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Secrets of the Moneylab

How Understanding People Will Increase Your Profits

Kai-Yut Chen and Marina Krakovsky

The Envy Game: children can choose between 2 options A:one sweet for themself and one for another child, or B:one for me 2 for the other kid. By the time they are 5 years old, 80% will go for A, even though B doesn't cost them any more.

We compare ourselves to others like us. Doesn't matter that Warren Buffett is a billionaire - we care about people we know. And his has practical implications. Study of charitable donations showed that if people were told that others had given $300, they gave more. This is consistent with psychological theory of influence that says that in ambiguous situations, people look to the behaviour of others to guide them. But effect is not unlimited. When another group was told that others had given $1000, they actually gave less than the control group. Backfired because vastly bigger sum meant subjects didn't see it as relevant to them.

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In negotiations, it matters which external group you compare yourself to. If you are arguing about wages, each side will of course choose a self-serving comparison group. And once the comparison is made, people's attitudes quickly harden, and they believe the other side is being unfair.

Ultimatum Game - generally you get about half the people splitting stake 50:50. But if you give them 10 minutes to chat to each other before hand (not about the game, just conversation) the number of 50:50 splits goes up to 83%. Same results in other expts, such as haggling over a car price - if engage in a bit of social chat first, much more likely to reach an agreement. Much more likely to feel empathy for them.

Anchoring - negotiated results bear strong correlation to the first figure mentioned, so it pays to be first to make an offer, and make it a reasonably aggressive one.

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Similar effect when we are in a queue. We don't just consider how many people who are ahead of us (which is actually only relevant factor), we also care about how many people are behind us -so if more people there, we are more reluctant to abandon the queue.

Trust Game - 2 players, an Investor and a Trustee, sitting in separate rooms with no contact.Investor is given $10. He can keep it or send some or all of it to the trustee. Whatever he sends gets tripled before it is given to the Trustee. The trustee can then do what he likes with the money - keep it all or send some back to the Investor. There are no repercussions if he keeps it all. Game theory says that rationally you shd not trust a stranger with no incentive to reciprocate. Yet that's not what happens. Original expt had 32 pairs, and only 2 sent nothing. Five players sent the whole $10. Most sent abt $5. And more than half of the Trustees sent back more money than had been sent to them, even though there was nothing stopping them keeping the lot. Also a gender difference - women sent back more than men did. And Trustee evaluated Investor by the amount of money he sent. If only sent $2 it was seen as sign of distrust, and so Trustee reciprocated.

What's explanation for this irrational behaviour? Evolution predicts that groups with too many selfish types tend to go extinct. But if enough people act with unselfish trust, trade can thrive, and everyone is better off. We are the survivors of a long process of winning and losing through various approaches to trust. At least some level of trust exists in all communities - some positive expectation of how people will behave. And when you add reputations, warranties and laws into the mix, trust usually increases.

We can see the impact of trust on a global scale: it is one of the strongest predictors of national wealth. When asked "Do you think most people can be trusted?"fewer than 10% of people from Brazil, Uganda or Philippines agreed. But in Denmark or Norway, 60% agree. Suggest that the countries low in trust are poor because citizens are reluctant to make the sorts of investments that create jobs and raise incomes. By greasing the wheels of commerce, trust reduces transaction costs: you don't have to waste a lot of time checking on reputations or monitoring performance or insuring against default.

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Sinister Attribution Error - we tend to assume malevolent motives in others. A bad outcome cd be due to circumstances beyond other person's control, or a mistaken assumption, or incompetence without any evil intent.

Incentives problem. Mattel got into trouble when some of its toys found to have poisonous lead-based paint. Turned out the cause was way down the supply chain - the guy who supplied pigment to the paint manufacturer got job on such thin margins that made sense to substitute cheaper coloring. The paint manufacturer also on thin margins so didn't spend money testing the pigment. The same applied to the manufacturer painting the toys. And Mattel didn't appreciate that their efforts to screw down suppliers prices provided a big incentive to cheat.

Real estate agents drive flash cars, lawyers have expensive offices, companies buy expensive superbowl ads - all extravagances that cost clients money. But they convince clients and suppliers that they have the resources to back up their services. On the other side of the coin, a surprising number of companies go with cheap and nasty web sites, thinking that customers just need facts. They forget about the message being conveyed between the lines in signals of high professional services and intention to stick around for the long haul.

Signalling impt in many areas - Fraternity hazing rituals, criminals tattoos and religious rituals - all signal commitment to group values. Ultra-orthodox Jews, the haredi , wear heavy black clothes and hats in all weathers and climates. They are signalling a message: "Look. I'm a haredi Jew. If you are also a member of this group you can trust me because why else wd I be dressed like this? No one wd do this unless they believed in the teachings of the ultra-orthodox Jews and were fully committed to its ideals and goals."

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