Rational and irrational decision-making

 From what I can see, there are two very good ways of getting lost in the maze of psychology and human decision making. The first is to accept, at some level or other, the insane delusions of ‘rationality’ as invented by the economics profession. I say ‘at some level or other’ because many people dismiss the economists’ ravings at one level only to find themselves trapped by their assumptions at a later stage in the argument.

The second is to accept the equally delusional assumptions of ‘stimulus-response’ as invented by the behaviourist school of psychology in the 20th century. Unfortunately, stimulus-response assumptions form the bedrock of most modern theories of marketing.

In this post, I’ll concentrate on ‘rationality’: that is, the assumption that all human beings always ‘maximise utility’ (or try to, anyway) and that the cost of researching and making these decisions is zero. You could write books about why this assumption is wrong (there are few already), but for our purposes we can sum the 'rationality' assumption up in a word. It’s bollocks.

It’s probably much safer to say that all human decisions are emotionally driven (i.e. motivated by a goal that is emotional in some way), and emotionally judged (i.e. we judge success versus failure not by some finely calculated balance sheet or profit and loss account, but what we feel about our experience overall). Reason and logic and calculation have a different function: to help us achieve emotional goals.

Four things follow from this.

1. Most emotional goals are reasonable. It’s a testimony to the power of the ideology of ‘rationality’ that we tend to assume that any decision that is emotional has to be wrong or dangerous in some way – ‘irrational’. The opposite is probably true. We evolved emotions to help us survive. Emotions usually point us in the right direction. We evolved reason a) because ‘usually right’ is not the same as ‘always right’, and in terms of survival being ‘usually right’ is still risky, and b) because thinking things through (i.e. using ‘what if’ models of cause and effect) can help us achieve emotionally driven goals better.

 
2. To see emotion as the enemy of reason in decision-making is therefore misleading. This is important, because the rationality assumption has bred dangerous delusions about the powers of marketing – both amongst marketers and their critics. If your starting assumption is that human decision-making is pink-elephantly rational, and if you assume that marketers ‘divert’ or ‘manipulate’ human beings away from the perfectly rational decisions that they should be making, then that makes marketing look supremely powerful (because so many people make supposedly ‘irrational’ decisions).

In fact, what’s going on is quite the opposite. People pay attention to marketing that recognises, addresses and appeals to the emotions they already have, and ignore it when it fails to do this. The marketer is not really influencing or changing the consumer; the consumer is influencing what the marketer does.

Exaggerated belief in the powers of marketing has two negative effects. First, it breeds delusions of grandeur among marketers, who begin to believe and claim that they can influence peoples’ decisions far more than they can. Disappointment follows as night follows day. Unrealistic expectations about what marketing and advertising can do lie behind many a debate about declining marketing and advertising ‘effectiveness’.

On the other side of the coin, there are also many people who accept the same basic premise (that marketers are diverting or influencing people away from the rational decisions that they should be making), but think this is wrong and should not be allowed. This is the starting point for many pressure groups, media commentators and regulators.

Both sides of this argument are actually sharing the same basic assumption but drawing opposite conclusions from it. This is a recipe for perpetual motion (or conflict). The arguments will last as long as the assumption remains unchallenged.  If I’m right on this, we won’t get past these adversarial relationships until we build a better understanding of what’s going on.

3. Every human decision has a strong emotional element. In fact, people with damage to parts of the brain which process emotions find it almost impossible to make the slightest of decisions: shall I make a cup of tea or not?

This is important because marketers tend to lump consumer decisions into two different baskets: there are ‘rational’ decisions and ‘emotional’ decisions.

For example, marketers might say that a decision to buy own label is driven by ‘rational’ considerations while a decision to buy the branded version is driven by ‘emotional’ considerations. This is rubbish. Both decisions are highly emotional – they just involve different emotions. For example, buying own label might be driven by emotions relating to thrift or smartness (‘those brands can’t fool me’) or by different emotional priorities (‘I would rather spend the money on giving the kids a treat’). Buying the brand might be driven by other emotions. But the emotions are there, either way. An individual’s decision to focus on the ‘rational’ aspects of a decision is, in itself, emotionally driven.

Following on from this, marketers also tend to dump some aspects of value (such as money) into one basket called ‘rational’ and other aspects of value (such as a sense of status) into another basket called ‘emotional’. When they do this, they are still trapped by economists’ pink elephant rationality assumptions. In reality of course, money is one of the most emotional things around, arousing all manner of strong feelings about control, status, conflicting priorities, pride, giving, feelings of success vs failure and so on.

4. If all the above are correct, the widespread marketing theory that ‘the product’ offers the consumer functional/rational benefits while its marketing and advertising add ‘extra’ emotional benefits, is wrong and misleading. For a start, you cannot simply equate ‘functional’ with ‘rational’ because ‘functional’ is as emotional as money. More importantly, these categories of analysis are, in fact, meaningless. Doing marketing using them is a bit like doing chemistry without any notion of the periodic table and relying instead on the inherently confusing assumption that the fundamental building blocks of matter are earth, air, fire and water (We did this for thousands of years).

There’s lots more we could say about the damage down by the rationality assumption. But the bottom line is this. Taken superficially, you might think that marketers should be praised for emphasising the importance of emotion, and for looking past the economists’ mistakes. Dig a little deeper, however, and it turns out that marketing is still trapped by inbuilt intellectual confusion about ‘rationality’. To successfully reinvent marketing, we have to go back to the drawing board.

Alan Mitchell     www.ctrl-shift.co.uk

The psychology of decision-making - a reading list

 A number of people have asked me what I read as background to my Marketing article on ‘predictably irrational’ consumer decision-making. Aside from various interviews I’ve done over the years, here is a list of the main books I’ve read in this arena.

The first two books are game-changers in my view – the two game-changing concepts being ‘choice architectures’ and ‘fair process’. The next five certainly changed the way I thought about these things, and have clear implications for marketing. The rest are in random order.

If there’s something I’ve missed, or if you think my assessment is wrong in some way, please add a comment. It would be great to share notes and create a collective learning exercise.

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Nudge  (Richard H Thaler and Cass R Sunstein)      A seminal piece of work for the way it shifts the focus away from ‘free choice’ – and the assumptions of perfect (i.e. pink elephant) rationality that lie behind it – to ‘choice architectures’: the frameworks, contexts and conditions in which people make their choices. Key message: the most powerful influence on choices is not ‘persuading’ people to make this or that choice,  but the ability to tweak their choice architectures: power tends to lie with the choice architect, not with the chooser.

In my view, this book is seminal for marketers. It transforms the agenda when it comes to understanding and influencing decision-making, shifting the debate to another level: to the role of ‘choice architects’ and whether they are using their power responsibly (i.e. to help individuals make better decisions) or manipulatively. Now this genie is out of the bag it cannot be put back. It’s no surprise that one of the authors is now an advisor to the Obama administration. I will return to this seminal debate in future blogs.

Markets and Moral Sentiments  (ed Herbert Gintis)    Path-breaking series of research essays on the power of reciprocal instincts in decision-making (‘an eye for an eye’/ ‘you scratched my back so I’ll scratch yours’) including their neurochemical underpinnings. My take-out: demonstrates why ‘fair process’ is the next big thing in marketing/business, along with choice architectures.

The Happiness Hypothesis (Jonathan Haidt)    Not supposedly about decision-making, but actually one of the best expositions there is. A brilliant book. The first chapter on ‘The Divided Self’ explains more, quicker and better than virtually anything else I have read.

The Things We Do (Gary Cziko)        Demolishes behaviourist stimulus-response theories of human decision-making and behaviour and convincingly advocates the equivalent of a Copernican revolution in psychology. The surface appearance – equivalent to believing the sun orbits the earth – is that perceptions (i.e. environmental stimuli) control behaviour. In fact, behaviour is “the control of perception”; organisms are autonomous, goal-seeking entities that behave as they do to control their perceptions (i.e. what they sense). If this is right, the implications for marketing are profound.

Basic Instincts (Pete Lunn)    Goes furthest in applying what we’ve learned so far to economics – a valuable contribution.

The Paradox of Choice (Barry Schwartz)    Brilliant analysis of the psychological costs of choice.

The Blank Slate (Stephen Pinker)    Tour de force demolition of 20th century (and earlier) theories that the human mind is like a piece of wax that’s moulded into shape by impressions received from the environment. (Next step: think through what this means for many common theories about branding, media buying and media measurement).


The Emotional Brain (Joseph Le Doux)     Powerful exposition of the power of primeval emotions in decision-making and behaviour.

Descartes' Error (Antonio Damasio)    Makes a huge contribution by helping us get past pink elephant theories of ‘rationality’.  The key sentences of this book for me are: “certain aspects of the process of emotion and feeling are indispensable to rationality. At their best, feelings point us in the proper direction, take us to an appropriate place in the decision-making space, where we may put the instruments of logic to good use.”

Also useful for its careful exposition of a truly scientific approach. Just one example: “in monkeys whose behaviour is socially well-tuned (as measured by displays of cooperation, grooming and proximity to others) the number of serotonin-2 receptors is extremely high in the ventromedial frontal lobe and the medial temporal cortices in its vicinity, but not elsewhere in the brain; in monkeys exhibiting non-cooperative antagonistic behaviour, the opposite is true.” In other words, there are countless contextual devils in the detail – devils which can turn your previous understanding upside down if you are not careful.

My take-out: when gurus start talking abstractly about things in general – e.g. the effects of serotonin or dopamine on decision-making or behaviour – they are probably talking out of the back of their hats. In this field, my advice would be to start with the assumption that the claimed expert is bullshitting, and then work backwards. (Remember, one well-researched predictable irrationality is our ‘stop there’ tendency; our willingness to believe explanations that ‘seem to make sense’ without really investigating whether they have any real foundation. In marketing, the concept of brand ‘loyalty’ is a classic example.)

Influence: the psychology of persuasion (Robert B Cialdini)        One of the earliest books on human decision-making foibles that’s stood the test of time. Good on what happens, less good on why (because at the time it was written, a lot of the research hadn’t been done).

Predictably Irrational     (Dan Ariely)      Important for its emphasis on the fact that perceptual biases and non-‘rational’ influences on decision-making are not arbitrary. In fact, they are highly predictable and we can understand this predictability – the implication being that we can also find ways of addressing it. This represents another nudge away from a narrow focus on ‘free choice’ to the nature of ‘choice architectures’. In the end however (in my view) the book fails to provide a framework for understanding and becomes a bit of a haphazard list of ‘interesting things’.

The User Illusion (Tor Norretranders)      Mind-boggling round-up on brain research that’s still got my head reeling. Two examples: 1) your brain registers what you are going to do a half of second before you ‘decide’ to do it. This seems to suggest that most ‘decision-making’ is not decision-making at all, but merely your consciousness registering that fact that a decision has been made. Can that be true? 2) The conscious brain processes less than 40 bits of information a second; the unconscious brain processes about 11 million bits of information a second. So the unconscious brain outdoes the conscious brain by nearly a million-to-one. Hmm.

Irrationality (Stuart Sutherland)    A well-researched round-up of research findings. Full of well-explained, interesting examples. However, lacks a coherent framework and ultimately degenerates into a rather confusing list.

The Brain that Changes Itself (Norman Doidge)     Reports on latest research into brain plasticity and its role in learning. Fascinating. The implication is that in many ways we are still living in the dark ages.

The Empathy Gap    Focused mainly on US public policy issues, but useful for the way it expands on the ‘choice architect’ idea.

The Mind of the Market (Michael Shermer)  A me-too round-up of much of the above, but OK for that.

The Advertised Mind  (Erik de Plessis)    A curate’s egg. Well explained round-up of lots of brain research marred by unquestioned stimulus-response assumptions and selling a particular advertising measurement methodology.

The Hidden Persuaders (Vance Packard)   The first classic exposé of the marketing industry’s attempts to use psychology to ‘manipulate’ consumers. Interesting for what it said about what some marketers/agencies were trying to do in the 1950s and 60s. Trouble is, Packard made the mistake of actually believing their sales pitches.

Similar things are happening today with a gullible press breathlessly and unquestioningly reporting charlatan gurus’ claims that we are close to discovering ‘the buy button’ or the neuroscientific secret of brand preferences. Yuck.

Some books that are not worth reading because they are sensational and/or superficial: Sway (Ori and Rom Brafman) and Buy-ology (Martin Lindstrom).

There are also many books such as Robert Franks’ Luxury Fever that highlight specific types of ‘irrational’ consumer behaviour. The drawback of many of these books is that they focus only on 5% of the picture and talk about it as though it were 100%. They are valuable if you put them into a broader context.        

Alan Mitchell    www.ctrl-shift.co.uk

Reinventing Marketing - a road map

 So here’s the agenda for reinventing marketing I promised a while ago.

First off, we need to recognise the core. Organisations apply knowledge and resources to supply individuals with products and services that are better quality and/or cheaper than these individuals can provide for themselves. This isn’t without its problems (we can return to these problems later), but it’s got ‘win-win’ at the heart of it. It’s what makes marketing successful.

But then there’s this extra layer of persuasion. Here, the underlying theory goes like this.

Goal         Marketers’ job is to help their organisations make money by changing consumers’ attitudes and behaviours in their brand’s favour (the persuasion paradigm)

Method    The way they do this is by issuing stimuli designed to elicit the right responses – the changes in attitudes and behaviours they want.

Metrics    They measure success by comparing the state of affairs before our campaign/initiative with after.

Underlying philosophy    Value extraction; extracting as much value from ‘the market’ as possible.

This model pretty much underpins virtually any marketing theory you come across – whether explicit or implicit. It has multiple variations. People disagree for example as to whether the best or most ‘effective’ stimuli are rational or emotional, conscious or unconscious. They also argue endlessly about which is the right stimulus delivery mechanism or channel (is it traditional TV, the internet or database marketing? Or perhaps retailing and sales? Or customer experiences?).

But when you peel away these differences, they all come back to the same basic model. The marketer issues a stimulus. The consumer responds. Success happens when the consumer responds in the right way.

There’s only problem with this model. Every step in its logic is codswallop. Balderdash. Baloney. Poppycock. Combined, it creates a mesmerising circular logic that’s almost impossible to see beyond once you’re inside it; a circular logic that dooms practitioners to repeating the same basic mistakes again and again without ever learning any fundamentally new lessons.

It’s also deeply schizophrenic.

What this theory suffers from is the observer’s illusion. All the evidence seems to point in its direction, just as all the evidence seems to point to the fact that the sun orbits the earth, the earth is flat, and the natural state of matter is rest.

To make real progress we have to leave each of these assumptions – about goals, methods, metrics and underlying purpose – behind. That’s why I called my blog ‘Reinventing Marketing’ and said marketers need to challenge their deepest assumptions.

The alternative model looks something like this.

Goal        The job of marketing is to make money by helping individuals make and implement better decisions.

Method    The best way to do this is by eliciting information from them about their needs, circumstances, plans, preferences and priorities and to act on this information in a value adding way.

Metrics    The challenge in metrics is not to understand our own ROI in isolation to that of our customers, it’s to identify the biggest win-wins. Focusing obsessively on your own ROI without knowing whether you’re creating a genuine win-win is not clever, it’s dangerous.
 
Underlying philosophy    Value exchange; win-win.

This agenda isn’t actually new: these have always been the underlying secrets of success. They’ve just been obscured by off-the-wall 20th century theories of economics and psychology on the one hand and prevailing technology infrastructures on the other. Together they created a layer of obfuscation that clouded the underlying reality.

All that’s happening today is that we are now beginning to see what was invisible before. New discoveries in economics and psychology and new developments in technology are handing us a microscope and telescope to pursue our investigations.

Marketing’s reinvention agenda is an all and nothing affair. By that I mean it changes everything: we need to revisit everything we think and do and sift the wheat from the chaff: What serves only the old, misguided agenda? What serves the new? How to connect it to the win-win core of value provision? Along the way, we’ll change what we do, how we do it, and how we measure what we are doing.

On the other hand we might also find it changes surprisingly little. As we work our way through, I think we may end up doing virtually everything we do today – albeit for different reasons and in different ways.

This is a vast agenda for R&D, experimentation and learning. It’s also very exciting!


Alan Mitchell    www.ctrl-shift.co.uk

A fundamental question

 
I wrote today in Marketing magazine about discoveries in psychology that are revolutionising our understanding of human decision-making.

Many marketers are seizing upon these findings as grist to the mill of marketing’s prevailing persuasion paradigm. I think the opposite is true. As we dig deeper, I think we’ll find that these discoveries point us in a very different direction.

Here’s a parallel. Aristotle said the natural state of matter was rest, and for 2000 years everyone believed him – a belief that acted as a highly effective block to further learning.

To explain motion, Aristotle had to invent a Prime Mover. Then Newton came along and turned Aristotle on his head. Newton said the natural state of matter is motion. There is a separate explanation for things whose movement has been blocked – friction. Friction doesn’t do away with the underlying reality of matter in motion, it simply helps to mask this reality – it helps explain why we have so much ‘evidence’ of matter being at a state of rest.

Modern marketing is victim of an illusion of Aristotleian proportions. The illusion goes like this. ‘The consumer’ is a basically an inert entity which is motionless unless moved by marketers’ stimuli. Marketers are the Prime Movers of markets.

‘Effective’ marketing delivers the right ‘stimulus’ – advertising, promotion, sampling, branding, etc – to get the right ‘response’ (where the right response is when the consumer does what the marketer wants her to do).

In reality, human beings are restlessly active in the search for value in their lives – always in motion. They are the prime movers of markets, and for them, the essence of value lies in the ability to make and implement better decisions. This is their natural state.

But there is a second layer of friction which helps mask this natural state: the fact that consumers are indeed open to various forms of persuasion and influence. The existence of this second layer doesn’t do away the underlying reality. As I said, it simply helps to mask it, making things a little more complicated.

When marketers attempt to influence consumers’ decisions to suit their own corporate goals – when they interrupt, obstruct and divert consumers’ from their natural decision-making processes – they are creating marketplace friction. In the consumer’s eyes, this is value-destroying, not value adding.

That’s why, in lay circles among people who don’t know better, marketers are so unpopular. In fact, they do know better.

 
To navigate our way through this intellectual maze we need to remember some important points, such as:

•    ‘Better decisions’ are not the same as ‘rational’, pink-elephant decisions. A better decision is one that helps an individual achieve a desired goal better. This goal may be emotional and ‘irrational’ as well as ‘rational’.

•    Not all marketing creates friction, some of it helps remove friction.

•    Judging marketing ‘effectiveness’ from a ‘stimulus-response’ perspective (‘how effective were we in getting them to respond to our stimuli in ways that we want?’) is a sure-fire way of never being able to distinguish between marketing that adds consumer value and marketing that destroys consumer value. It’s a perfect recipe for non-progress. This is what I alluded to in my articles and blogs about Mad Sheep Rage.

Once we have made our way through this maze, we will have arrived at a point we can start reinventing marketing (at last!) .

I’ll outline that agenda tomorrow.

Alan Mitchell      www.ctrl-shift.co.uk

The real home of customer insight

 If you had to answer the question ‘where is the natural home for knowledge about the customer?’ what would you answer?

OK. This is a bit simplistic but it’s also fundamental. The natural home for knowledge about supply is the supplier, and the natural home for knowledge about customers is … the customer.

Companies and brands may desperately want to accumulate more knowledge about their customers – to generate ever more, deeper customer insights – but when push comes to shove, the customer will always know more about the customer than the company.

Until recently this was an academic observation. There was no way for information to flow ‘bottom up’ from individuals to organisations or markets on an organised, mass scale (the only way information could flow was ‘top down’), so marketers had to do what they could with the tools available – focus on organisational information gathering and top down messaging.

In our research into Volunteered Personal Information (VPI) however, we identified a wide range of different types of information that individuals can, or soon will be able to, volunteer if they have good reason to do so. They include:

•    Administrative data, such as ‘my new email’ or ‘my new postal address’
•    Organisational arrangements: when and how to arrange conversations, visits, deliveries, payments etc
•    Questions about how to, what if, what’s possible, what the pitfalls are – an opportunity both to deliver immediate value and to learn directly about customer concerns
•    Expressions of demand: “right now, I want to buy a …” or “right now, I want rich, detailed information about …”
•    Forward looking plans and intentions: “some time over the next six months I intend to retire/buy a new car/move home/organise a once-in-a-lifetime world trip”
•    Opinions, including brand and corporate preferences, values and beliefs etc
•    Explanations as to why I did this and not that, or plan to do this and not that
•    Contextual information about my changing lifestyle, from big issues such as health, money, interests, family commitments etc to smaller details like a genuine as opposed to organisation-centric single customer view of my book purchases, or my financial situation.

If we look at this list it ranges from the mundane to the profound, informing every aspect of the organisation’s activities from operational efficiencies (admin data and organisational arrangements) though to customer insight, innovation and product development, taking in marketing, sales and customer relationship management along the way. It takes us way beyond social networking.

Yes, much of it is still more nascent than actual. But it’s also the direction in which technology is taking us – towards a new customer knowledge and insight world where empowering customers to generate, and share, information and insights about themselves generates far richer win-win opportunities than the historic agenda of gathering insights about customers behind their backs and without their involvement.

Both practically and mentally the shift to VPI is a huge change for marketers. It points to a world where top down messaging and corporate data gathering may no longer be pivotal.

Because of this it may be threatening to some, tempting them to look in the opposite direction. Given the scale of what’s now unfolding however, that would be folly. If your company isn’t already developing its own VPI strategy it needs to … if it doesn’t want to miss the boat.

Alan Mitchell          www.ctrl-shift.co.uk

Why CRM can never work

 There’s another interesting thing about the book buying data example I talked about in my last blog: by definition, the information you need to get insight into your customer’s overall book buying activities can never be generated via the transactions between your customer and your particular company.

In itself, this is not a new insight – CRM practitioners have been struggling to fill this data hole for decades. However, what stunned us when we crunched the numbers in our research into the emerging landscape of Volunteered Personal Information (VPI) was just how much essential information lies outside the one-to-one customer-company relationship. Our finding: a full two thirds of the information the organisation needs to really understand its customer.

Other vital lacunae in the CRM data armoury are future plans and intentions (rear view transaction histories can never predict the future, no matter what CRM-systems salesmen claim); changes to current priorities (triggered, for example, by changes to current circumstances outside of the company-customer relationship), plus the research, question-asking, evaluation and sifting that the customer does before arriving at the entrance to your particular sales funnel.

All of these fit are potential forms of Volunteered Personal Information.

The implication? As VPI moves rapidly from its former status of ‘theoretical nice to have’ to ‘practical operational possibility’, organisations that remain wedded to CRM-dominated mindsets and systems risk missing the real relationship building boat.

Alan Mitchell      www.ctrl-shift.co.uk

The myth of the single customer view

 In my last two posts I talked about two different sources of volunteered personal information: ‘my head’ (e.g. my future purchasing plans, my attitudes or beliefs) and ‘the things I do’, which are now increasingly captured via my digital slug trail.

The slug trail is important because it creates a new type of data with rich marketing potential. Take a simple example. If I buy a book from Amazon, I create a digital slug trail which it records – a history of my transactions which it uses to create recommendations for future purchases. When I buy a book from Waterstones, or Borders, or W H Smiths, the same thing happens. They each have their own, separate digital slug trail, each of which sees only one part of my overall book-purchasing profile – a restricted view which is almost certainly misleading in some way.

Only I, as the buyer, have a view of all these different slug trails. Only I can put them together to create a genuinely accurate, rounded picture of my personal library (if I want to).

This principle applies to every purchasing category, including financial services.

This simple analysis of one aspect of VPI exposes an irredeemable flaw in the concept of ‘the single customer view’ as invented by CRM (Customer Relationship Management).

The ‘single customer view’ as espoused by CRM practitioners is, in fact, a narcissistic, organisation-centric view of the customer: it only sees (it can only see) that customer’s dealings from the point of view of that particular organisation. It does not see the world of supply and suppliers through the eyes of the customer.

As Project VRM puts it the user/buyer, not the seller, is the natural point of customer data integration; not the organisation. (By the way, VRM stands for Vendor Relationship Management i.e. it looks at ‘relationship management’ from the point of view of the buyer managing sellers/vendors rather than the other way round.)

This little example illustrates two things:

1)    how the alternative VPI perspective throws new light on old, intractable problems such as ‘a single customer view’.
2)    VPI’s transformational potential – its ability to reach dimensions of information and insight that no other, traditional, forms of customer data can reach.


Alan Mitchell          www.ctrl-shift.co.uk