1. Set your target price (your goal).
2. Set your first offer at 65 percent of your target price.
3. Calculate three raises of decreasing increments (to 85, 95, and 100 percent).
4. Use lots of empathy and different ways of saying “No” to get the other side to counter before you increase your offer.
5. When calculating the final amount, use precise, non-round number like, say, $37,893 rather than $38,000. It gives the number credibility and weight.
6. On you final number, throw in a non-monetary item (that they probably don’t want) to show you’re at your limit.
Behavioural economics is an odd term. As Warren Buffett’s business partner Charlie Munger once said, ‘If economics isn’t behavioural, I don’t know what the hell is.’ It’s true: in a more sensible world, economics would be a sub-discipline of psychology. Adam Smith was as much a behavioural economist as an economist – The Wealth of Nations (1776) doesn’t contain a single equation. But, strange though it may seem, the study of economics has long been detached from how people behave in the real world, preferring to concern itself with a parallel universe in which people behave as economists think they should.
In general people prefer something freely chosen to the same thing forced upon them. The effect is dramatically revealed in a study that did not directly involve reward or punishment. Lottery tickets costing $1 each were sold to the employees of two companies. Some of the employees were allowed to choose the number of their tickets, others had no choice but were merely handed a ticket. Just before the draw, the experimenter approached each subject offering to buy the ticket back. The subjects who had no choice were prepared to sell back for $1.96 on average, but those who had selected their own tickets held out for an average of $8.67. There could be no better demonstration that we irrationally overvalue what we freely choose.
Excerpt from: Irrationality: The enemy within by Stuart Sutherland
One of those desirable difficulties is known as the “generational effect.” Struggling to generate an answer on your own, even a wrong one, enhances subsequent learning. Socrates was apparently on to something when he forces pupils to generate answers rather than bestowing them. It requires the learner to intentionally sacrifice current performance for future benefit.
Kornell and psychologist Janet Metcalfe tested sixth graders in the South Bronx on vocabulary learning, and varied how they studied in order to explore the generation effect. Students were given some of the words and definitions together. For example, To discuss something in order to come to an agreement: Negotiate. For others, they were shown the only definition and given a little time to think of the right word, even if they had no clue, before it was revealed. When they were tested later, students did way better on the definition-first words. The experiment was repeated on students at Columbia University, with more obscure words (Characterized by haughty scorn: Supercilious). The results were the same. Being forced to generate answers improves subsequent learning even if the generated answer is wrong. It can even help to be wildly wrong. Metcalfe and colleagues have repeatedly demonstrated a “hypercorrection effect.” The more confident a learner is of their wrong answer, the better the information sticks when they subsequently learn the right answer. Tolerating big mistake can create the biggest learning opportunities.
The average expert was a horrific forecaster. Their areas of specialty, years of experience, academic degrees, and even (for some) access to classified information made no difference. They were bad at short-term forecasting, bad at long-term forecasting, and bad at forecasting in every domain. When experts declared that some future event was impossible or nearly impossible, it nonetheless occurred 15 percent of the time. When they declared a sure thing, it failed to transpire more than one-quarter of the time. The Danish proverb that warns “It is difficult to make predictions, especially about the future,” was right. Dilettantes who were pitted against the experts were no more clairvoyant, but at least they were less likely to call future events either impossible or sure things, leaving them with fewer laugh-out-loud errors to atone for — if, that was, the experts had believed in atonement.
In separate work, from 2000 to 2010 German psychologist Gerd Gigerenzer compiled annual dollar-euro exchange rate predictions made by twenty-two of the most prestigious international banks — Barclays, Citigroup, JPMorgan Chase, Bank of America Merrill Lynch, and others. Each year, every bank predicted the end-of-year exchange rate. Gigerenzer’s simple conclusion about those projections, from some of the worlds most prominent specialists: “Forecasts of dollar-euro exchange rates are worthless.” In six of the ten years, the true exchange rate fell outside the entire range of all twenty-two bank forecasts.
A second, ironic, problem is that companies fear that if they produce a truly vital technology, governments will lean on them to relinquish their patent rights or slash prices. This was the fate of Bayer, the manufacturer of the anthrax treatment Cipro, when an unknown terrorist began mailing anthrax spores in late 2001, killing five people. Four years later, as anxiety grew about an epidemic of bird flu in humans, the owner of the patent on Tamiflu, Roche, agreed to license production of the drug after very similar pressure from governments across the world. It is quite obvious why governments have scant respect for patients in true emergencies. Still, if everybody knows that governments will ignore patents when innovations are most vital, it is not clear why anyone expects the patent system to encourage vital innovations.
An experiment on Stanford international relations students during the Cold War provided a cautionary tale about relying on kind-world reasoning — that is, drawing only from the first analogy that feels familiar. The students were told that a small, fictional democratic country was under threat from a totalitarian neighbor, and they had to decide how the United States should respond. Some students were given descriptions that likened the situation to World War II (refugees in boxcars; a president “from New York:, the same state as FDR”; a meeting in “Winston Churchill Hall”). For others, it was likened to Vietnam, (a president “from Texas. the same as LBJ,” and refugees in boats). The international relations students who were reminded of World War II were far more likely to choose to go to war; the students reminded of Vietnam opted for nonmilitary diplomacy. That phenomenon has been documented all over the place. College football coaches rated the same player’s potential very differently depending on what former player was likened to an introductory description, even with all other information kept exactly the same.
Engineer Marc Isambard Brunel, (father of the more famous Isambard Kingdom Brunel) discovered the perfect method for tunnelling through mud and clay to build the Thames Tunnel under London by observing the action of the shipworm, which tunnels through the hulls of boats, lining the hold with a hard chalky material as it goes. Mirroring the worm’s action, Brunel designed a revolutionary and ingenious tunnelling system, in which workers could simultaneous cut and line a tunnel with brickwork to seal it.
On its opening in 1843, the Thames Tunnel was described as the ‘Eight Wonder of the World’, and Brunel’s shipworm system is the basis of tunnelling methods still used today — a version of it was used in the construction of the 50- kilometre (31-mile) Channel Tunnel, built 40 metres (130 feet) below the seabed.
Martina Navratilova was described as “the greatest singles, doubles, and mixed doubles player who’s ever lived.”
That was some compliment, coming from former World Number One player Billie Jean King.
This is what Marina had to say about commitment:
“Other players are involved in tennis, but I’m committed. It’s like ham and eggs. The chicken is involved; the pig is committed.”
Daniel Kahneman sets them straight in Thinking, Fast and Slow: ‘If you care about being thought credible and intelligent, do not use complex language where simpler language will do. My Princeton colleague Danny Oppenheimer refuted a myth prevalent among undergraduates about the vocabulary that professors find most impressive. In an article titled “Consequences of Erudite Vernacular Utilized Irrespective of Necessity: Problems with Using Long Words Needlessly”, he showed the couching familiar ideas in pretentious language is taken as a sign of poor intelligence and low credibility.
Big doesn’t necessarily mean good. It could even be bad.
By contrast, there are tremendous advantages to making small changes.
Behavioural science has shown that tiny variations in phraseology can cause huge change.
Small changes are usually less costly, and often free.
Small changes attract less attention from bosses and meddlers, so they are easier to implement.
Small changes are easier to rectify if they don’t achieve their original objective.
So bear in mind that the ‘next big thing’ could be small.
A guy named James Webb Young, a copywriter from the 1940s, laid out a five-step process of idea generation that holds water today.
1. You gather as much information on the problem as you can. You read, you underline stuff, you ask questions, you visit the factory.
2. You sit down and actively attack the problem.
3. You drop the whole thing and go do something else while your subconscious mind works on the problem.
4 . “Eureka!”
5. You figure out how to implement your idea.
Naive realism suggests an answer: they do. It calls to mind a famous line of George Carlin’s: “Have you ever noticed that everyone driving slower than you is an idiot, and anyone going faster is a maniac?”
The worst-performing clubs were built on affective ties and primarily social; the best-performing clubs had limited social connections and were focused on increasing returns. Dissent was far more frequent in the high-performing clubs. The low performers usually had unanimous votes, with little open debate. Harrington found that the votes in low-performing groups were “cast to build social cohesion rather than make the best financial decision.” In short conformity resulted in significantly lower returns.
Take what happened when Coney Island visitors encountered entrepreneur Nathan Handwerker’s new food stand. When he went into business in 1916, the Polish immigrant decided to undercut the competition. Everyone else was charging 10 cents for the classic Coney Island meal — the hot dog — so Handwerker priced the dogs he made from his wife’s old recipe at a mere five cents. Despite the fact that Handwerker’s hot dogs were every bit as delicious as the competition’s (and were made from real beef), he attracted almost no customers. Visitors to Coney Island viewed these mysterious half-priced hot dogs as inferior and wondered what cheap, substandard ingredients went into the recipe. It didn’t help when Handwerker offered free pickles or free root beer to hot dog buyers. Sales remained flat and, if anything, giving away freebies only further cemented the value attribution.
It wasn’t until Handwerker came up with a clever new ploy that his hot dogs really started selling. He recruited doctors from a nearby hospital to stand by his shop eating his hot dogs while wearing their white coats and stethoscopes. Because people place a high value on physicians, customers figured if doctors were eating there, the food had to be good. So they soon started buying from Handwerker, and his “Nathan’s Famous Hot Dogs” took off. It makes you wonder just how many times we miss out on something worthwhile because of our preconceptions about its value.
Some people, and businesses generally, love having lots of people rushing around.
It makes them feel productive.
Regardless of what they are doing, all the frenetic activity suggests that much helpful work is being done.
People even say sometimes that they like the buzz.
But it’s a bit like a goalkeeper diving to save a penalty.
He might be just as effective staying exactly where he is.
So movement doesn’t necessarily mean progress.
Don’t confuse the two.
Paul Seward runs an NGA in Kenya called Farm Input Promotions (FIPS-Africa), dedicated to increasing the productivity of the local smallholder farmers, many of whom have just a quarter-acre of land. Seward discovered that if you paint the chicks blue, the eagles and hawks don’t realize what they are, and don’t try to eat them. The biodegradable paint washes off in ten weeks, by which time the chicks have enough yard-smarts to run for cover when they see a shadow overhead.
Because the farmers are losing fewer chicks to birds of prey, it is now more worthwhile for them to inoculate the young birds against disease. Through both of these measures, they have gone from a survival rate of 20 percent to close to 85 percent. Because the farmers have more chickens, they are eating more chickens themselves — and better nutrition means a healthier family. And because it is now a better business, more people are taking up chicken farming. Oh, and the idea has created an entirely new profession: chicken painters, who charge three Kenyan shillings to paint each chick. A fascinating example of the cumulative benefits of a simple idea across an entire ecosystem.
One day, Korzybski offered to share a packet of biscuits, which were wrapped in plain paper, with the font row of his lecture audience. ‘Nice biscuit, don’t you think?’ said Korzybski, while the students tucked in happily. Then he tore the white paper and revealed the original wrapper – on it was a picture of a dog’s head and the words ‘Dog Cookies’. Two students began to retch, while the rest put their hands in front of their mouths or in some cases ran out of the lecture hall to the toilet. ‘You see,’ Korzybski said, ‘I have just demonstrated that people don’t just eat food, but also words, and that the taste of the former is often outdone by the taste of the latter.’
Sailing across the Aegean Sea he was captured by Sicilian pirates.
They demanded a ransom: 20 talents of silver.
(That’s about 620kg worth about $600k.)
Caesar told them they were being ridiculous.
He couldn’t possibly allow himself to be ransomed so cheaply.
The pirates hesitated, the were confused.
Caesar insisted the ransom must be more than doubled to 50 talents of silver.
(Around 1550kg worth about $1.5 million.)
Now the pirated didn’t know what to make of this.
Normally their captives tried to escape as cheaply as possible.
They didn’t understand what was going on.
But if he said he would double the ransom, why argue?
They let Caesar’s men go back to Rome to raise the money.
And in Rome, in his absence, Caesar suddenly became very famous.
No one had ever been ransomed for such a vast sum before.
He must be very special, he must be very important/
That ransom demand put Julius Caesar on the political map.
He had just invented the Veblen effect.
There is no such thing as a new idea. It is impossible. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope. We give them a turn and they make new and curious combinations. We keep on turning and making new combinations indefinitely; but they are the same old pieces of coloured glass that have been in use through all the ages.
Consider Gosplan, the agency charged with central economic planning for the Soviet Union for most of the twentieth century. Their plans often involved setting economy-wide target amounts for commodities (wheat, tires, etc.), which broke down into production targets for specific facilities. In 1990, economist Robert Heilbroner described some of the complications with this system in “After Communism,” published in The New Yorker.
For many years, targets were given in physical terms — so many yards of cloth or tons of nails — but this lead to obvious difficulties. If cloth was reqarded by the yard, it was woven loosely to make the yarn yield more yards. If the output of nails was determined by their number, factories produced huge numbers of pin like nails; if by weight, smaller numbers of very heavy nails. The satiric magazine Krokodil once ran a cartoon of a factory manager proudly displaying his record output, a sing gigantic nail suspended from a crane.
Goodhart’s law summarizes the issue: When a measure becomes a target, it ceases to be a good measure.
Only 1.5 percent of the purchase price goes directly into your agent’s pocket.
So on the sale of your $300,000 house, her personal take of the $18,000 commission is $4,500… Not bad, you say. But what if the house was actually worth more than $300,000? What if, with a little more effort and patience and a few more newspaper ads, she could have sold it for $310,000? After the commission, that puts an additional $9,400 in your pocket. But the agent’s additional share — her personal 1.5 percent of the extra $10,000 — is a mere $150…
It turns out that a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house. When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along. Like a stockbroker churning commissions, she wants to make deals and to make them fast. Why not? Her share of a better offer — $150 — is too puny an incentive to encourage her to do otherwise.
Information is not processed neutrally. We are swayed by contextual cues.
Jeremy Bullmore, former Creative Director and Chairman of JWT in London, notes that this affects not just headlines, but advertising too:
A small ad reading “Ex-governess seeks occasional evening work” would go largely unremarked in the chaste personal columns of ‘The Lady’. Exactly the same words in the window of a King’s Cross newsagent would prompt different expectations.
When our bathroom scale delivers bad news, we hop off and then on again, just to make sure we didn’t misread the display or put too much pressure on one foot. When our scale delivers good news, we smile and head for the shower. By uncritically accepting evidence when it pleases us, and insisting on more when it doesn’t, we subtly tip the scales in our favor.
You might assume that a milkshake’s job is to be a special treat to cap off a meal. While it is true that many parents offer shakes as an after-dinner family treat, this restaurant learned that almost half of their shake customers were using them for a different job — to make their long morning commutes more interesting. People felt their trips were more enjoyable as they sipped milkshakes while moving through traffic.
Doing two jobs at once sounds great, but that usually means at least one job isn’t being done particularly well. In this case, parents didn’t like how long it took their kids to drink the shakes.. Yet that was one of the key features for the commuters.
The restaurant chain realized they needed two different products to do the two different jobs well. They decided to further improve the shake for the commuters by making it even thicker, adding more chunks and moving the shake machine to the front of the stores for the fast on-the-go service that commuters wanted. They then needed to market a wholly different dessert product to kids and their parents.
When you truly understand what job people are really truing to get done by using your product, then you can focus your efforts on meeting that need.
Bell’s subway performance started with Bach’s Sonatas and Partitas for Unaccompanied Violin, on of the most challenging piece ever composed for the instrument. Over the next forty-three minutes the concert continued, but on that January morning there was no thunderous applause. There were no cameras flashing. Here was one of the best musicians in the world playing in the subway station for free, but no one seemed to care. Of the 1,097 people who walked by, hardly anyone stopped. One man listened for a few minutes, a couple of kids stared and one woman, who happened to recognise the violinist gaped in disbelief.
A 2007 study by Sorensen investigated the impact of appearing in the NY Times bestseller list. He tracked the success of books that should have been included on the basis of their actual sales, but — because of time lags an accidental omissions — weren’t, and compared them to this that did make it on to the list. He found a dramatic effect: just being on the list led to an increase in sales of 13-14 per cent on average, and a 57 per cent increase in sales for first-time authors.
There is a parallel in the behaviour of bees, which do not make the most of the system they have evolved to collect nectar and pollen. Although they have an efficient way of communicating about the direction of reliable food sources, the waggle dance, a significant proportion of the hive seems to ignore it altogether and journeys off at random. In the short term, the hive would be better off if all bees slavishly followed the waggle dance, and for a time this random behaviour baffled scientists, who wondered why 20 million years of bee evolution had not enforced a greater level of behavioural compliance. However, what they discovered was fascinating: with out these rogue bees, the hive would get stuck in what complexity theorists call ‘a local maximum’; they would be so efficient at collection food from known sources that, once these existing sources of food dried up, they wouldn’t know where to go next and the hive would starve to death. So the rogue bees are, in a sense, they hive’s research and development function, and their inefficiency pays off handsomely when they discover afresh source of food. It is precisely because they do not concentrate exclusively on short-term efficiency that bees have survived so many million years.
If you optimise something in one direction, you may be creating a weakness somewhere else.
Transavia’s brilliant idea was to create a snack packaging that doubled as an aeroplane ticket to a low-cost destination. A €35 packet of crisps would buy you a one-way ticket from France to Barcelona, a €40 bag of gummy bears would take you to Lisbon, or a €40 cereal bar would get you to Dublin. Simply walk into your local Carrefour supermarket, buy the snack, and then enter the code found inside the packaging to redeem your ticket and choose your outbound flight.