#15 Hot Hand Fallacy: Why we love seeing hot streaks

You’ve just made your last three shots, won your last three hands or closed your last three deals. What do you think will happen next? In this episode, Mel and Dan explore the fallacy - and reality - of ‘catching fire’ in games, business and life.


Mel: 00:14 Hi, and welcome to Bad Decisions.

Dan: 00:21 The podcast that helps us understand why we choose what we choose.

Mel: 00:24 Why we think what we think.

Dan: 00:25 And how to exploit this stuff for fun and commercial gain.

Mel: 00:27 I'm Dr. Mel Weinberg, I'm a performance psychologist.

Dan: 00:30 And I'm Dan Monheit, co-founder of Hardhat, a creative agency built for today.

Mel: 00:34 You did it.

Dan: 00:34 I did it, now you do it Kops. [music playing]

Mel: 00:41 So Dan Monheit for this episode, I want to welcome you to Mel's Casino!

Dan: 00:44 Hey hey, it's great to be here.

Mel: 00:47 So here's the situation alright, we're flipping coins.

Dan: 00:50 This is a decidedly low-budget casino.

Mel: 00:53 This is a coin toss game, and I have just flipped the coin three times, and it has resulted in three heads. Your job, for a million dollars is to tell me whether you think that the next coin will be a head or a tail.

Dan: 01:10 So we've had heads, heads, heads?

Mel: 01:11 Yup.

Dan: 01:12 Due for a tail, I'm going with tails.

Mel: 01:13 You think you're due for a tails.

Dan: 01:14 Due for a tails.

Mel: 01:15 Willing to bet your life savings on it.

Dan: 01:19 I thought I was betting a million dollars that wasn't mine.

Mel: 01:22 Well we can go either.

Dan: 01:22 Either way.

Mel: 01:22 So you ready-

Dan: 01:26 Let's keep the show moving. I'm going with tails.

Mel: 01:26 Heads, heads, heads, tails. Alright. Okay so now I wanna switch things up a little-bit, and I want you to go in your crazy imagination, to the NBA playoffs.

Dan: 01:36 Okay, I'm there.

Mel: 01:37 You are, Dan Monheit. You are a fifty percent shooter from the field.

Dan: 01:42 Wait, I'm playing in the playoffs?

Mel: 01:43 Yeah.

Dan: 01:44 Oh, this is good. Okay yes.

Mel: 01:45 This is easy for you to imagine?

Dan: 01:46 Oh yeah.

Mel: 01:46 You're right there.

Dan: 01:47 Yes.

Mel: 01:47 Okay. You're a fifty percent shooter from the field.

Dan: 01:50 Yes.

Mel: 01:50 You've just hit your last three shots.

Dan: 01:50 That's good. Yes.

Mel: 01:52 Yes, it's NBA playoffs.

Dan: 01:52 So normally when I think about playing basketball I'm on the bench, but this is good. I'm in the game. I'm hitting shots, I've hit three in a row.

Mel: 02:02 Very realistic.

Dan: 02:03 Okay, so I've hit three in a row, feeling good.

Mel: 02:05 Alright, Coach Mel calls a timeout. Gonna draw up a play. We need a shot to win. You've just hit your last three. Should I put the ball in your hands?

Dan: 02:14 Gimme the ball, "get out of the way."

Mel: 02:17 Dan Monheit for the buzzer beater to win?

Dan: 02:17 Absolutely.

Mel: 02:18 You will back yourself every time?

Dan: 02:20 Oh I've just hit three in a row.

Mel: 02:21 Yeah, but you see, when we just flipped three heads in a row, you were pretty convinced that the fourth one was gonna be a tails.

Dan: 02:28 Because we're due for tails.

Mel: 02:29 We're due for tails, and this time?

Dan: 02:30 Yeah, well it's different.

Mel: 02:32 Okay, I can tell, why?

Dan: 02:33 I'm not a coin.

Mel: 02:34 Right, who are you?

Dan: 02:35 I've hit three in a row.

Mel: 02:35 You're super star bench player Dan Monheit right here.

Dan: 02:39 I'm no longer bench player.

Mel: 02:40 Sorry.

Dan: 02:41 Yes, this is my coming out party.

Mel: 02:42 So, what we're talking about here, what we're talking about today, what we've tried to just illustrate, is the idea of the Hot Hand Fallacy.

Dan: 02:50 This is not a fallacy. I actually had a hot hand. I hit three in a row, and I'm gonna hit the fourth.

Mel: 02:55 Remember this was your imagination, let's come back, let's bring it back into the podcast.

Dan: 02:58 Alright.

Mel: 02:59 The Hot Hand Fallacy, is the belief that we're going to be more successful in future attempts, if we've been successful in past attempts.

Dan: 03:06 I think NBA Jam has a lot to answer for, in this fallacy.

Mel: 03:10 Queue the audio.

Dan: 03:12 “He’s on fire. Razzle-Dazzle. It’s good!”

NBA Jam Audio: 03:12 Boom-Shaka-Lacka! Kaboom!

Dan: 03:18 So I tell you what Dr. Mel. I mean, I'm not a doctor but I don't know, I have some thoughts about this.

Mel: 03:23 Yeah, you're allowed.

Dan: 03:24 I'm allowed to have thoughts? With the fact that it's a fallacy, I totally get it for your first example, when we're tossing coins, or doing other completely random games, so maybe roulette or, something else like that. Where anybody that's done, you know, in maths, understands each event is completely independent and has nothing to do with the previous event and we kinda construct this story that, we're on fire. And I think, actually, casinos kinda know this and tap into it where at a roulette wheel they'll actually put up, what the last twenty spins or the last forty spins have been, to sort of help people construct a story.

Mel: 03:57 Yeah, that's not to actually give you information. It's actually to mess with your mind.

Dan: 03:59 Yeah, got it. So, you know that's a thing that we do, but, isn't sport different? In sport it's not completely random like if I have just hit three shots in a row, there's probably some things working in my favour. So like, my confidence is probably feeling better, my teammates might be looking for me, and maybe something's working against me as well. Like maybe the defence, trying to close out.

Mel: 04:19 100%.

Dan: 04:20 Or maybe taking stupid shots, cause, my confidence is up?

Mel: 04:22 Yeah well, your shot difficulty changes right?

Dan: 04:25 Yeah.

Mel: 04:25 With each one. What you're saying is that there's two different scenarios here. Right? One when we're talking about casino type stuff, mostly down to chance. Right? So the odds are fifty-fifty in those scenarios no matter what. Whereas, in the heat of a game, yeah there's so many other things that could influence whether or not you're going to make the shot.

Dan: 04:41 Exactly so with the casino stuff I'm sure there was research, but we don't really need research to know if that's a thing. We know it's completely random and we all know that we make up stories to tell ourselves that it's not cause we're all special snowflakes and we need to construct a narrative where the world makes sense around us.

Mel: 04:54 Well see that last bit, I'm not sure about being special snowflakes but we certainly do need to construct narratives how the world operate. Because we need to have meaning in our world it gives us a feeling of familiarity, predictability, it would be really uncomfortable for us to live in a world where we had no idea what was gonna happen next. So we tend to make patterns out of random things.

Dan: 05:13 Yeah, like how people see Jesus on toasted cheese sandwiches.

Mel: 05:16 Yeah.

Dan: 05:17 Yeah.

Mel: 05:18 We see faces. We see them in the clouds.

Dan: 05:20 Yes, and we're wired to do that, you know, even as a baby one of the first things you get to do is recognise what a face looks like, so, it makes sense we see patterns and repeated things everywhere we look.

Mel: 05:30 So, next time you see Jesus in the back of a tree, you're completely normal.

Dan: 05:34 Exactly, but with sport I guess it's, it's kinda different. Right? Like is there a fallacy or really is there a hot hand?

Mel: 05:41 Well so now we're going to enter ourselves into an argument that has been going for, about the last 35 years. Alright it started with a piece of research in 1985 by Gilovich, Vallone, and Tversky

Dan: 05:57 Did you say Tversky?

Mel: 05:59 Yeah.

Dan: 05:59 Because if there is a hot hand in research, this guy has it. He's basically on a Bad Decisions hot streak. He's been mentioned in every single episode.

Mel: 06:06 But here's the thing. When you get to be as good as Tversky was, you get to do really cool things with your research.

Dan: 06:11 Such as?

Mel: 06:12 Well, they spent their time, this is so totally different to my experience in Academia. Well it's a little-bit, cause I did watch a lot of basketball when I was in Academia, but they basically just got to look at and analyse the statistics of basketball games. So in 1985 they were looking at the shooting records of the Philadelphia 76ers.

Dan: 06:30 Jordan's rookie season.

Mel: 06:31 And what they were trying to do was look at whether shooters were more likely to make a shot, depending on the result of their previous shot.

Dan: 06:39 So they were trying to determine, if I just made a shot, am I more likely or less likely than average, to hit the following shot.

Mel: 06:45 Yep, and here's the thing, when they asked both the players, and the fans watching the game, if they were more likely to make the next shot after just hitting, the previous one, everybody was like, "Yeah, definitely more likely to."

Dan: 06:54 Yeah.

Mel: 06:55 Actually what the research found, was that there was no evidence for the influence or the suggested idea of a hot hand. The hot hand was a fallacy, and the hot hand didn't actually exist.

Dan: 07:09 Well that's upsetting.

Mel: 07:09 Isn't it?

Dan: 07:09 That's like, really upsetting.

Mel: 07:10 Sorry imaginary Dan in the NBA playoffs, apparently you are not a thing.

Dan: 07:14 I bet also, just like as a guy watching sport, you kinda like to think that this is happening right?

Mel: 07:19 Well yeah, it makes it entertaining, it makes it fun of course. The crowd goes nuts when somebody's hit three in a row.

Dan: 07:23 Exactly. So it may lead to the question I mean, you said this is a contentious issue, we’ve got a paper in 1985 that says no, his is absolutely not a thing ... surely it can’t end there?

Mel: 07:32 Well so then there was a whole-bunch of other studies that came out to replicate it, right? And then all of a sudden you got all these coaches going, "Na uh," and elite sports people going, "Na uh. I don't believe this. I don't care what your statistics show. I know that if I'm feeling hot, God damn it I am feeling hot!" Right? Now for 30 years this research stood, right? There was no such thing as a hot hand, in basketball or in sport.

Dan: 07:55 Well maybe not according to academics and statisticians.

Mel: 07:57 Right. According to everybody else and so a couple of researchers came out and they're like, "Not uh, this has got to be a thing and, we are gonna show you that it is a thing."

Dan: 08:04 "We're gonna keep researching this until we get it right."

Mel: 08:07 "And, we are going to keep watching basketball games and calling it research for as long as we possibly can."

Dan: 08:10 I see where you're going here.

Mel: 08:13 And so, in 2014 some researchers from Harvard, came out with a study.

Dan: 08:18 Well they're smart. They're smart right?

Mel: 08:18 Right, I mean they're from Harvard right? They came out with a study where they looked at 83,000 shots in the NBA.

Dan: 08:22 Tough gig.

Mel: 08:23 Yup, and they incorporated all these factors that weren't included in the earlier studies. So they were looking at factors that contribute to shot difficulty, like the things we were talking about like is another defender there, how far are you from the ring, etc. etc. What point in time is it in the game? And what they found was that there was, actually some evidence for the idea of a hot hand.

Dan: 08:41 Hey, see?

Mel: 08:43 If you look long enough. You'll find something.

Dan: 08:44 Exactly, you will find it’s in the data somewhere.

Mel: 08:47 So, currently, apparently, as it stands, the hot hand is not a fallacy. The hot hand is actually an effect.

Dan: 08:53 Right like what are we talking here. How much more likely am I to hit my 4th shot if I just hit the last 3.

Mel: 08:58 So here's the thing the effect sizes were marginal. I'm talking like an extra 1 or 2 percent. But look, if you think about in the contents of sport, like I always say in sports sometimes it's the smallest differences that have the biggest impact.

Dan: 09:12 I guess thinking back about what we were saying earlier about our desire to want to create stories around this stuff. Maybe the reality is you only have 1 or 2 percent difference in likelihood of hitting a shot but when you add on to that bit of extra swagger from the player, the crowd going off and cheering the person’s name because they just hit 3 in a row, the commentator starting to talk up that they have seen not seen a shooting streak like this at this count since December 1987 and this is one of the greatest performances likely to see. All sudden the story fits, even if the reality is questionable.

Mel: 09:44 Right the perception is way more fun.

Dan: 09:46 Yeah, and we want it right? We want the story. It's a much enjoyable experience to watch a game where there is actually momentum and hot streaks. Then when it’s just a bunch of random shot attempts.

Mel: 09:57 Right, so let's break this down in to a couple of reasons why we might fall for this. Okay, why we might think the Hot Hand Fallacy is a thing? In addition to it just being more fun to believe in. I will give you a couple other reasons why we tend to think this way. The first is the fundamental attribution era. Which is the idea when good things happen we attribute them to internal characteristics of ourselves. Right? So, when you've just hit 3 shots in a row you're thinking, "I'm hot, I'm on fire." The flip side of that when bad things happen we don't think that has anything to do with us. Right we’ll put things down like chance or bad luck.

Dan: 10:30 Exactly and so if we think about that example. Like in the casino where, you know if we are losing, oh you know, oh we get 3 heads in a row we think. We think we're due for tales..

Mel: 10:39 Yeahs, it's not because there's something wrong with us. It was bad luck.

Dan: 10:42 Exactly.

Mel: 10:43 We are due for a win.

Dan: 10:44 Due for a win. Totally.

Mel: 10:44 We're a good person. Good people deserve wins in life.

Dan: 10:47 Exactly, whereas if I just won 3 hands in a row. I'm probably due for a 4th.

Mel: 10:51 Of course. Because it was you.

Dan: 10:52 It was a skill. It was all skill.

Mel: 10:54 So, the next thing that comes in to place the idea of the law of small numbers. Basically, it's the idea when we know that something exist in the population. We assume it's gonna also apply in the small tiny little sub section of the populations. When we have small numbers. So, for example if we flip a coin 100 times we expect that we get 50 heads and 50 tails. Right? The law of small numbers said if I would of flip a coin 4 times. You would of expect to get what.

Dan: 11:22 2 heads and 2 tails.

Mel: 11:23 2 heads and 2 tails. Right, there’s just the same likelihood that we would have 4 heads in a row as if we would have head, head, tails, tails. That sequence “head head head head” is exactly the same likelihood happening as “head head tails tails” in a small sample.

Dan: 11:44 Right. So what you're saying about this law of small numbers, we failed to see the sample is merely part of a much much bigger experience. Much bigger population and we think that's the whole universe.

Mel: 11:50 Correct. If you go back to your hot streak in basketball. Right, you've just hit 3 out of 3 of your previous shots right, even though I know that you missed the last 20 before that and you're not really a great shooter. I'm looking at the little streak and I'm only looking at that and I'm neglecting all the information prior to that. I'm neglecting your overall shooting percentage which really, let's be honest isn't that great.

Dan: 12:12 High 40's probably.

Mel: 12:13 And I'm just looking at the small numbers. That little small instance that I’ve got there making my judgement  based on that.

Dan: 12:19 So you're not assessing my skill as a shooter over my lifetime. You're saying in the last 3 minutes this guy is a 100 percent shooter.

Mel: 12:27 Yep. Whenever we restrict the available range of data, we are going to make errors in estimation.

Dan: 12:32 Sure

Mel: 12:33 The last thing that comes into play is something that we have spoken about in previous podcast episode, which is the idea of availability basis. Which is if I want to think the likelihood of the next thing happening is, my brain is going to search for the most recent available information and “oh you hit your last 3 shots? Well of course you're going to make your next one.”

Dan: 12:48 Yeah and probably made shots more memorable than missed shots unless I missed a really critical shot or missed a layup or something like that. Chances are made shot that are memorable than missed shots. So that playing into that as well. So I guess we have all those things working in our favour or against our favour. It does seem pretty clear that we are excellent constructing stories where we want to. Maybe it's further evidence of that.

It seems funny that we only make the stories where we want them to. So we talk about hot streaks for shooting but we don't talk about hot streaks for other statistics like nobody gets on a steal hot streak or a block hot streak or a successful inbound pass hot streak.  

Mel: 13:24 And look that is one of the key criticisms of this sort of research when it comes to sport, that we only look at sort of one metric, one indicator of success and we make all of that judgements about future success based on that. Where as you say there's a whole-lot of other things that could come into play that we just don't pay attention to.  

Dan: 13:38 So the question for you Doctor Mel. The Hot Hand Fallacy is it a thing or is it not a thing?

Mel: 13:44 Look I think as long as we believe it's a thing. It's a thing.

Dan: 13:48 Right.

Mel: 13:48 Which is the point of the whole thing.

Dan: 13:50 So, Doctor Mel, the truth fairy. It is a thing or is it not a thing.

Mel: 13:52 Do you believe it's a thing?

Dan: 13:54 Well.

Mel: 13:54 If you think it, it is real.

Dan: 13:56 Okay, so the Hot Hand Fallacy is not a fallacy. The hot hand attribute is an attribute.

Mel: 14:01 According to the latest research there are some evidence for a hot hand effect.

Dan: 14:05 Alright, well I think we should go with that and I mean at the core of it, it’s because people like stories and a few consecutive shots made or few consecutive hands won at a poker table, or roulette wheel give us all the ingredients we need to construct a story about how wonderfully awesome we are.

Mel: 14:19 They also make good for Hollywood blockbuster movies. Right?

Dan: 14:22 This is true.

Mel: 14:22 About sports.

Dan: 14:23 Nobody's going to see a movie about a series of random shots that may or may not go in.

Mel: 14:28 So how do we take this and how do we apply this understanding of a Hot Hand Fallacy whether it exists or not. What does it mean in brand world?

Dan: 14:35 So if we look at that underlining ingredients for the Hot Hand Fallacy it’s people's desire to create a story and a story about somebody winning. And so, brands it makes sense to do whatever we can to look like we’re on a hot streak. Right. I guess often times with brands, and with agencies and other types of organisations we will look for big news and big wins to talk about our momentum moving forwards. But, probably a great lesson out of these is we should be looking for any sorts of wins we can talk about. Whatever that is individual performance reviews, or PR marketing we do out to the audience. The more made shots we can get out there the more we're contributing to the stories people are creating in their heads about our organisation or us as an individual being on a hot streak.

Mel: 15:20 Yeah, you're just trying to set the tone. Write the narrative.

Dan: 15:23 Exactly. So talking about this there are a couple of industries that come to mind straight away. Alright, maybe the umbrella over all of these is the awards industry, and how many awards are there that are set up just to give people good news to get themselves on hot streaks. So, I have not done the research maybe you would want to do the research but it would seem that there are more awards for cars available than there are cars, available in Australia. It seems that every car has won car of the year award for something. They've usually won it at least 4 or 5 times in a row. Total hot streak get on board with that.

I think superannuation is another one where you know, all of these different funds have been voted or recognised as a top something fund for the last x number of years and of course past performance is the best indicator for future performances, the fund is on a hot streak, make sure you get involved with that.

Mel: 16:10 See it’s funny that, right? Where past performance is the best indicator for future performance. It totally depends.

Dan: 16:15 Yeah who knows but I mean, actually it doesn't really matter because we like to believe that it is, and if you look at the ads, not picking on superannuation here but you will have the first 28 seconds of the ad talking about how amazing how their past performance been, and the last 2 seconds of the ad saying “past performance is not the best indicator for future performance” basically this whole ad was bullshit.

I should just say the ad is not bullshit. It's just the conclusions that we know people will draw from that are probably bullshit. The ads are true. Don't sue me.

Mel: 16:43 Alright so to bring it back and to really sum what we have been talking about. In circumstances where we don't have a whole lot of information or complete uncertainty. We have to understand our brain is going to look for patterns.

Dan: 16:55 For hot streaks.

Mel: 16:56 We're going to look for hot streaks. We're going to look for any information that can make us feel like we're in control of whatever is going to happen next but at the end of the day it's a story that our mind just made up.

Dan: 17:05 Right and clearly for completely random events, it’s 100 percent a story and for not completely randomly events, maybe sport, investment, buying and selling shares. It's like 98 percent a story. And 1-2 percent real.

Mel: 17:20 It's pretty much a story, our brain is making up stories.

Dan: 17:24 Alright it's all bullshit. It's a good way to end.

Dan: 17:26 No, actually you know what's a better way to end?

Mel: 17:28 What?

Dan: 17:29 How do people find you on the internet?

Mel: 17:30 Well they will either Google Melissa Weinberg or they can find me @DrMelW.

Dan: 17:36 Cool and if you finish talking to Mel and you would like to talk to me you can find me at @Danmonheit

Mel: 17:42 @Danmonheit #NBASuperstar.

Dan: 17:45 Yes. I think that is it for today. What are we going to talk about next time Mel? Are we going to keep the hot streak going?

Mel: 17:49 We are going to have to keep the hot streak going.

Dan: 17:51 Yeah I reckon we definitely talk about another bad decision making heuristic.

Mel: 17:54 It's a good chance. It's a good chance that will happen.

Dan: 17:57 Good chance. Seen you then.

#14 Planning Fallacy: Why the best laid plans always go awry

Do you find that things always take longer than you thought? Are you always running late? What if we told you it was all because you’re an irrational optimist? Chances are, you wouldn’t change a thing. In this episode, Mel and Dan consider the planning fallacy, and how our optimistic view of the world makes us underestimate how long things will take, and how much they'll cost.


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: 00:26 And how to explore this stuff for fun and commercial gain.

Mel: 00:29 I'm Dr. Mel Weinberg. I'm a performance psychologist.

Dan: 00:31 And I'm Dan Monheit, co-founder of Hardhat, a creative agency built for today. Spin it.

Hey, you know what I was thinking?

Mel: 00:44 What?

Dan: 00:44 Well I was thinking how as you get older, so many of these things that seem like good advice or conventional wisdom are actually just completely and utterly incorrect.

Mel: 00:54 It's like all those quotes on Instagram that people say that just aren't really true.

Dan: 00:57 Yeah, but even even like pre-Instagram things. So the one that actually got me thinking about it last week was the idea that whatever doesn't kill me can only make me stronger.

Mel: 01:07 Yeah. Okay. I don't like that at all.

Dan: 01:07 No, this makes no sense. Like, especially as I'm getting older and lots of things hurt me, but don't kill me, definitely make me weaker.

Mel: 01:13 And from a psychological perspective, people are most vulnerable to psychological illness after traumatic events happen, they don't get stronger from them they actually get weaker.

Dan: 01:21 Yeah, so it's like, hey, I just had half my arm mauled off by a bear, didn't kill me, probably not going to be stronger than before. In fact, I have like a massively open infectious, gaping wound where my arm used to be.

Mel: 01:34 Makes you feel good about yourself though, to say it.

Dan: 01:35 Officially not stronger than before.

Mel: 01:37 Officially, scientifically weaker.

Dan: 01:42 And you know, other things like sleeping like a baby, that's total bullshit. Babies wake up all the time and they shit the bed, like that's no way to sleep. But actually the one that really got me thinking was this idea that if we fail to plan, we plan to fail.

Mel: 01:54 Why?

Dan: 01:55 Well, because I feel like I plan a lot and I usually get it wrong. In fact, it seems like whether you do plan or you don't plan, you're pretty much going to screw it up anyway.

Mel: 02:02 Give me an example.

Dan: 02:03 Well, what actually got me started thinking about this was I was doing some research into different iconic Australian destinations, or locations.

Mel: 02:10 Must have been a thrilling weekends for you.

Dan: 02:13 No, this is what happens in agency land. And I was looking at the Sydney Opera House and I guess for anybody that was alive when this was being built, maybe this is old news, but I almost fell off my chair when I learned that the Sydney Opera House was meant to be completed in 1963 and was actually completed, guess?

Mel: 02:27 1965.

Dan: 02:29 1973, which was a lazy 10 years, whatever. It was simpler times maybe nobody really cared, but the thing that's really crazy is not the extra 10 years it took, it's the fact that it was originally meant to cost $7,000,000, which now is like a two bedroom townhouse in Sydney anyway. So it was meant to cost $7,000,000. Guess how much it ended up costing by the time I'd finished 10 years behind schedule?

Mel: 02:51 Tell me.

Dan: 02:52 $102 million.

Mel: 02:54 That is so much more than 7,000,000.

Dan: 02:54 Yeah, so I don't know what that is, it's like 15 times over budget. And it's like, this is a big project and I should mention that the project that got launched 10 years late and 15 times over budget was actually a scaled down version of what they actually intended to do.

Mel: 03:08 That's ridiculous.

Dan: 03:08 It is ridiculous. So it shows that even on the most high profile projects where there's best people working on them, planning doesn't really seem to help.

Mel: 03:16 So it's interesting you mentioned this and I think it's the same sort of thing that explains why I'm always late to everything. Even though I know there's a possibility of traffic, like if I'm going home I feel like it's going to take me 10 minutes.

Dan: 03:27 Yeah. Why would there be traffic - we're optimists?

Mel: 03:30 Yeah. I can just like scoot over it, flying right over the traffic. It's also the same belief that makes me think that I'm going to get a whole bunch of work done on the weekend, so I'll take a whole bunch of stuff home, and then sit and watch the footy all day.

Dan: 03:44 Yeah.

Mel: 03:44 Yeah, you know what it is?

Dan: 03:44 What is it?

Mel: 03:45 It's called the planning fallacy.

Dan: 03:47 The planning fallacy.

Mel: 03:48 And we're all victim to it.

Dan: 03:49 Every single one of us.

Mel: 03:50 It's something that particularly bothers me and I'm sure it affects you as well in sort of the consulting world where people are planning projects and stuff because people are really bad at planning how long things are going to take and how much things are going to cost.

Dan: 04:03 But you know where we're really good at?

Mel: 04:03 What's that?

Dan: 04:05 Being pressured into saying “yeah, yeah, we can do heaps of stuff in not very much time at all” and clients expect it.

Mel: 04:09 And I think it's the industry that both of us are in that when you're trying to win a contract or when you're trying to compete against other firms or other agencies for whether it's grants or whether it's projects, that you have to actually pitch yourselves as being able to do a whole lot of stuff in minimal time.

Dan: 04:25 Yeah, which optimistically you'll probably be fine to do, but realistically might be tougher than you anticipated.

Mel: 04:30 So this is the planning fallacy and we're all victim to it. It's the tendency to hold a confident belief that one's own project is going to proceed as planned even while knowing that the vast majority of similar projects have run late.

Dan: 04:44 Yeah, because the normal rules of the universe don't apply to me, just everybody else.

Mel: 04:44 Exactly.

Dan: 04:49 I mean, it feels like a silly question to ask, but do you have any research to support this?

Mel: 04:53 As a matter of fact, I do.

Dan: 04:54 Let's get the research music.

Mel: 05:02 So today's research comes from 1994.

Dan: 05:05 You get a certain glow about you when you start talking about the research.

Mel: 05:06 As I talk about the research can you tell I'm passionate?

Dan: 05:09 Which is not apparent in any other components of the podcast. I'm just saying.

Mel: 05:13 So 1994 Buehler, Griffin and Ross were exploring the ways that people have these self serving optimistic biases when it comes to planning things. And these research is particularly close to my heart because it involved honours in psychology students. I completed my honours in psychology, I supervised...

Dan: 05:35 Do you have a qualification? I was not aware.

Mel: 05:35 And I even supervised a number of students to gain their fourth year qualifications in psychology. So this is really close to my heart.

Dan: 05:43 You know if I said I observed a number of students it would be creepy, but when you do it is fine.

Mel: 05:46 Supervised.

Dan: 05:47 Supervised. Okay, all right, go on.

Mel: 05:49 Don't you go observing any students, it's weird. And basically what they did was they had people in their final semester, students in their final semester and they asked them to estimate how long it would take you to finish your thesis? You should be pretty close to the end of it, right? Your finals semester.

Dan: 06:05 And you're probably pretty smart by this part of your education.

Mel: 06:08 Well, it depends which of my students you were but... Okay, okay I'm kidding, I love all my students, they're all good.

Dan: 06:14 You're all above average.

Mel: 06:16 Just remember that. How long will it take you to finish your thesis? You're in your final semester so you're getting through it and most people said that at that time, yeah, I think it's going to take me about it's like 34 days, okay? Now, assuming like most people at this stage, they've got a plan, they're writing it, they've got their data, they're just writing it up, right all they have to do is really write it up.

Hopefully they’ve got a good supervisor who will get them through. They also ask them to say, you know, look if everything goes totally according to plan, how long is it gonna take? And they said “look, if everything going totally according to plan, I'll give myself a week less maybe 27 days”. And also what about if like everything stuffs up, what about if everything that could possibly go wrong goes wrong? And they say “yep, that's 48 days”

Dan: 06:57 So we got 27?

Mel: 06:59 At best.

Dan: 06:59 34?

Mel: 07:01 33, just saying how long, yeah.

Dan: 07:03 And 48?

Mel: 07:04 48 at absolute worst.

Dan: 07:05 Okay, yeah.

Mel: 07:06 And you know how long it took, the average that they took these people to finish?

Dan: 07:09 How long?

Mel: 07:10 55 days.

Dan: 07:11 That's upsetting.

Mel: 07:12 So even when they thought about everything that could possibly go wrong, it was another week on top of that and that average did not include a number of students whose final numbers couldn't even be included because they hadn't even finished by the time the data collection for this research was finished.

Dan: 07:25 Humans. This is a weird thing. Like I just think in most of the heuristics we've talked about, they kind of at least try to set us up for success and this just seems like a weird thing to have had this hardwired thing in our brains that makes us constantly disappoint ourselves and those we love.

Mel: 07:42 It's like you think something's going to happen. You plan for something to happen. And you're wrong.

Dan: 07:46 Yeah, but all the time, constantly. Why would this be like, does the universe want my wife to be constantly angry with me because I'm home later than I said I would be because why would there be traffic?

Mel: 07:55 Look at it does serve a motivational function, which is that at least makes us think that things are doable, things are achievable because if you think too far in advance, if you think that things are just too big and too grand and too expensive, you're not going to do anything. So it serves a highly motivational function. It makes us think that we can actually do something, we can actually get things done. We can get things done on time, we can get places on time and it drives us to actually do it.

Dan: 08:17 So if I understand correctly, what you're saying is if we were actually realistic and rational about how we saw our chances of completing things-

Mel: 08:24 We'd never get anything done.

Dan: 08:25 We wouldn't even bother starting. We'd all be miserable and depressed.

Mel: 08:28 Yeah. Well that's the flip side of things that you're constantly planning for failure and constantly planning for the worst case scenario. And that's not a good way to live.

Dan: 08:33 No, those people suck.

Mel: 08:34 Yeah.

Dan: 08:35 All right. So obviously you know, when human beings try to complete projects on the balance of probability, things are not going to go as planned. And so I would suggest that there are two giant contributors to this, one set is to do with people and the other set of giant contributors is just to do with the nature of projects. So how about we tackle one of these each? Maybe we can flip for it.

Mel: 08:56 Okay. I'll talk about the humans.

Dan: 08:58 Okay, you do humans.

Mel: 09:00 I win humans please, you talk projects.

Dan: 09:02 All right. What do you got?

Mel: 09:03 To explore the human factors that contribute to these, we're actually going to go back to one of the first papers, would you believe one of the first research papers that I ever read when I was studying well-being and human performance. And it was... Yeah, it's nice, it's got a bit of meaning to it this one. It's a study by Taylor and Brown in 1988. Sorry for more research, but it's obviously the thing I like and it's about how people have these positive mis-perceptions like those things you were talking about at the start those sayings that are not true, but help us feel good. There were three main things that we do that are called illusions because that sounds really magical, we call them positive cognitive biases. What Taylor and Brown in 1988 were talking about and what they actually challenged was this conception that a mentally healthy mind was a rational mind. Right?

What they actually showed was that a mentally healthy mind is one that is actually completely irrational. Sounds a little bit contradictory to what we would think, but in order to maintain our well-being, our motivation all these sorts of things, what we need to do is actually have these misguided views of the world and we do that according to three things. The first is that we think that we're better than everybody else, so we have this exaggerated sense of self esteem, which is why when it comes to the planning fallacy, we think, I know everybody else has failed at this, but I'm not going to do that.

Dan: 10:20 Because I am awesome.

Mel: 10:20 I am so much better than everybody else, but yeah, they've all stuffed up, but I'm going to be fine.

Dan: 10:24 Look I know I haven't done stats, probably to the great degree that you have, but it's pretty much impossible for us all to be above average, right?

Mel: 10:30 Correct. You can do that with minimal statistical knowledge.

Dan: 10:36 It breaks the definition of average, but we all think we're above average.

Mel: 10:38 The other thing is that we all think we can control the future and as nice as it sounds, we are very bad at estimating how unpredictable the future is and there are a lot of double negatives in that sentence I just said, but basically we fail to predict how unpredictable the future is.

Dan: 10:54 And it's kind of funny to think that we can't control the future at all, but there are like huge industries set up just around helping us create the illusion, do we need magical music? The illusion that we can control all of the project planning software and the gantt charts and the spreadsheets. We're all just making shit up, let's be honest. Unless you're one of my clients, in which case we know exactly what we're doing and it is going to follow this gantt chart exactly.

Mel: 11:19 And where everything will be done and delivered on time and to budget. The final thing, and we've talked about this before, is that we have an an unrealistic sense of optimism, right. We think that everything's going to go fine and the bad things are going happen to everybody else and not us, and our project is going to go completely according to plan. So all of these factors, the idea that we have, and enhanced sense of self esteem, and enhanced sense of control over the world, and an enhanced sense of optimism all contribute to us making massive errors when it comes to planning.

Dan: 11:47 Right. Yeah. So that's a pretty dangerous triad of afflictions that we all suffer from. It's like you know that that sentiment that like everything happens for a reason?

Mel: 11:57 Mmm it doesn’t ...

Dan: 11:58 Well sometimes the reason is that we're idiots.

Mel: 12:01 Yeah that's true, that's the underlying reason.

Dan: 12:03 That's the reason, right. Okay. So just humans are basically not wired to be very good at planning projects. We all think we're going to smash it and we're better than everyone else and we can control our future but even if that was aside, there's just stuff about the nature of projects that makes them really, really hard to plan for accurately. So I'll see your three and match it with three.

Mel: 12:03 Give me three.

Dan: 12:23 Well, the first one is that there's this natural asymmetry of information you find out as you start a project, so you go into a project knowing that you don't really know what's going to happen in there, and you're going to discover new things, but there's a natural asymmetry between the amount of bad or adversely effective things that you find versus the number or the amount of good things that you find.

So of all the things that you don't know that you're going to run into, more than half of them are going to be bad. You might find a couple of nice little upside, you might go hire somebody halfway through the project who freakishly has done this exact project before, but chances are most new information will be bad information.

Mel: 12:59 That's a scary thought.

Dan: 13:00 Yeah. So that's one. The second one is just issues inherent with scaling. So we tend to underestimate how hard scaling is and the problems and issues are not linear. So if you are building one bridge, or you've built one bridge before and you think you kinda know what you're doing and what sort of issues you're going to overcome, and then you decide that you're going to build two interconnecting bridges, the issues will not be doubled.

Mel: 13:23 Right, so you're talking about up-scaling but not understanding how the errors associated with that work.

Dan: 13:29 Yeah, so it's like you could double the size of a project and you will get more than double the amount of errors in the same way if you think about what it takes to run a 50 person business is not double what it takes to run a 25 person business. It's more because let's say at 25 people, as an owner, you kind of know everyone and can manage everyone and you've got visibility over every project and every client and every person, whereas at 50 you don't. So it's not like running two 25's because you need a whole layer of management, you need systems, and processes, and performance reviews, and career progression plans, and all of these sorts of things. So every project grows in complexity more than it grows in size or disproportionately to how it grows in size.

Mel: 13:29 That makes sense.

Dan: 14:10 Yeah. So there's the natural asymmetry, there's the scalability issues, and then the third one is something I discovered called Brook's Law. Well Brook's Law is an observation that relates to software projects but probably relates to most things in business and in life.

Mel: 14:25 What's Brook's Law?

Dan: 14:26 So Brook's Law is the idea that if a project is already running late, which as we've learned today, most projects are already running late before they even started and you add a new person to the project.

Mel: 14:36 Right, to help it along.

Dan: 14:37 Yeah. To help it along, chances are it's going to be later than if you hadn't added that extra person or extra people. So there's a whole bunch of reasons for this and if you work in in software like you see this happen all the time. So number one, the new person or the new people that come in need ramp up time, so you get loss productivity while everyone's trying to catch these people up. The second thing is around communication overheads, so as you add more and more people to the project, you need to spend more and more time explaining to everybody what's going on and having pre-project catch-ups, and mid project catch-ups, and making sure everybody knows what everybody else is doing so that takes time and further blows things out.

And then the third thing is the non divisibility of work, so sometimes we think that if you have a person doing something that's going to take a day, if you just put two people on it, it's going to take half a day, but a lot of projects actually don't work like that and you can't effectively break up a task evenly into little pieces for more and more people to get involved. Sometimes it's like putting something in a microwave, you can't put something in two microwave for five minutes each at the same time instead of just putting it in one microwave for 10 minutes.

Mel: 15:39 All of that would change my cooking but, yeah. I also wonder whether when somebody comes in late to a project because they know it's already late, it's almost like they have this idea or this view that you know what, it's acceptable in the scope of this project, lateness is acceptable and lateness can be fixed. So there's almost like no pressure or not as much pressure to be done on time because lateness is something that is part of the project.

Dan: 16:00 Or the person's come in and it's already fucked, so like you can't fall off the floor and the thing is most projects, in fact, I would almost say almost every project has a new person added to it somewhere beyond the halfway mark. So between the natural asymmetry of what we've learned about projects as we take them on, the inherent issues in scaling, and the fact that adding new people to an already late project is just going to make it even later it honestly is a wonder that we ever get anything done.

Mel: 16:24 It's amazing.

Dan: 16:25 And sometimes I've just wish I had a psychologist friend that I could turn to and say with all of this stuff stacked against us, with the issues of being human, and the issues of working on projects, whatever can we do?

Mel: 16:36 Well, Dan, let me be that psychologist. I'm going to offer you a couple of things that people can do and then you'll tell me some brand new applications.

Dan: 16:45 Sure.

Mel: 16:45 Okay. We'll do a trade.

Dan: 16:46 That's my job here.

Mel: 16:47 So, the first thing that we can do is when we're planning how long something is going to take and how much something is going to cost, it can really help to have somebody play devil's advocate because we're all vulnerable to these things at an individual level and like I think I'm going to get everything done, but you maybe not so much, right? If I'm overlooking your project, then I might be able to highlight some things that could potentially go wrong with your project that maybe you wouldn't have seen and it could be really hard for you to hear that because obviously you think you're fantastic and everything's going to go according to plan and nobody likes to hear that sort of negative feedback, but it can be really important in terms of planning properly. It's basically conducting a pre-mortem of the project of going what are all the things that could possibly cause this project to fail and work backwards from there.

Dan: 17:31 So it's like ‘bring a hater to work’ day.

Mel: 17:34 Pretty much you can do that.

Dan: 17:35 You just got to invite someone whose going to shit all over your project, it's sounds fun.

Mel: 17:40 And go from there. Yeah, right fun ways to work.

Dan: 17:42 It's so much more enjoyable to just assume everything's going to go great.

Mel: 17:45 Yeah. The next thing that we could do and in terms of a budget perspective and thinking how we tend to underestimate how much things are going to cost, if possible you can put some contingency planning in your budget. So you could have an amount of money that just goes under contingency in the budget. It's like, we're not quite sure what we're going to spend this money on, but we're fairly sure that we're going to need it for something, so let's just have some spare change in the back that in case shit hits the fan, we've got some money to cover it and it's part of our budget.

Dan: 18:11 And when you say in case what you actually made news in the highly likely event that everything goes wrong.

Mel: 18:17 We're planning for the inevitable uncertainty.

Dan: 18:19 At least we'll have money to have a party.

Mel: 18:21 It's like we don't know what we're planning for, but we're planning for it.

Dan: 18:21 And it's going to cost cash.

Mel: 18:24 And when it happens, we're going to say we knew about it. The last thing we can do is that we can break down tasks. Okay, because looking forward into the future, things seem so abstract, so vague in the more abstract something is, the harder it is to conceptualise it. So if we break it down into small tasks, sort of like goal setting, right? If we break it down into things that we can achieve where we have more certainty about it, things that we know we can do, things that we know how long it will take, even if they're like minimal tasks, the more concrete we can make it, the more we're able to accurately estimate how much time it'll take and how much it's going to cost.

Dan: 18:58 For sure. I mean first hand experience, I can attest to this, like in the agency  we work on lots of big complicated projects where at the start you really have no idea of even what you're doing. And so we force ourselves as a team to go through and turn this big ambiguous project into a whole bunch of cards, task cards. And a task card is four hours worth of work for somebody to do or less. And if a task is more than four hours, we need to split it into multiple tasks because four hours, like half a day you can kind of accurately estimate what you're going to get done but anything beyond that, we're basically just guessing.

Mel: 19:32 So putting it into much more practical, realistic terms.

Dan: 19:35 Bite size chunks.

Mel: 19:36 Bite size chunks?

Dan: 19:37 Yeah. So I mean look, as agencies and service providers, that's one thing that we can do but some of the other things we can do when we're trying to sell stuff is to really let this bias work in our favour. So really anytime you've got a service offering where you can let people self project, how often they'll use a product or service, chances are they're going to overstate how much they're going to use it. So if you imagine like selling an annual pass to a gym or to a swimming pool or something like that, people are doing the calculations on three or four times a week because of the planning fallacy they assume they're going to be able to organise their life to get that three or four times a week but in reality...

Mel: 20:15 Well, that's the thing and with the gym membership, all of a sudden it becomes, yeah, if I go four times a week, it's only going to cost me like $2 a session.

Dan: 20:21 Yeah, yeah, so that's why we have things like unlimited class passes because that lets the person do the calculations themselves and what do you know, they come up with a really optimistic answer. Similarly, like when you go to Queensland, you can get these three park super passes, and basically anything that's bundled and relies on people assuming they can do a certain number of things in a certain amount of time is going to work in your favour as a brand because they're probably not going to be able to do that. Let's just be honest about it.

Mel: 20:47 Yeah, and people just aren't as fit or as keen as they think they are to go to Dreamworld, Wet and Wild. What else? Movie World.

Dan: 20:54 Yeah, we're just, none of us are as organised as we think we might be.

Mel: 20:58 It sounds like a really good idea and then you get there and you're like, no, I just rather sit by the beach.

Dan: 21:02 Yeah. How good's the bench?

Mel: 21:03 Yeah, humans are lazy.

Dan: 21:04 Well, I think that's what we've learned today.

Mel: 21:07 You know Dan, at the end at the end of the day, you could always just apply Mel's theory.

Dan: 21:10 Mel's Theory?

Mel: 21:11 Yeah Mel's theory of planning.

Dan: 21:12 Should I check Wikipedia or are you just going to tell me what it is?

Mel: 21:13 Not yet, it’s not yet a thing - I'm telling you now, you're the first to hear this.

Dan: 21:18 Okay you heard it first listeners.

Mel: 21:19 Mel's theory when planning, when you have a project and you're thinking about how much time it's going to take you to do, estimate that amount of time and then just chuck on two weeks.

Dan: 21:28 What if it's like a three day project?

Mel: 21:29 I don't have three day projects.

Dan: 21:32 All right great theory, Dr. Mel.

Mel: 21:34 Thank you. I’m still working on it …

Dan: 21:36 So if you guys got thoughts on the planning fallacy or just on the show or just on Mill's theory.

Mel: 21:41 Any negative feedback is welcome @DrMelW.

Dan: 21:43 Yeah. Positive feedback is good for me @Danmonheit. I will see you guys next week, which is going to be here way quicker than any of us realise.

Mel: 21:50 See you next time.

#13 Mental Accounting: Why we’ll probably die broke

A hundred dollars is a hundred dollars is a hundred dollars, right? Well, no. Not according to our brains. In this episode, Mel and Dan explore how mental accounting influences the way we spend and save, and how brands can use this knowledge to make bank.


Dan: 00:20 Hey, and welcome to Bad Decisions. The podcast that helps us understand why we choose what we choose.

Mel: 00:24 Why we think what we think.

Dan: 00:25 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 I'm Dan Monheit, co-founder of Hardhat, a creative agency built for today.

Mel: 00:34 Let's do this.

Dan: 00:42 Alright Mel, we're gonna get right into this one today.

Mel: 00:44 Sure.

Dan: 00:45 Actually before we do, in this episode, there is a whole bunch of stuff that may be misconstrued as financial advice.

Maybe also nutritional advice, so let's just be very, very clear. Do not do anything with your money or with your body purely off our recommendation.

Mel: 00:59 If you choose to do stuff based on your own idea, that's fine. Just don't blame us for it.

Dan: 01:04 Yeah, this is not financial advice.

Mel: 01:07 It's good that we're aware of our limitations.

Dan: 01:09 Yeah, it's just some people talking about some stuff.

Mel: 01:10 Yeah.  

Dan: 01:11 Alright. I want to ask you two questions.

Mel: 01:14 Okay.

Dan: 01:15 The first one is, you need to imagine that you are going to go and buy a new stereo. Do people still buy stereos?  

Mel: 01:21 No.

Dan: 01:21 Is that a thing? A new iPod?

Mel: 01:21 An iPod.

Dan: 01:22 Alright. You're gonna go buy a new stereo, and you go to the shop, and you park and you go inside, and you look around, and you find a stereo that you want, and the stereo is going to be $550.

Mel: 01:33 That's a big stereo.

Dan: 01:34 Yes, it's a good stereo. Not like a barbecue, but it's still good. You're at the counter you're about to pay. I walk into the store and I see you there and I run over. I'm like, "Hey, Mel, how you doing?" You're like-

Mel: 01:44 "Hey, Dan."

Dan: 01:45 I'm like, "Hey, what are you buying?"

Mel: 01:47 "This massive stereo?"

Dan: 01:48 "Yeah? And it's how much?

Mel: 01:50 "550 bucks."

Dan: 01:51 I was like, "Oh, you know what? I actually just saw this exact same stereo for $400 where I came from, which is about, I don't know, probably a 10 minute drive from here".

Mel: 01:59 "Oh, my God. I'm gonna go get it."

Dan: 02:00 "Yeah. $150 saving."

Mel: 02:00 "Thank you so much."

Dan: 02:02 550 down to 400. You are out the door and you're going to get it.

Mel: 02:05 Yeah.

Dan: 02:06 Right, makes sense? Now, let me put you in another scenario.

You're about to buy a new car. You're at the dealership. You've done all the negotiations. You've managed to get him down to $28,400 for your new car.

Mel: 02:20 Bargain, I think. I don't know. What sort of car?

Dan: 02:20 I don't what car it is. I don't know.

Anyway, it's $28,400 and you're about to pay for it, and what do you know? It's your stalker/friend Dan. I walk into the dealership, I'm like, "Hey, Mel, what's up?" You're like-

Mel: 02:33 "Dan, what are you doing here?"

Dan: 02:34 I'm like, "Oh, I was just stopping by, and I saw you in here. What are you doing?" You're like-

Mel: 02:39 "I'm about to buy this car at $28,400. Great deal."

Dan: 02:42 I'm like, "Wow, that is great deal. Except, believe it or not, I was actually just at another dealership, which would probably be, I don't know, maybe 10 minutes away. And they had this exact same car for $28,250. That's $150 cheaper. What do you reckon?"

Mel: 02:55 "Yeah ... oh, 150 bucks?"

Dan: 02:57 "Yeah."

Mel: 02:58 "Nah. Nah, I'm good."

Dan: 02:59 "Not worth it?"

Mel: 03:00 "Nah, I'm just gonna stick here."

Dan: 03:01 Yeah. Now, that's weird right? Because two minutes ago, you were very happy to drive 10 minutes to go and save $150, and now with some different extraneous variables, you are now not willing to do it.

Mel: 03:15 You know what it seems like?

Dan: 03:16 What?

Mel: 03:16 It seems like I've made a bad decision.

Dan: 03:18 Seems like you made a bad decision. It seems like you made a bad decision around the idea of mental accounting.

Mel: 03:23 Mental accounting. Welcome to the episode.

The questions that you're asking about willingness to spend the same amount of money in different situations is reminiscent of the original questions that Kahneman and Tversky inspired by Nobel Prize winning economist Richard Thaler. I'm wondering, is there a Nobel Prize winning podcaster?

Dan: 03:55 I don't know, but if there is I'm sure they'll call us about it.

Mel: 03:58 Definitely. The questions they posed back in the 80s were with regard to people's willingness to spend money on tickets to see a play. Okay, there's two scenarios. The first is if you imagine that you've decided to go and see a play and you've spent $10 on the ticket. You're walking into the theatre-

Dan: 04:15 It's like a school play. $10 is pretty cheap.

Mel: 04:16 It's the 80s.

Dan: 04:17 Ah, 80s. Okay, cool.

Mel: 04:19 As you're walking into the theatre you realise that-

Dan: 04:21 It was probably Cats, yeah?

Mel: 04:22 Something like that.

Dan: 04:24 Okay. $10. Got it.

Mel: 04:24 You're walking into the theatre, you realise that you've lost your ticket.

Dan: 04:27 Oh, no!

Mel: 04:27 You're already there though. But you've spent $10, you've now lost your ticket. Are you gonna pay $10 for another ticket?

What happened was that about half the people said, "Nah, I'm outta here. I spent my 10 bucks. Well, didn't get to see my play, too bad. My fault. I'm out".

Dan: 04:27 "Lost the ticket. I'm an idiot."

Mel: 04:44 The other situation is that imagine you've decided to see a play and you pay on entry. The admission is $10.

Dan: 04:50 Is this still Cats in 1984?

Mel: 04:52 Yep.

Dan: 04:52 Good.

Mel: 04:54 As you go into the theatre this time, you put your hand in your pocket, and you realise, "Hang on a second. I had 10 bucks in here, and that $10 bill that I had is gone".

Dan: 05:01 Gone. Dun dun dun.

Mel: 05:03 But are you gonna spend $10 and buy a ticket to the play?

Dan: 05:06 Well, it's not the play's fault I lost $10.

Mel: 05:08 Well, and that's what most people say. In this situation 88% of people said, "Heck yeah, I'm here to see a play. I'm gonna pay 10 bucks".

Dan: 05:14 88% of people who lost $10 but were happy to pull out another 10 and buy a ticket, whereas only 50% of people who had already bought the ticket, and then lost the ticket, and had to spend another $10 on a ticket were willing to do that?

Mel: 05:27 Yeah, I think you summed it up there. I'm not sure if you summed it up or if you made it easier to understand or more confusing, but either way.

Dan: 05:33 I'm here to simplify, that's my main thing.

Mel: 05:34 The question is why are so many people unwilling to pay another $10 for a new ticket, when they would pay it if they'd lost the equivalent amount in cash?

Dan: 05:42 Right, because it's the same thing? At the end of the day, you are down $20 and you are up one ticket to Cats in 1984.

Mel: 05:48 Yeah, and the reason has to do with the way that we mentally account for the loss.

In the first scenario, we rationalise that we've paid $10 in exchange for seeing the play. To us that's what the play is worth.

If we have to buy another ticket, we're paying 20 bucks to see the play, and it's not worth that. Everyone else has only paid 10 bucks, so we feel like we're getting ripped off.

Whereas in the second scenario, the loss of a $10 bill from our wallet is totally unrelated to seeing the play.

Dan: 06:15 Yeah, not the play's fault. That's what I said.

Mel: 06:16 Exactly.

Dan: 06:17 I told you I'm helping.

Mel: 06:17 The $10 that we paid to see the play is stored in a separate mental account to the $10 that we lost from our wallet, so even though in both scenarios the net loss is the same, it's the way that we mentally account for it that ...

Dan: 06:29 Messes us up. Let's be honest.

Mel: 06:31 It's the way that we mentally account that predicts actually our future behaviour.

Dan: 06:34 I think that the big, fundamental concept that us silly humans are missing here is this idea of fungibility.

Mel: 06:42 Oh, big word.

Dan: 06:43 Yeah, it's a real word too. Do you wanna say it slowly? Fungibility.

Mel: 06:43 Fungibility.

Dan: 06:47 I'm actually not sure if fungibility is the correct conjugation of the word, but there's an idea that money is fungible.

Mel: 06:47 There's another big word.

Dan: 06:54 Fungible means that all money is the same. It's completely interchangeable. The $10 in your pocket is the exact same as the $10 that's now not in your pocket because you lost it.

It's the exact same as the $10 that you spent on a ticket, which is the exact same as $10 you could have spent at the supermarket. All the $10s are exactly the same.

Mel: 07:10 All the $10s.

Dan: 07:11 Yeah, and if we realised that money was fungible and completely portable between all of these different ways we could spend it, we'd probably make much better, much more rational decisions. But we don't. We do this weird form of mental accounting.

Mel: 07:25 We often these things where you'll say things in some language and I'll be like, "Well, here's how we say it my language".

What I'm taking from this is that there's an objective aspect to the amount of money, which is that it's $10, or it's $100, or whatever it is, it's that amount of money.

And yet, subjectively we impose some meaning, or some value, or some interpretation of what that money means to us, and because of that, that directs what we're gonna do with it.  

Dan: 07:51 Exactly. Somewhere between our objective part of our brain and our subjective part of our brain, we decide that all $10s are not the same.

Mel: 07:59 They're actually different. Cool.

In unpacking mental accounting, we're gonna break it down into three different theoretical perspectives on them. The first has to do with the origins of the money. Where this money has come from.

Dan: 08:14 This is a weird thing. Money is money is money, but for some reason, depending on where the money has come from, we tend to think about it differently.

For example, money that we've earned through our normal course of our work, the money that turns up in our bank accounts, fortnightly or monthly, is spent very differently to money that we just happen upon. Things like a one time bonus.

Mel: 08:37 Yeah. Tax returns.

Dan: 08:38 Tax returns. Great example of this. Money that just turns up, maybe if it's money you just found in the street.

Objectively, the $1000 that you just got as a tax return or as a bonus, is fungible. It's exactly the same as any other $1000 that goes in or out of your account, but we seem to grant ourself weird permission to spend it more frivolously than other types of $1000s.

In fact, there's a term for this. It's called house money.

Mel: 09:04 House money? Yeah, I like it.

Dan: 09:06 Yeah, yeah. Money in the house. If you're a gambler or you know gamblers, and you go in with the money that you start with, and then any money you win is the house money.

It's not yours, you never really earned it anyway, so you just spend it differently and more freely.

Mel: 09:19 It's like there's this trade-off, because you didn't really do anything to earn it, you're relieved of the guilt associated with spending it.

Dan: 09:25 Exactly. Even though objectively, it's the same $1000 that probably should go on a credit card, or go in your savings account, or whatever, we think about it differently and we just flutter it away. Flitter it away? We just spend it.

Mel: 09:25 We spend it.

Dan: 09:36 Whatever. I guess there's a political masterstroke, in 2009 on the brink of global financial crisis stuff, and Kevin Rudd, our Prime Minister at the time, just decided, "You know what? We'll fix this. $1000 for everyone! You get $1000! You get $1000! You get $1000!" Provided your tax returns were up to date.

I think it was actually 950, but it was some arbitrary number that just turned up in the bank account of millions and millions of Australians overnight.

Mel: 10:05 And let me guess, they all saved it? They all put into their long term savings account and took good care it.

Dan: 10:11 Not only did we not save it, a lot of actually spent it twice. We got told that we're getting $950 into our bank. For free, for doing nothing. And it's like, "Wahoo!"

Mel: 10:21 Free money!

Dan: 10:23 We went out and spent $950 on something. And then six, eight, 12 weeks later the actual $950 turned up in our accounts, and we're like, "Wahoo! Free money!" And we went and spent it again.

Mel: 10:33 God, we're dumb. But what we did do was stimulate the Australian economy.

Dan: 10:36 Yes. Yeah, and if we had gotten that $1000 as $10 little increments over the following two years, it probably wouldn't have had that sort of an impact.

But getting it as a one-time bank error in your favour Monopoly style, people went out and spent that shit and ... Go Australia!

Mel: 10:56 Well played Kevin Rudd. Well played.

The next theoretical explanation for mental accounting has to do with the intended purpose of the money. We make this determination about what the money is for, and then that guides how we spend it.

Dan: 11:08 Exactly. Again, ignoring fungibility, which is just a word I'm going to try and say as many times as I can in this episode, we designate money to go on different things.

This $5 here, this is going in a holiday account. See this $10 here-

Mel: 11:21 It's not gonna get you very far.

Dan: 11:24 Well, it's saving. It's a long road. Whereas this $5 here, that's actually for groceries, and there's another $10 here and that's going for takeaway food. This causes us to do some weird things.

For example, we will set up a savings account, because that feels like a good thing to do. A savings account might be getting ... say 4% interest. We do that at the same time as we have a mortgage, which we're paying 7% on.

Instead of putting say five grand into our mortgage, and not paying 7% interest, we put into a savings account where we do get 4% interest, basically costing us 3% interest.

Mel: 11:54 But at least we feel like we're saving.

Dan: 11:56 We feel like we're saving, but we're not. We're damaging ourselves.

An even worse example of this, at least that example you're getting 4% but you're paying 7%, worse example is where people have a coin jar. A savings jar, which is earning 0%, and they have that instead of paying off a credit card, which they're probably paying 17% on. That little savings jar is actually costing you way more than you realise.

Mel: 12:20 It's an interesting irony there to look at the cost of actual saving.

Dan: 12:24 Yeah, you're saving money but it is costing you 3%.

Mel: 12:28 Right. The last explanation that we're going to give for mental accounting is called category spends, and it's the idea that we're gonna artificially create different categories within which we'll hold our money.

We're gonna have a category that we allow for holiday. We'll have a category that we allow for spending on food. We'll have a category that we allow for indulgences. We'll have a category that we allow for entertainment. And we're really rigid in our willingness to shift money or move money between these categories.

Dan: 12:52 Yeah, and what's weird about this is that they're completely arbitrary, and the same thing could maybe fit into a few different categories. Let's say you were the zoo, and you-

Mel: 12:58 I'm the zoo?

Dan: 13:00 You are the zoo. And you want to promote yourself. Knowing that these category spends exist, you might have trouble positioning yourself as a form of entertainment, knowing that well, people have a mental bucket for what they'll spend on entertainment. And if you wanna be in that bucket, then if they went to the movies last week, you're probably not gonna get a look in this week.

Mel: 13:17 You're determining who your competition is essentially.

Dan: 13:19 Exactly. You might say, "Well actually, people probably have a less indulged in mental bucket for cultural experiences or educational experiences, and so maybe they'd be less competition and less pressure for the same person's money, if we put ourselves in that bucket".

Mel: 13:33 Right, and going back to what we were talking about before, you were talking about people having literally different bank accounts, and having a savings account, you might have five grand that you keep in your savings account, but meanwhile you've got 11 grand on your credit card earning interest.

There's something though about people feeling good about having that buffer of five grand savings, whereas I'm willing, I know that there's 11 grand on my credit card and I know that that is actually costing me, but it feels good to me. I feel safe, and I feel like I'm in control of my world if I have that five grand in savings sitting there as well.

I think that this idea of control comes into play a lot with mental accounting. The reason that we break our money and our accounts up mentally is because it's really hard to think of our overall net wealth, and so one way that we do it is to break it down into more manageable, smaller components. Little artificial buckets, if you will.

Dan: 14:24 Which is all well and good, expect for the fact that when you go on holidays, it's not just the Mel that's saved five grand that goes on holidays, it's the Mel that saved five grand, but also has 11 grand on her credit card that goes on holidays.

It is your net person and your net wealth that is the recipient or the beneficiary of all of this stuff.

Mel: 14:41 It's a way more fun holiday if we can keep that Mel in debt behind.

Dan: 14:43 That is true.

Mel: 14:43 She can just stay at home.

Dan: 14:44 She can stay in Melbourne and do some work, and I'm gonna go shop up a storm over here.

Mel: 14:49 Alright, let's talk about what the implications are for brands. If we understand mental accounting, if we know that this something that happens then, basically if you're a financial institution then one of the things that you can do is you can allow your customers to store their money in ways that mimic what their brain is doing.

If you know that your customers are mentally dividing their money into different categories, there are financial institutions that will let you break down your accounts into subcategories that reflect exactly what your brain's thinking.

Dan: 15:14 Yeah, which I think it's a pretty new thing that banks are letting you do that. I always used to find it weird that they wouldn't. That they couldn't let you artificially split one savings account into three or four things. You'd have to go and open completely separate accounts. It's good to know that they've fixed that.

Something else for brands to consider is where are you gonna position yourself? And even within that positioning, how you're going to break down your offering. We talked about the zoos just a minute ago, about whether the zoos wanna be in the bucket for entertainment or the bucket for education.

But if you think about say a online retailer example, the conventional wisdom is give people free shipping, and just work it into the overall costs of things. But if charging $10 for shipping and handling lets you reduce the price of say a pair of shoes from 160 to 150, you're probably gonna have a better chance of fitting in that acceptability threshold for that category, and the $10 that they're spending on shipping and handling is a separate-

Mel: 16:04 It comes from a different bucket.

Dan: 16:05 Absolutely. The other things that brands can think about. Number one, if you can, open at the casino.

The casino is just filled who have got money in a short term windfall kind of way, and they're happy to suspend their normal rules for spending and go out and buy new watches, and shoes, and suits, and whatever it is because it's house money. Why wouldn't I spend it?

Mel: 16:26 Capitalise on the fact that people have just come into house money?

Dan: 16:29 Yeah, exactly. We talked about how to exploit this stuff for fun and commercial gain.

Mel: 16:33 It's consistent with our overall theme, isn't it?

Dan: 16:35 That's what we promised, and we deliver what we promise. Look, this last one might be a little bit tricky, but depending on your customer base, you might have groups of people who all get paid bonuses at a really similar time of year.

That's a thing you might see in law firms, or in financial advisory services. Quarterly or end of year bonuses. You know that bonus money is gonna get spent like it's hot, so position yourself to be there.

I'm not saying you should be trawling the condolence messages in the local newspaper to find recent widows-

Mel: 17:01 "Hey, I've just got a massive inheritance! Let me see what I can buy."

Dan: 17:04 That is a great time to get somebody into the showroom.

Mel: 17:07 Let's move to the individual now.

Dan: 17:09 Respectfully.

Mel: 17:09 Respectfully. But moving to the individual level now, what do you do as an individual consumer if you know that mental accounting exists?

Well, the first thing is you can question your own behaviour. With this understanding that maybe I'm not willing to ... maybe when it comes to petrol, I'm willing to spend up to $1.40 on petrol.

Dan: 17:27 That's your arbitrary limit.

Mel: 17:28 That's my arbitrary limit, but if I see that petrol's at $1.44 per litre, well, you know what? I'm actually gonna go for a half hour drive somewhere a little bit further out of the city where I know that it might be about two cents a litre cheaper, and I'm gonna go out there and I'm gonna do that. Stupid decision! Bad decision, Mel. Again.

Dan: 17:47 You would fail first year economics, because this is a thing called opportunity costs.

Opportunity costs says, there's no such thing as a free lunch because while you're at the free lunch, you are foregoing all sorts of other value creating activities you could do.

In your example, driving around for half an hour is probably gonna cost you more than the four cents a litre that you were hoping to save.

Mel: 18:04 But it just feels so good to save it.

Dan: 18:06 And you've got the buckets, you didn't violate your rule of buckets, of $1.40 per litre.

Mel: 18:11 And I stick to the rules, goddammit.

Dan: 18:12 Yeah, exactly.

Mel: 18:14 The more that we understand about this then the more that we can catch ourselves in the process of making bad decisions, and we can think about, "Do I really wanna go ahead and make that bad decision? Hell yes, I do," or, "No, I've listened to Dan and Mel, I know the Bad Decisions podcast, and I'm smarter than my brain".

Dan: 18:29 Exactly. Look, really I think at the end of the day this is about zooming out.

When we're zoomed in, or we're in the category or in the purchase decision we're trying to make, we have these rules, but if we just zoom out a little bit and think about stuff in the broader context, often we'll realise that, you know what? Paying two bucks to withdraw $500 from an ATM is not the worst thing that can ever happen.

Mel: 18:48 Zooming out is probably a good idea in other parts of our life as well, right?

Dan: 18:52 Absolutely. We're not gonna get all spiritual on you people, but if we think about things like nutrition and diet, I read something really interesting that said if you're trying to lose weight or get into shape or whatever, what you ate for lunch today doesn't matter, what you ate this month matters.

I think it's the same thing. What you spent on coffee today doesn't matter, but what you spent on everything in the last month matters.

Mel: 19:11 A bit of context and bit of perspective goes a long way here.

Dan: 19:13 Exactly. Context, perspective, but not financial advice. We are not giving financial advice.

Mel: 19:19 But if you do want any advice from us in general, please feel free to hit us up on social media. You can find me @DrMelW.

Dan: 19:25 You can find me @danmonheit, and we are both all over the internet.

Mel: 19:30 We're all over it.

Dan: 19:32 Everywhere.

Mel: 19:32 We basically are the internet.

Dan: 19:33 Everywhere.

Mel: 19:34 We're not.

Dan: 19:35 What? I think it's time.

Mel: 19:37 You know what I think we did today? You know what I think you did today, Dan?

Dan: 19:37 What?

Mel: 19:40 I think you put the "fun" in fungibility.

Dan: 19:42 Ah, good one! Alright, that's a wrap. We're done.

#12 Peak-End Rule: Why we all love a lolly bag

We’d like to think it’s all about the journey, but our brain prefers to remember the outcome. In this episode, Mel and Dan discuss the peak-end rule, and how neglecting to pay attention to the end could be costing you dearly.


Mel: 00:19 Hi and welcome to Bad Decisions.

Dan: 00:21 The podcast that helps us understand why we chose what we chose.

Mel: 00:24 Why we think what we think.

Dan: 00:25 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, a creative agency built for today.

Mel: 00:42 So, ordinarily it'd be time for one of us to present some sort of personal story about a bad decision that we've made. And it would just coincidentally represent a heuristic.

Dan: 00:53 Yeah, we usually put a lot of work into that part of the episode.

Mel: 00:56 We do, but the heuristic that we're gonna talk about today basically tells us that it's a waste of time.

Dan: 01:01 Yeah we are gonna stop doing that, it's complete bullshit.

Mel: 01:03 We are gonna hack ourselves, it’s fun.

Dan: 01:04 Yeah, cause what you're gonna learn today, if you don't have the 17 or 18 minutes to listen to the whole show, and I must admit the best bits are at the end. What you're gonna learn is that having the best bits at the end is really important.

Mel: 01:16 In fact, it's pretty much all that matters.

Dan: 01:18 Yeah, this could be complete horse shit for the next 15 minutes as long as you guys stick with us and get to the goal of the end you are gonna remember this show as being unbelievable.

Mel: 01:27 Alternatively, if you only want a 3 or 4 minutes podcast just fast forward right through to the good stuff.

Dan: 01:31 Exactly.

Mel: 01:31 Or don't though.

Dan: 01:33 Also don't, I'm confused. Anyway, what are we doing today? What is today's heuristic Dr. Mel?

Mel: 01:38 So today we are gonna talk about the peak-end rule.

Dan: 01:41 Peak-end rule.

Mel: 01:42 Yeah, which is basically the idea that when it comes to us judging or evaluating an experience, we don't base that judgement on a calculated average of the enjoyment of every moment of the experience. Which I guess, you know, in a rational mathematical brain that's what we would do, take the emotional experience of every single moment and average it out. But that's not what we do, because there are some parts of the experience that has a disproportionate impact on our memory. For example, the peak of the experience, or the most emotionally intense experience, and the end of it.

Dan: 02:18 So the really good bits, the really bad bits, and what happens in the end.

Mel: 02:21 Pretty much everybody forgets what happens in the middle anyway.

Dan: 02:23 Well the middle's bullshit.

Mel: 02:24 So part of the reason that this peak-end rule is such a powerful heuristic has to do with the way our brain processes information. How we store memories, right? So most people are familiar with the idea of the recency effect.

Dan: 02:37 Yep, I've heard of that.

Mel: 02:38 So the recency effect basically explains that if I were to give you a random list of words to record. A bunch of words that mean absolutely nothing to you, you would be more likely to recall the words that I said at the end of the list, followed by the words at the beginning, and you know if you got a really good memory you might remember the ones in the middle. But pretty much the ones at the end are gonna stand out.

Dan: 03:01 Right, cause the middle is bullshit. I think that's what we are learning today.

Mel: 03:04 Yeah don't worry about the middle right? And a happy ending makes everything better.

Dan: 03:08 Well, now what happens? That's awkward. So speaking of happy endings, or not speaking of happy endings at all. I guess one of the places that this seems to come to the fore, is when you think about holidays. Where it doesn't really seem to matter whether we've been away for a week or two weeks, if somebody asks us for a little snapshot of what our holiday was at the end of the holiday, I am probably going to remember it based on something really good that happened, or something really bad that happened, and how everything kinda wrapped up. And that story probably wouldn't change if we were away for 4 days or 3 weeks.

Mel: 03:39 So you know I've got some research to support the idea of a peak-end rule.

Dan: 03:43 No you don't.

Mel: 03:43 Would you believe.

Dan: 03:43 I thought you were just making this shit up.

Mel: 03:45 Nah, I've actually got some research.

Dan: 03:46 Okay.

Mel: 03:46 So let me tell you about a little bit of research. Can we just get some research music please. So in a 1993 study from Kahneman and some of his colleagues, what they did was they exposed participants, the same participants with two different conditions, and both of them involved an unpleasant experience where they had to submerge a hand in cold water. So it was like 14 degrees Celsius, which is I think what it was, and they had to submerge it, the hand in that water bucket of ice water whatever it is for 60 seconds.

Dan: 04:22 Yeah

Mel: 04:22 Clearly not a fun thing to do.

Dan: 04:24 Not fun at all, but science is hard.

Mel: 04:26 Alright look, sometimes you gotta sacrifice for the sake of science. But in the first trial, the participants kept their hand in the water for 60 seconds and at the end the experiment, the trial was over. Okay? In the second trial the same participants kept their hand in the water for an additional 30 seconds after that 60 second period. But in that additional 30 seconds, the temperature rose by 1 degree celsius. Providing some much needed relief from that unpleasant experience.

Dan: 04:55 Right so the difference was in 15 and 14, is enough for it to feel good?

Mel: 04:59 It was enough to change the participant's overall memory of the experiment. So then what happened was, when they asked participants when they basically said to participants afterwords, "Alright, you're gonna do this again. Which trial would you like to do again? Would you like to do the 60 second one, or would you like to do the 90 second one?" A stupid amount of people said they would like to repeat the 90 second version of the experiment. So they are going to totally discount the length and the time that the experiment took and they're going to be more likely to want to do that 90 second study because they get that last 30 seconds where they get that little bit of relief. Which influences the overall memory of the enjoyment of the experience.

Dan: 05:39 So, like a little bit of a happier ending can overcome a far worse experience.

Mel: 05:44 One degree celsius is enough.

Dan: 05:45 Is all it takes.

Mel: 05:46 Yeah, and going back to what you were talking about with holidays, it doesn't matter how long the holiday is, in that sense, because we have what's called duration neglect. We literally will neglect the duration of an experience in favour of how emotionally intense that ending was.

Dan: 06:02 Right so, I guess once you know that people care way more about the highs and the lows of how something ends, it just makes you realise how many industries get this kind of right, and how many industries get this diabolically wrong.

Mel: 06:17 Give me an example.

Dan: 06:17 Yeah so I mean we are talking about a holiday's right? So you think about all the sorts of things that happen on a holiday, one of the obvious ones is around car rentals. And, you know, there's not a lot of great car rental stories out there in the world, I wouldn't think. But of all of the experience that happens with interaction with a car rental company, most of it comes down to what happens in that last 15 minutes, right? And so you've hired a car, you've probably forgotten what you've paid for it, you've just had it for a few days or a week or two, you've driven around, you've had a lovely holiday.

Mel: 06:46 Yeah, what do you have to do before you return it?

Dan: 06:48 And then you go like 15 minutes, because you are probably running late to the airport. You are then driving around trying to work out, should I drive around the industrial business park that surrounds this airport and try and find somewhere to fill up the petrol tank? Or do I roll the dice and return it 7/8ths full and get stung 4 bucks a litre or whatever they are going to charge me to fill it up? Once I drop it off, are they gonna find some chip or scratch or scrape that I absolutely didn't do, but like who knows? And even in neutral experience, when none of those things happen, you're basically just dumping the car in an empty lot and then running off the make your flight.

Mel: 07:24 Cause you're always late.

Dan: 07:24 Cause you're always late. So, at best, car rental experiences end neutral, though usually end pretty badly.

Mel: 07:30 Well, I mean from the stuff you're describing the end of the experience with a car rental company is associated with a whole lot of panic, worry...

Dan: 07:30 Anxiety.

Mel: 07:39 Anxiety around whether or not you are gonna be busted for something you didn't do. It sounds pretty awful. Talk about neutral.

Dan: 07:44 It's terrible, and the thing is, you get used to having to pay for an experience at the end, which kinda sucks as we've learned about this peak-end theory. Paying at the end sucks, but add onto that the anxiety of not knowing exactly how much you're going to have to pay, it's just enough to ruin the whole thing.

Mel: 08:00 Yeah, car rental companies, get your shit together.

Dan: 08:02 Get your shit together. Similarly, if you think about hotels, who invest so heavily in the check-in and the welcome process, and you get there and you get some drinks on arrival, and they guide you around, and they show you around the place, even if you don't really want them to. They really insist on doing that. And you contrast that with what happens at the end, where you basically get a slot to put your key into and then you're just off on your way. And how much more important the ending of that experience is, and how you recall the whole, the whole time you spend at the hotel.

Mel: 08:32 So I'm starting to the get the picture that there are sometimes there are little things that we can do, or things that we can not do, that's actually gonna make the ending of an experience, which is the most memorable part of it. We can actually improve the quality of that experience for the customer.

Dan: 08:46 Absolutely, so yeah for hotels maybe champagne on departure not champagne on arrival. Or maybe it's both. We couldn't do an episode without talking about restaurants, and it's a thing we all know and love and indulge in. And I just think about how many otherwise great restaurant experiences are ruined by the last 3 minutes. You know, when the person comes out to give you a bill, and they want to be difficult about the credit card payments, you know they don't want to split it between 4 people, they have some arbitrary number like "we can only split a bill between 3". And you're out there as 4 couples, and it’s like what the actual fuck guys, it doesn't cost you anything more. Or when you go to places, like your normal café, and they have minimum EFTPOS spends.

Mel: 09:27 I hate that.

Dan: 09:27 Hate it. You know what guys, come on, I'm here everyday.

Mel: 09:30 Yeah.

Dan: 09:31 It doesn't cost you anymore.

Mel: 09:32 No and they also say like the minimum must spend, is $10 dollars, and like where coffees don't add to 10 dollars.

Dan: 09:38 No, no.

Mel: 09:38 Multiples of coffees don't add up to 10 dollars, so you end up having to get 3 coffees just so you can make that maximum, or minimum.

Dan: 09:42 Yeah, I'm not buying a coffee and two muffins just so you don't have to give me the privilege of swiping my card with this machine that is just sitting there idly by while I try and give you money.

Mel: 09:51 Yeah, just process the payment, do you want my money or not?

Dan: 09:54 Process the payment, and instead we've gone from a good or at least a neutral experience to something that is kind of annoying and like begrudging which just seems like a huge missed opportunity.

Mel: 10:03 Yeah.

Dan: 10:04 So it's also interesting when you look at restaurant review sites, like Yelp, like what huge proportion of the reviews actually talk a lot about things that happen in those last few minutes of an interaction. So it is a lot of people bitching and moaning about split bills and EFTPOS fees, and that sort of stuff, but also some really wonderful stories about somebody leaving their keys or their wallet or something at the restaurant, and a matradee or a waiter or waitress running out after them to make sure they didn't leave without it and what an amazing uplifting thing that can do for the whole experience.

Mel: 10:32 Something as simple as giving a mint at the end of the meal, or putting a couple after-dinner mints with you know, with the bill.

Dan: 10:39 Yeah or putting a smiley face on the bill.

Mel: 10:41 It's just a nice little touch.

Dan: 10:41 Which often can attract tips.

Mel: 10:44 It changes the emotional tone at the end of the experience.

Dan: 10:46 Yeah now the guys who do this really well, there's a, you know, a hoity toity fancy restaurant in Melbourne called Vue de monde, and I'm not sure if these guys still do it, but I assume they do, I have young kids now, I'm not eating at Vue de monde these days. But if I did, I would imagine this would still happen. So what happens is you go to this incredible restaurant you have some sort of 7 or 15 course degustation meal, you get to the end of the meal, you’re feeling pretty great about it. The bill comes out, you’re feel slightly less great about it cause you just spent like two weeks wages on a great dining experience. But then, as you go to leave, they present you with this little breakfast bag which has got a couple of eggs, and I think some brioche buns in there...

Mel: 10:46 Delicious.

Dan: 11:25 ...And some little instructions about how to make some wonderful scrambled eggs or something in the morning. And you know, it probably costs them 4 bucks on a scheme of a $1000 dollar dinner.

Mel: 11:33 What's a couple of eggs?

Dan: 11:34 Yeah, a couple of eggs, seriously. But the last thing you remember is not the bill, the last thing you remember is, and they gave me this little bag with like this little card and the things I need to continue the experience all the way into the next morning, which is wonderful!

Mel: 11:49 You should be familiar with this experience, because like you said you have young kids. You're going to kids parties, you're getting lolly bags at the end!

Dan: 11:55 You know what, you are absolutely right.

Mel: 11:57 Vue de monde is giving you a lolly bag!

Dan: 12:01 Giving me a lolly bag. Thankfully, they don't have those bubble blowing things, those bubble sticks in there, drive me crazy. But you're right, I mean, kids know this, kids understand inherently the peak-end rule is a real thing.

Mel: 12:12 Yeah and they figure out, was that a good party? I don't remember but hey I got this awesome lolly bag.

Dan: 12:15 And it's got a bouncy ball in it!

Mel: 12:17 I love parties!

Dan: 12:20 Best party ever!

Mel: 12:20 So, getting back to the idea that we are actually willing to endure a whole lot of pain, so long as we get some relief, or some pleasant emotion at the end of it. Let's talk about endurance events.

Dan: 12:31 Absolutely, what do you want to talk about? This show? This show right now? So what we know is people seem to fall into one of two camps from entering either marathons or iron man. People will just do one and they are like a bucket list athlete, and they just need to get it done. But there are people that just go over and over and over again. And when these people think about the experience of completing a marathon or completing an iron man, we very, very quickly forget the pain and the suffering and the grit and the gruelling and sucking down your 35th GU gel, you know, as you're trying to get through the last 10K's of the run. And what we remember is the elation, the endorphins of crossing the finish line or hearing your name, "Dan Monheit, you are an iron man", which I have never heard but I will hear one day. And it's no coincidence that a lot of these events will ask you to sign up for the next event...

Mel: 13:25 Immediately after?

Dan: 13:26 Literally as you are crossing the finish line. "Here's your ribbon and here's a form to sign up for next time."

Mel: 13:31 I wouldn't know I've never run further than about 10K, but anyway. If we're talking endurance events, it would be completely remiss of us to not mention the ultimate endurance event, childbirth.

Dan: 13:41 Right.

Mel: 13:42 And if the peak-end rule didn't exist, nobody would ever have more than one child.

Dan: 13:45 I gotta say, I've never done it. Seen it, didn't look that much fun. And you know what, right at the other end of our life as well, the peak-end rule seems to kick in. Where when, you know, think about how people describe elderly relatives or people who have passed. We tend to talk about how they were at the end, how dignified they were and how inspiring they were, and how together they all look, all the way until the end. And you know, we just kind of gloss over the bullshit bit in the middle, the 75, 80 years that they actually did cool stuff. It's how they were in that hospital bed in the last couple days.

Mel: 14:14 That's what really defines a person.

Dan: 14:16 Yeah.

Mel: 14:17 So, because of the peak-end rule there are things that people have figured out to do that makes the end stand out more.

Dan: 14:24 Yeah, it's kind of like this self fulfilling thing, ay? So like we know that the ends are going to stand out more, so we try and do things that try to make the ends better. So, one of the ways that we do this, we were talking about marathons before, I mean what's crazy is that you are something like 2 or 3 times more likely to run a marathon...

Mel: 14:40 I love the way that you talk about research. Go on..

Dan: 14:42 What?

Mel: 14:43 Nothing, I'm sure it's completely legitimate.

Dan: 14:44 You are 2 or 3 times..

Mel: 14:45 Go on. Just don't play the research music yet, so we know it's not real.

Dan: 14:48 Well, its real! It's just I haven't googled it, but it's basically true. Look I saw somebody else present the research okay?

Mel: 14:53 Case and point.

Dan: 14:53 Daniel Pink, he is very smart. Alright? Thank you Mr. Pink. So he talked about how you are 2 or 3 times more likely to run a marathon at the age of 29 compared to the age of 28 or 30. And it's a very similar thing at the age of 39 versus 38 or 40.

Mel: 15:09 So the idea is that you're coming towards the end of a decade, a period of your life.

Dan: 15:13 Yeah and physiologically you really not in a significantly better or worse shape, 28, 29, 30, 38, 39, 40. But mentally, we are coming to the end of a thing, and I want a good ending and I'm going to remember my 30 as the year that I did my first marathon and so that's what we seem to do.

Mel: 15:29 Right so, we put a highlight at the end of that period.

Dan: 15:32 Exactly.

Mel: 15:33 So we can, there's another example with regard to chocolates, yeah?

Dan: 15:37 So yes, actually in the same presentation there was a conversation around Hershey's kisses, which I'm just gonna say, they kind of suck as a chocolate let’s be honest.

Mel: 15:47 I mean I have no affinity towards it, no.

Dan: 15:47 They are like cut small, and not that delicious.

Mel: 15:49 I think, isn't it that the point? They're like bite size?

Dan: 15:51 I don't know. Anyway, whatever. They did this experiment where they gave two groups of people 5 Hershey's kisses. So to the first group, they said "here's a chocolate, here's a chocolate, here's a chocolate, here's a chocolate, here's a chocolate." And after eating each chocolate people rated the overall pleasure of eating that chocolate. The second group, they said "here's one, and here's another one, and here's another one, and here's another one, and now this is the last one I'm gonna give you, here you go."

Mel: 16:18 Oh, that last special chocolate.

Dan: 16:19 And what do you know, just knowing that it was the last one, people rated that shit through the roof. It was like twice as enjoyable for these people as every other chocolate that they've consumed. Just because I knew it was going to be the last one, I guess they knew that the last one was going to stand out so I'm gonna hack myself into making this delicious.

Mel: 16:38 So there's a big message here for brands right?

Dan: 16:40 Absolutely.

Mel: 16:40 In terms of focusing on the end of the experience.

Dan: 16:40 Exactly.

Mel: 16:43 I mean as we come towards the end of this episode, I think it's really important that we remember that we need to make this good.

Dan: 16:49 Yeah so, let’s give some real punchy takeaways here.

Mel: 16:51 Yeah let's do it.

Dan: 16:52 I mean I think for brands we often think a lot about the start of an experience, we think about how we're gonna attract clients, we think about how we are gonna onboard clients and get them into our system and get them moving as quickly as possible. But we don't think very much about how things are gonna end.

Mel: 17:08 And its important that we do. It's super important that we do think about when the relationship with the customer ends, because actually what we want is for that relationship to continue. And sometimes there is no end point.

Dan: 17:20 Exactly, so you know in some business-customer transactions there is a definity of endpoints, so you drive out of the dealership with the car, or you walk out of the store with your bag with your new jeans and your whatever it is. And so we need to think about how do you make that as interesting and as memorable and as emotionally charged as possible. But similarly, in like professional services, often there is no natural end point. And I think it would be really worth exploring ways to add sort of like artificial end points, whether it's a post-campaign celebration or you divide a year up into quarters, like we used to do in school, like school we knew its...

Mel: 17:53 Kids had this figured out, lolly bags in school terms.

Dan: 17:55 It's true, like you know your springing to the end of a term and you get to the end and its awesome and it's fun, you have a little class party.

Mel: 18:01 End of term party.

Dan: 18:01 Yeah and you're on to the next one.

Mel: 18:02 And then you get lolly bags!

Dan: 18:03 Lolly bags, I think the answer to everything is lolly bags.

Mel: 18:06 Lolly bags.

Dan: 18:06 Yeah, so I mean we spoken quite a bit about end. I mean I think peak is kind of, maybe just worth touching on quickly. Where we do have industries where a long term relationship with the client is defined by some peak experiences.

And so if we think about say an insurance company, alright? Well you might have a relationship with an insurance company for 5 years. And when somebody asks you, "Ah how is insurance company XYZ to deal with?" You're gonna search around in your head and you’re not gonna give an average answer, an answer that is the average of the total 5 year experience. You are going to think about that one moment when you needed to call them, because you had a car crash or you needed a hip replacement or whatever it was given the type of insurance.

And so, while it is important to have, again, great onboarding experiences for consumers it may be good end experiences for consumers, knowing that that peak moment, that moment of crisis that is gonna turn into a moment of joy or a moment of despair, is really the only thing to worry about, everything else is kind of bullshit. We really have to figure out how we can make that a 5 star, 7 star, best in class experience, knowing that's what's going to pay the dividends.

Mel: 19:15 It's so important, I think there are so many things that can be taken away from this idea, because it is one of those things that I think we've seen the research shows that its a thing, and I just don't think people pay enough attention to it.

Dan: 19:24 Yep, so I think we have paid a lot of attention to the end of this episode.

Mel: 19:28 Yeah.

Dan: 19:28 Feels like it was good, it was value.

Mel: 19:30 I think this was a fantastic end to the episode.

Dan: 19:32 Yeah, I mean the stuff in the middle is kind of rubbish but this...

Mel: 19:35 This is it right? Yeah.

Dan: 19:37 You know what would be even better?

Mel: 19:38 If we had lolly bags?

Dan: 19:39 Yes, and also if you told people what your social media handles were and then how they can get in touch with us. People love that shit.

Mel: 19:45 Oh my god, I know they do. Alright. Please, please find us on social media; LinkedIn, Twitter, Instagram, any other things. What do you usually say? Google?

Dan: 19:54 Yeah, whatever.

Mel: 19:55 You know what? Google Scholar, you can find some research articles on there.

Dan: 19:58 Oh from you?

Mel: 19:59 Some, well the ones that I've published.

Dan: 20:01 Really?

Mel: 20:01 Yeah!

Dan: 20:02 Nothing from me.

Mel: 20:03 Anyway you can find me @DrMelW.

Dan: 20:05 And yeah I'm @DanMonheit. Across a bunch of the internet, we are not going to talk about the doctor thing. Right?

Mel: 20:11 No.

Dan: 20:11 Good. Cool alright well hey thanks for listening to Bad Decisions. Hey probably worth noting, we are on Spotify now as well.

Mel: 20:17 Yeah, good call.

Dan: 20:18 Yeah, so that's like platform agnostics, so that's good tell your friends.

Mel: 20:21 I think that's it!

Dan: 20:22 Alright, we out.

Mel: 20:23 Let's go to Vue de monde.

Dan: 20:24 Let's.

#11 Sunk Cost: Why we behave so badly at the buffet

Everybody makes bad decisions, but how do we make amends? Turns out our instincts often guide us to follow bad decisions with worse decisions. In this episode, Mel and Dan explore the sunk cost fallacy, and how knowing when to cut your losses can be the smartest decision of all.


Mel: 00:18 Hi and welcome to Bad Decisions.

Dan: 00:20 The podcast that helps us understand why we choose what we choose.

Mel: 00:23 Why we think what we think.

Dan: 00:25 And how to exploit this stuff for fun and commercial gain.

Mel: 00:27 I'm Dr.Mel Weinberg. I'm a performance Psychologist.

Dan: 00:30 And I'm Dan Monheit. Co-founder of Hardhat, a creative agency built for today. Do it.

Dan: 00:41 So Mel, I was thinking right.

Mel: 00:43 Yeah.

Dan: 00:44 The way Ikea is set up is completely wrong.

Mel: 00:50 Okay. They seem to be pretty successful.

Dan: 00:50 Yeah, I know. But it's because they're not doing what I think they should do. They should literally just take my wallet when I get there.

Mel: 00:56 Okay.

Dan: 00:57 Because I think as anybody who has been to Ikea would know, that it is a forgone conclusion that once you are there, there is no way you are leaving without buying something.

Mel: 01:07 It's hard not to fall for that, isn't it.

Dan: 01:09 Yeah. Because, you know, they're usually like, not in the middle of the city. There's usually some sort of a drive to get out there and then you sort of circle the parking lot for a while and you park your car. That's not even really the start of it. 'Cause then you get in and instead of just giving you, like, a few simple aisles to walk down, they try and take you on this magical, fantastical journey, which requires a minimum, let’s be honest. A minimum of 45 minutes.

Mel: 01:33 Yeah. I mean, I've tried to do it faster and you end up just getting distracted by things you don't need.

Dan: 01:37 Yep.

Mel: 01:37 Kitchen appliances...

Dan: 01:38 Yeah. So you're gonna be in there 45, let's call it an hour, right. Plus the half hour to drive there, plus the half hour to park. You are in the haul for a minimum of 2 hours.

Mel: 01:46 Yeah.

Dan: 01:47 And there is just no way you are going to find yourself, at the end of that two hours, at the checkout saying “no nothing, nothing really for me this time. I'm just gonna leave.”

Mel: 01:58 What do you do instead?

Dan: 01:59 You buy something right.

Mel: 01:59 Just buy anything.

Dan: 02:01 You just like, I need some sort of a memento of my time, that Ikea and I spent together. I'm gonna go buy some more forks for the office. No office ever has enough forks. Maybe I'll just buy some cute kitchen gadgetry, that is probably never gonna get used, but at least I bought something right.

Mel: 02:19 It's like you made the bad decision to actually go to Ikea without first of all, checking online if they actually had what you were after.

Dan: 02:25 Yeah.

Mel: 02:25 Right.

Dan: 02:26 Don't rub it in.

Mel: 02:26 There's one bad decision. Then in order to try to mitigate that initial bad decision, you make another bad decision, which is to buy something that you really don't need.

Dan: 02:35 Yeah, 'cause I wasn't gonna let Ikea win. I was not gonna let them take two hours of my life and for me to just leave empty handed. I showed them. I bought something.

Mel: 02:35 You won.

Dan: 02:43 I won.

Mel: 02:43 Okay.

Dan: 02:44 I won. My extra forks are the trophy.

Mel: 02:50 What you're talking about Dan is another irrational decision that we make. Funny that.

Dan: 02:54 Yeah.

Mel: 02:55 How surprising that it would come in this, while we're sitting here recording. We're gonna talk about the sunk cost fallacy.

Dan: 03:03 Sunk cost.

Mel: 03:04 Yeah.

Dan: 03:04 Sign me up.

Mel: 03:05 We can talk about the psychology of sunk cost, which actually happened to be the title of a research paper.

Speaker 3: 03:17 Movie quote: “What do you want?”

Dan: 03:18 A research paper.

Mel: 03:19 Yeah.

Dan: 03:20 How surprising.

Mel: 03:21 By Arkes & Bloomer back in 1985. They're building off the work that Kahneman and Tversky did. What they were looking at was instances where people had already made an investment of either time, effort or money.

Dan: 03:34 Mm-hmm (affirmative).

Mel: 03:35 Like you did at Ikea. What their behaviour was like after that, once you've already made the investment. The idea is that we have this tendency to make further bad decisions once we've made an investment in something.

Dan: 03:48 Right. It's just like what we would casually refer to as throwing good money after bad.

Mel: 03:52 Yeah, exactly. The idea is, they did a bunch of experiments, and one of them was, and it's from the 1980's, so we're just gonna excuse the numbers and the places here because this was a 1985 US study.

Dan: 04:04 So you and three friends bought a hyper-coloured t-shirt and happy pants.

Mel: 04:10 Well actually, in this experiment, the idea is, the example is, okay. Imagine you've just spent a hundred dollars on a ticket for a weekend ski trip.

Dan: 04:10 Bargain.

Mel: 04:19 Decide to go to Michigan. Yeah a hundred bucks, weekend ski trip. I'd do it!

Dan: 04:22 For sure.

Mel: 04:23 A couple weeks later, you're thinking about planning another ski trip and you buy a fifty dollar ticket for a weekend ski trip to Wisconsin.

Dan: 04:29 Wisconsin.

Mel: 04:30 Yeah.

Dan: 04:30 Okay.

Mel: 04:31 And you really want to go to Wisconsin. Like, this fifty dollar ski trip to Wisconsin is gonna be the best ski trip you've ever had.

Dan: 04:36 Who doesn't love Wisconsin?

Mel: 04:37 Wisconsin's great.

Dan: 04:38 People haven't been there.

Mel: 04:39 Anyway. You then realise that you've actually double booked. You've actually booked the two weekends away for the same date and you can't change the date.

Dan: 04:49 Totally something I would do.

Mel: 04:52 Well, you've got a choice basically. You can't sell the tickets, okay, they're non-refundable.

Dan: 04:56 Yep.

Mel: 04:56 You can't exchange. You've gotta go on one trip or the other.

Dan: 04:58 Yep. So I paid fifty bucks for Wisconsin.

Mel: 05:00 Which you're gonna love.

Dan: 05:01 Yeah, and I paid a hundred bucks for?

Mel: 05:03 Michigan.

Dan: 05:03 Yep.

Mel: 05:04 You're faced with this decision. You've got two ski trips.

Dan: 05:07 Mm-hmm (affirmative).

Mel: 05:07 One of them, you really want to go on.

Dan: 05:09 Yep.

Mel: 05:10 The other, like, well you sort of want to go on.

Dan: 05:10 Yep.

Mel: 05:13 It costs a bit more.

Dan: 05:14 Yeah.

Mel: 05:14 Anyway, the cost is spent.

Dan: 05:14 Yeah.

Mel: 05:16 There's nothing you can do about it. You can't reclaim those costs. Either way, you're gonna miss out on something.

Dan: 05:20 Yep.

Mel: 05:20 The rational decision maker would think, well I really want to go to Wisconsin.

Dan: 05:23 Yeah. Sign me up.

Mel: 05:24 That's the one I'm gonna enjoy more. Off we go, pack the skis. Let’s go. Actually what happened, when the researchers asked people in this example, which ski trip will you go on, over 50 percent, said that they would choose to go on the 100 dollar ski trip to Michigan.

Dan: 05:24 Right.

Mel: 05:39 The one that they were gonna enjoy less.

Dan: 05:42 Right.

Mel: 05:42 Or not as much.

Dan: 05:43 Why?

Mel: 05:43 Instead of the 50 dollar ski trip to Wisconsin.

Dan: 05:46 Why?

Mel: 05:47 The idea is that we've already, we feel like we've already spent the money. We've already spent a 100 dollars on going to Michigan, so even if we're not gonna enjoy it as much, we should go because it would be wasteful not to.

Dan: 05:57 Right. Just like I showed Ikea who was boss.

Mel: 05:57 Exactly.

Dan: 06:00 They're gonna show Michigan “you took my 100 dollars, well I'm gonna turn up and enjoy you less than if I'd just gone to Wisconsin.”

Mel: 06:05 Sounding like a true winner there. Somebody's really happy with their victory.

Dan: 06:08 Yes. I guess we see this happen in lots and lots of places. That was a nice, cute 80's example. I mean this happened to me like, not even 12 months ago, where wifey, bless her, went and decided it would be a great thing for us to go and learn some wine appreciation. I'm pretty much a heathen when it comes to this stuff. We should go and do a wine appreciation course. Right. Now this thing was six nights.

Mel: 06:31 Why did you need to do a course? I mean, I appreciate wine.

Dan: 06:32 Yeah, talk to her about it. This was a six week course, one night a week.

Mel: 06:38 Okay.

Dan: 06:38 Yeah, it was like a Wednesday night.

Mel: 06:40 Mm-hmm (affirmative).

Dan: 06:42 I really didn't want to do this, but you know, sometimes you know marriage is about compromise. I decided I would go to this thing. I went to the first week and we have the parental advisory thing, yeah. It fucking sucked. This was terrible. Like 15 minutes into this two hour thing, I just wanted to get the hell out of there, after killing everybody in the room.

Mel: 06:59 Okay.

Dan: 07:00 I was like, you know what, it was just the first week, maybe it's gonna get better. So I went back the second week, and guess what happened the second week?

Mel: 07:05 You'd already paid for it, so you might as well go back the second week.

Dan: 07:07 Well this is what happened right. I went back the second week, I thought maybe I'm gonna get into it, I was just a bit rough. Second week sucked worse than the first week.

Mel: 07:07 Oh God.

Dan: 07:13 Right. I'm like, why on earth would I sign myself up to spend four more weeknights like this?

Mel: 07:20 But you went didn't you?

Dan: 07:20 But of course I ended up doing it because number one, I was already invested, I'd been to the first two weeks. And number two, like I guess I was kinda invested in the marriage. So, I needed to really see that through.

Mel: 07:31 Kind of.

Dan: 07:31 Yeah, it's probably not the best, you know, eight hours that I've ever spent in my life. But I for some strange reason, I felt completely obliged to do it.

Mel: 07:39 We do this in other situations where we feel like, we've already committed time, so we don't really want to be wasteful of that. An example might be from, if you're waiting on public transport, right. You're standing there, you're waiting for the bus.

Dan: 07:39 Mm-hmm (affirmative).

Mel: 07:52 The bus is supposed to come, but it's public transport, so it never comes when it's supposed to. You've been standing there for a good 15, 20 minutes waiting for this bus, have no idea really when it's coming. But you could call a cab or an Uber and you could get one in three minutes.

Dan: 08:09 Yeah.

Mel: 08:09 But most people will be like, oh but I've already spent 15, 20 minutes waiting for the bus, I'm gonna wait for this damn bus.

Dan: 08:15 Yeah. I think what we see, the theme with all this stuff is, there's no rewind button on life. Right. But we don't seem to be able to realise that when we're making decisions. We somehow let the sunk cost, the bits that we've already invested, shape what we do next.

Mel: 08:31 We've talked about a few heuristics over the previous episodes that come into play with this right. One of them is the idea of loss aversion.

Dan: 08:38 Yep.

Mel: 08:38 Right. Which as come up a few times, because it's a big heuristic. We're so against the idea of feeling like we've lost something, if it's time, if it's money, if it's effort, that we're highly motivated not to feel like we've lost something. Right. We're gonna wait for that bus because I don't want all that time to be lost, for nothing. I want that time to be for something.

Dan: 09:00 It's interesting that we feel such a strong fear of loss for things that have happened in our past. Like we’ve already invested that money, that it overrides the idea of losing things in the future, which we could still change.

Mel: 09:12 Right. We have a decision there to make. The cost is gone either way. We could choose to actually make the cost worse, by investing more like you said. Sort of putting good money after bad money. We can make that choice, which is a rational choice, we know what we should do, but so many of us, in all sorts of different situations are just gonna continue it. We see this happening with regards to time spent and then sort of wanting to pay money or pay more, or invest more time to make up for that bad time or bad money lost.

This also extends to more emotional decisions. For example, there are a lot of people that will stay in bad relationships or in bad jobs, just because they've invested a lot of time in it. They're like “this guys is an absolute asshole, but I've been with him for five years. This is five years of my life I'm not willing to give it up. I don't want that to be for nothing.” So you continue to stay in an unhealthy relationship because, well you've already been in it for so long, you may as well just continue.

Dan: 10:06 I'm feeling like we're starting to move into Dr.Phil territory here.

Mel: 10:10 Dr. Mel!

Dan: 10:12 You got to move on.

Mel: 10:14 People do the same thing with jobs. And even with careers. Like, people might be in a career that they don't like, but they feel like, oh my God. I spent four years at Uni getting this degree...

Dan: 10:22 Yeah.

Mel: 10:22 Now I have to do this job for the rest of my life.

Dan: 10:25 Yeah, and so absolutely, employees think about it when they're staying in a job. But also, I think from an employer perspective, you might have a staff member who it's just become really apparent to you that they're probably not right and they're probably not gonna be a person for the future of the team or the organisation. But oh God, like, they've been here for so long and we've spent all of this time together and they've seen things come and go. It just feels like it would be way too painful to send them on their way. So we end up ploughing another bad six months, year, two years, three years into this person, who really we didn't need to.

Mel: 11:00 You know, and we've talked about this in relation to time, in relation to emotions. I'm thinking as well of some examples in relation to food and sort of the retail industry. The idea of food, first of all, is like, you'll go to a restaurant and you'll look at the menu and with your hungry eyes, you'll order a whole bunch of stuff. So you've effectively paid for it.

Dan: 11:00 Yep.

Mel: 11:17 Right. Then you start eating, You feel like you've eaten enough. You feel pretty sick right now, but you're like “damn it, I paid for these 15 dumplings, I'm going to eat every last one of them!”

Dan: 11:30 Yeah, and you know this is also... I don't know if there's a migrant parent heuristic, but like, “you finish what's on your plate or you are not leaving the table!” Probably, that's got something to do with it as well.

Mel: 11:38 For sure.

Dan: 11:39 But you definitely see that come to the party, at things like buffets as well. Where you've got a bad buffet behaviour, where if you're at a buffet and you're trying to decide whether to go up for another round on the dessert bar. What you rationally should be thinking about is, well am I gonna feel better or worse after consuming the fourth round of dessert for this sitting? Actually what most people end up thinking about is the fact that they've already paid for the buffet. That is a sunk cost, so their only objective now is to get the absolute maximum they can out of the money they've spent.

Mel: 12:08 Optimising buffet performance.

Dan: 12:09 Yeah. Which I guess the, Pizza Hut works creators, probably should have spoke to us about. 'Cause there's really no way that was ever gonna work. $4.95, all you can eat, pizza, pasta, salad and dessert. You're just baiting people to put you out of business.

Mel: 12:25 If we know that people are vulnerable to making bad decisions like this and to wanting to continue to invest in something that they've already invested into. What do we do with it?

Dan: 12:34 Awesome. I thought you'd never ask. As businesses, this is like a really interesting one for us to explore. If we know that people feel committed to things that they've already started to invest in. One of the things we can do as businesses or as brands, is to try and get people to sink a little cost early on.

Mel: 12:52 Mm-hmm (affirmative).

Dan: 12:52 Right. This is where things like offering free trials or helping people import all of their contacts from an old system into a new system to get them going, can really start to pay dividends.

In a retail environment, a well trained retail person knows that when you approach a customer, the first question you should ask them, should not end with no. So Mel, if you're in the store and I walk up to you and I'm like “hey can I help you with something?”

Mel: 13:17 No.

Dan: 13:17 Yeah, right. So, that's terrible.

Mel: 13:17 Go away.

Dan: 13:19 You've just shut me off and now there's no investment. Right. But if I can go over and start engaging you, even just a smidgen, teeny bit, right.

Mel: 13:19 Mm-hmm (affirmative).

Dan: 13:27 And get some yes's early.

Mel: 13:28 What would you ask me?

Dan: 13:29 I'd say “hey Mel, are you finding everything you're looking for?”

Mel: 13:33 “Yes, thanks.”

Dan: 13:33 “Did you notice we've got some of the new season stuff up the front?”

Mel: 13:36 “Oh, new season.”

Dan: 13:37 “There's sale stuff up the back.”

Mel: 13:37 “Sales.”

Dan: 13:39 “Maybe I'll leave you to have a browse, then I'll come back and check in a few minutes.”

Mel: 13:42 “Sure, thanks.”

Dan: 13:42 Great. You've just started committing to me. Right. Just a little, teeny bit. Like we're not getting married anytime soon. But you have the start of a commitment and over the course of a conversation or a sales interaction, I can start building and building and before you know it, you're me, and I'm Ikea and you've just spent 45 minutes with me and there's no way you're gonna leave with nothing. In sales, this is what we call incremental buying, getting little yes's along the way and all of a sudden, the person you're selling to feels like they're in too deep and they'd be betraying themselves to back out.

Mel: 14:11 I feel like this reminds me of those annoying guys at shopping centres who try to sort of call you over to sell you some...

Dan: 14:16 Oh chuggers.

Mel: 14:17 Yeah, chuggers.

Dan: 14:18 Chuggers, they're like charity muggers.

Mel: 14:21 I like it. I like it.

Dan: 14:21 They basically mug you in plain sight. They mug you by trying to get you to donate to a charity for the rest of your life.

Mel: 14:25 Yeah, so they're just trying to entice you in a little bit, right.

Dan: 14:28 Yeah, so these guys don't stop you and say like “hey do you want to give 15 dollars a week for the rest of your life to some charity?” 'Cause obviously you're gonna say no. What they'll do is they'll try and get you to do anything. They'll just try and get you to stop. They'll ask you how your day is going. They'll do magic tricks. They'll ask you for the time. They'll do anything just to get you starting to sink a little bit of cost with them. Before you know it, you've signed yourself up to go on a Greenpeace boat and campaign against whaling in Japan or whatever it is they want you to do.

Mel: 14:54 Bloody chuggers.

Dan: 14:55 It happens. Chuggers, they ruin lives.

Mel: 14:59 I think the thing to remember, have we got anything else in terms of what we do, from sort of the brand perspective or from the sellers perspective?

Dan: 15:05 Well I mean, one of the things you might have realised as a retail consumer is this concept of you know, completing a look.

Mel: 15:11 Yeah, like if I've bought something, well I can't just have this pants without the top to go with it. Is that what you're talking about?

Dan: 15:16 Exactly. Once the retail person realises they've got you to commit to the pants.

Mel: 15:19 Yes.

Dan: 15:19 That's now sunk. They might as well try and leverage that into another sale with a, hey complete the look and get the top or the whatever else to go with it.

Mel: 15:26 Right. 'Cause I've already made the commitment to the entire look and if I just buy part of it, it's gonna feel incomplete.

Dan: 15:30 Exactly. You're gonna feel like you've wasted just buying the pants. You might as well buy the top as well.

Mel: 15:35 Very clever.

Dan: 15:35 Which extends us into the whole world of collectables and sets and there's a different one available each week. People make wildly irrational decisions to complete a set.

Mel: 15:44 Just to complete, just to feel that sense of closure right.

Dan: 15:45 Yeah, it's like, oh my God, if you had eight out of the nine possible happy meal toys that were available in that collection. How could you live with yourself?

Mel: 15:53 Yeah, you couldn't.

Dan: 15:53 No, you should drive across town and find the one that you don't have. Just so you can sleep at night.

Mel: 15:57 Make sure you complete the set.

Dan: 15:59 Yeah.

Mel: 16:00 From the consumer side of things, I think it's important to remember that you always have a choice. Right.

Dan: 16:05 Yeah.

Mel: 16:06 You do have a choice.

Dan: 16:06 You do.

Mel: 16:07 Your choice can either be rational or it can be emotional, right.

Dan: 16:07 Yeah.

Mel: 16:11 If you want to be a smart consumer, like we all sort of always say, don't, once we know that we have these tendencies to make irrational decisions, we can outsmart ourselves.

Dan: 16:20 Yeah. What you're saying is that you gotta be able to just flush your past. Just like reformat.

Mel: 16:25 We've gotta be able to accept that whatever it is we've invested, whether it's time, effort, money. It's gone and it's not coming back.

Dan: 16:32 Yeah.

Mel: 16:32 We can continue to chase after it and try and make it better, but we end up sort of like a bad gambling addict, where you just try to chase losses all the time.

Dan: 16:40 Yeah.

Mel: 16:41 Continuing to spiral into some serious, bad decision after bad decision after bad decision. As a consumer, you have a choice and you have a choice to be smarter than your brain.

Dan: 16:52 Yeah. I mean, one of the ways I've sort of found that I can hack myself into thinking about this stuff correctly...

Mel: 16:58 I like these self hacks.

Dan: 16:59 Yeah, yeah. Other than just having really no emotional connection to the things that have happened historically.

Mel: 17:02 You can do that too.

Dan: 17:02 I can maybe see you in your other professional capacity to talk about that.

Mel: 17:05 Okay, Mr.Robot.

Dan: 17:08 I think something that everybody would relate to is, starting a book and getting, I don't know, a quarter of the way in...

Mel: 17:15 There's so many unfinished books.

Dan: 17:16 And realising this book just sucks. I had this real problem, as far as problems, I mean this is not like a heroin problem. It's not such a bad problem but, I had this real problem that I would just persevere through books that I hated and it would be the same for movies, it would be the same for Netflix series. Because I started it and the idea of a book that I hadn't finished sitting on my shelf, I felt like a fraud or an imposter. You know.

Mel: 17:40 It was incomplete.

Dan: 17:40 It was incomplete.

Mel: 17:40 Yeah.

Dan: 17:41 I found a couple ways to get around this. Number one, Kindle changed my life because their unread books don't taunt me anymore, because I can't see them.

Mel: 17:48 It's such a difference.

Dan: 17:49 That's one. The other thing is I realised that, I'm a pretty slow reader right. I've got young kids, I've got a pretty busy life. Optimistically, to be honest, very optimistically, I could maybe read one book a month.

Mel: 18:02 Okay.

Dan: 18:02 Right. I can read, let’s just make this easy, I can read ten books a year.

Mel: 18:06 Okay.

Dan: 18:07 And I've probably got realistically, I don't know, 50 years left.

Mel: 18:11 I'll give ya 50 years.

Dan: 18:11 50 years left.

Mel: 18:13 50 years with good vision, enough to read.

Dan: 18:15 Yeah. I'm gonna be able to read 500, you know what, lets round me up. Let's say I'm gonna have a bit more free time when I'm older. Maybe I'm gonna be able to read 700 books.

Mel: 18:23 So optimistic. 700 books.

Dan: 18:24 700 books is the total number of books I will be able to read for the rest of my life.

Mel: 18:29 You better choose carefully.

Dan: 18:31 There are like a billion books out there.

Mel: 18:31 Yeah.

Dan: 18:33 Right? So if I'm 20 pages into a book that sucks, and I'm pretty sure this is not gonna be in the top 700 books I'm ever gonna read in my life, turf it, move on. I guess my mental hack is I've realised that FOMO, and like reminding myself that there's other things out there, other ways I could spend the next ten minutes or the next hour or the next year of my life, seems to overcome or outweigh the desire to want to make good on a bad investment.

Mel: 19:01 Okay. For more of Dan's self hacks against cognitive biases or if you have any hacks that you use to overcome these biases. We'd love to hear about them. Please find us on social media. My Twitter handle is @DrMelW.

Dan: 19:16 Just Twitter for you this week?

Mel: 19:18 I mean, whatever social media, find me. Just Google Melissa Weinberg.

Dan: 19:21 Yeah. Dr. Melissa Weinberg.

Mel: 19:21 Of course.

Dan: 19:23 Yeah and I'm @DanMonheit, no Doctor. Still waiting on that honorary Doctor to come through. If you or anybody you know is able to give them out, you know where to find me.

Mel: 19:32 Professor Dan.

Dan: 19:33 That's right.

Alright. Is that it?

Mel: 19:33 I think that's all.

Dan: 19:37 You know, I feel like we've come this far, maybe we should just do a little bit more.

Mel: 19:39 You know I feel like that people have already been listening to us for the last sort of, 15 minutes, they're just gonna keep listening to the rest anyway.

Dan: 19:45 You know, actually, honestly really and truly, one thing we didn't talk about at all in this episode, which maybe if you got thoughts, let us know, is how people stay in really bad financial investments, holding onto stocks and things for way too long. Anyway, that's a whole separate show. We'll do something about money later. Yes?

Mel: 19:58 Sure.

Dan: 19:59 Cool. Alright.

Mel: 20:00 Sounds good.

Dan: 20:00 Don't forget to tune in next time for more bad decisions.

Mel: 20:03 Plenty more bad decisions.

Dan: 20:05 Peace out everybody.