By Luc Wade, Marketing Director at Hive Business.
Choices. Decisions. They’re a big part of what it means to grow up, to take responsibility. What is it to be human other than make choices all day, every day? We’re decision making machines. From jeans to dating partners and TV subscriptions to schools, we think the more choices we have the better. But too many options create anxiety and leave us less satisfied.
The psychologist Barry Schwartz called it the tyranny of choice and said humans aren’t really cut out for it. He talks about an accounting firm that offered 156 retirement plans. When an employer takes the trouble to provide many routes, then it seems reasonable to think that the employer has done their part, so choosing wisely among those options becomes the employee’s responsibility. Instead of making that choice, though, many defer it endlessly, and to their cost: as much as $5,000 a year from the employer who would happily match their contribution. The analysis paralysis in this case affected two per cent more employees for every 10 mutual funds the employer offered.
In the UK we’ve come up with a cunning workaround for this specific problem: pension auto enrolment. Employees can opt out of course, but being human and choice averse many don’t, and so it’s been a spectacular success (for the Government anyway — the employer and employee bear the burden. It doesn’t take a genius to see that the building blocks are now in place for the state retirement pension to be withdrawn down the line). Personal pension contributions rose by 20 per cent in the 12 months to 5 April 2016. Many of the people saving through auto enrolment could have found more favourable rates but they didn’t, and that’s because people don’t choose between things, they choose between descriptions of things. Auto enrolment sounds solid, and if more people are doing it it’s probably safer, and it must be right if the government set it up.
That’s all simply a description, a story, and the thinking behind it comes from something called the framing effect, a phenomenon discovered by Amos Tversky and Daniel Kahneman, two Israeli psychologists. (The latter won the Nobel prize for economics, not bad for a psychologist.) The framing effect is a cognitive bias in which people react to the same choice in different ways depending on how it is presented. They tend to avoid risk when a positive frame is presented (ie accept pension auto enrolment) but seek risks when a negative frame is presented (ie deferring endlessly when there’s too much choice). We’re more susceptible to the framing effect with age.
Tversky and Kahneman also found something called the availability heuristic. This is the idea that people tend to heavily bias their judgements toward more recent information; the easier it is to recall the consequences of something the greater those consequences are often perceived to be. You can see this play out no end in how politicians spin media coverage of immigration, terrorism and anything and everything really.
Ross talked about how some of these systematic thinking errors are being exploited by the Cabinet Office’s Behavioural Insights Team to get us all paying more taxes. But the reason I mention them here is that I keep seeing bad decision making among practice owners and I wanted to ponder why. Why is it, for instance, that someone who calls to say they are unhappy with their marketing provider decides to stay with them for a further six months? I can see elements of analysis paralysis, the framing effect and the availability heuristic at work.
I think they have too many choices and freeze up because it’s easier to do nothing rather than something (analysis paralysis). It seems cheaper to keep paying the bad marketing agency rather than swallow the bigger bill for good marketing that can produce return on investment (framing effect). They know the consequences of sticking with the bad agency for a bit longer and, even though they’re bad, they’re not that bad (availability heuristic). All I can say is, I get it.
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