Behavioral Odds

“If you are the only one she has, make sure you are one in a million” – Irish Folk Song

Say you had an opportunity to buy one of fifteen lottery tickets to be sold to fifteen different individuals for $20 a ticket. Since this is a charity event, a corporate sponsor is kicking in coupons for $50 worth of free pizza at the local pizza joint. If your ticket ends up being the winning ticket you will claim the entire prize, which is worth $350. Would you spend $20 for a one-in-fifteen chance to win $350? That doesn’t sound too bad does it? Now say we change one thing. Instead of the 15 tickets being sold to 15 different people, the tickets are sold to only two people. You get to buy one ticket and another person, let’s call him Joe, buys the other 14. Joe-the-gambler has a 14 out of 15 chance of winning and you have a 1 out of 15 chance of winning. Would you spend the $20 now? Doesn’t sound as attractive does it? But your chances of winning under these two scenarios are identical. You have a 1 out of 15 chance when there are 15 participants in the lottery and you have a 1 out of 15 chance when there are 2 participants in the lottery. But with Joe owning 14 of the 15 tickets the whole thing comes across as less attractive – less fair, you perceive the deck as being stacked against you. But it is not stacked any higher in the second scenario than it was in the first scenario.

Traditional economic theory regarding how people make decisions assumes that they are completely rationale, or what is called perfect rationality, and would say that the likelihood of you purchasing your lottery ticket under the two differing scenarios would be identical, yet it is pretty easy to demonstrate in the real world that it is just not the case. Behavioral economics tries to take into consideration the psychology behind how people make decisions, decisions that might fly in the face of traditional economic equations.

The situation where the two starting positions can be mathematically shown to be equal but one psychologically appears to be disadvantageous is driven by what is called situational efficacy. You are less likely to buy the lottery ticket under the second scenario because of a perceived situational deficit. In a sports comparison, it is the equivalent of being the visiting team. Visiting teams often labor the assumption that there is a home team advantage. But it is still the same players, playing the same game that they have repeatedly practiced. But statistically you can demonstrate a home field advantage for the home team. It is coming from the player’s psychology or situation efficacy driven by the belief of a home team advantage and by the visiting team letting the situation (noisy crowds, unfamiliar physical location etc.) affect them.

About a year or so ago I saw the following demonstration in a room of about 1000 people. The speaker at the front of the room asked, “Please raise your hand if you are personally fighting cancer right now”. Five or six hands went up. Then he asked, “Please raise your hand if sometime in the past you had battled any form of cancer”. A larger number of hands were raised. Then he asked “Please raise your hand if someone in your immediately family is battling or has battled cancer”. Predictably, an even greater number of hands were raised. Then, “Raise your hand if any relative of yours has battled cancer”, then, “Now raise your hand if anyone you personally know has battled cancer”. He did not have to go that far to make his point. By the time he got to the relatives every hand in the room was raised. The demonstration pointed out two things. One, we are all interconnected and share common experiences to a much greater extent than we usually realize and two, well let me first ask the 1000 people reading this, “How many of you who do not currently have cancer or are unaffected by cancer in your immediate family, think you will be diagnosed with cancer this coming year? Please raise your hand if you believe that to be the case”.  Hard to see through the screen, but I don’t see too many hands raised. Even with our shared experience, even though we can see something like cancer all around us, sometimes we 1). choose not to see and 2). assume that things like cancer will happen to someone else. Not to us. Our brains are wired to assume that positive things will happen to us, at least the majority of us. Negative things happen to someone else; we hope for and desire positive things to happen to us. Assuming positive outcomes is an evolutionarily derived survival mechanism which allows us to forebear in the face of adversity. We are attracted to buying that lottery ticket when we think that each individual has an equal chance of winning or losing, because we perceive that given an equal chance as everyone else that positive things could happen to us, but when we perceive the deck being stacked, even if your own chances don’t change with the changing situation, the situation becomes less attractive to you.

If we take those notions and apply them to the mortgage meltdown, why would someone take out an ARM, an adjustable rate mortgage, knowing that they will not be able to pay the mortgage if the rate goes up, as it would do once any teaser rates expire or as the economic conditions change, and their income does not increase. Would they take that ARM if the bank were required to layout for them what their monthly payments will be once the teaser expires, and if the rate raised to the maximum amount possible each year, the worst case scenario being very clearly laid out for them? Providing knowledge can have a dampening effort on the desire to gamble.

Why would an organization merge with another, knowing that the only way the joint organization could survive is if the entire entity is restructured, with new unknown ways found to reengineer business processes to achieve greater efficiencies while maintaining phenomenal growth rates for an extended period of time?

Why would the federal government develop an annual budget that is dependent on assumptions about taxes, growth rates, and other sources of revenue while incorporating assumptions about expenses, all of which are simply unrealistic?

Why would children at school assume that they can get a good grade if they do not put in the necessary effort in order to do so, and then be disappointed when the grade does not come through?

I want to be careful here to delineate what I am describing from complete risk aversion. Humans can and will rise to new heights when faced with new and unexpected challenges. We can and do need to take risks in order to further ourselves individually and where we sit as a species. We are nothing else if not adaptable and resourceful. We need to be willing to reward people who try new things and fail, so that they are willing to try other things that might succeed, perhaps wildly. But the above descriptions are based upon irrational assumptions, not thoughtful processes. Saying that, we are also a product of our evolution and it would be erroneous to assume that simply because someone points out particular behavioral flaws that are inherent to our psychology, that the psychology can and will change. However, knowledge of why certain behaviors occur is the first step towards controlling and directing those behaviors.

Anyone want to buy a lottery ticket?

© 2010 by Jeffrey M. Saltzman. All rights reserved.

Visit OV: www.orgvitality.com

Every Wednesday?

A union leader is addressing the crowd at a union meeting. From the podium he begins talking, “We have agreed on a new deal with management. We will no longer work five days a week.” The crowd roars it approval. “We will finish work at 3pm, not 4pm.” The crowd roars again. “We will start work at 9am, not 7am.” Once again the crowd roars. “We shall have a 150% pay raise”. The noise level was deafening. “We will work only on Wednesdays.” There was then a silence that immediately engulfed the room. You could hear a pin drop. Then from the back of the crowd a voice asks, “Every Wednesday?”

In spike of jokes like this that make the rounds, the evidence is overwhelmingly clear. The vast majority of workers want to do a good job at work. They want to work hard, they want to create products or services of which they can be proud, they want to work for a company that from their perspective has its act together and they want to be treated fairly and with respect, but then doesn’t everyone? This truism holds regardless of where in the world you happen to be, and whatever generation, gender or ethic group you are interacting with. Organizations tend to make rules to deal with the 5% of the population that do not fit this description not the 95% who do. As you think about your role think about what you can do to enable the 95% and not to control the 5%.

© 2011 by Jeffrey M. Saltzman. All rights reserved.

Visit OV: www.orgvitality.com

 

Downstream Wash & Dry

There is an old fable that goes something like this: A father was giving his son some advice. The father asked the son what skills he would like to learn; how he would like to earn a living. The son said that he would like to learn to wash clothes in the river. Washing clothes being a good honest trade, he sent his son down to the river to learn and told him “Become the best clothes washer you could possibly be”. The son worked very hard and opened a small clothes washing business called “Downstream Wash & Dry”, and soon his work became known for producing the cleanest clothes possible and he prospered. People stood in line in for hours to get their clothes washed by the agreeable washerman. A few years later a paper mill opened upstream from the son’s business, fouling the river water. No one wanted their clothes washed downstream of the paper mill. What was the son to do? He checked the village records and found that the paper mill was operating legitimately and had all the necessary permits. He then checked with the landowners above the paper mill to see if he could purchase any land close enough to the village so he could successfully relocate his business and found that all the nearby land had been bought up by a company called “Upstream Wash & Dry”, which had just opened a franchise in town. The competition, upon seeing the success of Downstream, had been paying close attention to the changing environment, waiting for an opportunity to clean up and grab market share. The moral of the story: Simply being very good at something can become irrelevant if your operating assumptions don’t keep up with the times. This fable has a happy ending (as fables should), for the father was watching over his son’s business and had already invested in “Downstream Water Filters”, whose products allowed the son’s business to continue.    

If the first time you are thinking about how to manage your business or your employees through a down business cycle is when you have already entered a down business cycle, do yourself a favor—turn off the lights, lock the door and go home. The time to think about these things, like so many other things in life, is prior to when you actually need them. No one, at least not many, would think about retirement for the first time on the very day they were to retire, and no one should be thinking about how to manage in a down cycle for the first time upon the realization that they are in a down cycle. “Now let’s see, where did I put that magic button?” Having said that, if we assume that some prudent steps were taken prior to the down cycle, there are some things that can help ease an organization through a downturn.

How do you motivate employees to do their best at work during a downturn, especially when the future is uncertain and layoffs are possible?

I would answer that question with another. How did you motivate employees prior to the downturn? While there may be some nuances to operating in a downturn, good business practices are still good business practices. If you have built a reputation for open and honest communication, that will stand you in good stead with your employees and during a down cycle you want to increase the frequency and amount of communication even when the news is bad. During times of turmoil people’s desire for communication increases exponentially, so while the natural tendency may be to withhold bad news, it is better to increase the information flow. A lack of information will cause people to fill in the blanks—and they will generally fill in the blanks with an imagination that creates worse scenarios than the reality.

But communications is simply process. What should you be communicating about? Message. Now is the time to unveil the plans you had developed during the good times and let people know how you will cope with the bad. What are the timeless principles by which the company will continue to operate regardless of the environment? What will you do? How will you treat people? How will you cope with lower business volumes and potentially shrinking market share? Performance. What will the organization do to enable people to get their jobs done and done well? What new strategies will be put into place, what new products that are more attractive in a down market? Future. What are the compelling reasons why someone should stick around and help the organization make it through a down cycle? What is in it for the individual? 

What can an organization do to show its top talent how crucial they are and prevent them from jumping ship?

If all your talent is not crucial to your success that means you have not been dealing with issues that you should have dealt with prior to the downturn. Using the downturn as an excuse to deal with performance issues, under the banner of “downsizing”, will be transparently seen through and is potentially alienating to other employees. In other words, the organization was looking for an excuse rather than dealing with issues on an ongoing basis. People who are able to help reinvent the organization, its products and services and its ways of operating will be crucial to the long-term success of the organization and should be rewarded appropriately. The traditional rewards such as money and opportunity are traditional because they have been found to work.  

If your company is forced to lay off people, how do you then reassure and engage those that are left?

Alternatives to the layoff should be considered first. Can other operating costs be cut? Will some take an early retirement if it is offered? Can an across-the-board pay cut be implemented so that everyone can stay employed? Are some willing to go to a part-time schedule? One of the privileges of being in management is that they should take the lead in suffering during a down cycle. They should be the first to take a pay cut and they should be cut the deepest. If a layoff does happen management should also be laid off in equal percent to the non-management employees, rather than being viewed as a protected group.  Those companies that can retain their talent though, assuming that they have been dealing with performance issues on an ongoing basis, will be better positioned to flourish in the recovery. If a layoff happens, it happens as a last resort, not a first choice. It should happen all at once and not in a slow drip kind of fashion. Once completed, the staff should be told that the downsizing is finished as long as market conditions are stable. Based on this approach people will recognize that the company operates in a manner that tries to protect their employment to the extent possible and that when pain is to be suffered it is suffered in a fair and equitable fashion and that will provide reassurance.