Tag Archives: behavioral psychology

Daniel Kahneman on Intuition and the Limits of Self-Help

Daniel Kahneman

“I’m very pessimistic about self-help,” said Nobel-winning behavioral psychologist Daniel Kahneman to a questioner at Seattle’s Town Hall last week. He’d been delivering a talk on “fast and slow thinking,” which contrasted the non-conscious pattern recognition of intuition with the more laborious process of reasoning.

The questioner wanted some tips on how to circumvent flawed intuitive leaps, but Kahneman’s position was that, if he himself is any model, knowing about intuition’s shortcomings doesn’t grant you any special ability to turn it on and off. (I would add that depending on how intently you approach Buddhist practice, your mileage may vary, if not in precluding the intuitive leap, then at least in reflecting before acting upon it. But this requires you to work through several meditation cushions.)

Well, what is the problem with intuition, anyway? In Thinking, Fast and Slow, Kahneman lays out the ways in which intuition’s pattern recognition is immensely capable–at the talk he referenced a few “miraculous” cases where a non-conscious expertise, gained from repeated experience, allowed quick thinking to save the day.

A medical professional, for instance, see subtle signs of a heart-attack coming before it hits and calls for an ambulance. A firefighter’s hot feet tell him to clear the room before he can explain why he’s alarmed.

“I hope I have made it clear,” Kahneman added later, “that there is nothing magical about this.” (Magic, he added, is the pernicious belief that the universe is ultimately knowable, can be “clearly seen.”) It’s just that we perceive, and associatively link, much more than we’re ever aware of. Over time, repeated linkages gain in relevance, to use search terminology, still without our being cognizant of it. But our ability to form hunches that pay off becomes stronger and stronger.

The best question you can ask of your intuition about something is whether the environment is regular enough to have taught you this lesson–“Quite often it just isn’t.”

The classic case is your stock market hunch. The market’s behavior is incredibly complex, defeating supercomputer attempts to find regular behaviors over its recorded history, let alone you, with your lifespan-limited range of experiences. (Now, of course, the trading market is in its way self-aware, knowing within milliseconds of moves large and small, and displaying exactly the kind of frightening reactivity that we are prone to as well.)

Part of the urge to hack our intuition comes from how we conceptualize it. To allow an audience to grasp the dynamic easily, Kahneman laid out System 1 (intuition) and System 2 (reasoning). It’s a “psychodrama with two fictitious characters.” System 1 is always “whispering” hints to System 2, and System 2, being lazy, prefers simply to endorse System 1’s input most of the time, and generate some bullshit explanation after the fact, if pressed.

When Kahneman surprised everyone with a slide that said simply “banana vomit,” he pointed out that in addition to experiencing a measurable physiological reaction of disgust simply to seeing the word “vomit,” that we also likely made up a story about bad bananas on the spot to explain the two works appearing next to each other. (Fun fact: When you make people appear to smile by asking them to place a pencil between their teeth, they find cartoons funnier.)

One problem is that creating some patterns excludes other patterns, in the same way that you can’t see the vase and face simultaneously. System 1 suppresses what doesn’t fit the pattern it’s settled on, and so you’re never aware of that missing, conflicting data. Interestingly, not only is intuition on autopilot, but so seems to be our response to it; we respond to people with gut feelings. We glare in exasperation as Spock weighs pros and cons.

Intuition isn’t about accuracy so much as it is about taking action. Sure, we work from terribly small sample sizes, but on the other hand, we have only to see the tiger jump out of the bushes that one time to jump into the next county the next time we hear rustling there. To promote action, rather than lengthy debate, gut-based hunches come with a healthy heaping of self-confidence and a sense of impenetrable coherence.

It’s a little like William James‘s hypothesis that emotion is based on physiological response, rather than the reverse. The hair on the back of our neck goes up, and we describe a feeling of fear. Forming a judgment results in a feeling of confidence in it. We say we have “settled” on something, and in actual fact, we resist being moved off that position. Further details, especially if they don’t easily fit within our schema, are rejected so that we can continue to enjoy the way everything fits so neatly together.

When faced with a truly difficult problem, Kahneman said, intuition will try to answer an easier one instead. In the Israeli Army, he was tasked with testing candidates for officer training school, and had to report on whether candidates displayed leadership qualities in a stressful problem-solving situation. When the results were in, “our predictions were worthless,” he recounted. They were using one-time, situation-specific performance as a proxy for leadership skills, without having proven there was a strong correlation between the two.

(Equally, we are prone to making after-the-fact predictions. “I knew that was going to happen,” we will exclaim, when what we mean is that it was among the outcomes we had entertained. Thinking something will happen and seeing it happen is not a prediction; that’s chance. Even explaining why something has to happen, and watching that exact thing happen is a question of percentages, as Nassim Taleb will demonstrate for you.)

While intuition is flawed, there’s not much easily to be done about it. Remember that the “systems” are fictitious–in reality the same brain’s function generates both. Trying to “correct” intuition’s real-time performance could affect brain function in a way that would change the performance of System 2. Besides, intuition is very good at getting us through our day without having to reason our way past every bit of news we encounter.

Kahneman suggested that we really only need to revisit the most significant decisions, and check for evidence of systematic bias. Because we are the biased system, in most cases, self-help isn’t help at all. You get more mileage from asking other people, whom you haven’t screened to share your biases, what they think of your decision.

“Let other people correct you,” advised Kahneman, knowing that is exactly what many people are least fond of. But as proof of the soundness of his advice, he pointed out how much better he was at detecting when other people were making mistakes, than when he was.

For more on this subject, Kahneman suggests you read Steven Pinker’s How the Mind Works, watch Moneyball on the confrontation between scouts and statistics, and, of course, read Thinking, Fast and Slow.

Is Groupon’s Greater Value in Behavioral Psychology?

The monetary value of Groupon is a hot topic as their IPO nears. Some people are pro: “Why Groupon’s Biggest Critics Are Short-Sighted.” And some are con: “Memo to SEC: Groupon Has No Competitive Advantage, Stop Its IPO” (h/t @jontalton). At least one person is calling the social giant a Ponzi scheme.

But, as I’ll get to shortly, I’m struck that Groupon’s case history is enormously valuable outside of social coupon considerations, in the behavioral psychology of markets.

It’s true that competitive social coupon Davids may learn something heartening (or not) from criticism of the Groupon business model: Business Insider reports that just 19 percent of Groupon’s 83 million “customers” have bought a Groupon. Here also is a chart of Groupon’s revenue vs. losses.

So, the social Goliath may not be hard to knock down with the right pebble of value capture. (In Seattle, Tippr has just acquired DealPop from Whitepages.com, perhaps marking, GeekWire speculates, the beginning of a wave consolidation in a wildly proliferating market. We profiled DealPop last August.)

A Rice University study claims 40 percent of businesses who’ve used Groupon would not do it again. Why? Seattle food blogger Ronald Holden has written extensively on Cornichon on Groupon’s mismatch with restaurant industry margins. While certain sectors (salons, spas, yoga studios) appear to have the margins to fund the use of Groupon as advertising to opt-in shoppers, it’s not at all clear that coupon shoppers are as interested in daily spa treatment offers as they are in daily deals on hot dining spots.

This raises a few, but substantial questions about a) the actual size of Groupon’s pool of potential consumers, b) the actual size of Groupon’s pool of potential business buyers, and c) the social coupon space’s susceptibility to a tragedy of the commons. (As to that last, if the social coupon “works,” and customers are acquired, there will be less reason for businesses to use social coupons as they’re currently structured. On the customer side, it’s already become a tragedy of the email inbox, which fills with spa and salon and yoga deals.)

Tippr's deals of the day

While Groupon is clearly worth something, it’s not at all guaranteed, as they say, that past performance ensures future success. For my speculative money–which is exactly $0, full disclosure–the hyper-competitive social coupon market has already robbed Groupon of its power to dictate the most favorable terms possible. And given the depreciating value of email databases, its head start in customer acquisition comes with an expiration date.

No, what is most fascinating to me–and seems underreported–is not Groupon’s value per se, but the revenue that it has generated from the small business sector. While many armchair analysts are eager to tell you how running a Groupon sale should be considered an advertising cost, not a simple discount, what’s incredible is that Groupon has found a way to separate small business owners from their money at all.

The most valuable lesson that social coupons can teach us has to do with the use of behavioral psychology for selling to small businesses. That has long been the holy grail of anyone in B2B: the sheer size of the market is tremendous. But until Groupon, that market had also been known by the sheer reluctance of small business owners to part with their cash for any reason, let alone marketing and PR.

Before Groupon, to generate real traffic, a retailer might have had to cut prices 50 percent and pay for an advertisement. This the small business owner hated to do. Bootstrapping makes for incredible stinginess with actual cash when the outlay is in advance of a promised sale. The sense of risk can be heightened in proportion to a lack of trust in the potentially snake-oil-selling marketer, but in general a social coupon’s magic is in its micro-payment approach to the advertising/customer-acquisition budget. (Or so it appears.)

Notice that with Groupon, the cost (and its pain) is bundled and contained within a multitude of sales transactions–risk, meet much more immediate reward. Social coupons have already extracted an incredible amount of cash from small businesses, but only on condition of a sale (a lure so potent that some business owners have been driven to near bankruptcy by it). Behavioral psychology will tell you that people value not losing money more than gaining it, and Groupon’s success-so-far bears this out.

What is the most salient feature of the social coupon, after all? It’s not the coupon idea. It’s not online delivery. It’s not steep discounts. All of these were available before. (Even the massive audience Groupon provides was around in one form or another.) It’s the transposition of the sequence of events (the small business owner and Groupon make a sale…and then Groupon takes the lion’s share). You could call it misdirection: Watch this sale! says Groupon, and the smiling business owner fails to feel the difference, that it’s not really their sale anymore.

Notice that the small business owner still has to take the marketing theory on faith: These customers will return, spending like sailors! (Not that this doesn’t happen–but Groupon’s ability to guarantee conversion rates is not, I suspect, much better than anyone else’s.) So the main thing that has changed, really, is simply that Groupon has deferred charging for this trial-offer form of advertising until that first sale is made. It’s still the small business owner’s money, but it’s associated in time with the benefit of making a sale.

(Timing is key on the B2B side as well as the consumer side: nothing motivates a business owner like an immediate uptick when business is slow, and the purchase cut-off creates a sense of scarcity for the customer when, in point of fact, there’s an over-supply.)

A canny business owner will still sit down and pencil out break even points, but psychological appeal (and/or recessionary desperation) is evident in the amount of small businesses who clearly haven’t. And this is what is different: small business owners flocking to try social coupons as a form of advertising, when an up-front payment would dampen their ardor significantly. Groupon, of course, doesn’t assume extra risk for nothing–that’s why they have been able to get the lion’s share that a more competitive field is clawing back.

Again, it’s the timing and automation of the micro-payment process that matters here, because without that, Groupon would be spending even more than it does on sales staff. Chalk up one more thing that newspapers–the industry that can’t out-design Craigslist–should have done, but didn’t. As critical as people can be of Groupon’s model, it remains true that they don’t get paid unless a sale occurs, and then only in proportion to the sale price; newspapers, who already had coveted local audiences, were not willing to take even that chance.

Still, the great Groupon experiment stands right up there with the App Store as a paradigm shift in investment and payment, one that takes into account the hard-wired in human nature. Groupon led the small business horse to water and made him drink. Who’s next? What other sectors are limited by psychological barriers, rather than purely financial ones?