#27 Zero Risk Bias: Why there’s so much value in nothing
Turns out that one of the most ‘sure things’ in life, is people’s likelihood of picking a ‘sure thing’. In this episode, Mel and Dan look at how we make choices around risk, and why our desire to avoid uncertainty can sometimes end up costing much more.
Mel: 00:20 Hi, and welcome to Bad Decisions ...
Dan: 00:22 The podcast that helps us understand why we choose what we choose ...
Mel: 00:25 Why we think what we think ...
Dan: 00:27 And how to exploit this stuff for fun and commercial gain.
Mel: 00:28 I'm Dr. Mel Weinberg. I'm a performance psychologist.
Dan: 00:31 And I'm Dan Monheit, co-founder of Hardhat.
Mel: 00:44 All right, Dan. We're going to start today and I'm going to pose you a little hypothetical scenario. It's only hypothetical.
Dan: 00:50 These never go well. Anyway. What have you got, Mel?
Mel: 00:54 Dan, look, I'm sorry to tell you that you've got an illness.
Dan: 00:56 Oh, good! An illness, yes..
Mel: 01:00 Look, there's two main symptoms that you're likely to suffer. One is that you'll have excessive body odour and the other is that there's a chance you'll get severe acne.
Dan: 01:15 So you're basically turning me back into my 13 year old self.
Mel: 01:18 Pretty much. But look, the good news is that I am a doctor.
Dan: 01:23 Good.
Mel: 01:23 I can treat these.
Dan: 01:25 I'm still actually doing my background research to confirm that, but let's just roll with it for this hypothetical situation anyway.
Mel: 01:30 It's hypothetical. Dan, the thing is I can sort of only treat one of these conditions.
Dan: 01:35 Okay. The odour or the acne?
Mel: 01:38 Excessive body odour or severe acne.
Dan: 01:40 Yes.
Mel: 01:42 So look, there's a 30% chance that, with this illness you've got, there's a 30% chance that you're going to get excessive body odour. There's a 5% chance you'll get severe acne. Okay? Now, look, if I treat the body odour, the treatment's actually pretty good. It's going to reduce your chances of getting that from 30% all the way down to 5%. There's still going to be a 5% chance that you'll get severe acne. So you'll have a 5% chance of getting excessive body odour and a 5% chance of getting severe acne, okay?
Dan: 02:08 And an 85% chance of being divorced. Yeah, let's go. What's option two?
Mel: 02:14 The other treatment is that I can reduce the risk of you getting severe acne by 5%, which means we'll completely eliminate it. So there'll still be a 30% chance of getting excessive body odour, but you won't have to worry at all about getting severe acne. Which treatment would you like?
Dan: 02:30 Let me just make sure I get this because I don't know why I always end up in these situations with you.
Mel: 02:33 The first option is you do nothing. There's a 30% chance you get body odour and 5% chance you get severe acne.
Dan: 02:39 Right. 30% chance of body odour, 5% chance of acne. Treatment one brings both of those things down to 5%. I've got a 5% chance of severe body odour, 5% chance of severe acne.
Mel: 02:48 That's right.
Dan: 02:49 The next option says the acne is not going to be anything at all, but I still have a 30% chance of severe, excessive body odour.
Mel: 02:57 That's right. Which treatment would you like me to proceed with?
Dan: 03:01 Well, it's always such a pleasure recording with you, Mel. I mean it seems to me that the logical, rational thing to do here, it would be to go 5% and 5%. I can probably live with that. So I would take-
Mel: 03:13 Is that what you want to do?
Dan: 03:14 Yeah, let's take the first treatment option, which will bring my chances of excessive body odour down to 5% and my chances of severe acne down to 5%.
Mel: 03:23 Okay, so then that's the rational decision. It may therefore surprise you to know that in a sort-of-similar but not quite like this study by Schneider et al. in 2017 when they posted a similar hypothetical situation, 47.1% of participants in their study, so almost half of participants actually chose the other option.
Dan: 03:45 So they chose-
Mel: 03:47 They chose to completely eliminate one of the risks even though there'd still be a significantly higher chance of the other one.
Dan: 03:53 Right. So instead of bringing them both down to 5%, they said, "I'll take one of them down to zero and leave the other one at 30."
Mel: 03:59 Yep.
Dan: 04:00 Well that seems appalling, but also understandable.
Mel: 04:03 Yeah, it's surprising sometimes to learn that people don't always make rational decisions.
Dan: 04:07 Wow. Who would have thunk it, right? So I mean surely in your realm as both an actual doctor and a hypothetical doctor, you have some sort of a name for this thing that we're talking about?
Mel: 04:17 So let's put the hypothetical stuff aside and let's go to sort of real stuff now. There is in fact a name for this tendency and it's called the Zero-risk bias, and essentially what it means is that we have an irrationally strong preference for situations that have absolute certainty.
Dan: 04:35 Well, I have an absolute certainty that we're going to get some Zero-risk bias music happening right here, right now [music plays]
Dan: 04:42 I guess what we're talking about here is Zero-risk bias. As humans, I guess it makes sense, right? We really like a sure thing. And we all have so many things to worry about that I kind of empathise and understand why even if it doesn't make rational sense, people would say, "You know what? I'll take the same chance of that other thing happening. Just get one thing off my list. Just give me one less thing to stress about in my day."
Mel: 05:08 Yeah. That's what this is all about. This is all about our preferences for certainty and particularly so when there are multiple conditions of uncertainties, when we've got a lot of uncertain things going on, even more so, we're going to be drawn to the option that completely has no risk attached, or completely reduces risk.
Dan: 05:23 Just take one away from me.
Mel: 05:25 There's another part to this as well, where not only do people prefer to reduce their risk, but they're actually also willing to pay more to reduce the risk down to zero, to completely eliminate a risk, which is weird. Do you mind if I share some research with you?
Dan: 05:40 Oh, I love some research. Let's do it.
Mel: 05:48 So it will probably come as no surprise to you that the Zero-risk bias was first alluded to in Kahneman and Tversky's famous prospect theory article. They cited a research piece done by somebody else called Sechauser. And basically, in this research piece, you were asked to imagine that you were compelled to play a game of Russian roulette.
Dan: 06:09 Right...
Mel: 06:12 Just imagine if you can, so I give some hypothetical scenarios and Kahneman and Tversky give you other ones.
Dan: 06:17 If while playing Russian roulette, do you have excessive body odour or severe acne? Or do you just play it as you are?
Mel: 06:25 That adds all another level to it. No, just stick with me, or stick with Kahneman and Tversky, who asked you to imagine that you were compelled to play a game of Russian roulette.
Dan: 06:33 All right, and just to make sure I understand what we're talking about here, Russian roulette is a game where we've got a gun, we've got some number of bullets in the cylinder, the bit where you hold the bullets, and you kind of spin it around and then you close it and then you put it to your head and you pull the trigger?
Mel: 06:49 Yeah, so calling it a game is probably a little bit misleading but-
Dan: 06:53 It depends which position you're playing really. I guess.
Mel: 06:57 Here's what's happened. So you're actually given the option to purchase the removal of one bullet from that loaded gun.
Dan: 07:03 Yes. This makes sense.
Mel: 07:04 The question is, would you pay as much to remove the number of bullets from four to three as you would to reduce the number of bullets from one to zero? And-
Dan: 07:12 Well, having just live through this hypothetical situation about body odour and acne, I know that surely people must have decided that it would be better or more valuable to get the last bullet out of there than to go from bullets five to four, right?
Mel: 07:29 That's right. So most people would be willing to pay much more for a reduction of the probability of death from one out of six to zero than for reduction from four out of six to three out of six. And the idea is that, essentially, you're still removing one bullet either way. But you're willing to pay more for that bullet if it takes your chances of living basically up to a hundred percent or if it reduces the risk of death down to zero.
Dan: 07:51 So I'll let you do the maths because you're allegedly and actually a doctor, so you must've done stats or something. But I guess rationally, objectively, each bullet should have the same value, right? It is like the removal of one chance of dying?
Mel: 08:04 Yeah, exactly. So essentially, a bullet is a bullet is a bullet.
Dan: 08:08 Yeah. Well, what I like about this is that when you say to me that people are willing to pay more, they will pay a premium to get a risk down to zero because I get the thing I'm buying and then I also get to cross something off my list. The inner marketer in me, which is pretty much all of me, says this is awesome because we have lots and lots of opportunities to use that in our favour. And it might sound really obvious because it's a tried and tested technique to talk about why free trials and money back guarantees work, especially for new brands where there is a really hard perceived risk of would I really stop buying the soap or the shampoo or whatever that I've been buying my whole life to switch to a new one? It's kind of risky. You see why, not just reduction but complete removal of that risk, has helped brands turn up and explode.
Mel: 08:58 Yeah. I mean from a psychological perspective, what you're basically paying for is the reduction of risk and also the elimination of uncertainty. And we've talked a lot about how all these heuristics are all about reducing uncertainty. So we will actually pay a lot more to do that.
Dan: 09:12 Yeah, I mean we've seen in the local market, sampling is a huge thing we see across food businesses in Australia. And if I think about the takeover of Chobani of the local yogurt market, how they've basically gone from zero to category kings in a lot of parts of the supermarket, and they have done that almost exclusively through sampling. So turning up in busy places, giving people free samples of the yogurt, which has effectively eliminated the risk of paying money at the supermarket, not picking your usual brand, instead of taking the risk of paying money to buy something that you don't even know if you're going to lick. So yeah, free samples, free exchanges, free returns, wonderful way to take risk completely down to zero for people.
Mel: 09:53 Yeah. And look, one of the reasons why, I mean fundamentally this is a thing, is because we like to reduce, or we have a desire to reduce, our cognitive capacity. So if something's not a problem, if we don't need to worry about it at all, then we've actually got more cognitive load to devote to other things that might be more worthy to us. So eliminating one risk entirely just totally releases our cognitive capacity and then we can focus our energy on the remaining risks that there are.
Dan: 10:20 Like how do I clean up this acne or body odour problem that I seem to have inherited?
Mel: 10:24 Sorry about that.
Dan: 10:25 I guess thinking about these more broadly, I completely get it from an individual decision making perspective. I think it's also interesting to think about the collective. So if we think about as a country how we want our politicians to spend money. And sometimes it seems like this obsession with getting something to zero, completely eliminating the risk of something, can distract us from solving other problems that would give us an overall reduced risk across the board. So if I think about the obsession with trying to get the threat of terrorism down to zero or the current global pandemic of coronavirus down to zero. I'm not saying that we shouldn't be trying to do that, but we have to acknowledge that if we try and do that, we are not trying to reduce road fatalities. We are not trying to reduce domestic violence. We're not trying to reduce all of these other problems that we won't probably get to zero, but still are massive contributors to our quality of life and as a society.
Mel: 11:26 There's definitely some merit in that. And the idea that this is something that happens at an individual level but has implications at a broader societal level. What we do find with this bias is that we tend to fall victim to it when it has more direct relevance to us, obviously. So when there's a risk to your personal health, for example, or your body odour or the chances of you getting acne, you're much more likely to fall victim to that Zero-risk bias than if it was something at a more distal or societal level to you.
Dan: 11:55 I guess if we talk about things that are relevant at a more personal level, it would be remiss of us not to at least touch on the idea of hoarding and specifically the idea of hoarding toilet paper. What we've seen in recent times is this Zero-risk bias come into play where people have decided that if they buy their normal six rolls of toilet paper, their chances of running out are pretty small. If they decide to buy 60 rolls of toilet paper, the chances of running out are now zero. And next thing you know we are buying a year's worth of toilet paper every week and brawls and hilarity ensue.
Dan: 12:26 So I guess this is one of those ones where we don't need to over cook it, we don't need to labor the point. As soon as you say it, it just seems really obvious.
Dan: 12:33 So that's a good transition really into thinking about, well what can brands and businesses do about this? And I've sort of got three very related threads on this. The first one is really straightforward. It's saying, well, if people are willing to pay more for the complete removal of risk of something, for something to be a hundred percent guaranteed, risk-free, it's a sure thing. The first thing you got to ask yourself is where can you do that in your product service or brand offering? Can you give people free trials, free samples, guaranteed buyback, guaranteed trade in prices, find it cheaper and we'll refund you the difference plus 10%.
Dan: 13:07 Any of those things we know are going to have a disproportionate impact on people's likeliness to purchase your product. And I think one of the best examples of that in the local market is from MECCA Cosmetics, where they have a hundred percent return and exchange on anything you buy, even if you've used it. So you go and buy perfume, you take it home, you use it for two weeks, you decide you don't like it, you can just take it back and swap it over. And I guess that they know that the disproportionate impact that's going to have on sales and appeal of shopping with them more than compensates for the reality of the people that are actually going to bother doing that.
Mel: 13:39 You can almost say that they found a solution to reducing excessive body odour.
Dan: 13:43 Oh my God, you know what? MECCA, if anyone from there is listening, give me a call.
Dan: 13:49 So number one is: look for those opportunities to completely remove risk.
Dan: 13:54 The second thread in what brands can do about this, is find the ways you're already reducing risk, surface them and celebrate them. So if you're running a decent business, you probably already have reasonable policies or processes that let people exchange stuff anyway, or come back to you and renegotiate down the track if something doesn't work out how they thought it was going to work out. And so my second guidance is find those things, surface them, celebrate them, make sure people understand that you are doing everything you can to reduce the risk for them. That makes sense, Mel? You with me?
Mel: 14:24 That sounds good to me.
Dan: 14:25 And really the third thing is for brands to realise that a lot of the time what people are buying is not just their product, it is the outcome of their product. So I think about this a lot in terms of food brands where if you are, let's say, a brand of chicken that people might buy or a brand of pasta sauce that people might buy. Of course, you can have your guaranteed preservative free. But the other thing you could do is talk to people about the bulletproof bolognese, or the home run parma. Basically saying here is a recipe to go with this product, which it is impossible to mess it up or it is impossible that your kids will not like this, effectively taking risk off the table.
Mel: 15:01 Sounds like it could make me a better cook.
Dan: 15:03 It could.
Mel: 15:04 Better get some of that bulletproof bolognese.
Dan: 15:06 Bulletproof bolognese. Yeah, I don't really do the naming convention stuff. I think it was the Russian roulette reference earlier. It fined me for thinking about that. So that's three thoughts for brands, what can the people of the world do about the Zero-risk bias, Dr. Mel?
Mel: 15:23 I think when we consider this as it applies to us individually, we obviously have this inherent desire to reduce risk and to want to try and impose some sense of certainty on a completely uncontrollable world most of the time. I think what we tend to do, knowing that we have this desire to reduce risks to absolute zero, what we tend to do is actually underestimate our ability to cope with stuff. So I guess my message is let's actually be okay with accepting a little bit of uncertainty in multiple areas of our lives, even though we want to really reduce as much as possible, let's not forget that we actually are really good at coping with a lot of uncertainty most of the time. And so we can probably handle a little bit more than we give ourselves credit for.
Dan: 16:04 So what you're saying is even if I had excessive body odour and extreme acne, we could still record podcasts together?
Mel: 16:11 Yeah. As long as we're not doing it in the same room.
Dan: 16:13 Yeah. My camera is turned off.
Mel: 16:15 Is that going to be a problem?
Dan: 16:15 Yeah, and my camera's off, right?
Mel: 16:17 Fine.
Dan: 16:19 Awesome. All right. I think that's quick and efficient, so let's put a ribbon on it. Today, Zero-risk bias. What's our definition, Dr. Mel?
Mel: 16:27 Zero-risk bias describes how we have an irrationally strong preference for situations with absolute certainty and that we're actually going to be willing to pay more for situations that completely reduce the risk.
Dan: 16:38 Awesome. So this is a super powerful one for all of us businesses and brands out there. Three things to think about if you're a brand owner. Number one is can you add risk-free elements to what you're already doing? Number two is can you surface and celebrate the risk-free things that already exist in your product or service? And number three is to say, how can you de-risk the outcome of whatever people are using your product or service to do.
Dan: 16:59 And for people?
Mel: 17:00 Don't fear uncertainty. Embrace it.
Dan: 17:02 Just settle in. We are in uncertain times.
Mel: 17:02 Powerful.
Dan: 17:07 Speaking of which, next time, I'm going to do the hypotheticals.
Mel: 17:11 Oh, be cool.
Dan: 17:13 Yes. All right. Hey, thanks for listening. If you got any feedback, you know where to find us. Dr. Mel, where are you on the internet?
Mel: 17:20 All over it.
Dan: 17:20 All over it? What do people Google to find you?
Mel: 17:23 The people can Google "Dr. Mel Weinberg." People can find me @DrMelW on Twitter, LinkedIn, wherever else you want to, Instagram. Don't do much on there.
Dan: 17:34 And I'll be on all your favourite social channels as well. All right, we'll see you all next time.
Mel: 17:37 See you.
Dan: 17:38 Bye.