The basically three ways, I think that behavior economic can help companies one is we call it the little tweaks default signup flow and so on the second one is more complex, which is about adding motivation. And then there's the third component which I think is the most interesting and that's about what is the role of Behavioral economics in the core
product?
Don't guy. We have dinner really with us and then you're this power has thinker in Psychology and behavioral economics your professor Duke and the founder of the center for advanced inside you written a few best-selling books. And on top of that you work for the world's best companies from Google to Lemonade to motivate their customers promote emotions and behaviors that they need in order to grow and what we want to do today is basically take all that wealth of knowledge and understand how startup Founders can actually use that in building their companies and building.
Their products and this is you know, we've had many discussions on that in the past and it's all been incredibly useful for me and I we want to bring this also to our listeners so would be great I think for me and for people that are not sure to get the definition for it out of the way what is actually behavioral economics and what's the economics part of this definition?
Yeah. So, you know, first of all economics, sometimes people think of it that it's only about decisions about money, but it's actually not true economics is a perspective on human behavior right economist get involved with how
Set that taxation and ucation systems and all kinds of things but economics also assume some very strong things. Basically The Economist assume rationality. They assume that people have all the computational power possible that our long-term thinkers that we are long-term thinkers that there are no emotions and it turns out that you know, it's okay sometimes to make these assumptions but mostly it gives us misleading results. The thing about economics is it's both a descriptive theory in a prescriptive Theory it's supposed to
Describe the world and describe some of it it's a prescriptive theory that tells you how you want to build a world. Right? So if you have a start up a new take the rational economic perspective, you would for example set up prices is a function of cost-benefit analysis and behavior economics comes in and says, you know not so quickly humans are much more complex. Let's not assume perfect rationality. Let's instead put people in different situation. Let's be empirical about it. And let's see how people behave and it turns out that when you look at how people behave it's very very different than what
Rational theory predicts if we just look at pricing for example, and I'll give you a story. I was in Australia and I met a really wonderful Bank there. I will not tell you the name and they said that they are going to change the ATM fees, right? They say people come and get cash and it was costing $2.50 Australian and they're going to make it free and they said oh people would love us because we're making it free and I said to them that I think people would hate them if they do it for food because I said,
You think to yourself that people would be grateful. I think that people would say you bastard. Why did you charge me all these years? And I said look a lot of things about pricing is not about the value. It's about fairness. And if you just reduce the price to free you're basically telling people we could have charged you nothing. We just didn't and that would create a tremendous anger because the furnace not because the service is not worth 250. It's because of fairness and I said what you should do instead.
Is you should tell people look it really cost us 250 to provide you with this service, but if you don't have the money to pay for it pay us less it's up to you. So basically use the name your own price approach this way. You don't have to go to zero right mustard can happen is that people pay you nothing but you're not communicating to people that this cost you nothing. Anyway, didn't do what I proposed. It was probably too late by the time they're already ready with the campaign and so on it backfired exactly as I predicted and in following
Follow-up tests turned out that my Approach would have been much better. Right? So we tested it. It would have been much better. It would have changed completely the sense of fairness as some people would have paid by the way not the majority would not pay 250, but lots of people would pay something for it. And this is an example that you take the rational perspective and you just lead you to the wrong conclusions. If you understand the complexity of human beings, even for small decision. It matters a great deal
and the interesting thing is that if you just took the dry
Theory then their customers should have been ecstatic right? That's right. They should have loved it.
That's right. They should have said oh we're going to join these Banco think about another example, I'm just giving pricing examples, of course, it's not just about pricing but you remember what happened to Netflix when it is an old story, but you remember what happened to Netflix when they split their services so Netflix started as a company that used to send DVDs to people at home and then they had the streaming service on the side, but as the internet became faster and faster the streaming service became more popular.
And at some point they said okay, let's split it. I don't know exactly the numbers but let's say it was $14 a month instead of $14 a month for both streaming and DVDs will make it eight dollars a month for DVDs and eight dollars a month for streaming and Wall Street analysts were ecstatic about this. They said oh, you know revenues will go up knew people would sign up a lot of good things will happen and they announced it and I think that close to a million people left them that day. Now what happened was that it wasn't that the deal was not better. It was better because
Most people did not need both the DVDs and the streaming they could use only one of them survived most people they were getting whatever they were getting before for less money. But what happened was that people felt it was unfair? Why are we increasing the prices for me now, by the way, you can increase prices. It's not it increasing prices is not possible. But you need to do it in a way that people feel is fair. And when you do it in the way that people feel fair then you can increase price when you just look like price.
Gouging people are really upset and basically sometimes people just cut the nose to spite the phrase, right? They basically are so angry with the company. They're willing to not get the good service just as an act of Revenge
and so if we try to simplify the difference between pure economics kind of the dry numbers that make sense on paper customers should be happy. Most of them don't need both services. And so the price per one Services Lower they should be happy. That's dry. That's the computer answer for the problem and the actual behavior of people
Would be the difference between economics and behavioral economics, right? This is what people many times miss that there's more in human behavior than just a dry numbers.
Yeah that human behavior is a magical and fantastic and complex and we're capable of all kinds of things like, you know, climbing mountains and writing books and doing startups, but our motives so doing all of these things are much more complex, right? If anybody of our listeners today would basically write down an equation of what gets them up.
Up in the morning and what gets them to be excited about what they're doing. It will not be an equation that is driven purely by how much money am I making and what will be the financial maximizing Next Step from it and we have lots of other motivations and whatever works for us works for lots of other people and therefore we need to put this into our products and you know when we talked last and we're thinking about what to talk about today you can have asked me to think about the different ways in which behavioral economics can help startups and I think they're kind of
Three buckets of help in the first one. Let's call it two weeks. What do I mean by that? It's basically seeing something in the process that is just slowing people down and think of it something like somebody is setting up the wrong default, right you look at the signup flow. And you say Hey you asking people a question here that you don't really need to ask. It's too difficult. It's too complex. People are dropping off the story about organ donation, right you basically have organ donation is opt-in.
People have to go to the DMV and sign up for organ donation very few people sign up you have it as opt-out people are assumed to be organ donors and they have to sign something to get out of it. Almost everybody becomes an organ donor the default really met, you know many times when we set up products and sign up flows and so on. We don't truly understand how difficult things are for the consumer to do and therefore we set up processes in a way that is too complex or too difficult and there's a lot of tweaks around
No, it's not just default. It's a bit more complex than that. For example, it Lemonade turns out it when you do a chatbot falls under what we call conversational gnomes you and I when we meet, you know, now it over video, but when we meet face-to-face, there's a discussion, right? Ask a question answer you there's a give-and-take and you don't stop in the middle, right? It'll be very strange if the two of us met in office and in the middle, I would just end up in rows and now this conversation Norms gets people to continue responding to questions in a way that
They wouldn't do in a regular form right It just fits onto like if you think about the chat with asking you question it fits with this General metaphor of you know, somebody's asking me question. I need to answer. I can't stop in the middle. So there's a whole set of things that we can call them small tweaks. Then there are things that are more complex and I'll give you one example from study we did with the large a GMO and this HMO sent people in notification saying you have an appointment to meet a specialist in
Five days in two days. They send a message twice. Please show up on time. And if you're not going to show up, please follow this link and let us know you're not going to make before they send this text message. There were lots of people that didn't show up. So they started sending these text message to remind people and they thought that people would not showing up because they forgot to say, hey, let's remind people five days before two days before but even with those reminders more than 20% of the people did not show up on time. Right and it's very hard to run the healthcare system when 20% people don't chop the way if it's everyday 20%
Don't show up. It's easy but changes over time. It's very hard to manage. So they asked us for help and they limited us very much. They said the only thing you can do is change the text message, right you could imagine that you would give people pointing reputation and money like the world of motivation is very broad, but they limited us only to the text. So we try different things some people we reminded them that their family wants them to be healthy. Some people we reminded them the name of the doctor. Remember, dr. X is looking forward to seeing you on this.
In this time for some people we reminded them about the nurse. Remember nurse, why is going to see for some people we told them how much it would cost the HMO if they don't show up we reminded people about their own commitment for health. We did all kinds of things and one other thing we told them was that some other patient could use their appointment if they don't show up. So the first thing that happened is that all of our methods worked better than the control condition, right the good news, right add a source of motivation everything worked the thing that worked the best was to say another patient could
Is your
appointment so the feeling that by not showing up your basically ruining it for somebody
else? That's right by not showing up in not canceling but it's perfect if you cancel. So this is a slightly more complex issue because now you say okay people don't show up. We need to add motivation and adding motivation is much more complex and there's many more options. Right and if we were going to sit here for an hour and think about what are the motivations could we add in a text message? We could probably come up with more ideas. Right? I'm not saying that the right one was that
authors the differences by the way between
In terms of kind of give people the feeling of when you get it, right? How much better is it compared to control? We
cut the no-show rate by more than
half. That's amazing. That is a huge financial impact on such an organization
huge financial impact. I think it was something like 800 Thousand Days of wait a year. That's amazing that we save them by the way. We did something else we had some people on the team that are much better mathematicians than I am. And we ask the question of what if we used a I what if we basically created an algorithm like what I told you another page
And could use your appointment worked on average for everybody. But we had a lot of different types of clinics and types of doctors and type of illnesses and so on and we said what if we could tailor the specific message for each person how much better would it get in the results? We got are basically kind of the famous ad20 more than 80% of the value from picking one message. That was the best for everybody but we could get some additional value by tailoring it specific for individual right? So there is kind of if you ask me like how much are people
Mostly were the same the same thing works on everybody and there's some tweaks on the edges
interesting. Yes. We see it in many companies that when you get it, right, it's 80% of the value and then with more personalization you can add additional 20% but it's basically the big things is understanding the core motivations and the big segmentation that is a big part of the change. Yeah.
So we said okay is that there are basically three ways. I think that behavior economics can help companies one is we call it the little tweaks default signup flow.
And so on the second one is more complex, which is about adding motivation. Right? How do we add motivation to people somebody else money? Whatever it is. And then there's the third component which I think is the most interesting and this is the one that is worthwhile for people to think about earlier in their agenda. And that's about what is the role of Behavioral economics in the core product or the business model and it's not true for everybody, but I'll give you maybe two.
So one example is a company called shaper and shaper the goal was to help people lose their weight, you know, there's lots of ways to get people to lose weight. But if you start thinking about this from a behavioral economics perspective, you say the following to say, okay the struggle for health is a daily struggle. You can't be healthy five days of the week and not healthy to days of the week with food, right? You can completely overrun everything you do by the way the Obesity epidemic in general. It's a 200 calorie a day game if you can cut it.
Hundred calories a day systematically basically people lose a pound every two weeks. That's incredible. It just really how to do it on a consistent basis. So people don't but to reset it needs to be every day and you need to start in the morning. You can start your diet
only the afternoon.
So and then we said something like the Forum said okay in Psychology there basically models of recall and models of recognition recall is something that you think about yourself like you walk around the house and say, ah, let me think about my long-term savings or my diet on my health.
Happens occasionally, but not that much right the idea that somebody will come up with the priority. That is something about the long-term well-being just doesn't happen that much recognition happened when you see something in that reminds you of and by the way in the digital era, we don't have that much recognition think about pictures those of us who don't have picture frames. How often do we think about our loved ones? Yes, we have all of these pictures on our phones, but they're mostly off. I'm good friends with your wife. Do you have a picture of her on your
desk?
I have a digital frame. So the answer is
yes, so, you know, but when we have things in the environment, they remind us of things by the way religion, of course has this right? So we said, okay, so we need first thing in the morning and the reminder. So we said let's think about the bathroom scale first thing in the morning. You see it every day. If somebody gives you 2 square feet of their Prime real estate take it. Okay, so we start with a bathroom scale and then we study the bathroom scale and I know it sounds ridiculous because you know, what is there to study but it turns out there is a lot to study in the bathroom scale here.
Three things will first thing it turns out it's really good to stand on a bathroom scale every morning not so good to stand on it at night. Now why? Yes, we weigh more at night, but it's not the reason if you stand on it in the morning you remind yourself that you want to be healthy and then you eat a little bit
less throughout the day. You're not going to change a lot in your behavior at night before you go to sleep.
That's right. If you stand on the scale at night, you just go to bed by the morning. You forgot the whole thing. Yeah, that reminded doesn't work for a long time. But if you have it just before breakfast. It's very effective. Okay, that was Point number one point.
Point number two, remember the principle of loss aversion the subversion is the idea that we hate losing money more than we enjoy gaining money and with weight, of course, it's the opposite we hate gaining we like losing but because they are not symmetric imagine somebody who goes up and down in their weight. We are fluctuate right? It's based on how much salt we hadn't went to the bathroom and so on some of the fluctuates up and down up and down the apps are really miserable the down to slightly happy but on average it's not good news, right? Hi miseries like happiness. I mean seriously,
Happiness, basically, we don't feel good about it. And the last thing is it turns out people expect their bodies to change very quickly. People say I've been on a diet since yesterday morning like where there is
nothing changed. Nothing changed. I hate my
scale not the body takes eight days to two weeks to react but our theory is much faster. And by the way, it's true for lots of medical condition. So what happens is you go on a diet or four days you stand on a scale and your weight fluctuates and went up by half a kilo people say it's not working then they take a day off and eat.
Some cheesecake and then it goes down a little bit. So if you think about it, the scale is very confusing and demotivating by the way before the digital era. The scales were mechanical in the needle was thick and we didn't really know our exact weight
completely and so you can be as
upset. That's right. So what did we decide to do? We said let's do a scale with no display and let's give people the feedback on an app, but in trends of the last three weeks, let's not focus on the numbers the numbers of confusing and the motivating. Let's
People the trend and now we had another interesting question. Do we do a five Trends or four Trends? So think about for much worse the trend is going up a lot up a little down a little down a lot. That's four points or five points up a lot up a little nothing happened slightly down a lot down. So what do you think? Is it better to have a five-point scale or 4-point scale? Is it good to have the
middle? I think it's good to have the middle. I think the middle gives you leeway and helps you with motivation
your
Absolutely, right and here's the thing imagine a year 52 weeks and imagine somebody is losing weight 12 weeks and nothing happens for 40 weeks. Is that a good year or bad?
Yes, a greater overall wheezing here in my
age a you that nothing bad happened, but this is where it's so important to understand the psychology because if people in code nothing happened is bad news a year when you lost weight 12 weeks and nothing happened 40 times you would feel as if failure, but it's an amazing year.
And we need to give people credit for nothing bad happened. So we created a five-point scale and we celebrate the middle. Congratulations very very
important interesting question. What are the words that you're using for? The neutral? What are the colors that you're using? Because you want to make the neutral positive
right? So we gave the neutral green color. We made the decrease in weight in blue colors and we made the increase in Gray colors. So we operate the green and we give you extra extra points for it. Now with the first study we did.
Did lasted about half a year and you know where the control condition people who got the regular scale. We had our condition and we went to call centers and why did we pick call centers? We wanted people who are relatively low income relatively obese because that's some of the toughest population to change right? If you get people who are highly motivated that's not as interesting and the people who got the control scale the regular scale a digital scale that sells your weight is a hundred sixty eight point two they gained
0.3 percent of their body weight every month gain gain gain gain for the six months of the study the people who got a scale lost 0.6 percent of their body weight every month lost lost lost lost in the big deal was adherence first, right? We had people who basically stood on the scale 79 percent of the people stood up on the scale five times or more per week. It was not frightening anymore. It was not aversive and they did it. And then the last thing is that they
Stood better the relationship between cause and effect. Now. Here's the thing that came to me at the end of this, you know, a lot of times. We think that the right thing to displays accurate information and I'm all for accurate information, but I think that information does three things it's about accuracy. It's about helping people understand the relationship between cause and effect and it's about motivation and it turns out you can't always have all three of them and for me as somebody who wants behavioral change accuracy is nice.
I have but not that important. The first thing I want is motivation. The second thing I want is understanding the relationship between cause and effect. And only the third thing I want is accuracy. I want to create interfaces that motivate first then help people understand cause and effect and then are accurate but if those goals conflict, I'm willing to give accuracy. Now the reason I'm talking so much about this. It's not that at scale. Is that crucial but it's about the perspective of thinking about all the little details.
Right, you look at the scale and you would say what the boring product what else is there the moment you take seriously human behavior motivation understanding. What do we do with variance? Right statistical software are great with dealing with variance. People are not then you start designing your product from the beginning taking these principles into
account. These are such amazing examples and I think that at the end of the day the toughest thing that we're trying always to tell startups is that when you stumble across principles that are important for your company
It is really critical to think about them early on rather than try to patch them onto your product later. And so, you know, we have this thesis about Network effects and we keep telling Founders, you know, think about your network effects early on don't wait for when you've already completed your product and then you try to patch something on top and I wonder how I can take what you just spoke about and translate that into startup guidelines. So, you know, we say that are tweaks and they're more complex changes and then clearly the highest level or the ones where you get the most out of it is when you actually start
thinking about behavioral economics when you actually design your core product, you don't wait later. You don't say oh my emails are going to be using the Haver economics, but my core product is my core product or you don't wait just for the tweaks. And so how would you recommend that people and I know it's a big question. But have you seen the best Founders try when they're starting it? Let's start the earliest possible. When you think about your core product, how do you see the best Founders think behavioral economics in designing their main product? What is the process that they're doing after they think about
that?
So I think of really good example from this is lemonade. So I met shy and Daniel before there was lemonade or there was anything and they came to talk to me about insurance. And the question was what are the biggest barriers for insurance? Right so they didn't say okay. Here's the product help us tweaker. I did some of those things later on but in the beginning it was what's the barrier for insurance and I told them trust I said in here's the situation with insurance you as a consumer pay the insurance pay the insurance paid insurance.
It's some point something bad would happen and you want them to pay you back but they have your money and they write the rules and the question is do you trust them? And if you don't trust them, are you going to be dishonest and exaggerated and I worked with quite a few us insurance and we saw a lot of fraud, right? So and people justify the fraud because they said these are bad people. They're in conflicts of interest. They don't have my best interest in mind and I'm going to cheat people kind of wrap guys cheating
because the insurance companies are bad because they didn't want to pay I
said, it's a
A bad situation if you started from scratch, you wouldn't design something like this, but I said you have to understand that not trusting the insurance company creates Vicious Cycles. And what happened is that people lie to the insurance company the insurance company spends a lot of money to adjudicate claims because they don't trust people and the whole system is losing lots of money like adjudicating claims is what's called a deadweight loss like everybody loses money. So I said let's deal with the in the way and we talked about different options and the way we chose to do. It is to eliminate
Imitate conflicts of interest and that's also was very psychological right? There's a version of psychology that says trust me. I have your best interests in mind. I have done lots of research and conflicts of interest and I know that it's not enough that when you have people with conflicts of interest, they often don't see things correctly. So we said let's change it from a two-player game to a three-player game. Let's have the consumer lemonade in the charity and when people sign up they pick their favorite charity and they pay lemonade and them and always takes a fixed amount as our Prophet but
We keep the money in the pool. So let's say you get you joined lemonade and you signed up and you chose the World Wildlife Fund is your favorite charity. We take all the people that sign up under the World Wildlife Fund in your one pool and you pay money into lemonade. We take the fixed amount we pay back claims and if there's money left over in the pool and we design it so that there's very high likelihood will be money left over in the pool. And that money goes to the World Wildlife Fund now think about what it happens that two things one.
These we say look we're in different of whether we pay you back your claim or not. We are different. We don't make a different amount of money. We have a fixed amount and on top of that if you're cheating, who are you cheating the non-for-profit? Yeah, and of course, you know, there's all kinds of tweaks. We remind people about this and there's lots of other things going on. But if you think about this lemonade started I mean lemonade is a wonderful product is lots of people working on all kinds of amazing things data and so on but it baked trust into the business model from the beginning.
Right. It says if you want to have an insurance company that you know, we don't have a 200-year reputation and so on trust is the main barrier and we have to make a business model around trust
and that clearly works so well for the guys and so if I try to generalize it for a second, I mean lemonade is such a great example because it's really was one of the biggest differentiators and what got them to be so loved by their customers. If we now take a Founder that comes up with a new product and they want to think what's the methodology?
G to try and basically incorporates behavioral economics thinking into their product or into their company should they ask themselves what are people's motivations? Should they ask themselves where the incumbents wrong and understanding people what are the few questions that they can ask themselves that would really help them build a product that is based on these
principles. Yes, a no creativity is an np-complete problem. Right? It really took me for this but in general I would say the following if we think about the third component, right?
We have tweaks we have motivation and we have the big questions on the big questions. I think they need to do two things one is they need to ask? What are the assuming about their users? What is motivating them? What is causing them to want some things versus something else and they need to make sure that they're explicit about those assumptions because a lot of times when you write these assumptions you realize maybe you're not as sure about the Assumption as
before when you start writing them
down. That's right. So you can ask the question of you know, what is causing people to eat lat
Judge portions or what is causing people to not keep to a diet. And you know, what is causing people not to repay debt, whatever it is. What is causing people that I think is the first thing I would not start with what are the competitors are doing. I would basically asked what is my model of humanity as it interacts with my product. I'll give another example paying back debt. Yep. What is causing people not to pay that on time. So two experiments one. We said, you know what?
Maybe paying that is just not that motivating when you think about it, you say yes, people should pay the debt. It's really important, but maybe just not that motivating because the end is 0 right at the end of paying that you got to nothing. So we try to frame it differently. So we sent letters to people and we said you already paid 20% of your car payment. Would you like this month to pay a little extra and pay more of your loan zero interest to other people we send a slightly different letter and we say you already own 20%
out of your car. Would you like to pay a little extra this month and
own your car a bit more?
Yeah a lot of interest
from the negative to the positive and
motivation owning right? Because if you say what is my motivation to pay my loan faster 0 what is my motivation to like are much higher or here is another example. This is a recent paper in which they basically gave people their credit card statement, but they allow them to pay some of the category specific.
So imagine you get it online. And for some people I say, you know, you always thousand dollars. The minimum is 50. How much do you want to pay? But for other people we show the specific things and you say which one of those do you want to pay and you can pick I want to pay for all my food and electricity and so on and it turns out that people pay a 12% more your balance when it's specific things because there are some things we don't feel like they should be on credit
completely and I said on the board of this company that was selling e-commerce billions of
of dollars in credit and we could actually see a huge difference in the pay ratio for things that were perceived by people as think that should be paid off like when they bought things for their kids for school or when they bought think that were a must compared to the payback ratio on luxury stuff which many times
defaulted. Yeah to go back to the question of what to do is you basically want to write your assumption. So if you saying about paying that you could say, I'm assuming that people want to pay their debt back how much what kind of
The moment you get into it. Now, you can tell you know, I'm assuming that people are tone between paying that and other needs and what puts the mortar with this. What is the right way? So basically writing down. What do you assume I think is Step. Number one, I think step number two is kind of like where the rubber meets the road basically go very slowly through the experience with your product and at each point ask yourself. What's the friction? And what's the motivation right? What is holding people?
Go back and what would give them extra motivation? So you get a letter that says you owe this amount of money and you need to pay what's stopping you and what would motivate and it's not an easy process. But those are process. I think we need to go through and then the other thing I would say is that there's this belief in get out early and iterate. I don't know about your experience, but my experience is that people do get out early, but they don't iterate until it's too late
many times, you know, we clearly at
Kids are going out a new trading fast point. Is that as you say many people sometimes mix going fast with K. We put out something. Let's wait and clear without data rates faster. And there's no point of going out fast.
That's right and often the experiments are not that good. So it's harder to learn you would think least. I thought the electronic world would give us amazing platforms for testing. The reality is the testing is tough It's hard to know how to create the test correctly. It's how to run tests as sometimes. It's require extra work in lot of
Startups I find don't do enough testing. The basically are so driven to get out quickly the slowness that is required by testing. Something is just very unappealing. So I think we don't test enough and you know, sometimes by the time people come to ask me for advice. It's a shame because I find that we could have done some things much much earlier.
So that's a great frame. We're basically saying before you design your product, you've got to write down and test your assumptions on what motivates your customers in the behavior in the areas where
Interested and then basically you got to take your product. And as you said test it stage by stage and find out and make sure that you're addressing the right motivations in each step of the product.
Yeah it like a microscope you want to go over it incredibly slowly and at each point you ask yourself to question. What is holding people back and what would motivate them? Right? So what would get me to sign up and what's causing me not to sign up. What would get me to you know pot with my money and what would get me
to work out?
Out of the store. Yeah, you're famous for thinking about rationality or lack of and you know, one of the things that I found that many Founders have a tough time with is that and everybody actually is that we kind of assumed many times that the motivations of our customers are rational and I think that even sometimes even people that try to follow structure of understanding motivations ditches get it wrong because many times they're not understanding the real motivations of people the assume that what should work works and then they're kind of
Later on to find out that different not rational or that the textbook. Hey you press here. You make more money doesn't work because there's additional elements that are impacting people's behavior. How do you suggest that people manage to understand irrationality and kind of better really understand? What are the motivations when they're not trivial?
Yeah, and that's very tough right stuff because you know, I've been you know reading this literature and contributing some to it for about 30 years. And the reality is that it's really tough for
Or people who are not coming from social science to master this field. It's always kind of baffling for me how you know, nobody would ever do a start-up in biology without having a biologist but people have no problem doing a start-up on Behavior change without somebody who knows anything about Behavior change it is kind of surprising, but I think people do need to get some expertise on that. And of course everybody can do it. It just a question of time. We all have access to libraries and books and so on but the reality is that you know,
Startups are usually created by people who are amazing it technology not mastered the literature on behavioral change, even if they do behavioral change and there's just not enough time that they have to master it and they have to help get help. It's just not the question. I think it's something that people have to reduce and say differently. I think there's a lot of areas where startups benefit a lot from overconfident and I think that overconfidence about an have an intuition about human
Peter is not the healthy one. So when you come to present to VC's well, I mean there's lots of things were overconfident is helpful being overconfident about your own intuitions about human behavior. I think is very unhealthy and people should go and find somebody out get some PhD student in some area of Behavioral change that is relevant to what you're doing get them to help you for a couple of months, you know, you don't have to hire a full-time person but getting some help on that is crucial because you mean behavior is really mysterious. For example, I've been doing this.
Study for the last four years now trying to understand how companies treat their employees how the employees feel about the company and what it means for the profitability of the company in the stock market. So I'm doing it on public companies in the US as for example, do you think that salary matters for profitability the companies that pay employees better the employees feel that they are getting paid better is all those companies more profitable. Yes, or no.
Well the way you asking it I assume that there is some link but not
Very
significant. Yeah, so no however perception of fairness in salary matters a great deal, right? So absolute salary doesn't matter quality of coffee doesn't matter what really matters is people feel that they can make mistakes honest mistakes are valued bureaucracy by the way kills motivation. I mean, there's all kinds of things the quality of coffee doesn't matter quality of furniture doesn't matter employee benefits doesn't matter appreciation matters dramatically study date.
The different components but when I go even to HR managers and I say what do you think matters and doesn't matter the wrong right our intuition about what matters is just not that good and this is why people dig deep into their intuition. They're not necessarily going to get it right because some of the things that motivate us are very different and it's also very hard to Intuit that when you're not in that situation so we have something called the hot called empathy Gap in the hot called empathy Gap is the idea that when your neck called rational state
You don't really understand how you would be when you're in the hot State and of course the easiest example to about his sexual arousal right when you're not sexually arouse you set yourself. I'll always respect to him and I'm using it as a man. Now all this track women always wear condom always do this when people are aroused a chain, but it's not just about sexual arousal when you think about things outside of that situation. It's really hard to Intuit what it would mean to be in that situation. So for example, if you're not looking for a loan right now, you don't
remember when I moved
I moved to New York a few years
ago. I quite a few years ago when I came here. I have my own health issue. So I go to doctors and with more than I would have liked to but in the beginning I hated this thing that the doctors come to you and say hi. Then I'm Doctor whatever and I wanted to say Professor really for you. Right like why did I've done and their doctors and I was planning on saying it every time but the moment you're in this role when you're kind is peeping up your this small and in that situation the power is in their hand and
I wanted to say it but I couldn't bring myself to it and after a few years they all know me they stopped but it is incredible how it's hard to predict how it would fit in a doctor's office. But do I hear something we did with doctors doctors sometimes ask you to end of the visit you have any questions people are always so embarrassed to ask they don't ask questions. We change it to the doctor saying I know you have lots of questions. Can you ask me your top three different the moment you understand the power dynamics and how difficult the power Dynamic is?
Now right now I'm sitting here next to oh, yes, I'll go and ask questions next time. No you feel this small and you feel you're taking their time and they're in a rush and you feel like you taking the time from another ancient and you don't ask questions
completely. So I think you're touching on something which is really interesting for me is that many times we look at the founders and we say can these Founders really understand the customers and many times. We call it the founder market fit meaning that you know, that's a found that can actually understand the motivation of the customers. But even when that's working, we don't always end up with a
Under being in the same state of mind as the customers at the point of decision. And so I think many Founders many time come to us and you know, they say we've asked customers we've had surveys we've had studies and you know, how do you feel about these studies as ways of discovering people's motivations? Because I always you know, when I look at the many times, it's very clear that when the people were asked they were not really in the same state of mind, even if they're the right customers. They're not in the same state of mind for them to be able to predict what they really want or what they really need. How do you think about
that?
Okay, so for that we need a whole nother session at some point because it's such a big question. But in general there are things that people can report and things that people can't I'm quite comfortable asking people to report what they have done. I can ask you for example, did you check social media yesterday? Right? Would you be aware of the exactly how much time probably not but can you tell me if you checked it yesterday or last night before you go to sleep? The answer is yes people can report quite well.
Well on what they have done with some limitations, I would be very hesitant to ask people for their intuitions about it. And here's just an example. It turns out that retirement savings 401K in the u.s. Is basically driven by default if when you come to a new job, they default you into 401K you save if they don't you don't, you know, big differences some people do but uh different but if you go to people and you ask them, why did you save and why you didn't save nobody says it
default right people have Story by the way, the stories are fantastic if you wanted to write fiction, don't worry, but people can tell you I'm saving I'm not saving but when you ask them for their why
they have a totally different perception of what really
happened they have wonderful stories and basically, you know the lot of times we act as a function of the environment that were in but when we tell ourselves a story the story is not about the environment this story is about something
Music in us and we make the story so quickly that we start believing in it, right? So it's not that we lie back stability of in it. They have no idea and on the spot that trying to find out the story and the story that they find is a story about intrinsic attribution. I did this because I wanted to and then you just tell Optimum. I would not trust it now. There's some exceptions right there some experts like if you want to understand why some people are able to control their A1c.
We'll take mealtime insulin, you know people who have to take mealtime insulin. It's quite embarrassing to go with coworkers to lunch and basically take a needle out and inject yourself. Some people have managed to get out of it. It's really good to take the people who don't feel embarrassed anymore and say what have you done? How did you introduce this to your coworkers? How did you get them to explain it? How comfortable do you feel? Like you can learn from those things but I wouldn't ask people for reason. I would first go to the literature, right? I mean, it's kind of awesome amazing, you know how quickly people
Pilar to experiment and how slowly people out to go and read something in the library
that is so true. We had a few mistakes that are very clear like, you know, not iterating fast enough for getting wrong sources for what are people's motivation and not using extras that actually help you either additional kind of typical mistakes that you see that companies got wrong that they could have learned from behavioral economics and actually do better.
So there's a huge range of things in pricing right pricing is a magical amazing.
Them and people make lots of mistakes there, but I think that's one. I think a second big mistake is that people don't work enough on their users mental model of their product give you one example for this. I went to visit Microsoft couple of years ago and I met the people who are working on Cortana and they told me that people use Cortana for the weather and jokes and that's it and ask them what can Cortana do and you can imagine what they said everything I said and you're not setting up.
Katana correctly and they said what do you mean and I basically created a following study some people we said hey, there's something called Cortana ask it anything you want and people ask for weather and jokes other people we said there's Cortana for meetings. There's Cortana for amen. There's Katana for transportation. There's Katana foreign. We gave them ten categories ask it anything you want. Now people had lots of questions right there would say it's show time. They would say cancel my appointment. When is my meeting? I mean, they had all kinds of things and the thing is
That people don't have the mental model of what can Cortana do this by the way also fits with our notion of everything digital is hidden and we don't know what to ask. Right and one of the challenges is if you do something new what to do people understand about what is this new thing. Now, this is called the curse of knowledge because we know our product so well,
we think that it's clear. Yes, of
course this by the way is what happened to Professor's right we teach and then after a while everything we teach seems obvious, right? So teach worse and worse.
Worse and worse because we just assume more and more on the side of the people listening. So I would say that not helping people create a better mental model of the product and its use I think that's another one. That's a big mistake. Yes. Think another one is not thinking clearly about what is the pattern of use we want to create and how do we reinforce habits, you know people have measures like daily active or weekly active whatever but the real question is are people using the product at the
And seeing timing that we want them and what is the model for repeated use that we have? And how do we create that
and people tend to default for the looking at the dry kpis and not thinking about what's really happening behind
them? That's right. So, you know is this for example a product that would be very useful to try and get people into a habit of checking every Monday morning or Sunday or Friday. What is the right Caden and what do we create in the environment to become a trigger for that? So that's really a
range. No, it's amazing but
What I wanted and it's just you've done it real it's just give people the kind of the perspective of what are the things they should think of I want to ask you one word started touching before and something
really wasn't nothing. I sometimes ask people to think that they are designing products for Homer Simpson and I don't mean it in an offensive way. I mean, it's kind of offensive to think about people is Homer Simpson, but I don't mean it as people are idiots. But I mean that people are have busy complex lives and therefore we need to realize that the time that they are giving us is very very limited people have very very
Method attention and time and when we design products, we often think that people care about the things we care about right here. I have this new product people would probably read the manual and I want to lose weight and people after all want to control the diabetes. But the reality is that people have very little time and very little attention and if we design with that in mind, I think we'll get much more progress.
Yes. That's a perfect segue because for me the kind of last question I have which is really interesting for me both of the next founder, but also,
oh somebody that helps and supports Founders today and he started touching upon it before is what do you see from the behavioral economics perspective on the mindset of the founder himself other than you know, not thinking that you know what you don't know but what do you think is the mindset that's required or what's the behavior economics elements that we can take into the actual behavior of the founders themselves if they want to become the most effective startup leaders, how do they get from being the dreamers of an idea to being this great execution leaders in their
But he would skin. They learn from behavioral economy to become more successful at that
job. So yeah, I would separate it into treating people and treating the product and I think on the product you can't test everything like, you know, scientist want to test everything possible. I think good leaders are able to separate core assumptions of the product and figure out what to test and what to make assumptions about and they can sequence it the right way so they can say no, what's the right building blocks and what to test
When that would be kind of number one and two for the product here the central assumptions. We're making I'm going to test this assumption first and then this and then we'll move to smaller things that are less important right and say for example in Lemonade's case. It was first, let's test trust Let's test the charity model later on we can test things like pricing and whether we could get people to like lemonade more answer more questions and so on and then internal to the company it's about being able to create motivation.
The big lessons we have the motivation is that appreciation is incredibly important. I would say that appreciation furnace and tolerance to mistakes
are the three elements that get startup leaders to be the most effective in leading their companies.
The thing about tolerating mistakes is about agency, right? It's about giving people the ability to move forward in the way that they think is right and allowing them to make mistakes as well. Right? So you want people to move forward and when they're trying something new and interesting
Testing whether it's working or not working. You want to reward them for it, you know all companies basically when you talk to them they want people to take more risk, right and try to move it.
Well, they think they do or things they say they do they don't necessarily behave as if they
do exactly. So now the question is, how do you also get people to behave this way and not just to say it?
Yeah, and I think that, you know such a good point because at the end of the day, I think one of the biggest differences we've seen between successful and unsuccessful straight-up ecosystems is the acceptance of failure there is where there is no failure.
Or failures are not acceptable. Then you get less, you know a lot less risk taking and a lot less intrapreneurship and similarly probably the biggest difference between large companies and startups in the reason why straight-up still win is because in the large companies, you know your best way to get your bonus and get promoted is not make any mistakes, which is clearly the most important, you know, being willing to accept mistakes as the number one thing in terms of encouraging Innovation, simply because most Innovation
fails. Yep, you know, it's not about accepting stupid mistakes, right? It's
About rewarding the process versus outcome. So, you know academics right? We do studies not all studies work as we wanted them to write sometimes wrong. I try to encourage my team to be wrong at least 50% of the time. If you're right, too often, it means you haven't tried things that are sufficiently interesting right because it's very easy to do studies that always work as you expected. If you are assuming very boring things
completely and then when I rang larger companies when people came to tell me about a failure I had these two buckets of fake
They had good failures and bad failures. The good ones were those where people were pushing the boundaries and trying hard and working but working properly and doing everything they should have done and they were no stupid bugs or stupid mistakes and at the end of the day, it didn't work like many Innovations and then bad ones are the ones where you basically didn't write the code. Well or you didn't test it and see if you put out a buggy product with it shouldn't be now tour you basically completely didn't follow the process and these are bad mistakes and the way I used to look at it as that the people that had great failures.
They're the ones that got promoted as if they had successes because you could see that they were doing the right things and eventually they're going to get it. Right and the people that had the bed failures there the one that you know, we could never accept simply because that's bad for the company
and you want to separate those and one way to frame this which I try to do in my academic setting is to reward process versus outcome. So imagine you have a kid and one day your kid studied really well for the exam, but the exam asked about some you know side.
Shoes and your kid did not get a good grade and then another kid didn't study at all but went to the examining them asked him. The one thing he knew and he aced it do you want to punish the first kid and reward the second the answer is no because in the long term what the first kid is going to be the right thing and what the second kid that is not what you want to do in reality is we want to reward Behavior not outcome and we often reward outcome not Behavior because it's easy not because it's the right thing to do
completely. We see it in politics many times.
Right and how do you respond to terrorist attempts versus successes and so on it many times most people deal with the outcome rather than with what was the intention
and I think this is a real benefit of startups as companies get too big and bureaucratic. They set up procedures and procedures are you know, inherently trying to get things up with that are measured and you know, so on Startup so much more flexible and I think one of the benefits is to use the size of the startup to truly understand.
People are are doing not what the outcome is and to reward correctly the right
people. Yes, that is the benefit because you don't need to stick it on to have the liability of past products or past processes or past things. You can always go to the new thing. I wanna ask you one last question a personal one and you know, it's something that I've always wanted to ask you your clear. You're such a wealth of information and you know, you seem to understand people better than most. Well clearly better than most people I know and I kind of wonder that was after all these years and all that knowledge you have from
behavioral economics about people's behaviors. How does that change your behavior your interaction with people your life because it seems that you have like this ability to understand people so much better. How does that display itself in everyday life?
So lots of ways so, you know, first of all, you know, just to be clear. I do make some mistakes as well. If you think about the types of mistakes you think about little decisions big decisions and habits little decisions is going to the supermarket and something is on sale and
You know still with the sell price you wouldn't have bought it if it wasn't on sale at the same price like it was 20 now. It's 15. You wouldn't have bought it for 15, but now you buy it. I still do this sometimes right? That's
but it seemed you laugh at yourself when you do it,
right? Yeah, sometimes I notice it sometimes I don't it's amusing and that's fine. I am much more careful with big decisions. Like if you think about big decisions buying a house investing in the start of getting married getting divorced, you know, those are the big things. I do understand better the motives and then
You protect myself against mistakes. And then the third thing is habits and I spend much more time on my own habits because I know that habits are basically a way to take a lot of small decisions and make them better and in total have a big impact, right? So if I buy the small condominium coffee sighs, I don't care so much, but when it comes to habits that's incredibly important and then on the professional side, I'll say the following figure. I look at the world and there's lots of sad things look at the world in general and there's lots of sadness but what gives me optimism is
It we are designing the world and my sense is that if we design the world better, we would have better outcomes. So think about the physical world. We have planes and chairs and air conditioning. We really have kind of a fragile body physically, but with technology we could do amazing stuff cover great distances be called resistant all kinds of things like in the mental world. I think we're kind of maybe even more helpless than we in the physical world. We have a hard time thinking carefully.
Making the right decisions. We don't pick right we get confused all kinds of things now in the physical world. It's very easy. I'm on the standing desk since we started, you know, I think I need to sit down, you know, you need to sit down and you know, I'll sit down later. We understand our physical discomfort and we build around it or mental inability. We don't see it as clearly but the good news is that I think technology being all around us means that we can have decision AIDs that follow us in the all day if you have a computer that gave you
Decision Aid and then you went to the supermarket you forgot what you decided to do. Now. We have phones that travel with us. We have technology everywhere. I think they're really way to improve I look at the sadness around the world our inability to manage our money or health the health of the planet hate. I mean all of those things I think we could build tools to overcome those. We're not there yet and we're just starting my optimism come from technology. The technology is going to be pervasive in everywhere and we can create tools that
Would get us to be very different like if you look at where we should have been and where we are. There's a huge gap the way to fix it is not to change people. It's to change the interface between people and the environment in the same way that we build better chairs. People are able to sit longer. I think if we build better money management tool people
would manage their money better. Yes and Better Health control Health motivation. That's a very positive note and one that I believe in Israel, and I think that's a great note to wrap on. This is really been fascinating, you know.
Time we speak. I know that we can speak for many more hours and you know, you mentioned before that. We may need another session. I may hold you up to it because I think this is incredibly useful for everybody that's listening. And for those of you that didn't I truly recommend reading Dan's books because he's done a phenomenal job at taking this very complex science and turning this into something that every startup founder and every person can understand and learn from and build better products and better companies and become better leaders then I want to thank you.
So much for being with us and wish you that you know your prophecy. It's nobody's going to help make the world a better place will actually take
place. Thank you lovely to spend some more time with you until
next time. Thanks, Dan.
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