The Financial Crisis And Human Psychology: Cutting Off Your Nose To…

MIT Professor and behavioral economist Dan Ariely (who’s excellent book "Predictably Irrational" I have referenced or quoted a number of times on this blog in recent months) was interviewed via phone on CNBC a few days ago, and he pointed out something very significant:

When social trust is violated, as has been very broadly and shockingly the case over the last month or so, the instinctive psychological reaction of human beings is revenge.

And while that may still sound rather pedestrian, the corrolary is where the proverbial rubber meets the road. Because the emotional state of revenge includes an element that says, "we want to hurt the perpetrator(s) of this breach of social trust, EVEN if it ends up hurting us in the process."

If you take this to be the definition of revenge in contrast to say "normal" anger or even rage – which do not include this self-destructive element outright, though they may of course often go down a similar path -, then it is clear why our instinctive response to this financial crisis and the various remedies such as bailouts (whether they be perceived or actual) is so dangerous:

We are literally prepared to undergo further pain personally, if only there could be revenge taken on the "greedy Wall Street executives" et al. by letting their companies go under, and so forth. The sentiment is very much like that captured in the old proverb: Cutting off your nose to spite your face.

I am not trying to make an economic or political case either for or against anything that has been going on since at least September 15 (though there is much to be in disbelief or even cynical about), but the reality is that revenge (or anger) is a very poor basis from which to operate or from which to make important decisions for your business, your loved ones, or yourself. Because it clouds our judgment.

If you have any means to do so (Business Mind Hacks coaching is one of the ways), it would best to let go off the anger and/or feelings of revenge, or to at least set them aside while you are trying to make important decisions or take important actions.

Best wishes in "interesting times"

– Alex Schleber

Psychological Aspects of the Financial Crisis: In Warren Buffett We Trust?

The news regarding the ongoing problems in our financial systems, analysis and second-guessing of those news, and prescriptions for or against proposed ways to right the ship (AKA the Bailout/Rescue package) have reached a fevered pitch.

Rather than add to this imbroglio, I’ve decided to "take a time out" (though I’ll admit I have been an avid participant in debates on various related blogs over the last few weeks to keep on top of this), and focus solely on the psychological aspects of all this. Things that should largely be beyond the realm of political and economical opinion (I am not an economics expert, nor do I believe that infusing politics into this is helpful at this point).

To borrow a well-worn metaphor, if you cannot see the forest for the trees, maybe you can at least create some clarity for yourself as to what types of trees you are dealing with:

1) The fractional reserve banking system that most of the world has used for many decades is fundamentally based on confidence and trust between the parties involved. That is what we mean when we use phrases such as "the full faith and credit of the U.S. goverment".

Since the Bear Stearns "forced sale" in March, trust has been evaporating at ever faster rates. So much so that at this point, nobody trusts their counter-parties anymore, and hoards cash positions wherever they can.

2) In the absence of confidence and trust, there is only fear and uncertainty. Fear tends to attract more fear, such that there is a tendency to become a self-fulfilling prophesy. Hence the words we use and think do matter.

You see, terms such as "melt-down, toxic assets, fire sale, depression, collapse," asf. all have a tendency to incite further fear, because they draw on metaphors of real and direct physical harm rather than the hardly comprehensible yet comparatively boring transfer of blips of numbers on computer screens and piles of paper between various complex corporate entities (themselves largely purely abstract and based on further piles of paper).

After initially due to form going overboard with such language, the mainstream media has now largely pulled back from its usage, after apparently scaring ITSELF with the precipitous stock market "dives" last week.

Lesson: I would advise you to do the same. Stop using misleading and inflammatory language for the sake of your own sanity during a time of challenge.

3) Back to the issue of trust, since it is a purely psychological state, all elements of long term forming of associations in our mental real estate – in other words "branding" – come into play. The best example of this I could find is the fact that last week, the brand of "Warren Buffett" – shrewd yet kindly investor and economic wise man, the "Oracle of Omaha" – commanded a tidy premium when lending money to Goldman Sachs and General Electric well beyond that which the U.S. government would charge.

In other words, Warren Buffett has built up a brand that made him more trustworthy in the minds of many than even the "full faith and credit" of the U.S. government. Now while this is of course illogical on its face, it is nevertheless true at a deeper psychological level:

The inherent endorsement those two companies got from having Buffett invest a total of about $8 Billion was worth the premium to them, given his well-known penchant for strict value investing and abhorrence of leverage (investing with borrowed money). It was somewhat like say Michael Jordan endorsing Wheaties.

Lesson: Continue to build your own brand as a haven of sober analysis, rational balance, and calm, in ANY interaction with customers, clients, and even just your friends and family. You simply can’t go wrong.

4) Being reminded of prior warnings by Buffett against an impending housing bubble, let’s quickly look as to how this sort of thing can develop (and repeatedly so). Why would otherwise supposedly largely rational people act in ways that would turn out to be so problematic, even ruinous longer-term?

The answer is twofold: First, there is denial.

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New iPod Touch Pricing: Just A Decoy Offer To Drive iPhone Sales?

Apple unveiled it’s new renditions of both the iPod Touch and the iPod Nano on Tuesday, along with several other software upgrades. And at first I was surprised by some of the price-point decisions:

1) I had thought the Nano might go to $99 from $149 in line with Apple’s new, more populist "recession pricing" ideas they applied to the iPhone. Then again, as the undisputed market leader (73%), you by rule have premium pricing power, although it seems like it could have put a permanent nail in the coffin of all competitors (Microsoft’s Zune apparently currently only has 2.4% marketshare).

2) Thought that the Touch (entry-level now priced at $229) might be put at $199 for the same reason, the psychological impact of going below the ‘2’ should not be underestimated, as recently proven by the strong iPhone 3G sales.

Then it hit me, the Touch in particular may be just the $229 comparison item, that could push people to look at buying the (long-term more lucrative and more important to Apple) iPhone for $199 as a no-brainer.

Dan Ariely’s excellent "Predictably Irrational" talks about such contextual "decoy offers" that can boost sales for the item the seller really wants people to buy. As an example he uses a past offer by british business magazine The Economist:

It had listed $59 for on-line access only, $125 for print-only, and $125 for print & Web combo subscriptions, and had thereby significantly boosted the number of the expensive combo subscriptions sold (vs. test offers that omitted the seemingly non-sensical $125 print-only option)!

Other similar set-ups in formal experiments conducted by the MIT behavioral economics professor had shown similar results. People make less-than-fully-rational decisions based on the context and comparisons provided.

So in essence, it is like saying: "Let a few technophiles buy iPod Touches, but really we want to indirectly boost iPhone sales." And even the $149 Nano pricing makes more sense that way, if you view it as yet another decoy offer to point to the iPhone as a no-brainer.

I wouldn’t put it past Apple, they can read New York Times Bestseller books on business psychology with the best of them…

In other Apple news from the launch event…

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