Wednesday, August 16, 2017

The Economics of Emotion

In a previous post, I considered the emotional basis of decision making, concluding that all decisions are essentially emotional ones.  The reason we want to achieve an outcome is often to achieve another outcome, but when you follow the chain to the ultimate outcome, it is the desire to effect an emotional state. 

We choose to take action because it earns a monetary profit, but what need do we have for that money?   If there is a specific need (to purchase certain things) it is because we expect to experience happiness because of their consumption.   If there is no specific need and we simply desire to have purchasing power, it is the possession of that power that creates feeling of security and happiness.  In either case, it is an emotional objective.

But what of the other side of the equation – the cost and effort involved in achieving an emotional benefit?   By the same reasoning, these are emotional costs.   The willingness to part with money is a willingness to do without those things (or the purchasing power) that money represents because we estimate we will feel greater happiness from whatever we purchase than with the possession of money.   Or the willingness to perform unpleasant tasks to acquire money is because the happiness that the money will provide is greater than the unpleasantness of what must be done to obtain it.

Thus considered, economics is not about money – as money is an element that can be factored out of the equation.    If we undertake displeasure to gain money, then use that money to obtain pleasure, then money is merely a temporary possession that is used to facilitate an exchange of displeasure for pleasure – of undesirable emotions for desirable ones.

The childish game of “what would you do for a million dollars” is in this context quite illuminating – it focuses on the unpleasant and humiliating activities a person would undertake to gain the pleasure of a reward, and puts focus on the emotions rather than the money, which is merely a token.   This is actually quite realistic.

In considering any job, the worker asks himself whether the labor is worth the wage.  It is not a matter of how much money will be earned, but how much pleasure will be received.   And considering that many of the most unpleasant and degrading occupations pay minimum wage, it can be seen that workers have different levels of tolerance for emotional displeasure in exchange for the same emotional benefit.

So when one asks if a given trinket is “worth” five dollars, it is not merely the amount of money that is considered, but the amount of displeasure that was undertaken to earn that sum and whether it is worth the pleasure of owning and consuming the trinket.   And this is the reason that various buyers place different bids on the same object.

To rely on monetization is thus to ignore the emotional basis of economic decisions, and will invariably lead to serious errors in judgment.

Wednesday, August 9, 2017

The Evolution and Perversion of Economics

The study of economics did not originally have to do with markets - the word originates as Greek "oikonomos" (household knowledge) which referred to the sound management of an estate and the allocation of human effort that was required for the members of the household to produce the necessities they required, preferably before devoting time to conveniences and luxuries.   Economics had nothing to do with the world outside of the household, except in rare instances in which a household produced more than was necessary and could barter with other households for their own excess.

The principles of a well-managed house was scaled up to the management of towns, cities, nations, and nowadays even the world.   It has been stretched well beyond what it was intended to manage, and stretched to a scale at which management may not be at all practicable.  Thus considered, if economics seems unfathomable, it is only because it has overstepped the bounds of its original intent.

The needs of a household and the means to achieve them are quite straightforward, such that even uneducated peasants can manage to figure out how to get by on what they have and to improve their lot over time.  But when men who consider themselves to be smart and sophisticated engage in the foolish behavior of presuming to speak on a grand scale about the needs and means of every household in a nation or in the entire world, complications invariably arise.

Economics is a simple concept that is only made complex by struggling vainly to amalgamate that which should likely not be amalgamated, and complexities and paradoxes arise when such broad and sweeping statements are attempted.  It has, in other words, overstepped its bounds and become entirely insular and divorced from reality.   The academic economist is a man who has bitten off far more than he can chew and is too arrogant to spit it back out and deal with it in smaller bites.

This is not to say that there is no use for the principles of running a household, or even a production facility – merely that when the efficiency of production and trade has swelled to overshadow the meaning of those activities, economics has been misapplied and is quite likely more damaging than beneficial.

Wednesday, August 2, 2017

Right-Sizing Experience Design

Experience design, which focuses on facilitating the peripheral tasks around using a product (chiefly, the acquisition process) is being overemphasized of late.  Largely, the notion of a “design-led organization” is being promoted by the design department, which is composed by narcissistic idealists who imagine themselves to be the center of the universe anyway, but it’s also being embraced by product management groups, who see “design” as a way to promote a product without making any substantial changes or improvements to the product itself.

While it’s good (and quite overdue) that firms are recognizing the need to do more than push boxes and reducing the pain in the process can reduce drop-out in the acquisition funnel, the emphasis on design rests on the false assumptions that the product is perfect as it is, that people are eager to acquire it, and that the friction in the acquisition process is the only thing that is stopping prospects from purchasing the product.

Said another way, experience design can be applied to make it easy to acquire a desired product – but it cannot be used to make an undesirable product desirable.   And in the rare instances in which the acquisition process can be made so attractive that prospects will purchase an undesirable product, it becomes toxic – much in the way that people who get wound up in the excitement of an auction end up purchasing products they neither want nor need – and while a one-time sale can result, buyers’ remorse diminishes the likelihood of their becoming regular customers.

If experience design succeeds at jostling for control, it will ultimately be to the detriment and long-term sustainability of the brand.   It needs to be considered, but is not the paramount concern – hence the appropriate level of emphasis for experience design is partnership, a contributor that plays a supporting role, valued for what it is worth – but never to the degree that more important concerns are subordinated.

Wednesday, July 26, 2017

Overdoing Innovation

Lately, it seems to me that “continuous innovation” has become one of those rallying cries that people follow without thinking about what it really means of if it’s really needed.   The notion that customers are dissatisfied with your current product offering and that you need to constantly abandon old products and adopt new products just to be fashionable is simply not true of most industries.

Chances are, your current product lines are profitable and popular.   If this were not so, the firm would be in turmoil and would not have budget to innovate.  And chances are, the majority of your customers like your products just as they are, and will not be delighted by arbitrary changes.

As a concrete example, the customer who goes to a Macdonalds restaurant and orders a Big Mac is not going to be delighted to hear that they are no longer being sold – that the company has “innovated” and is now selling stromboli instead of hamburgers because, according to their marketing firm, that’s what customers want this week.   This would be a disastrous business decision.  The Big Mac sandwich has not changed much, if at all, for decades – and customers like it just the way it is, and will probably continue to do so.

That’s not to say the brand isn’t innovative.  It seems that every month they are offering some new item to try to keep pace with the changing tastes of the market  - but they do so without disrupting their primary menu items that most customers like and expect of them.   It’s also worth observing that their main menu is very slow to change because most of the innovative items have only a temporary popularity – those that have staying power become permanent offerings.  The Big Mac itself was a new and different idea in 1967 and has not evolved – nor has it needed to evolve.

But back to the main point, there is no value in continuous innovation  unless there is a need for innovation in the first place – when a product is no longer meeting the needs of its customers (or never really did in the first place) and there is widespread discontent with all product offerings, then there is a need to innovate to find a better solution – but for most goods and services, this should be unusual if they are currently viable in the marketplace.

Wednesday, July 19, 2017

The Value of a Leading Question

I read an interesting factoid from a “study” that was unfortunately not cited – so I can’t get further detail or verify that it is anything other than folklore – but it seems plausible.   Allegedly, researchers conducting a face-to-face study found that less than 30% of the people they confronted were willing to take the time to participate – but when the surveyor asked prospects, “Do you consider yourself to be a helpful person?” the participation rate jumped to over 70%.

Both of those numbers seem a bit high to me, but the premise is sound: it is based on the mechanisms of consistency and commitment.   Once a person states that they are “a helpful person” they feel compelled to back that statement by acting in a way that is helpful – in this case, to “help” the surveyor by taking the time to respond to the survey.   Psychologically, it feels important to maintain personal integrity by acting in a way that is consistent with one’s words (even though being a helpful person isn’t an obligation to help everyone at all times).

A more reliable and documented resource (Cialdini) reports similar results in a volunteer program: asking people if they would be willing to volunteer, then asking for a specific commitment to participate in a volunteer effort, resulted in a 700% increase in participation.  He also speaks of commitment as being a “sunk cost” that makes people continue to do something, even if it is not in their interest, to justify past events – to have answered a leading question creates a sense of investment on the part of the prospect.

Given the psychological underpinnings of this practice, I am cautious of its manipulative nature – to “hook” someone into doing something that is not in their interest is definitely unethical, but to commit someone to completing an action that is in their interest may be within the bounds – though I am cautious of whether this is merely justifying the behavior for the sake of achieving a one-sided outcome.

Wednesday, July 12, 2017

Sustaining a Luxury Brand

In the marketplace for luxuries, there are two kinds of customer: those who seek luxury for its own sake, and those who seek luxury as a means to bolster their social image.  My sense is that if a luxury brand is to be sustainable, it must embrace the first and shun the second.

For the hedonic customer, luxury is access to pleasure, and there is a strong and sustainable demand.   So long as the brand delivers the pleasure that was expected, its consumers can remain engaged (and re-engaged) and the only means of competition is to deliver a substitute product that legitimately provides greater pleasure.

For the status-seeking customer, luxury is a means to gain approval, and the demand for the brand is only sustainable so long as others approve of its consumption.    Because there is no evaluation of the qualities of the brand itself, only of the opinions of those the status-seeker wants to impress, there is nothing that the brand can do to the product itself to reinforce and retain the loyalty to the customer.

To compete with a luxury brand for the status-seeking market, one need only to sway public opinion: the product can be unchanged and objectively just as good as it ever was, and the competing product does not have to be any better – it only needs to be more fashionable.   This is easily accomplished by advertising and publicity efforts: get a person who has high social esteem to endorse the brand, directly or indirectly, and the flock of status-seekers will follow.

Fashion is innately perishable: when one group adopts a brand to distinguish itself from other, lesser, groups, its inferiors will seek to imitate it, which tarnishes the cachet of the brand in the eyes of the group that wished to differentiate itself.   Because those with whom they do not wish to associate are using the brand, they must abandon it to seek another brand to remain distinct.

In this sense, pursuing the status-seeking market will drive short-term revenue but will not sustain the brand.    If the quality of the product is not harmed, then the hedonic customers will remain after the status-seekers have moved on to the next brand – because it is the quality of the brand, not its public image, that results in their satisfaction.

But very often, the quality of the product is compromised to gain popularity, whether directly (the product is changed to suit the perceived “tastes” of a majority of its customers, who are now status seekers who have no taste at all) or indirectly (the product is compromised to lower its price so that it is affordable to a broader market).

This may be the reason that many of the luxury brands of the past have fallen from grace or disappeared entirely, while certain other luxury brands have stood the test of time: if it remains indifferent to the demands of the status-seekers, it may enjoy temporary popularity while retaining its core customers.   And it seems that few are able to do so.