money. It's not because we are stingy by nature.
So, we would explain our behavior by outside circumstances, external forces, things out of our control. We would explain our behavior with an external locus of control. Like it's not our fault. We were made to do it.
But we would explain other people's behavior. They are like that. That's how they are. It's their fault because of who and how they are.
So, this is the first thing. We have something called, we have a bias called extrinsic incentive bias.
We would tend to assume that people do things because somehow they want to manipulate us or to achieve some goal. Or there is some ulterior motive or something hidden.
So, we are very conspiracy oriented.
Even the most rational and cool and so on. When we meet someone, we immediately ask the question, what's in it for him? Why is he doing it? Where is it all leading?
And this is called the extrinsic incentive bias.
We also have something called false consensus effect.
The false consensus effect is the belief that we are likeable. We should be liked as a matter of principle. And if someone doesn't like us, then something's wrong with them. Mostly. Not with us.
And there is also something called illusion of asymmetric insight.
We tend to believe that we know others better than they know us. We read people much better than people read us. It's asymmetric knowledge.
And finally, there is my favorite.
And my favorite is the, it's called naive realism. That's by far my favorite. And because it's my favorite, I'm going to stand up. I am even going to put my glasses. And that's my favorite part of the course or the seminar or the lecture. It's called naive realism.
And this is how it's phrased in academic literature.
It's a mistake, of course. It's a bias. People who disagree with me are uninformed, lazy, irrational, biased, boring, predictable, stupid people. I am more variable than anyone else. They are one dimensional.
And this is called the trait ascription bias.
If you disagree with me, you're an idiot.