242. Biases -- Math Is Hard (Refreshed Episode)

Welcome to episode 242 of the Brainy.

Business Understanding the Psychology of why People Buy. Today's episode is all about our biases toward numbers. Ready? Let's get started.

You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer.

Hello. Hello everyone.

My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Today's episode is one that Originally aired on June 14, 2019 as part of an eight part series I did called all the Biases, which broke hundreds of different biases into different categories. Because our brains are complex interconnected webs.

This could have been done in many.

Ways and the biases mentioned could belong in multiple areas, but I picked groupings based on what I thought would make the most sense to this audience and applying the information about our biased brains into business. Those eight episodes, which will all be linked for you in the show. Notes for this episode include personal biases, biases toward others, including groups, an overview of memory, past versus future biases, selective attention, lazy brain biases, our bias toward novelty and stories, and this one which was called Math is Hard. This episode is going to go through a lot of concepts at a very high level. Unlike the Foundations episodes of the podcast which have sometimes a full hour dedicated to a single concept, many of these will get a sentence or only a few points. This episode is more about bringing your attention to the concepts overall and what's out there and to scratch the surface on the complexity of our brains. I chose this episode as the refresh for this week because it mentions ambiguity and uncertainty aversion, which is the topic for this coming Friday's brand new Foundations episode. So it felt like a nice way to set the stage for that. I talk about ambiguity and uncertainty aversion in my book what your employees need.

And can't tell you, which came out a few weeks ago.

In that I included a virtual glossary with all kinds of terms, including some that are in this episode. I'm going to be linking to it in the show notes as well so you can go check it out. The link will take you to a page about the book which has links to its freebies, including that glossary that's.

Free to you whether you've purchased your.

Copy of the book yet or not. I want everyone to have access to lots of great knowledge and resources, so that's all waiting for you within the app. You're listening to and@the brainybusiness.com 02:42 along with all the other links and articles and books and really, really great stuff. Again@the brainybusiness.com 242 all right, let's dig into our numbers biases in an episode I've titled Math is Hard.

As you've heard me mention on the show many times before, our brains are lazy and they like to take the path of least resistance to get to what they believe to be a good enough answer as quickly as possible. We'll get into that in more detail next week, but today I want to talk about how that impacts our interactions with numbers and math and value and probability and money. If you've heard episode 11 on anchoring and Adjustment or heard one of my presentations, you've likely heard me talk about this concept. The flagship example I give to demonstrate Anchoring and Adjustment is where the two end cap displays had only one word difference. One said Snickers bars, buy them for your freezer and the other said snickers bars, buy 18 for your freezer. The one word change resulted in a 38% increase increase in sales when the high anchor of 18 was used. This is also why we buy more cans of soup when they're labeled as 10 for $10 instead of a dollar each. Our brains make lots of assumptions based on the little bit of information they're looking at. This combines with our brain's natural tendency to believe everything it learns to be true first and ask questions later. Maybe when suggestions are made, the brain assumes that they're there for a reason. The ad for 18 Snickers bars potentially makes the brain ask, wait, have we been buying Snickers wrong for all these years? Because we are particularly lazy when it comes to math, we rely on the source of whatever's thrown our way, and the brain would rather risk being wrong than take the time to do the numbers in everyday interactions. Sure, there are some human calculators out there, like my husband Aaron, but for most of our lazy brains, Math is hard. I'm going to start with a couple of general biases, and then I have the episode broken into two categories. First is money and value, and then we'll get into games and probabilities. To kick us off, I want to talk about cereal. These days, cereal is more like candy for breakfast. But have you ever decided which cereal to buy by comparing the calories per serving? Let's say you did, and you chose to get Honey Nut Cheerios instead of Trix because you assume they're better for you. Or maybe you even looked at the labels and saw that Honey Nut Cheerios has 110 calories per serving and Trix is 160 calories per serving. Because of unit bias, you may have assumed the amount you serve matches the intended serving size, but you're probably wrong. Interestingly, to continue with the math is hard theme, you should note in your mental calculation that the 110 calories for Honey Nut Cheerios are for a three quarter cup serving and the 160 calories for tricks are for one and a quarter cups. So which actually has less calories? It's Trix. For the record, they're only 96 calories in a 3 quarter cup serving and if Trix was my client, I would recommend they change their packaging to match up the serving size to what everyone else has. I commend them for potentially trying to get closer to a real serving size on their packaging. But no one eats a single serving of cereal or really knows what the serving sizes are. So keeping in mind what they're looking for and looking at is more important when choosing how to frame the nutritional information or anything else. And I have linked to episode 16 in the show Notes on Framing, so I don't have to get too deep into the concept here now. But it's important to know again what people care about. When you set up that messaging, the calories are listed in big bold letters on the nutrition label for cereal. And that's the main comparison point a lot of people will make. And most people will not take the time to do an accurate mental calculation in their head to divide 160 by 5 and multiply it by 3 to properly compare it to Honey Nut Cheerios. And now you have to do the same calculation for grams of sugar and fiber and whatever else you care about. It just makes it hard, which can lead to a bad decision of maybe someone choosing Honey Nut Cheerios instead of Trix if you're trying to sell Trix. And even if we know on a conscious level that calories are not the only thing that matters, the brain will probably revert to that rule and go with the lower number for someone who cares about the numbers. Okay, I'm going to move along now, but apparently I could do an entire episode on serving sizes and the unit bias, so keep an eye out for that one Due to the less is better effect, our preferences change when we evaluate things alone versus comparing them against others. This is relativity in action. Consider this study which gave people two options for buying dinner sets. The first option had 40 pieces and nine of them were broken. The second option had 24 pieces and they were all intact. The first option is actually the better one because it has 31 intact pieces compared to 24 in the second set. But when evaluated on their own, people were willing to pay more for the second set. They might have been swayed by the stories their brains told them about nine broken pieces. Oh, this must be bad quality if all these are broken. But what happened when they were evaluated together side by side? People were willing to pay the most for the first set with the nine broken pieces. You don't see when they're on their own that there are actually a ton of extra pieces in that first set compared to the 24 pieces in the second set because you have no comparison in point and this can make a big difference. This bias reminded me of one of my favorite quotes from Thinking Fast and Slow. It was actually a quote from Paul Rosen, who's an expert in disgust, and he said a single cockroach will completely wreck the appeal of a bowl of cherries, but a cherry will do nothing at all for a bowl of cockroaches. It's not exactly the same thing, but I wanted to share it here anyway because it is relevant. Do you have a cockroach in your messaging anywhere? Because it could be ruining everything you're trying to convey. And now that I've thoroughly disgusted you with that image, let's move on to money and values. Due to the money illusion, we tend to concentrate on the nominal or face value of our money instead of thinking of it in terms of how much it can get for us. And due to the denomination effect, we're more likely to spend money in smaller denominations than when it is in bigger ones, meaning you're more likely to spend coins or small bills than break a 20. Even though this is completely arbitrary. Having a $20 bill is the exact same amount of money as having $21 bills, or 80 quarters for that matter, but it doesn't feel the same for your brain. This has changed a little bit since we started buying with plastic, and there's plenty of research into how we buy more. When the pain of paying is removed from the buying process, it physically hurts a little due to loss aversion when you have to count out bills and hand them to someone, a pain. You don't necessarily feel the same when you swipe a card. However, we still do a lot of mental accounting. This is where we think money in different places or accounts is not all accessible the same way. A thousand Dollars in checking account does not feel the same as a thousand dollars in your savings account or your 401k or a jar that you keep next to your bed. And what if you got a lottery ticket and won a thousand dollars? Does that go into a fun money you can blow on whatever you want category because it's found money or winnings? Why is a thousand dollars not the same everywhere? Consider all the ways this is good and bad and know that this is not only done for dollars, this can be done for time as well. Not all time is the same, and some goes into buckets, but you may be hoarding time in a retirement plan today that would be much better to think about as winnings. Sort of a philosophical behavioral economics approach to happiness. Being in the journey, I suppose. But also, when thinking about how much time you have allocated for things like binge watching shows or playing Candy Crush, could that be moved into a different mental account to advance your exercise time or working time? This is getting into work life balance, which is a much bigger topic, but an interesting one for sure. Mental accounting will definitely have an episode soon. If you have an idea for what you would like me to cover in that episode, send me an audiogram on the website or me a shout out on social media where you can find me as the brainy biz. All right, moving on. Due to the IKEA effect, and yes, that is its actual name, people will value things more that they made themselves or partially assembled than things they did not. The work they put in, like for pieces from Ikea factors into their valuation, and even though it has no impact on the actual outcome, and knowing that it might be put together wrong doesn't actually impact the valuation too much. This is another version of the Endowment Effect, which I've talked about a few times on the show. The Endowment Effect is where we value things we own more than things we do not. This is why people who have lived in a house for a long time may overprice the listing because they've overvalued all the memories of their time there. This is where little Johnny took his first steps. The buyers walk in, on the other hand, and see the hole in the wall there. I need to repaint here. Is this floor creaky for your business? Remember that making people feel like they came up with the idea means they're more likely to support it. This is something I touched on in episode 45. If they helped assemble the idea, they value it more. Just like a piece of furniture from ikea, they can see what went into it and their own blood, sweat and tears in that idea. It's their baby now and they want to protect it. Interestingly, due to the Zeigarnik effect, we will remember the tasks we did not complete or where we were interrupted better than the tasks we did complete. This is why it can be so hard to remember our accomplishments come review time and why you should celebrate your wins. It's important to remember the good stuff and not just dwell on the bad or unfinished. I talked a lot about the stock market in episode 30 on booms, bubbles and Busts. Due to the disposition effect, we humans will tend to sell assets that have accumulated in value and hold on to those that have declined in value. Often this is the completely wrong strategy, as winners might just be winners and continue to go up, while losers will continue to lose value. Don't get hung up on trying to recoup losses in one spot and sell on the other side to avoid losing. I'm going to get into game theory a little later in the episode and in its own episode coming up soon, but note that playing to win is not the same as playing not to lose. I talked a little bit about time earlier in the episode, and we have all sorts of bad habits when it comes to placing a value on time. Because of our time saving bias. When going at a relatively low speed, we underestimate the amount of time we would save by speeding up or lose by slowing down, while at a high speed, we overestimate the time we would lose by slowing down or gain by speeding up. If you're already performing at a high level, slowing down a little bit will not be as impactful if someone at a lower level slowed down a little bit. If you're running ragged, you think the world might end if you stop for a second, but it probably won't. And if you're already procrastinating, what's another minute or two? Perspective can make a huge difference for good and bad. So whenever you're thinking about slowing down or speeding up, whether you're driving a car or working through a project, just try to think about how fast you're already going or how slow you're already going and how that might be impacting your decision. Through this bias, we also tend to forget about how long something took when determining how valuable it was or was not due to duration neglect. This likely combines with the IKEA effect, where we forget the eight hours it took to put together that simple bookshelf and just see the glorious thing we've created with our own two hands. If you're launching a product or opening a new location and worry about people having to wait and what that might do to the way they value the experience. Remember this bias and put a little effort into helping them forget the time they're waiting. Think about rides at Disneyland or other amusement parks. Are the 72 seconds of enjoyment on the ride worth the hour and a half you stood in line? In any other context, that would be a definitive no. So why do we forget about the time in line? And why is five minutes in line at the grocery store excruciatingly long duration? Neglect is part of it, and there are differences in the way our brain is willing to wait for things it's excited about, like Disneyland, then things it is not. Like mundane tasks. If you have something people will be excited about, you can make the wait a little more enjoyable to increase the experience in a mundane task space, reducing the wait as much as possible is key. And the last bias for this section is the well Traveled Road effect, one I'm absolutely a victim of we underestimate how long it will take us to go on roads or routes we've taken a lot and overestimate how long it will take to go on less familiar ones. So you may say, I can just run to the store between calls and I'll be back in 15 minutes. 45 minutes later you're still waiting in line. But when planning a trip in a new city, you may think, well, the GPS says It will take 20 minutes to get there. Better budget 45 just in case. Silly but true. Remember, our brains use these same rules in all sorts of areas. Stop here for a minute and think about what you value or where you get impatient and consider why that is. Why do you feel like your life is slowly ticking away in one moment, but that it's moving too fast the next? What are you doing in those moments? And are you finding enjoyment in life and work? What can you do to enjoy each and every moment and celebrate each and every dollar earned? Now let's move on to games and probabilities. I feel like it's appropriate that I'm going to talk about this first bias in the midst of the NBA Finals. I know this episode will probably go live once the winner has already been determined, but if it goes to Game seven, there will be a couple of days overlap. For any of you big basketball fans or fans of other sports, you may not like the name of this one and all the science that backs it up. It's called the Hot Hand Fallacy, and with a term like fallacy in the name. You potentially already know what I'm going to say. But saying a player has a hot hand or because they've made a lot of shots in a row that they're on fire today means they are going to continue to defy the odds. It's a myth. When all the numbers get plugged in and run, the law of averages wins out. Hot hands are not real, but our brains like to think this is true due to the clustering illusion, which is where we see phantom patterns and overestimate the importance of small streaks or clusters in large samples of data. Our brains like to look for patterns, and we'll grab a small sample to prove our own points. But when evaluated over time, it looks very different. This is a lot like the gambler's fallacy. This is where we think the past has an impact on future probability, even when the probability remains the same. For example, what are the odds that a coin being flipped will land on either heads or tails?

50.

50, right? What if you flipped the coin four times and each time it landed on heads, what would you guess would come next? Most would say tails because the coin was head so many times. If there's a 5050 chance it will land on tails, it must be tails. Turn to shine next. You might even bet big because the odds are likely in your favor now, right? Wrong. The probability of heads and tails does not change based on the results of previous flips. It's good to learn from the past to keep from making the same mistakes, but make sure it doesn't distort your view of reality. On episode 49, I talked about how we are biased toward having zero risk if we can. This is much like ambiguity aversion or uncertainty aversion. People are much more likely to prefer the things we know than those that are unknown. If you've ever heard someone say the devil you know is better than the devil you don't, that's what this bias is about. In reality, the this is not necessarily true at all. And in some cases, the grass may really be greener over there than it is here. I know I personally have a history of sticking with jobs or relationships longer than I should have. Because of this bias, we're much more likely to choose an option which we know the odds for, even if they're terrible. Because we're so afraid of the unknown, our brain says, well, if this option is this bad, imagine how terrible that could be. I better take my chances over here and not risk that nightmare. This shows up in real life where people may choose to avoid investing in the stock market, which can have risks and results that are unknown, or avoid medical treatments with less known risks. Try to remember that our brains fear the unknown and might be telling you a story that's keeping you from trying that new thing in your business, or maybe starting a new business altogether. If you put in the due diligence and know something can work, try not to let that bias stop you from doing big things. We're all capable of amazing things, but sometimes we have to walk through a dark room to get to the light on the other side. It's okay to be anxious, but that doesn't always mean you're on the wrong path. It could just be your biased brain's favorite fear of change and the unknown. This can all go wrong though, when we enter into neglected probability territory. That's when we're uncertain about the options or outcomes and need to make a decision. And we completely disregard everything we do know about probabilities. Just because one item or a few are unknown, it doesn't mean all the other probabilities change or go away. Try to understand and remember what you can consider the known and know that the unknown doesn't negate everything else when making a decision. This can lead to Berkson's paradox, where someone will misinterpret statistical experiments when the probabilities are conditional. This is similar to correlation versus causation and looks at how two unrelated events can make it look like one is causing the other even when they're not. I have linked to an article that shows how someone could interpret data to say that having influenza can reduce a child's likelihood of having appendicitis, even though that makes absolutely no sense. Again, the show notes are in the app you're listening to or@the brainybusiness.com 52 we also have a hard time with combining probabilities. Remember, math is hard, so due to the sub additivity effect, we judge the probability of the whole to be less than the probabilities of its individual parts. I've been finding it very interesting to see where we tend to overestimate and underestimate and how that can impact decisions. This this leans a little into the present and future biases I talked about in the last installment of this series. When we want something today, we value it differently than tomorrow, and when we look at tomorrow or things we don't know about, we expect the worst, even when there's nothing to make us feel that way other than our own natures. These can also lead to an insensitivity to sample size, which is where we don't properly anticipate the variation that will show up in small samples. Like the Hot Hand Fallacy, where we look for patterns in those small samples and assume the pattern we see must mean something. But when you look at the bigger picture, it often doesn't. On the flip of that is the Weber Fechner Law, which is when we find it difficult to compare and see small differences among large samples. I'm going to close out this episode with a little excerpt from Thinking Fast and Slow to tell you about regressive bias. Most of us don't properly understand how averages impact our lives every day, and this can impact the decisions we make in business. Something you think is making an impact on your employees or vendors may in fact just be coincidence and counterintuitive in many ways. Here's Kahneman's story to help illustrate this I had one of the most satisfying Eureka experiences of my career while teaching flight instructors in the Israeli Air Force about the psychology of effective training. I was telling them about an important principle of skill rewards for improved performance work better than punishment of mistakes. This proposition is supported by much evidence from research on pigeons, rats, humans, and other animals. When I finished my enthusiastic speech, one of the most seasoned instructors in the group raised his hand and made a short speech of his own. He began by conceding that rewarding improved performance might be good for the birds, but he denied that it was optimal for flight cadets. This is what he said on many occasions I have praised flight cadets for clean execution of some aerobatic maneuver. The next time they try the same maneuver, they usually do worse. On the other hand, I have often screamed into a cadet's earphone for bad execution, and in general he does better on his next try. So please don't tell us that reward works and punishment does not, because the opposite is the case. This was a joyous moment of insight when I saw in a new light a principle of statistics that I had been teaching for years. The instructor was right, but he was also completely wrong. His observation was astute and correct. Occasions on which he praised a performance were likely to be followed by a disappointing performance, and punishments were typically followed by an improvement. But the inference he had drawn about the efficacy of reward and punishment was completely off the mark. What he had observed is known as regression to the mean, which in that case was due to random fluctuations in the quality of performance. Naturally, he praised only a cadet whose performance was far better than average, but the cadet was probably just lucky on that particular attempt and therefore likely to deteriorate regardless of whether or not he was praised. Similarly, the instructor would shout into a cadet's earphones only when the cadet's performance was unusually bad and therefore likely to improve, regardless of what the instructor did. The instructor had attached a causal interpretation to the inevitable fluctuations of a random process. The challenge called for a response, but a lesson in the algebra of prediction would not be enthusiastically received. Instead, I used chalk to mark a target on the floor. I asked every officer in the room to turn his back to the target and throw two coins at it in immediate succession. Without looking, we measured the distances from the target and wrote the two results of each contestant on the blackboard. Then we rewrote the results in order from the best to the worst performance on the first try. It was apparent that most, but not all of those who had done best the first time deteriorated on their second try. And those who had done poorly in the first attempt generally improved. I pointed out to the instructors that what they saw on the board coincided with what we had heard about the performance of aerobatic maneuvers on successive attempts. Poor performance was typically followed by improvement and good performance by deterioration, without any help from either praise or punishment. The discovery I made on that day was that the flight instructors were trapped in an unfortunate contingency. Because they punished cadets when performance was poor, they were mostly rewarded by a subsequent improvement, even if punishment was actually ineffective. Furthermore, the instructors were not alone in that predicament. I had stumbled onto a significant fact of the human condition. The feedback to which life exposes us is perverse. Because we tend to be nice to other people when they please us and nasty when they do not. We are statistically punished for being nice and rewarded for being nasty. This is the introduction to an entire chapter called Regression to the Meaning of, so there's plenty more information. If you want to dig into that book, there is a link for you in the show Notes. The thing to remember as we close out this episode is that everything we know to be true is not necessarily true. We need to flex and relax, step back and zoom in, look from different angles, talk to different people, and be open to the responses. And when we see an answer in the data, it's still important to question and see if it is truly an answer or merely an illusion or something our biases want us to see. As I tell my clients all the time, it's easy to find the right answer to the wrong question, and it's easy to find patterns when we're looking for them, but that doesn't mean they truly exist in your business processes. Try to take an objective look and see how you might be helping and hindering yourself every day. If there's something you want to change or work on or a problem you want to solve, take some time tracking to get a more accurate picture. Laura Vanderkam has interviewed thousands of people about their schedules and how to feel like you have more time. Many busy people said they spent 80 hours a week working and when they tracked it was only 660 or so. I've linked to one of her articles so you can check out some of her stuff. It's really fascinating and shows how we can shift our mindset to keep our biased brains in check and working for us instead of against us. The lesson in this whole series, in the podcast in general, is to know that our brains like to tell us stories. They write their own rules and details that serve what the subconscious thinks is best and and we're all genetically wired to be selfish and shortsighted in this way. Taking a little extra time and being a little more open can change your whole view and success rate. Just think about what a great world it would be if everyone did this a few more times a day. What could we all accomplish?

So what got your brain buzzing as you learned about numbers biases today? For me, I enjoy taking the time to step back and look at the vast landscape of biases every so often. If you're a longtime listener of the.

Show, you know that I go deep.

On a lot of concepts, like you'll hear in this upcoming Friday's New Foundations episode about ambiguity and uncertainty aversion. Really understanding the nuance of individual concepts and topics is great. It's really important and we can't get too myopic and forget the big picture, how these things work together or don't, and how they sometimes contradict each other. And understanding those gaps is so important as we look to apply the concepts of behavioral science and behavioral economics into business. As Dilip Soman said in episode 241, which came out just a couple days ago, we need a science for applying behavioral science. We need to know what works in the wild and not just in the lab, and to dig in to find out why. Adapting your lenses and looking from multiple angles and depths is really important to make that possible.

Which is why an episode like this.

Is so valuable, in my opinion. Consider that as you take a minute to look at your own work and expertise, whatever industry you might be in, where do you have a deep knowledge? And when is the last time you took a step back to see how the landscape has changed around you?

Where might you want to dig in?

If you're a surface level expert in a lot of different things, how can that help in the way you communicate with others and understand your work and theirs? And as I mentioned at the top of the show, Ambiguity and Uncertainty Aversion.

Which was lightly touched on in this.

Episode, is also part of my book what your Employees need and can't tell you, which has a virtual glossary that I've linked for you in the show Notes at the time of this recording. At least it doesn't include all the biases that were talked about in this episode as they weren't all part of the book and the applications there. And I don't want to create overwhelm. There's always a balancing act here, but.

It is useful and intended to be.

Updated all the time. That's one reason why I opted for.

A Virtual Living glossary instead of one printed in the book. There will be a link for you.

In the show Notes for the episode, along with links to related past episodes, including the other seven from this, all the Biases series, and my interview with Dilip Soman, as well as links to.

Other great related books like his Behavioral.

Science in the Wild and so much more.

It's all waiting for you in the.

Show Notes within the app you're listening to and at the brainy business.com 242 and just like that, episode 242 on our biases toward numbers called Math is Hard is done.

Join me Friday for a brand new.

Behavioral Economics Foundations episode on Ambiguity and Uncertainty Aversion.

It's going to be a lot of fun.

You don't want to miss it.

Until then, thanks again for listening and learning with me.

And remember to be thoughtful.

Thank you for listening the to the Brainy Business podcast Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness. Com.